**MANAGEMENT’S DISCUSSION AND ANALYSISOF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**For the Nine Months Ended****September 30, 2003**

* *

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

* *

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

* *

*Thefinancial information appearing in this report and in the accompanyingfinancial statements is stated in Philippine pesos.  All references to “pesos,”“Philippine pesos” or “Php” are to the lawful currency of the Philippines; allreferences to “U.S. dollars,” “US$” or “dollars” are to the lawful currency ofthe United States; all references to “Japanese yen,” “JP¥” or “¥” are to thelawful currency of Japan**and allreferences to “Euro” or “€” are to the lawful currency of the European Union**.Translations of Philippine peso amounts into U.S. dollars in this report and inthe accompanying financial statements were made based on the exchange rate ofPhp54.877 to US$1.00, the volume weighted average exchange rate at**September 30, 2003**quoted through the Philippine Dealing System.*

* *

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

* *

*Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that forward-looking statements and assumedfacts or bases almost always vary from actual results, and the differencesbetween the results implied by the forward-looking statements and assumed factsor bases and actual results can be material, depending on the circumstances.When considering forward-looking statements, you should keep in mind thedescription of risks and cautionary statements in this report and in our 2002Annual Report on Form 17-A.  You should also keep in mind that anyforward-looking statement made by us in this report or elsewhere speaks only asof the date on which we made it.  New risks and uncertainties come up from timeto time, and it is impossible for us to predict these events or how they mayaffect us.  We have no duty to, and do not intend to, update or revise theforward-looking statements in this report after the date hereof.  In light ofthese risks and uncertainties, any forward-looking statement made in thisreport or elsewhere might not occur.*

**Financial Highlights**

|                                      | **September 30,**                   |   | **December 31,** |
|-------------------------------------------|-------------------------------------|--------|------------------|
| **(in millions)**                         | **2003**                            |   | **2002**(1)      |
| ** **                                | **(Unaudited)**                     |   | **(Audited)**    |
| **Consolidated Balance Sheets**           |                                |   |             |
| Total assets                              | Php296,502                          |   | Php303,330       |
| Property, plant and equipment - net       | 247,148                             |   | 252,025          |
| Total debt                                | 158,532                             |   | 168,523          |
| Total stockholders’ equity           | 92,617                              |   | 88,088           |
| Debt to equity ratio                      | 1.71x                               |   | 1.91x            |
| ** **                                | ** **                          |
| ** **                                | **Nine Months Ended September 30,** |
|                                      | **2003**                            |   | **2002**(2)      |
| **Consolidated Statements of Income**     | **(Unaudited)**                     |
| Operating revenues                        | Php70,403                           |   | Php58,164        |
| Operating expenses                        | 48,053                              |   | 43,999           |
| Net operating income                      | 22,350                              |   | 14,165           |
| EBIT(3)                                   | 15,747                              |   | 14,722           |
| EBITDA(4)                                 | 33,546                              |   | 32,574           |
| Net income                                | 5,795                               |   | 3,666            |
| Operating margin                          | 32%                                 |   | 24%              |
| EBITDA margin                             | 48%                                 |   | 56%              |
| **Consolidated Statements of Cash Flows** |                                |   |             |
| Net cash provided by operating activities | Php36,886                           |   | Php38,293        |
| Net cash used in investing activities     | 11,773                              |   | 11,882           |
| Capital expenditures                      | 10,997                              |   | 11,111           |
| Net cash used in financing activities     | 24,571                              |   | 23,325           |

_____________

 

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

 

(2)  As restated to reflect the retroactive change inrevenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002 and the change in accounting policy on preoperatingexpenses, as described in Note 3 to the accompanying financial statements. 

 

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

 

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

 

EBIT and EBITDA, on aconsolidated basis for the nine months ended September 30, 2003and 2002, are derived as follows:

 

| ** **                                                                               | **Nine Months Ended September 30,** |
|------------------------------------------------------------------------------------------|-------------------------------------|
| ** **                                                                               | **2003**                            | ** ** | **2002**(a) |
| **(in millions)**                                                                        | **(Unaudited)**                     |
| Earnings before minority interest in net income (losses) of consolidated subsidiaries(b) | Php5,640                            |   | Php3,648 |
| Add/(deduct):  Interest expenses and related items, net of capitalized interest(c)       | 9,173                               |   | 10,693 |
| Provision for income tax(b)                                                              | 1,531                               |   | 1,176 |
| Interest income                                                                          | (597)                               |   | (795) |
| EBIT                                                                                     | 15,747                              |   | 14,722 |
| Add:  Depreciation and amortization(b)                                                   | 17,799                              |   | 17,852 |
| EBITDA                                                                                   | Php33,546                           |   | Php32,574 |

________________

 

(a) As restated to reflect the retroactive change inrevenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002.

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

(c) See Note 18 to theaccompanying financial statements.

**Overview**

 

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

 

•              *Fixed Line* — fixed line telecommunicationsservices primarily provided through PLDT.  We also provide fixed line servicesthrough PLDT’s subsidiaries PLDT Clark Telecom, Inc., Subic TelecommunicationsCompany, Inc., Maranao Telephone Company, Inc. and Bonifacio CommunicationsCorporation, which together account for approximately 1% of our consolidatedfixed lines in service, and PLDT Global Corporation;

 

•              *Wireless* — wireless telecommunicationsservices provided by PLDT’s subsidiaries, Smart Communications, Inc., ourcellular service provider, and Mabuhay Satellite Corporation, ACeS PhilippinesCellular Satellite Corporation, and Telesat, Inc., our satellite and very smallaperture terminal, or VSAT, operators; and 

 

•              *Information and CommunicationsTechnology* — information and communications infrastructure and services forInternet applications, Internet protocol-based solutions and multimedia contentdelivery provided by PLDT’s subsidiary ePLDT, Inc.; Internet access servicesprovided by ePLDT’s subsidiary Infocom Technologies, Inc.; and e-commerce, callcenters and IT-related services provided by ePLDT’s other subsidiaries andassociates, as described in Note 9 to the accompanying**financialstatements. 

** **

**Results of Operations**

** **

Thetable below shows the contribution by each of our business segments to ourconsolidated operating revenues, operating expenses and net operating income(loss) for the nine months ended September 30, 2003 and 2002.  Most of our revenuesare derived from our operations within the Philippines.  Our revenues derived from outside the Philippines consistprimarily of revenues from incoming international calls to the Philippines.

** **

|                                      | **Nine Months Ended September 30,** |
|-------------------------------------------|-------------------------------------|
|                                      | **2003**                            | ** ** | **%**(1) | ** ** | **2002**(2) | ** ** | **%(**1) |
| ** **                                | **(Unaudited)**                     |
| **(in millions)**                         |                                |   |   |   |   |   |   |
| **Operating Revenues**                    |                                |   |   |   |   |   |   |
| Fixed line                                | Php34,288                           |   | 49 |   | Php33,929 |   | 58 |
| Wireless                                  | 34,858                              |   | 49 |   | 23,622 |   | 41 |
| Information and communications technology | 1,257                               |   | 2 |   | 613 |   | 1 |
|                                      | 70,403                              |   | 100 |   | 58,164 |   | 100 |
| **Operating Expenses**                    |                                |   |   |   |   |   |   |
| Fixed line                                | 24,421                              |   | 35 |   | 23,990 |   | 41 |
| Wireless                                  | 22,226                              |   | 31 |   | 19,043 |   | 33 |
| Information and communications technology | 1,406                               |   | 2 |   | 966 |   | 2 |
|                                      | 48,053                              |   | 68 |   | 43,999 |   | 76 |
| **Net Operating Income (Loss)******       |                                |   |   |   |   |   |   |
| Fixed line                                | 9,867                               |   | 14 |   | 9,939 |   | 17 |
| Wireless                                  | 12,632                              |   | 18 |   | 4,579 |   | 8 |
| Information and communications technology | (149)                               |   | – |   | (353) |   | (1) |
|                                      | Php22,350                           |   | 32 |   | Php14,165 |   | 24 |
|                                           |                                     |  |  |  |  |  |  |  |

________________

 

(1) Operating expenses and netoperating income (loss) are computed as a percentage of operating revenues.

(2) As restated to reflect the retroactive change inrevenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002.

**Consolidated Operating Revenues**

 

Largely driven by the continued stronggrowth of our wireless business, particularly Smart’s cellular business, ourconsolidated operating revenues for the first nine months of 2003 increased by Php12,239 million, or 21%,to Php70,403 million from Php58,164 million for the first nine months of 2002.  Smartcontributed Php34,502 million in revenues forthe first nine months of 2003, an increase of 50% over its revenue contributionof Php22,968 million for the same period in2002.  Smart’s revenue contribution accounted for 49% of our consolidatedoperating revenues for the first nine months of 2003, compared to 39% for thesame period in 2002.

 

***Fixed Line***

 

Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services, and miscellaneousservices.  Revenues generated from this business in the first nine months of 2003 totaled Php34,288 million, an increaseof Php359 million, or 1%, from Php33,929 million in the same period in 2002.This increase was due to higher revenues generated from international longdistance service, data and other network services and miscellaneous services,partially offset by decreased revenues from local exchange service and nationallong distance service.  As a percentage of our consolidated operating revenues,however, fixed line revenues decreased in the firstnine months of 2003 to 49% from 58% in thesame period in 2002 principally due to the continued strong growth of ourwireless business.

 

The following table summarizes our consolidatedoperating revenues from our fixed line business for the nine months ended September 30, 2003and 2002 by service segment:

 

|                        | **Nine Months Ended September 30,** |
|-----------------------------|-------------------------------------|
|                        | **2003**                            | ** ** | **%** | ** ** | **2002** | ** ** | **%** |
|                        | **(Unaudited)**                     |
| **(in millions)**           |                                |   |   |   |   |   |   |
| Fixed line services:        |                                |   |   |   |   |   |   |
| Local exchange(1)           | Php15,607                           |   | 45 |   | Php15,936 |   | 47 |
| International long distance | 9,247                               |   | 27 |   | 7,804 |   | 23 |
| National long distance      | 4,793                               |   | 14 |   | 5,837 |   | 17 |
| Data and other network      | 4,381                               |   | 13 |   | 4,126 |   | 12 |
| Miscellaneous               | 260                                 |   | 1 |   | 226 |   | 1 |
| Total                       | Php34,288                           |   | 100 |   | Php33,929 |   | 100 |

________________

 

(1) 2002 has been restated to reflect the change inrevenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002.

 

*LocalExchange Service*

 

Ourlocal exchange service revenues consist of: 

 

•              flat monthly fees for our postpaidservice; 

 

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

 

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

 

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

 

•              call revenues generated frompayphones and coin-operated phones; and

 

•              charges for special features,including bundled value-added services such as *call waiting*, *callforwarding*, *3-party conference calling, speed calling* and *CallerID*. 

 

Thefollowing table summarizes key measures of our local exchange service businesssegment as of and for the nine months ended September 30, 2003and 2002:

 

|                                                    | **Nine Months Ended September 30****,** |
|---------------------------------------------------------|-----------------------------------------|
|                                                    | **2003**                                | ** ** | **2002** |
|                                                    | **(Unaudited)**                         |
|                                                    |                                    |   |   |
| Consolidated local exchange revenues (in millions)(1)   | Php15,607                               |   | Php15,936 |
| Number of fixed lines in service                        |                                    |   |   |
| PLDT Group                                              | 2,123,510                               |   | 2,153,798 |
| PLDT(2)                                                 | 2,098,493                               |   | 2,128,396 |
| Number of PLDT employees                                | 10,355                                  |   | 12,584 |
| Number of PLDT fixed lines in service per PLDT employee | 203                                     |   | 169 |

________________

 

(1) 2002 has been restated to reflect the change inrevenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002.

(2) Approximately 85% and 88% were postpaid fixed linesubscribers as of September 30, 2003 and 2002, respectively.

 

Revenuesfrom our local exchange service for the firstnine months of 2003 decreased by Php329 million, or 2%, to Php15,607 millionfrom Php15,936 million for the same period in 2002. The decrease was due to acontinuing shift in subscriber preference from postpaid to prepaid services,which generate lower average revenue per subscriber, partially offset byadjustments in our monthly local service rates.  The percentage contribution oflocal exchange revenues to our total fixed line revenues also decreased in the first nine months of 2003 to 45% from 47% in thesame period in 2002.

 

Grossadditions to PLDT's fixed lines in service in the firstnine months of 2003 totaled 400,514, a decrease of 1% from the gross additionsof 405,703 in the same period in 2002.  On anet basis, PLDT’s fixed line additions in the firstnine months of 2003 totaled 5,954, which was 89% lower compared to the netadditions of 53,287 in the same period in 2002. While fixed line additionstotaled 75,941 for PLDT’s prepaid fixed line services, particularly *Teletipid*and *Telesulit*, PLDT’s postpaid fixed lines in service declined by 69,987in the first nine months of 2003.

 

Initially intended as an affordable alternativetelephone service for consumers under difficult economic conditions, *Teletipid*now forms an important part of PLDT's overall churn and credit risk exposuremanagement and subscriber retention strategy.  *Teletipid* phone kits,each containing Php300 worth of pre-stored call credits, are sold for Php1,700per unit.  Prior to May 1, 2002, *Teletipid* subscribers were charged based onusage at a rate of Php0.50 per minute for local calls and at the same ratesapplicable to postpaid fixed line subscribers for national and internationallong distance calls. Effective May 1, 2002, the local call rate was increasedto Php1.00 per minute, but the rates for national and international longdistance calls remained unchanged.

 

Launchedin February 2002, *Telesulit* is a premiumvariant to *Teletipid.**Telesulit* phone kits, each containingPhp500 worth of pre-stored call credits, are sold for Php1,900 per unit.Effective 

February 1, 2003, the local call rate for *Telesulit* wasincreased to Php1.00 per minute from Php0.75 per minute, while the national andinternational long distance rates are the same as those applicable to *Teletipid*and postpaid fixed line subscribers.  *Teletipid* subscribers migrating to*Telesulit* are able to retain their telephone numbers. 

 

Asof September 30, 2003, PLDT’s active prepaid fixed line subscribers totaled318,968, of which 100,491 were *Teletipid* subscribers and 218,477 were *Telesulit*subscribers.  These subscribers accounted for approximately 15% of PLDT’s totalfixed lines in service as of September 30, 2003.

 

Aprepaid fixed line subscriber is recognized as an active subscriber when thatsubscriber activates and uses a prepaid call card.  Prepaid fixed linesubscribers can reload their accounts by purchasing call cards that are sold indenominations of Php300 in the case of *Teletipid* and Php500 in the caseof *Telesulit*.  Reloads are valid for two months.  A prepaid fixed linesubscriber is disconnected if that subscriber does not reload within fourmonths for *Teletipid* and within one month for *Telesulit* after theexpiry of the last reload.  All sales of prepaid *Teletipid* and *Telesulit*cards, whether through dealers or through PLDT's business offices, arenon-refundable.

 

Pursuantto a currency exchange rate adjustment mechanism authorized by the PhilippineNational Telecommunications Commission, or the NTC, we adjust our monthly localservice rates upward or downward by 1% for every Php0.10 change in thepeso-to-dollar exchange rate relative to a base rate of Php11.00 to US$1.00.During the first nine months of 2003, we implemented nine upward adjustmentsand three downward adjustments in our monthly local service rates, compared toseven upward adjustments and six downward adjustments during the same period in2002.  The average peso-to-dollar rate in the firstnine months of 2003 was Php53.877 to US$1.00, compared to the average ofPhp51.062 to US$1.00 in the first nine monthsof 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 the first ninemonths of 2003. 

 

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

 

Toattract new fixed line subscribers and retain existing ones, PLDT hasintroduced various value-added services such as *Caller ID.  Caller ID*allows subscribers to identify callers by telephone number, and it is nowbundled at special rates with other value-added phone services, such as *callwaiting*, *call forwarding*, *3-party conference calling* and *speedcalling*.

 

Theratio of PLDT fixed lines in service per PLDT employee improved from 169 at September 30, 2002 to203 at September 30, 2003. This improvement resulted from the net decrease inPLDT’s employee headcount.  During the twelve months ended September 30, 2003,PLDT’s workforce was reduced by 18% to 10,355 employees mainly on account ofPLDT’s manpower reduction program. 

 

*International Long Distance Service*

 

Our international long distance revenues, which wegenerate through our international gateway facilities, consist of:

 

•              inbound call revenues representingsettlements from foreign telecommunications carriers for inbound internationalcalls;

 

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

 

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

 

The following table shows information about ourinternational long distance business for the nine months ended September 30, 2003and 2002:

 

| ** **                                                      | **Nine Months Ended September 30,** |
|-----------------------------------------------------------------|-------------------------------------|
| ** **                                                      | **2003**                            | ** ** | **2002** |
|                                                            | **(Unaudited)**                     |
|                                                            |                                |   |   |
| Consolidated international long distance revenues (in millions) | Php9,247                            |   | Php7,804 |
| Inbound                                                         | 7,840                               |   | 6,158 |
| Outbound                                                        | 1,407                               |   | 1,646 |
|                                                            |                                |   |   |
| International call volumes (in million minutes)                 |                                |   |   |
| PLDT Group(1)                                                   | 1,722                               |   | 2,089 |
| Inbound                                                         | 1,602                               |   | 1,957 |
| Outbound                                                        | 120                                 |   | 132 |
| Inbound-outbound call ratio                                     | 13.3:1                              |   | 14.8:1 |
|                                                            |                                |   |   |
| PLDT                                                            | 1,626                               |   | 1,930 |
| Inbound                                                         | 1,508                               |   | 1,801 |
| Outbound                                                        | 118                                 |   | 129 |
| Inbound-outbound call ratio                                     | 12.8:1                              |   | 14.0:1 |

________________

 

(1) Excludes cellular callvolumes.

 

Ourconsolidated international long distance revenues increased by Php1,443million, or 18%, to Php9,247 million in the first nine months of 2003 fromPhp7,804 million in the same period in 2002, primarily as a result of anincrease in the average termination rates.  Likewise, the percentage contributionof international long distance revenues to our total fixed line revenuesincreased in the first nine months of 2003 to 27% from 23% in the same periodin 2002.

 

Ourrevenues from inbound international long distance calls for the first ninemonths of 2003 increased by Php1,682 million, or 27%, to Php7,840 million fromPhp6,158 million for the same period in 2002 primarily due to an increase inPLDT’s average termination rates and the positive impact of the depreciation ofthe average value of the peso relative to the U.S. dollar, partially offset bythe effect of lower inbound call volumes.

 

Ourinbound international long distance call volumes for the first nine months of2003 decreased by 18% to 1,602 million minutes from 1,957 million minutes forthe same period in 2002 primarily due to increased competition from alternativemeans of long distance communications, particularly e-mail, international textmessaging and Internet telephony and more inbound calls terminating directly tocellular subscribers.  In addition, the increase in our average terminationrates has also resulted in reduced inbound call volumes, principally thosebeing routed through direct facilities from the U.S. to the Philippines.

 

After lengthy negotiations commencing in May 2002 withcarriers around the world, PLDT increased its termination rates with carriersaccounting for a substantial portion of its international traffic terminatingon its fixed line network to US$0.12 per minute effective February 1, 2003 forinternational long distance calls terminating on its fixed line network.  Priorto 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.  On March 10,2003, the International Bureau of the U.S. Federal Communications Commission,or U.S. FCC, issued an Order on petitions filed separately by AT&T and MCIrequiring all U.S. carriers providing direct facilities-based service on theU.S.-Philippines route to suspend payments for termination services toPhilippine carriers, including PLDT, Smart and Subic Telecom, until such timeas the U.S. FCC issues a public notice that the affected circuits of U.S.carriers on the U.S.-Philippine route are fully restored.  The Order alsoremoved the Philippines from the list of U.S.- international routes approved for the provision ofInternational Simple Resale.  In responseto the Order of the International Bureau of the U.S. FCC, the NTC issued aMemorandum Order dated March 12, 2003, directing all affected Philippinecarriers “(1) not to accept terminating traffic via direct circuits from U.S.facilities-based carriers who do not pay Philippine carriers for servicesrendered; and (2) to take all measures necessary to collect payments forservices rendered in order to preserve the viability, efficiency, sustainedgrowth and development and continued competitiveness of the Philippinetelecommunications industry.”  On April 9, 2003, we filed with the U.S. FCC anapplication for review of the International Bureau’s March 10, 2003 Order.  On April 24, 2003,AT&T and MCI filed oppositions to our application for review of theInternational Bureau’s March 10, 2003 Order and on May 5, 2003, wefiled our reply to these oppositions.  Our revenues derived from internationallong distance calls have not been materially adversely affected by the Order ofthe International Bureau of the U.S. FCC because most of the facilities-basedtraffic originating in the United States is being routed through circuits of third parties notsubject to the Order.  To resolve the long standing issue on termination ratesand to allow Philippine and US carriers to freely negotiate a mutuallyacceptable settlement of this issue, and to provide an appropriate atmospherefor commercial negotiations to prosper, on October17, 2003 the NTC lifted its March 12, 2003 Order and ordered all Philippinecarriers to immediately accept terminating traffic via direct circuits fromU.S. facilities based carriers on mutually acceptable final or interimtermination rates, on terms and conditions agreed upon by the parties.  Based on the negotiations between the NTC and the U.S.FCC, the NTC stated in its October 17, 2003 Order that it expects the U.S. FCCto immediately lift its March 10, 2003 Order, thereby canceling the non-paymentprovisions thereof and subsequently returning the Philippines to the list ofU.S.-international routes approved for the provision of international simpleresale. As of November 3, 2003, the U.S. FCC has yet to lift its March 10, 2003 Order.PLDT is currently in negotiations with AT&Tand MCI with respect to new termination rate agreements.  See Note 26 of the accompanying financial statementsfor further discussion.

 

Thedepreciation of the peso increased our inbound international long distancerevenues in peso terms because settlement charges for inbound calls are billedin U.S. dollars or in special drawing rights, an established method ofsettlement among international telecommunications carriers using values basedon a basket of foreign currencies, that are translated into pesos at theprevailing exchange rates at the time of billing.

 

Ourrevenues from outbound international long distance calls for the first nine monthsof 2003 decreased by Php239 million, or 15%, to Php1,407 million from Php1,646million for the same period in 2002.  The decline was primarily due to reducedIDD rates attributable to our corporate customers and lower outbound callvolumes, partly offset by the positive impact of the depreciation on the pesoon outbound international long distance service revenues.

 

Thedepreciation of the peso increased our outbound international long distancerevenues in peso terms because outbound calls are charged at U.S. dollar ratesand billed to our subscribers in pesos at the prevailing exchange rates at thetime of billing.  This increase, however, was not sufficient to compensate forthe reduced IDD rates attributable to our corporate customers and the declinein outbound call volumes.  Our outbound international long distance callvolumes declined by 9% to 120 million minutes in the first nine months of 2003from 132 million minutes in the same period in 2002 primarily due to cellularsubstitution (subscribers opting to use cellular for internationaloutbound calls) and the popularity of alternative means of communications suchas e-mailing and text messaging.

 

*National Long Distance Service*

 

Our national long distance revenues consist of: 

 

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

 

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

 

The following table shows our national long distancerevenues and call volumes for the nine months ended September 30, 2003 and2002:

 

| ** ** | **Nine Months Ended September 30,** |  
** **

**2003**

** **

**2002**

 

**(Unaudited)**

 
 

 

 

 

 
Consolidated national long distance revenues (in millions)

Php4,793

 

Php5,837

 
National long distance call volumes (in million minutes)

 

 

 

 
PLDT Group

1,534

 

1,735

 
PLDT

1,511

 

1,709

 
 

Ournational long distance revenues decreased by Php1,044 million, or 18%, toPhp4,793 million in the first nine months of 2003 from Php5,837 million in thesame period in 2002 as a result of lower call volumes.  Accordingly, thepercentage contribution of national long distance revenues to our total fixedline revenues was down to 14% for the first nine months of 2003 from 17% forthe same period in 2002.

 

Ournational long distance call volumes decreased by approximately 12% to 1,534million minutes in the first nine months of 2003 from 1,735 million minutes inthe same period in 2002.  Cellular substitution and the widespread availabilityand growing popularity of alternative non-voice means of communications, particularlycellular text messaging and e-mailing, have negatively affected call volumes.

 

The decrease in our national long distance revenues inthe first nine months of 2003 compared to the same period in 2002 was, however,mitigated by the impact of the launch of various *PLDT Premium Phone Services*and rate adjustments.

 

*PLDTPremium Phone Services*allow customers to access voice-based content and information through anautomated call-in facility for a certain fee.  Over 30 premium phone serviceapplications are being offered to PLDT customers ranging fromappointment-booking services for select embassies (including, among others, theU.S. and Australian embassies in the Philippines), entertainment and TVgameshow hotlines, televoting, spiritual and love counseling, celebrity chat,phone karaoke and music services.  PLDT charges an average of Php10 per minute for thesepremium phone services.

 

Effective March 1, 2003, the rate fornational long distance, or NDD, calls terminating to other local exchange carriersincreased from a flat rate of Php4.50 per minute to Php5.00per minute.  Previously, this rate ranged from Php3.00 to Php5.00 per minute,depending on distance, but was later simplified to a flat rate of Php4.50 per minute.  Effective June 8, 2003, the rate for national long distance calls originating from andterminating to PLDT subscribers was adjusted to Php5.00 per minute.

 

*Data and Other Network Services*

 

Inthe first nine months of 2003, our data and other network services continued toregister increasing revenues.  This growth segment of our fixed line businessgenerated revenues of Php4,381 million in the first nine months of 2003, anincrease of Php255 million, or 6%, from Php4,126 million in the same period in2002.  The percentage revenue contribution of this business segment to ourtotal fixed line revenues increased to 13% in the first nine months of 2003from 12% in the same period in 2002, primarily due to the increase in digitalsubscriber line, or *DSL,* subscribers and corporate clients, whichsubscribe to *ARCSTAR* bandwidth services, as well as the launch of newservices, such as *PLDT**Vibe* and *Vibe Card*.  We currentlyexpect that demand for, and therefore revenues generated from, these serviceswill continue to grow in the foreseeable future.

 

Dataand other network services we currently provide include: 

 

•              traditional bandwidth services — high-speed point-to-point domestic and international digital leasedline services; 

 

•              broadband/packet-based/Internet-basedservices — frame relay, asynchronous transfer mode or ATM,Internet protocol-virtual private network or IP-VPN, DSL, Internet gateway, andwholesale digital signal level 3 or DS3; and 

 

•              other packet-based switchingservices — Datapac and integrated services digital network, orISDN.

 

Theforegoing services are used for the following: 

 

•              domestic and internationalcommunication; 

 

•              broadband data transmissionservices that transmit data over a range of frequencies and/or bandwidth intoseveral narrower bands;

 

•              Internet exchange services thatprovide Internet service providers, or ISPs, with a primary connection to theglobal Internet to exchange local traffic generated within the Philippines;

 

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

 

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

 

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

 

Traditionalbandwidth services accounted for 51% of the total revenues from PLDT’s data andother network services for the first nine months of 2003, broadband/IP-basedservices accounted for 43%, and other services accounted for the remaining 6%,compared to 58%, 37% and 5%, respectively, for the same period in 2002.  Thesepercentage changes indicate a continuing shift in data and other networkrevenues from traditional bandwidth services to broadband/IP-based services.We expect this trend to continue given the growing demand for broadbandtransmission of voice, data and video due to the continued growth of theInternet, e-commerce and other online services.

 

InMay 2002, PLDT launched a pay-per-use dial-up Internet service under the brandname *PLDT Vibe*, which is available on a postpaid or prepaid basis toPLDT’s fixed line subscribers.  Charges for this service are Php0.25 per minutefor off-peak hours, which are from 10:01 p.m. to 6:00 a.m., and Php0.50 perminute for peak hours, which are from 6:01 a.m. to 10:00 p.m.  Withthe launch of *PLDT Vibe*, PLDT now offers two residential Internetservice packages targeting separate markets:  *PLDT Vibe*for light tomedium Internet users and *myDSL*broadband for heavy Internet users.  Asof September 30, 2003, the number of PLDT’s postpaid fixed line subscribersthat signed up for *PLDT Vibe*was**113,575 while the number ofsubscribers to *PLDT DSL* and *myDSL* broadband service reached18,334.

 

InAugust 2002, PLDT launched *Shops.work*, a network solution that allowsthe electronic linking of retail stores providing, among other features, salesand inventory reports, up-to-date and real-time monitoring of sales andinventory, and on-line access to head offices. 

 

InMarch 2003, PLDT launched a number of data services, namely: *Continuum,iView*and *Encompass*, all under the *Brains* umbrella. *BrainsContinuum* provides customers the ability to recover from serviceinterruptions and offers network diversity, facility and hosting services inpartnership with ePLDT.  *Brains iView* enables customers to monitor theperformance of their network, track bandwidth utilization patterns and identifythe source of network problems.  *Brains**Encompass* provides abroad range of services for the customers’ managed networking needs, be it awide area network or local area network.

 

InApril 2003, PLDT introduced a full two-way fixed line text messaging serviceunder the brand name *Hype,* which allows subscribers to send and receivetext messages to and from landline and mobile phones, and is capable ofinternational text messaging.  *Hype*also**allows subscribers tojoin TV network-based and new PLDT-initiated texting services.

 

*Miscellaneous*

 

Miscellaneousrevenues are derived mostly from directory advertising and facilities rental.For the first nine months of 2003, these revenues increased by Php34 million,or 15%, to Php260 million from Php226 million for the same period in 2002, andaccounted for approximately 1% of our total fixed line revenues in each ofthese comparable periods.

 

***Wireless***

 

Ourwireless business segment offers cellular services as well as satellite, VSAT,and other services.

 

The following table summarizes our consolidatedoperating revenues from our wireless business for the nine months ended September 30, 2003and 2002 by service segment:

 

** **

**Nine Months Ended September 30,**

 
** **

**2003**

** **

**%**

** **

**2002**(1)

** **

**%**

 

**(Unaudited)**

 
**(in millions)**

 

 
Wireless services:

 

 

 

 

 

 

 

Cellular

Php34,502

 

99

 

Php22,968

 

97

Satellite, VSAT and others

356

 

1

 

654

 

3

Total

Php34,858

 

100

 

Php23,622

 

100

________________

 

(1) As retroactively restated to reflect the change inrevenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002.

 

Ourwireless service revenues increased significantly by Php11,236 million, or 48%,to Php34,858 million in the first nine months of 2003 from Php23,622 million inthe same period in 2002 mainly as a result of the continued strong growth inrevenues generated from Smart’s cellular service.  Accordingly, as a percentageof our consolidated operating revenues, wireless service revenues increased to49% for the first nine months of 2003 from 41% for the same period in 2002.

 

*CellularService*

 

Ourcellular service revenues consist of: 

 

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

 

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

 

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

 

•              service fees charged to Piltel forusing Smart's GSM network for Piltel's *Talk 'N Text* prepaid cellularservice; and

 

•              other charges, including those forreconnection and migration. 

 

Proceedsfrom the sale of handsets and SIM cards are not recorded as part of cellularservice revenues.  Gains on the sale of handsets are offset against selling andpromotion expenses, while losses on the sale of handsets and SIM cards areincluded as part of selling and promotion expenses.

 

Ourcellular service revenues for the first nine months of 2003 amounted toPhp34,502 million, an increase of Php11,534 million, or 50%, from Php22,968million for the same period in 2002.  Cellular service revenues accounted for49% of our consolidated operating revenues for the first nine months of 2003,compared to 40% for the first nine months of 2002.  The significant increase inour cellular service revenues was primarily a result of respective 51% and 77%increases in prepaid and postpaid subscribers, partially offset by about 4%drop in net blended monthly average revenue per user, or ARPU.  Our GSMsubscriber base increased by 3,061,692, or 51%, from 5,949,236 as of September 30, 2002 to9,010,928 as of September 30, 2003.

 

Smartmarkets nationwide cellular communications services under the brand names *SmartBuddy, Smart Gold*and *addict mobile.  Smart Buddy* is a prepaidservice while *Smart Gold* and *addict mobile* are postpaid services,which are all provided through Smart's digital GSM network.  Introduced inApril 2003, *addict mobile*offers exclusive multimedia content tosubscribers and features personalized means for Internet surfing, allowingsubscribers to apply their allocated free credits towards their choice of dataand value-added services.

 

The following table summarizes key measures of ourcellular business as of and for the nine months ended September 30, 2003and 2002:

 

** **

**Nine Months Ended September 30,**

** **

**2003**

** **

**2002(1)**

 

**(Unaudited)**

 

 

 

 

Cellular revenues (in millions)(1)

Php34,502

 

Php22,968

GSM

34,240

 

22,695

Voice

17,893

 

12,045

Data

12,780

 

8,496

Others(2)

3,567

 

2,154

Analog

–

 

54

Others(3)

262

 

219

Cellular subscriber base

9,010,928

 

6,122,604

GSM

9,010,928

 

5,949,236

Prepaid

8,779,170

 

5,818,005

Postpaid

231,758

 

131,231

Analog(4)

–

 

173,368

Prepaid

–

 

19,316

Postpaid

–

 

154,052

Systemwide subscriber base(5)

11,550,792

 

7,796,710

Traffic volumes (in millions)

 

 

 

Calls (in minutes)

2,619

 

2,062

Domestic

1,842

 

1,380

International

777

 

682

Inbound

674

 

601

Outbound

103

 

81

Messages - SMS(6)

16,969

 

11,743

________________

 

(1) 2002 has been retroactivelyrestated to reflect the change in revenue recognition for prepaid cards fromsales to usage beginning in the fourth quarter of 2002. 

 

(2) Refers to othernon-subscriber-related revenues, such as facility service fees from Smart’srevenue-sharing agreement with Piltel and inbound international roaming fees. 

 

(3) Refers to all other servicesconsisting primarily of revenues from Smart Money Holdings Corporation, PublicCalling Offices and *SMARTalk* payphones, and a small number of leasedline contracts.

 

(4)  Smart closed down its analog/ETACS network in December2002.

 

(5)  Includes Piltel’s *Talk’N Text* subscribers of2,539,864 and 1,674,106 as of September 30, 2003 and 2002, respectively.  *Talk’N**Text* is a prepaid GSM service provided by Piltel using Smart’s GSMnetwork.

 

(6)  Refers to short messaging service or text messaging.

 

*VoiceServices*

 

Smart’srevenues from voice services, which include all voice traffic and value-addedservices such as voice mail and international roaming, increased by Php5,848million, or 49%, to Php17,893 million in the first nine months of 2003 fromPhp12,045 million in the same period in 2002 mainly due to the increase insubscriber base, as well as the increase in termination rates for inboundinternational long distance calls.

 

*DataServices*

 

Smart’s**revenuesfrom cellular data services, which include all text messaging-related servicesas well as value-added services, increased by Php4,284 million, or 50%, toPhp12,780 million in the first nine months of 2003 from Php8,496 million in thesame period in 2002.  In the first nine months of 2003 and 2002, cellular dataservices accounted for 37% of Smart's cellular revenues for both periods.  Inthe first nine months of 2003, text messaging-related services contributedrevenues of Php11,389 million, compared to Php7,535 million in the same periodin 2002, and accounted for 89% of the total cellular data revenues for thefirst nine months of 2003 and 2002.  Revenues from domestic text-relatedservices amounted to Php10,177 million in the first nine months of 2003,compared to Php6,750 million in the same period in 2002, representing 80% and79% of cellular data revenues for the first nine months of 2003 and 2002,respectively.  International text contributed revenues of Php1,212 million inthe first nine months of 2003, up by 54% from Php785 million in the same periodin 2002.  The increase in revenues from text messaging-related servicesresulted mainly from a 45% increase in volume of text messages to 16,969 million outbound messages during the first nine months in2003 from the 11,743 million outbound messages handled during the same periodin 2002.

* *

*Smartzed*ä**contributedrevenues of Php574 million in the first nine months of 2003, compared to Php384million in the same period in 2002.  Other value-added services developed bySmart on its own platform contributed total revenues of Php748 million in thefirst nine months of 2003 and Php563 million in the first nine months 2002.  Inthe first nine months of 2003 and 2002, Smart also recognized revenues of Php69million and Php14 million, respectively, from mobile banking, roaming shortmessaging service, wireless application protocol, and *Smart Money.*

* *

*Facility Services*

 

Smart’s revenues from GSM service for thefirst nine months of 2003 and 2002 included facility service fees totaling Php2,923 million and Php1,732 million, respectively,representing Smart’s 50% share from Piltel’s *Talk ‘N Text* revenues, netof interconnection fees.**As of September 30, 2003and 2002*,*Piltel had 2,539,864 and 1,674,106 *Talk ‘N Text*subscribers, respectively, using Smart’s GSM network pursuant to a facilitiesservice agreement between Smart and Piltel.  See Note 16 to the accompanying**financial statements for a description of this agreement.

 

*Subscriber Base, ARPU and Churn Rates*

* *

OfSmart’s 9,010,928 GSM subscribers as of September 30, 2003,prepaid subscribers accounted for 97% while postpaid subscribers accounted forthe remaining 3%.  Smart's prepaid GSM subscriber base grew by 51% to 8,779,170as of September 30, 2003 from 5,818,005 as of September 30, 2002, whereasSmart's postpaid GSM subscriber base increased by 77% to 231,758 as ofSeptember 30, 2003 from 131,231 as of September 30, 2002.  Smart’s prepaid andpostpaid net subscriber activations totaled 2,130,132 and 55,110, respectively,in the first nine months of 2003, or a monthly average addition of 236,681prepaid and 6,123 postpaid subscribers.

 

Revenuesattributable to Smart’s prepaid service amounted to Php28,231 million in thefirst nine months of 2003, a 46% increase over the Php19,387 million earned inthe same period in 2002.  Net prepaid revenues in the first nine months of 2003accounted for 92% of GSM voice and data revenues, compared to 94% in the sameperiod in 2002.  Revenues attributable to Smart’s postpaid service amounted toPhp2,442 million in the first nine months of 2003, a 112% increase over thePhp1,154 million earned in the same period in 2002.  Net postpaid revenues inthe first nine months of 2003 accounted for 8% of GSM voice and data revenues,compared to 6% in the same period in 2002.

 

The following table summarizes Smart's usage-basedmonthly ARPUs for the nine months ended September 30, 2003and 2002:

 

 

**Nine Months Ended September 30,**

 
 

**2003**(3)

 

**2002**(1)

 

**Gross**

 

**Net**

 

**Gross**

 

**Net**

 
GSM

 

 

 

 

 

 

 

 
Prepaid

Php517

 

Php415

 

Php584

 

Php438

 
Postpaid

1,732

 

1,304

 

2,052

 

1,452

 
Blended

550

 

439

 

608

 

455

 
Analog(2)

 

 

 

 

 

 

 

 
Prepaid

Php–

 

Php–

 

Php85

 

Php63

 
Postpaid

–

 

–

 

32

 

27

 
Blended

–

 

–

 

45

 

35

 
________________

 

(1)    As restated to reflect the changein revenue recognition for prepaid cards from sales to usage beginning in thefourth quarter of 2002. 

(2)    Smart closed down its analognetwork operation in December 2002.

(3)    As restated to reflect theexclusion of pre-termination fees in the calculation of postpaid ARPUs, seediscussion below.

 

 

ARPUis computed for each month by dividing the revenues for the relevant servicesfor the month by the average of the number of subscribers at the beginning andat the end of the month.  Gross monthly ARPU is computed by dividing therevenues for the relevant services, gross of dealer discounts and allocatedcontent-provided costs, including interconnection income but excluding inboundroaming revenues, by the average number of subscribers.  Net monthly ARPU, onthe other hand, is calculated based on revenues net of dealer discounts andallocated content-provided costs and interconnection income net ofinterconnection expense.  ARPU for any period of more than one month iscalculated as the simple average of the monthly ARPUs in that period.

 

Smart’sprepaid service revenues consist mainly of charges for subscribers' actual usageof their prepaid cards.  Gross monthly ARPU for Smart’s prepaid GSM service forthe first nine months of 2003 was Php517, compared to Php584 for the sameperiod in 2002.  The decline was attributable mainly to the decrease of 14% and21% in outbound and inbound local traffic per subscriber (coveringmobile-to-fixed and mobile-to-mobile traffic), respectively, for the first ninemonths of 2003.  On a net basis, ARPU for the first nine months of 2003decreased to Php415 from Php438 in the same period in 2002.  We expect Smart’sprepaid ARPUs to continue to decline over time as Smart expands further intothe lower end of the market.

 

MonthlyARPU for Smart’s postpaid GSM service is calculated in a manner similar to thatof prepaid service, except that the revenues consist mainly of monthly servicefees and charges on usage in excess of the monthly service fees.  Further,monthly postpaid ARPUs are now calculated to exclude pre-termination fees withrestatement, for comparative purposes, effective the second half of 2002onwards.  Until April 2003, pre-termination fees had been reported as part ofusage revenues and included in the calculation of postpaid ARPUs.  ARPU is ameasure associated with a subscribers’ actual usage of the network on whichpre-termination fees would have had no effect.  Pre-termination fees areone-time fees charged to subscribers who terminate their postpaid service priorto the end of their respective “lock-in” periods.  These “lock-in” periods areimposed in cases where a free or discounted handset has been provided to asubscriber as part of a postpaid plan which normally last for 24 months.  As ofSeptember 30, 2003, 94% of Smart’s postpaid subscribers have “locked in”contracts.  This change in ARPU calculation would have had no material effecton our net income as reported in 2002 and in the first quarter of 2003.Beginning the second quarter of 2003, pre-termination fees were included, uponcollection, under “Others” of “GSM Revenues” and are therefore no longerincluded for the purpose of calculating ARPUs.

 

Grossmonthly ARPU for postpaid GSM subscribers for the first nine months of 2003 wasPhp1,732, compared to Php2,052 for the first nine months of 2002.  On a netbasis, postpaid ARPU decreased by 10% to Php1,304 in the first nine months of2003 from Php1,452 in the same period in 2002.  Smart's GSM monthly grossblended ARPU, both prepaid and postpaid, for the first nine months of 2003 werePhp550, compared to Php608 for the same period in 2002.  Blended net monthlyARPU decreased by 4% to Php439 in the first nine months of 2003 from Php455 inthe same period in 2002.

 

Smart's 50% share of Piltel's revenues from *Talk ‘N Text*under a revenue-sharing agreement between Smart and Piltel are notincluded in the computations of Smart's ARPUs.

 

Churn,or the rate at which existing subscribers have their service canceled in agiven period, is computed based on total disconnections in the period, net ofreconnections in the case of postpaid subscribers, divided by the average ofthe number of subscribers at the beginning and the end of a month, all dividedby the number of months in the same period.

 

Aprepaid cellular subscriber is recognized as an active subscriber when thatsubscriber activates and uses the SIM card in the handset, which alreadycontains Php100 worth of pre-stored air time. Subscribers can then reload bypurchasing prepaid call-and-text cards that are sold in denominations ofPhp300, Php500 and Php1,000 or, by purchasing additional air time “over theair” via *Smart Load* or through their handsets using *Smart Money*.Reloads have validity periods ranging from three days to two months, dependingon the amount reloaded.  A prepaid GSM account is disconnected if thesubscriber does not reload within four months after the full usage or expiry ofthe last reload.  As a result, a subscriber would not be included in our churnrate calculation for up to four months and three days to six months after thesubscriber may have stopped using the service to make calls or send messages (althoughthe subscriber may continue to receive calls and messages).  These effects may cause our calculated churn ratefor a period to be lower than the actual rate at which subscribers are ceasingto use Smart's services, and may contribute to more rapid growth in calculatedchurn following periods of rapid subscriber growth. 

 

ForSmart's prepaid GSM subscribers, the average monthly churn rate for the firstnine months of 2003 was 2.9%, compared to 3.5% in the first nine months of2002.  Smart's churn continues to be influenced by several factors,particularly the sluggishness of the Philippine economy, which negativelyaffected the ability of some subscribers to afford the service.  In line withthe various churn management initiatives implemented to address increased churnrates, Smart launched *PureTxt 100* in August 2002.  *PureTxt 100*was originally a text-only card with a denomination of Php100 intended for *SmartBuddy* subscribers.  Once a *PureTxt 100* card was loaded, the incomingand outgoing voice call capabilities of the subscriber were temporarilydeactivated until such time that the subscriber reloaded a “call and text” cardin a denomination of at least Php300.  On May 11, 2003, *SmartBuddy* and**Piltel’s*Talk 'N Text*launched *SmartLoad*, an“over-the-air” electronic loading facility designed to make reloading of airtime credits more convenient for, and accessible to consumers.  These“over-the-air” reloads, which have both voice and text functions, are packagedin smaller denominations of Php30, Php60, Php115 and Php200, but have shortervalidity periods of three days, six days, 12 days and 30 days, respectively.Since its introduction, *SmartLoad* has averaged over 1.2 milliontransactions per day.  As of September 30, 2003, 63% of *Smart Buddy*subscriberswere using *SmartLoad* as their reloading mechanism, accounting for 42% ofsales derived from reloads in the third quarter of 2003.  Like *PureTxt 100*,we believe that *SmartLoad* will encourage subscribers to stay within ourcellular network instead of churning and resubscribing at a later time.  As aresult of the launch of *SmartLoad*, we have ceased the production andsale of *PureTxt 100* cards.

 

Theaverage monthly churn rate for Smart's postpaid GSM subscribers for the firstnine months of 2003 was 3.6%, compared to 2.6% for the same period in 2002.Smart's policy is to redirect outgoing calls to an interactive voice responsesystem if the postpaid subscriber's account is either 45 days overdue or thesubscriber has exceeded the prescribed credit limit.  If the subscriber doesnot make a payment within 44 days of redirection, the account is disconnected.Within this 44-day period, a series of collection activities are implemented,involving the sending of a collection letter, call-out reminders and collectionmessages via text messaging.

 

*Satellite, VSAT and Other Services*

 

Our revenues from satellite, VSAT and other servicesconsist mainly of rentals received for the lease of Mabuhay Satellite'stransponders and Telesat's VSAT facilities to other companies and charges forACeS Philippines’ satellite phone service.  Total revenues from these servicesfor the first nine months of 2003 amounted to Php356 million, a decrease ofPhp298 million, or 46%, from Php654 million for the same period in 2002.

 

***Information andCommunications Technology***

 

Ourinformation and communications technology business is conducted by ePLDT, awholly-owned subsidiary of PLDT.  ePLDT's principal business is its operationof an Internet data center under the brand name *Vitro*ä; and Infocom, an ISP.  Granted pioneer status as an Internet datacenter by the Philippine Board of Investments, *Vitro*ä provides co-location services, server hosting, hardware and softwaremaintenance services, website development and maintenance services, webcastingand webhosting, shared applications, data disaster recovery and businesscontinuity services, intrusion detection, and security services such asfirewall and managed firewall. 

 

ePLDT is also engaged in the call center businessthrough the following wholly-owned subsidiaries:

 

•              Vocativ Systems, Inc., or Vocativ,which owns and operates a call center facility capable of accommodating 750seats exclusively for clients of a global provider of customer relationshipmanagement services.  Vocativ commenced commercial operations in April 2002;and

 

•              Parlance Systems, Inc., orParlance, which owns and operates a call center facility capable ofaccommodating 520 seats exclusively for one of the largest direct-to-homesatellite service providers in the United States for customer support andbilling requirements.  Parlance commenced commercial operations in June 2002.

 

ePLDTsold its entire 51% interest in Contact World on June 30, 2003 and assigned itsreceivables from the same to Service Zone Inc., a U.S.-based call centeroperator, for a total consideration of US$700,000.  Contact World is a callcenter facility capable of accommodating 200 seats.

 

ePLDThas also invested in a number of other e-commerce and Internet-relatedbusinesses, as described in Note 9 to the accompanying**financialstatements.

 

Inthe first nine months of 2003, our information and communications technologybusiness generated total revenues of Php1,257 million, an increase of Php644million, or 105%, from the Php613 million in the same period in 2002. Theserevenues accounted for 2% of our consolidated operating revenues for the firstnine months of 2003.  ePLDT’s call center business contributed revenues ofPhp668 million; *Vitro*ä contributed revenues of Php321million and Infocom contributed revenues of Php268 million, representing 53%,26% and 21%, respectively, of the total revenues from our information andcommunications technology business in the first nine months of 2003, comparedto 23%, 35% and 42% in the same period in 2002.  Going forward, we expectrevenues from our call center business to continue to contribute significantlyto our information and communications technology revenues with the fullcommercial operations of Parlance and Vocativ and the growing demand for callcenter services. 

 

**Consolidated Operating Expenses**

 

Our consolidated operating expenses for the first ninemonths of 2003 increased by Php4,054 million, or 9%, to Php48,053 million fromPhp43,999 million for the same period in 2002.  The increase was primarily dueto higher selling and promotion expenses, maintenance, taxes and licenses andcompensation and benefits mostly associated with our wireless business.  As apercentage of our consolidated operating revenues, however, consolidatedoperating expenses decreased to 68% for the first nine months of 2003 from 76%for the same period in 2002.

 

***Fixed Line***

 

Consolidatedoperating expenses related to our fixed line business for the first nine monthsof 2003 totaled Php24,421 million, an increase of Php431 million, or 2%, comparedto Php23,990 million for the same period in 2002.  The increase was primarilydue to higher cash expenses, particularly maintenance expenses, insurance andsecurity expenses, taxes and licenses and other operating costs.  As apercentage of our total fixed line operating revenues, fixed line-relatedoperating expenses remained unchanged at 71% in the first nine months of 2003and 2002.

 

The following table shows the breakdown of our totalconsolidated fixed line-related operating expenses for the nine months ended September 30, 2003and 2002 and the percentage of each expense item to the total:

 

 

**Nine Months Ended September 30,**

 

**2003**

 

**%**

 

**2002**

 

**%**

 

**(Unaudited)**

**(in millions)**

 

Fixed line services:

 

 

 

 

 

 

 

Depreciation and amortization(1)

Php9,831

 

40

 

Php9,819

 

41

Compensation and benefits

5,399

 

22

 

5,422

 

23

Provision for doubtful accounts

2,551

 

10

 

2,730

 

11

Maintenance

2,397

 

10

 

2,133

 

9

Selling and promotions

989

 

4

 

943

 

4

Rent

681

 

3

 

743

 

3

Professional and other service fees

707

 

3

 

718

 

3

Insurance and security services

569

 

2

 

448

 

2

Taxes and licenses

489

 

2

 

392

 

2

Other operating costs

808

 

4

 

642

 

2

Total

Php24,421

 

100

 

Php23,990

 

100

____________

(1)   Includes depreciation of capitalized foreignexchange losses from the revaluation of net dollar liabilities of Php3,203million in the first nine months of 2003 and Php2,549 million in the sameperiod in 2002.

 

Depreciationand amortization charges increased by Php12 million to Php9,831 million mainlydue to an increase by Php654 million in depreciation of capitalized foreignexchange losses from the revaluation of our net dollar liabilities, which wereincurred in acquiring various telecommunications equipment offset by a netdecrease of Php642 million in depreciation of our regular asset base primarilyresulting from asset disposals.

 

Compensationand benefits decreased by Php23 million, to Php5,399 million owing to an 18%decrease in headcount due to PLDT’s manpower reduction program partially offsetby collective bargaining agreement-related increases in salaries and benefitsof PLDT employees.  See Note 18 to the accompanyingfinancial statements for further discussion on PLDT’s manpower reductionprogram.

 

Provisionfor doubtful accounts decreased by Php179 million, or 7% to Php2,551 million onaccount of higher provisions by PLDT for anticipated uncollectible accountsfrom various specifically identified second-tier internationaltelecommunications carriers in 2002, partially offset by an increase inprovisions pertaining to other fixed-line subsidiaries in 2003. 

 

Maintenanceexpenses increased by Php264 million, or 12%, to Php2,397 million due primarilyto higher maintenance costs of inside plant facility, computer and peripheralsand provision for obsolescence of certain maintenance-related inventory,partially offset by lower electricity costs and lower maintenance costs onoutside plant facilities.

 

Sellingand promotion expenses increased by Php46 million, or 5%, to Php989 millionmainly as a result of PLDT’s promotional activities in relation to the launchof *Hype, myDSL* and other *Premium Phone Services*, partially offsetby reduced corporate public relations expenses.

 

Rentexpenses decreased by Php62 million, or 8%, to Php681 million mainly resultingfrom the reduced number of leased transponders partially offset by higherrentals paid by PLDT to suppliers of customer premises equipment as part of itsbundled services to corporate customers.

 

Professionaland other service fees decreased by Php11 million, or 2%, to Php707 million asa result of its efforts to streamline outsourced services, partially offset byhigher collection agency fees on account of higher collection of final accountsand payment of higher legal fees in 2003 for various services.

 

Insuranceand security services increased by Php121 million, or 27%, to Php569 millionprimarily due to higher premiums on all risks insurance for properties anddirectors’ and officers’ liability insurance for the first nine months of 2003as compared to 2002.

 

Taxesand licenses increased by Php97 million, or 25%, to Php489 million mainly onaccount of higher business-related taxes paid in the first nine months of 2003as compared to the same period in 2002.

 

Otheroperating costs increased by Php166 million, or 26%, to Php808 million mainlydue to higher office supplies consumption and printing costs partially offsetby decreases in travel and training expenses in line with PLDT’s cost-cuttingefforts.

 

***Wireless***

 

Consolidatedoperating expenses associated with our wireless business for the first ninemonths of 2003 amounted to Php22,226 million, an increase of Php3,183 million,or 17%, from Php19,043 million for the same period in 2002.  A significantportion of this increase was attributable to Smart’s increased selling andpromotion expenses, maintenance, compensation and benefits and taxes andlicenses.  As a percentage of our wireless operating revenues, operatingexpenses associated with our wireless business decreased to 64% for the first ninemonths of 2003 from 81% for the same period in 2002. 

 

The following table summarizes our consolidatedwireless-related operating expenses for the nine months ended September 30, 2003and 2002 and the percentage of each expense item to the total:

 

** **

**Nine Months Ended September 30,**

 
** **

**2003**

** **

**%**

** **

**2002**

** **

**%**

 
 

**(Unaudited)**

 
**(in millions)**

 

 
Wireless services

 

 

 

 

 

 

 

 
Depreciation and amortization(1)

Php7,721

 

35

 

Php7,816

 

41

Selling and promotions

6,295

 

28

 

4,947

 

26

Compensation and benefits

2,399

 

11

 

1,999

 

11

Rent

1,598

 

7

 

1,440

 

8

Maintenance

1,174

 

5

 

665

 

3

Insurance and security services

533

 

2

 

448

 

2

Taxes and licenses

497

 

2

 

257

 

1

Professional and other service fees

494

 

2

 

435

 

2

Provision for doubtful accounts

493

 

2

 

475

 

2

Other operating costs

1,022

 

6

 

561

 

4

Total

Php22,226

 

100

 

Php19,043

 

100

__________

 

(1)   Includes depreciation of capitalized foreignexchange losses from the revaluation of net dollar liabilities of Php858million in the first nine months of 2003 and Php776 million in 2002.

 

Depreciationand amortization charges decreased by Php95 million, or 1%, to Php7,721 millionmainly due to the absence of any depreciation charge for Smart’s analog networkassets in the first nine months of 2003, compared to Php1,410 million ofdepreciation for these assets in the same period in 2002.  Smart’s analognetwork assets were fully depreciated as of December 31, 2002.  Thisdecreasing effect was partially offset by an (1) increase of Php1,234 millionin depreciation charges resulting from an increase primarily in Smart’sdepreciable asset base owing to continuing network expansion and upgrades and(2) an increase in depreciation of capitalized foreign exchange losses from therevaluation of net dollar liabilities of Php82 million.

 

Sellingand promotion expenses increased by Php1,348 million, or 27%, to Php6,295million mainly due to a 61% increase in Smart’s prepaid phone kit/SIM packsales in the first nine months of 2003, higher product subsidies for postpaidsubscribers and an increase in advertising and promotion expense on account ofthe launches of new services such as *addict mobile* and *SmartLoad*.Smart’s average subscriber acquisition cost, or SAC, for prepaid subscribers inthe first nine months of 2003 was Php711, a decrease of 40% from Php1,193 inthe same period in 2002.  Commissions to dealers accounted for the highestpercentage of prepaid SAC at 43% and 84% in the first nine months of 2003 and2002, respectively.  On the other hand, postpaid SAC in the first nine monthsof 2003 was Php13,041, an increase of 100% from Php6,512 in the same period in2002 reflecting Smart’s renewed marketing efforts to attract postpaidsubscribers.  Handset subsidies accounted for 81% and 76% of postpaid SAC in thefirst nine months of 2003 and 2002, respectively.  Blended SAC have declined by23%, to Php1,046 in the first nine months of 2003 from Php1,352 in the sameperiod in 2002.  Effective August 1, 2002, Smart changed its mode of paymentfor dealer commissions from prepaid air time cards to cash and reduced themaximum commission paid from a range of Php1,000-Php1,300 (depending on thevolume purchased) to Php800 per prepaid phone kit sold.  An additional 1%rebate is given on cash purchases of the prepaid phone kits.  A Php50commission is paid for each SIM pack sold. 

 

Compensationand benefits increased by Php400 million, or 20%, to Php2,399 million primarilydue to increased headcount and increased salaries and benefits of Smart’semployees.  Smart's employee headcount increased from 4,675 as of September 30, 2002 to5,338 as of September 30, 2003 mainly due to the integration of TelecommunicationsSpecialists, Inc., or TSI, personnel into Smart, following Smart’s purchase ofTSI’s assets on December 1, 2002.  TSI was previously Smart’s largest dealer.

 

Rentexpenses increased by Php158 million, or 11%, to Php1,598 million on account ofhigher site rental cost incurred by Smart for its growing number of cell sitesand base stations, in line with its network expansion and increased operationalrequirements for circuit facilities, coupled with higher office space rentalsfor the increased number of wireless centers and space requirements forincreased personnel.  As of September 30, 2003, Smart had 2,569 GSM cell sites and3,497 base stations, compared with 1,979 GSM cell sites and 2,588 base stationsas of September 30, 2002. 

 

Maintenanceexpenses increased by Php509 million, or 77%, to Php1,174 million mainly due tohigher site utility, repairs and other maintenance-related expenses associatedwith the expansion and upgrade of Smart’s cellular network equipment; increasedoffice and telecenter utilities expenses; and increased computer hardware andsoftware maintenance expenses. 

 

Insuranceand security services increased by Php85 million, or 19% to Php533 million mainly due to the growth in the number of Smart’s cellsites and the increase in the cost of equipment insured as a result of thecontinued growth and expansion of its GSM network facilities.

 

Taxes and licenses increased by Php240 million, or 93%, to Php497 million mainly due to an increase in Smart’sbusiness-related taxes, NTC supervision and regulation fees and disallowedinput taxes.  See Note 22 to the accompanying**financial statements for a discussion relating to NTCsupervision and regulation fees. 

 

Professional and other service fees increased by Php59million, or 14%, to Php494 million incurred by Smart mainly as a result ofincreased legal, consultancy, audit and bill collection service fees, partiallyoffset by a decrease in technical service fees due to ALBV resulting from thereduced rate from 2% of net revenues to 1% effective January 1, 2003.  See Note16 to the accompanying financial statements for further discussion onagreements between Smart and ALBV.

 

Provisionfor doubtful accounts increased by Php18 million, or 4%, to Php493 millionmainly due to increased provisioning for carrier accounts.  In respect ofcarriers, Smart’s provision increased by Php345 million to Php474 million for thefirst nine months of 2003 from Php129 million for the same period in 2002, dueto increased provisioning for U.S. carriers as a result of the recent order ofthe U.S. FCC instructing U.S. carriers to withhold payment on their current anddelinquent accounts to Philippine carriers.  In respect of subscriber anddealer accounts, Smart’s provision decreased by Php110 million and Php190million, respectively, due to net reversals for the first nine months in 2003.The reversals were mainly due to improved collections on Smart’s postpaidsubscriber and dealer accounts previously provided for.

 

Otheroperating costs increased by Php461 million, or 82%, to Php1,022 million mainly due to increases in Smart’s variousbusiness-related expenses such as facility usage fees, training, travel,supplies, printing, and communication expenses.

 

***Information and Communications Technology***

 

Consolidatedoperating expenses associated with our information and communicationstechnology business for the first nine months of 2003 totaled Php1,406 million,an increase of Php440 million, or 46%, from Php966 million for the same periodin 2002.  The increase was due principally to the full commercial operations ofePLDT and its newly formed subsidiaries.  As a percentage of our informationand communications technology operating revenues, operating expenses related toour information and communications technology business decreased to 112% in thefirst nine months of 2003 from 158% in the same period in 2002.  The threelargest expense items related to our information and communications technologybusiness in the first nine months of 2003 were maintenance, compensation andbenefits, and depreciation and amortization, representing 33%, 28% and 18%,respectively, of our total operating expenses related to this business.  Incomparison, the three largest expense items related to our information andcommunications technology business in the first nine months of 2002 were,compensation and benefits, maintenance and depreciation and amortizationrepresenting 24%, 24% and 22%, respectively, of related total operatingexpenses.

 

**Net Operating Income**

 

Our consolidated net operating income for the firstnine months of 2003 was Php22,350 million, an increase of Php8,185 million, or58%, from Php14,165 million for the same period in 2002.  Accordingly, ourconsolidated operating margin (net operating income as a percentage ofoperating revenues) improved by eight percentage points to 32% in the firstnine months of 2003 from 24% in the same period in 2002.

 

***Fixed Line***

 

For the first nine months of 2003, our fixed linebusiness segment contributed an operating income of Php9,867 million, lower byPhp72 million, or 1%, than Php9,939 million for the same period in 2002 as the1% growth of our fixed line operating revenues was insufficient to cover the 2%increase in our fixed line-related expenses primarily pertaining to certainsubsidiaries.  On a non-consolidated basis, the net operating incomecontribution of this business segment for the first nine months of 2003increased by Php87 million to Php9,678 million from Php9,591 million for thesame period in 2002.

 

***Wireless***

 

Ourwireless business segment recorded an operating income of Php12,632 million inthe first nine months of 2003, an increase of Php8,053 million, or 176%, overPhp4,579 million registered in the same period in 2002.  This significantimprovement was due to a substantial increase of Php8,282 million in Smart'soperating income contribution for the first nine months of 2003 which reached Php12,890million from Php4,608 million for the same period in 2002.

 

***Information andCommunications Technology***

 

Inthe first nine months of 2003, our information and communications technologybusiness segment incurred an operating loss of Php149 million, down by Php204million, or 58%, from the Php353 million operating loss posted for the sameperiod in 2002.  These operating losses reflect the start-up nature of ePLDT’sbusinesses and those of ePLDT’s subsidiaries.

 

**Other Expenses – Net**

 

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

 

 

**Nine Months Ended September 30,**

 

**2003**

** **

**2002**

 

**(Unaudited)**

**(in millions)**

 

Interest expense and related items

Php9,918

 

Php11,777

Capitalized interest

(745)

 

(1,084)

Subtotal

Php9,173

 

Php10,693

Other expenses (income) – net

6,006

 

(1,352)

Total

Php15,179

 

Php9,341

 

On aconsolidated basis, our other expenses, net of other income, increased by Php5,838million, or 62%, to Php15,179 million in the first nine months of 2003 fromPhp9,341 million in the same period in 2002 primarily due to an increase ofPhp7,358 million in other expenses - net, partially offset by a decrease ininterest expense (net of capitalized interest) and related items of Php1,520million.

 

The14% decrease in interest expense and related items, net of capitalizedinterest, in the first nine months of 2003 compared with the same period in2002 was mainly attributable to the decrease in PLDT’s, Smart’s and MabuhaySatellite’s interest expenses by Php964 million, Php520 million and Php67million, respectively, due to lower debt balances and lower interest ratesmainly on foreign currency-denominated loans bearing fluctuating interestrates.  These decreases were partially offset by a net increase of Php33million in ePLDT’s interest expense resulting from an increase in its debtbalances.

 

For the first nine months of 2003, consolidated otherexpenses – net of other income amounted to Php6,006 million while in thecomparable period of 2002, consolidated other income – net of other expensesamounted to Php1,352 million.  The increase in other expense – net wasattributable to the following: 

 

•        an increase in manpower reductioncost by Php1,782 million representing the costs related to 1,681 employees whowere affected by the enhanced separation package under PLDT’s manpowerreduction program.  Total cost relating to PLDT’smanpower reduction program of Php1,955 million for the first nine months of2003 consisted of Php1,422 million payments made over and above the normalseparation benefits under the PLDT employees’ benefit plan and Php533 millionloss on settlement/curtailment.  Unrecognized past service costs andexperience adjustments, which are normally amortized over the estimatedremaining working lives of employees, in respect of employees who availed ofthe manpower reduction program are recognized as loss on settlement/curtailment;

 

•        increase in hedging cost andforeign exchange swap losses by Php572 million as PLDT increased the hedgedportion of its debt to 37% as of September 30, 2003 from 19% as of September30, 2002;

 

•        net gains aggregating Php906million relating to certain financial instruments terminated in 2002; 

 

•        provision for unrealizable assetsof Php1,408 million; and 

 

•        impairment losses recognized inrespect of ACeS Philippines’ investment in ACeS International Limited, or AIL,of Php1,614 million and certain equipment of ACeS Philippines related to thebusiness of AIL amounting to Php964 million.

** **

**Income Before Income Taxand Minority Interest**

 

Ourincome before income tax and minority interest in net income (losses) ofconsolidated subsidiaries in the first nine months of 2003 was Php7,171million, representing an increase of Php2,347 million, or 49%, from Php4,824million in the same period in 2002.  On a non-consolidated basis, however,income before income tax and equity share in net income of our subsidiariesdecreased by Php4,497 million, or 180%, to a loss of Php1,997 million in thefirst nine months of 2003 as against an income of Php2,500 million in the sameperiod in 2002.

 

Ourconsolidated provision for income tax in the first nine months of 2003increased by 30%, to Php1,531 million from Php1,176 million in the first ninemonths of 2002.  However, on a non-consolidated basis, our tax benefit wasPhp536 million in the first nine months of 2003 as against a provision ofPhp739 million in the same period in 2002.

 

Inthe first nine months of 2003, our effective corporate tax rate on aconsolidated basis was 21% as against a negative 10% on a non-consolidatedbasis.  Our effective corporate tax rates were lower than the 32% statutorycorporate tax rate due to differences between our consolidated and non-consolidatedincome as shown in our financial statements and our taxable income.  Thesedifferences arose from the following:

 

•              the effect of a three-year incometax holiday granted to Smart by the Philippine Board of Investments inconnection with the pioneer status it awarded to Smart's GSM network expansionproject;

 

•              income already subjected to finaltax; and

 

•              equity in net income of ourassociates, which has already been subjected to tax and therefore, as income toPLDT, is no longer subject to income tax. 

 

Smart'sthree-year income tax holiday, which will expire in May 2004, applies to theincremental income generated from its GSM network expansion.  The income taxholiday is computed by applying the exemption rate against the income tax dueon GSM operations.  The exemption rate is computed by dividing the incrementalGSM revenues by eligible GSM revenues (both gross of interconnection revenues)where the incremental GSM revenues are derived by deducting the BOI-prescribedbase figure (Smart’s gross GSM revenue in 2000) from the total GSM revenues.After adjusting for non-deductible items and unrealized and realized foreignexchange losses, Smart’s net taxable income is multiplied by the statutorycorporate income tax rate of 32% and the exemption rate.  The resulting figureis the income tax holiday that will be deducted from the income tax due on GSMrevenues with the difference being the income tax due for the period.  Weexpect our consolidated effective tax rate to increase following the expirationof Smart’s tax holiday.

 

**Net Income**

 

As aresult of the factors discussed above and after taking into account our equityin net income of investees amounting to Php7,256 million, our consolidated netincome for the first nine months of 2003 was at Php5,795 million, representingan increase of Php2,129 million, or 58%, over our restated consolidated netincome of Php3,666 million for the same period in 2002.  This increase waslargely due to Smart’s net income contribution of Php10,342 million for thenine months ended September 30, 2003, a significant improvement of 212% overits net income contribution for the same period in 2002, partially offset byhigher other expenses - net of Php5,838 million in 2003.

 

PLDT'snet loss for the first nine months of 2003, before taking into account itsequity share in net income of investees, was Php1,461 million, representing adecrease of Php3,222 million, or 183%, as against an income of Php1,761 millionfor the same period in 2002.  The decrease was attributable to PLDT’s (1) manpowerreduction cost of Php1,955 million, which increased by Php1,782 million for thefirst nine months 2003, as compared to the same period in 2002 (see Note 18 tothe accompanying financial statements for further discussion on PLDT’s manpowerreduction program) and (2) non-cash charges of Php1,486 million, mainlyresulting from a provision for unrealizable assets of Php1,408 million.

 

Smart’snet income for the first nine months of 2003 was Php10,342 million, a 212%increase over its net income of Php3,319 million in the comparable period of2002, on account of the sustained growth of its cellular operations.

 

ACeSPhilippines registered a net loss of Php2,799 million for the first nine monthsof 2003, compared to a net loss of Php197 million for the first nine months of2002 largely due to impairment charges in respect of its investment in AIL ofPhp1,614 million and of certain equipment related to the business of AIL ofPhp964 million.

 

Basicand diluted earnings per share of common stock increased to Php25.20 andPhp24.57, respectively, in the first nine months of 2003 from basic and dilutedearnings per share of Php14.45 and Php14.41, respectively, in the same periodin 2002, after giving retroactive effect to stock dividend declarations.

 

**Liquidity and Capital Resources**

 

The following table shows our consolidated andnon-consolidated cash flows for the nine months ended September 30, 2003and 2002 (unaudited) as well as consolidated and non-consolidatedcapitalization and other selected financial data as of September 30, 2003(unaudited) and December 31, 2002 (audited):

 

 

**Consolidated**

 

**Non-Consolidated**

 

**Nine Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2003**

 

**2002**

 

**2003**

 

**2002**

 

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

**Cash Flows**

 

 

 

 

 

 

 

Net cash provided by operating activities

Php36,886

 

Php38,293

 

Php18,049

 

Php22,319

Net cash used in investing activities

11,773

 

11,882

 

859

 

5,900

Capital expenditures

10,997

 

11,111

 

3,869

 

4,667

Net cash used in financing activities

24,571

 

23,325

 

18,167

 

16,592

 

** **

 

** **

 

** **

 

** **

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,**

 

**December 31,**

 

**September 30,**

 

**December 31,**

 

**2003**

 

**2002**

 

**2003**

 

**2002**

 

(**Unaudited**)

 

**(Audited)**

 

**(Unaudited)**

 

**(Audited)**

**(in millions)**

 

**Capitalization**

 

 

 

 

 

 

 

Notes payable

Php2,094

 

Php760

 

Php1,884

 

Php720

Current portion of long-term debt

21,494

 

19,176

 

13,847

 

11,962

Long-term debt - net of current portion

134,944

 

148,587

 

118,849

 

127,362

Total debt

Php158,532

 

Php168,523

 

Php134,580

 

Php140,044

Stockholders’ equity

92,617

 

88,088

 

92,617

 

88,088

 

Php251,149

 

Php256,611

 

Php227,197

 

Php228,132

** **

 

 

 

 

 

 

 

**Other Financial Data**

 

 

 

 

 

 

 

Cash and cash equivalents

Php11,430

 

Php10,876

 

Php3,235

 

Php4,165

Property, plant and equipment - net

247,148

 

252,025

 

188,045

 

190,722

Total assets

296,502

 

303,330

 

260,277

 

262,415

Net debt (1)

147,102

 

157,647

 

131,345

 

135,879

________________

 

(1)Total debt less cash and cash equivalents.

 

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

 

Throughthese initiatives, PLDT was able to successfully raise the necessary externalfinancing to fund its operating, investing and debt service requirements for2002.  On January 25, 2002, PLDT signed two loan agreements with *Kreditanstaltfur Wiederaufbau*, or KfW, which provided PLDT with a refinancing facilityof US$149 million.  On May 2, 2002, PLDT completed a global offering of notesin the aggregate amount of US$350 million with a simultaneous tender offer forits 8.5% Notes due 2003 and 10.625% Notes due 2004, which closed on May 15,2002.  On July 26, 2002, PLDT signed a loan agreement with Japan Bank forInternational Cooperation, or JBIC, for a JP¥9,760 million credit facilityunder JBIC’s Overseas Investment Loan Program.  On September 4, 2002, PLDTsigned a US$145 million syndicated multicurrency term loan facility, the firsttranche of which was drawn on June 18, 2003 to refinance a portion of aJapanese yen syndicated term loan which matured on the same date, and thesecond tranche to be drawn in December 2003 to refinance a portion of a U.S.dollar term loan falling due in December 2003.

 

As of September 30, 2003, non-consolidated cash and cashequivalents amounted to Php3,235 million, while our consolidated cash and cashequivalents totaled Php11,430 million.  Principal sources of consolidated cashand cash equivalents in the first nine months of 2003 were cash flows from operationsamounting to Php36,886 million, drawings from short and long-term creditfacilities aggregating Php10,348 million, and net equity funds raised throughPLDT's subscriber investment plan totaling Php47 million.  These funds wereused principally for capital outlays of Php10,997 million, includingcapitalized interest of Php745 million; debt principal payments of Php24,110million; and interest payments of Php8,486 million charged to operations.

 

***Operating Activities***

 

On aconsolidated basis, net cash flows from operating activities in the first ninemonths of 2003 decreased by Php1,407 million, or 4%, to Php36,886 million fromPhp38,293 million in the same period in 2002.

 

Agrowing portion of our consolidated cash flow is generated by our wireless anddata businesses, which accounted for 49% and 6%, respectively, of ourconsolidated operating revenues for the first nine months of 2003, compared to41% and 7%, respectively, for the same period in 2002.  Revenues from our localexchange and international long distance services accounted for 22% and 13%,respectively, of our consolidated operating revenues for the first nine monthsof 2003, down from 27% and 14%, respectively, for the same period in 2002.  Ournational long distance service revenues has decreased over the past severalyears owing mainly to cellular substitution.  In the first nine months of 2003,this service accounted for 7% of our consolidated operating revenues, down from10% in the same period in 2002.

 

PLDT'scontribution to our consolidated cash flows from operations in the first ninemonths of 2003 was Php18,049 million, representing a decrease of Php4,270million, or 19%, from Php22,319 million in the same period in 2002.  Thedecrease was due to a higher level of cash operating and other expenses,including the cost for the manpower reduction program during the first ninemonths of 2003, compared to the same period in 2002. 

 

Our subsidiaries, particularly Smart, made significantcontributions to our cash from operations.  In the first nine months of 2003,Smart generated cash from operations of Php18,335 million, or 50% of ourconsolidated cash flows from operations.  Smart’s strong cash flows reflect thecontinuing strong performance of its cellular business.  However, Smart is subjectto loan covenants that restrict its ability to pay dividends, redeem preferredshares, make distributions to PLDT or otherwise provide funds to PLDT or anyassociate without the consent of certain of its lenders.  After receivingapprovals from Finnvera andcertain lenders for the payment of dividends to PLDT in an amount not to exceed40% of Smart’s net income in 2001, Smart made its first dividend payment ofPhp1,540 million to PLDT in December 2002.  In June 2003, Smart paid dividendsin the amount of Php4,300 million to PLDT, representing 70% of Smart’s 2002 netincome and in November 2003, Smart paid additional dividends to PLDT equivalentto the remaining 30% of its 2002 net income or Php1,866 million, afterreceiving the necessary approvals from Finnvera and certain lenders.  Smartwill be required to obtain further waivers to pay additional dividends infuture periods.  We cannot assure you that Smart will be able to obtain suchwaivers in the future, or what amount, if any, Smart would be permitted orfinancially able to distribute.  We expect that we will have difficulty meetingour debt payment obligations if we do not continue to receive cash dividendsfrom Smart. 

 

Asof September 30, 2003, related party liabilities included (1) PLDT’s payablesto Smart amounting to Php3,077 million, representing interconnection fees; (2)Piltel’s liabilities to Smart totaling Php556 million, representing variousfees under the facilities, customer services and administrative support andmanagement services agreements as well as a revenue-sharing agreement betweenSmart and Piltel; and (3) Piltel’s liabilities to PLDT amounting to Php760million, representing interconnection charges.  For a detailed discussion ofthese related party transactions, see “Related Party Transactions” in thisreport and Note 16 to the accompanying financial statements.

 

***Investing Activities***

 

On aconsolidated basis, net cash used in investing activities in the first ninemonths of 2003 of Php11,773 million was lower by Php109 million, or 1%,compared to Php11,882 million in the same period in 2002.  This decline wasprimarily the result of lower aggregate capital spending.  On anon-consolidated basis, net cash used in investing activities was Php859million in the first nine months of 2003 compared to Php5,900 million in thesame period in 2002 largely due to dividends received from Smart.

 

Ourconsolidated capital expenditures in the first nine months of 2003 totaledPhp10,997 million, a decrease of Php114 million, or 1%, from Php11,111 millionin the same period in 2002 primarily due to Smart’s and PLDT’s reduced capitalspending.  Smart's capital spending of Php6,895 million in the first ninemonths of 2003 was used to further expand and upgrade its GSM and transmissionnetwork facilities to increase capacity and coverage in respect of basic andadvanced cellular services.  PLDT's capital spending of Php3,869 million wasprincipally used to finance the expansion of its fixed line data and networkservices.  ePLDT and its subsidiaries’ capital spending of Php71 million wasused to primarily fund its Vitro, Infocom and call center business operations.The balance represented other subsidiaries’ capital spending.  Consolidatedcapital expenditures for the first nine months of 2002 amounted to Php11,111million, of which Php4,667 million, Php5,364 million and Php608 million wereattributable to PLDT, Smart and ePLDT, respectively.

 

Our 2003 budget for consolidated capital expendituresamounts to Php15,000 million, of which Php6,000 million is budgeted to be spentby PLDT for its fixed line data and network services and Php9,000 million isbudgeted to be spent by Smart for further expansion and upgrading of its GSMnetwork.

 

Underthe terms of Piltel’s debt restructuring plan, PLDT issued a Letter of Supportfor the benefit of Piltel and its creditors under which PLDT has agreed tocover any funding shortfalls of Piltel up to a maximum amount of US$150million.  Under the Letter of Support, PLDT provided to Piltel Php2,317 million(US$48 million) in 2000, Php2,039 million (US$41 million) in 2001, and Php571million (US$11 million) in 2002.  Drawings under the PLDT Letter of Support areconverted into U.S. dollars at the prevailing exchange rates at the time ofdrawdown.  There was no drawdown under the Letter of Support in the first ninemonths of 2003 while drawdowns in the same period in 2002 was at US$7 million(approximately Php362 million.)  As of September 30, 2003,the remaining undrawn balance under the Letter of Support was US$50 million(approximately Php2,757 million).  If, among other things, Piltel's financialand operating performance were to deteriorate or any amounts were required tobe paid to Piltel's unrestructured creditors in cash to settle their claims(aggregate principal of US$7 million as of September 30, 2003), additionaldrawings under the Letter of Support would likely be required to provide all ora portion of the funds needed by Piltel.  We cannot assure that additionalamounts will not have to be drawn under the Letter of Support nor can wepredict when the remaining undrawn balance under the Letter of Support will beexhausted.  Piltel is currently in discussion with certain holders of itsconvertible bonds and is seeking to restructure such debt on the terms and conditionsof Piltel’s debt restructuring plan.  However, there is no assurance thatPiltel and the bondholders who have not participated in the debt restructuringplan will be able to reach an agreement to resolve the default and address thenotice of acceleration. 

 

***Financing Activities***

 

On aconsolidated basis, we used net cash of Php24,571 million for financingactivities in the first nine months of 2003, compared to Php23,325 million inthe same period in 2002.  On a non-consolidated basis, net cash used infinancing activities in the first nine months of 2003 was Php18,167 million,compared to Php16,592 million in the same period in 2002.  The higher net cashused in financing activities in the first nine months of 2003 was mainlyattributable to debt repayments by PLDT in line with its ongoing debt reductionprogram.  On a stand-alone basis, Smart’s financing activities in the firstnine months of 2003 used net cash of Php9,986 million for debt amortization,compared to Php6,627 million in 2002.

 

*DebtFinancing*

 

Additionsto our consolidated long-term debt during the first nine months of 2003 totaledPhp9,018 million, consisting of PLDT's drawings totaling Php8,800 million,primarily from loan facilities extended and/or guaranteed by various exportcredit agencies and refinancing facilities used to repay maturing debts, andSmart's drawings of Php218 million, under its loan facilities withHypoVereinsbank and Credit Lyonnais.

 

On aconsolidated basis, proceeds from short-term borrowings amounted to Php1,330million during the first nine months of 2003 as compared to payments ofPhp4,703 million during the same period in 2002.  This was primarily due to theissuance by PLDT of One-Year Peso Notes in April and May 2003.

 

Our consolidatedindebtedness as of September 30, 2003 was Php158,532 million, representing adecrease of Php9,991 million, or 6%, compared to Php168,523 million as of December 31, 2002.  This decrease was mainly due to the reductions of Php5,464 million andPhp4,027 million in PLDT’s and Smart’s indebtedness, respectively.  PLDT’sindebtedness decreased by 4% to Php134,580 million as of September 30, 2003 from Php140,044 million as of December 31, 2002, due to PLDT’s debt payments inline with the thrust to reduce PLDT’s overall indebtedness.  Smart'sindebtedness as of September 30, 2003 was Php18,864 million, a decrease of 18%from Php22,891 million as of December 31, 2002.

 

Asof September 30, 2003, PLDT had undrawn committed dollar-denominated long-termcredit facilities in the aggregate amount of US$173 million, inclusive of theUS$55 million undrawn portion of the US$149 million KfW refinancing facility,the US$19 million and JP¥3,191 million undrawn portions of the US$145 millionsyndicated multicurrency term loan facility, US$8 million undrawn portion ofthe US$12 million term loan facility extended by DEG-Deutsche Investitions-undEntwicklungsgesellschaft mbH, or DEG, under an agreement dated May 29, 2003 andthe undrawn JP¥5,615 million syndicated term loan facility supported by Nippon Exportand Investment Insurance of Japan under an agreement dated June 11, 2003.Smart also had undrawn committed dollar-denominated long-term credit facilitiesin the aggregate amount of US$106 million, which includes a US$100 millionfive-year term loan facility supported by Nippon Export and InvestmentInsurance of Japan obtained by Smart in November 2002.  In addition, Smartstill has available facilities under its €50million Framework Agreement with HypoVereinsbank up to a maximum aggregateamount of €44 million.

 

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

 

 

**Consolidated**

** **

**Non-consolidated**

**Maturity**

**(in millions)**

 

 

 

 

2003(1)

Php3,475

 

Php1,697

2004

23,108

 

15,613

2005

29,649

 

22,114

2006

27,688

 

21,146

2007 and onwards

72,518

 

72,126

________________

 

(1)  October 1, 2003 throughDecember 31, 2003.

 

Approximately Php83,920 million principal amount ofour consolidated outstanding long-term debt as of September 30, 2003 is scheduledto mature over the period from October 2003 to December 2006.  Of this amount,approximately Php60,570 million is attributable to PLDT, Php18,472 million toSmart, and the remainder to Mabuhay Satellite, MaraTel and ePLDT.

 

OnJanuary 25, 2002, PLDT signed two loan agreements with KfW that provide PLDTwith a US$149 million facility to refinance in part the repayment installmentsdue under its existing loans from KfW due from January 2002 to December 2004.The facility consist of two nine-year loans, inclusive of a three-yeardisbursement period and a two-year grace period during which no principal ispayable.  It partly enjoys the guarantee of HERMES, the export credit agency ofthe Federal Republic of Germany.  Disbursements under this facility, which aremade as the KfW loans to be repaid fall due, are currently available. As of September 30, 2003,drawings under this facility totaled US$94 million (Php5,171 million).

 

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

 

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

 

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

 

On May 29, 2003, PLDTobtained a US$12 million term loan facility from DEG, of which US$4 million wasdrawn as of September 30, 2003.

 

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

 

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

 

*Covenants*

 

Ourdebt instruments contain restrictive covenants and require us to comply with specifiedfinancial ratios and other financial tests, calculated in accordance withaccounting principles generally accepted in the Philippines, at relevantmeasurement 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 basis and excluding PLDT’s equity share in netearnings or lossses of investees, of not less than 150%, 180% or 200%;

 

•              total debt to EBITDA on anon-consolidated basis of not more than 5.5:1 from September 2003 to December2003, not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1from September 2004 to December 2004 and not more than 4.0:1 from March 2005and thereafter;

 

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

 

•              current ratio on anon-consolidated basis, ranging from not less than 0.9:1 to not less than1.2:1;

 

•              debt service coverage ratio on anon-consolidated basis of at least 1.1:1; and

 

•              debt to free cash flow ratio on anon-consolidated basis of not more than 5.5:1 from September 30, 2003 to June30, 2004, not more than 5.0:1 from September 30, 2004 to June 30, 2005, notmore than 4.5:1 from September 30, 2005 to June 30, 2006, and not more than4.0:1 from September 30, 2006 onwards.

 

Inaddition, some of PLDT's debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis.  These include:

 

•              long-term debt to appraised valueof equity/tangible net worth of not more than 2.33:1;

 

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

 

•              current ratio of not less than0.75:1 to 0.9:1; and

•              interest coverage ratio of notless than 200%.

 

Forpurposes of deriving appraised value of equity/tangible net worth, wedetermined the revaluation surplus in respect of PLDT’s properties.  PLDT’sproperties in service as of December 31, 1997 were reappraised by anindependent firm of appraisers to reflect their sound value, as part of NTC’sfinancial reporting requirements, based on the December 29, 1997 exchange rateof Php40.116 to US$1.00.  As of December 31, 1997, the sound value was Php225,966million and the revaluation surplus was Php82,723 million.  This reappraisalwas approved by the NTC on January 28, 2000 under NTC Case No. 98-183.  As of September 30, 2003and December 31, 2002, the revaluation surplus on PLDT’s 1997 appraisedproperties still in service, net of a 5% disallowance factor, amounted toPhp40,074 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 of investmentsor other assets that may be recognized by PLDT and its consolidatedsubsidiaries, and increases in our interest expense.  Interest expense mayincrease as a result of various factors, including issuance of new debt, therefinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT's credit ratings or the creditratings of the Philippines, increases in reference interest rates, and generalmarket conditions.  Since approximately 96% of PLDT's total debt is denominatedin foreign currencies, principally in U.S. dollars, many of these financialratios and other tests are negatively affected by any weakening of the peso.As of September 30, 2003, the peso depreciated by 3% to Php54.877 to US$1.00,from Php53.254 to US$1.00 in December 31, 2002.  The peso has been subject tosignificant fluctuations.  During the first nine months of 2003, the pesodepreciated to Php55.075 to US$1.00 on March 12, 2003then recovered to a high of Php52.021 to US$1.00 on May 8, 2003 only to depreciateagain to a low of Php55.532 to US$1.00 on August 26, 2003.

 

PLDT'sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of ourfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other investees in assisting in complying with non-consolidatedcovenants.

 

Wehave maintained compliance with all of our financial ratios and covenants asmeasured under our loan agreements.  However, if negative factors adverselyaffect our financial ratios, we may be unable to maintain compliance with theseratios and covenants or be unable to incur new debt.  Under some of our loanagreements, certain of our financial ratios have become more restrictive at theend of the second quarter of 2003 and will continue to become more restrictivein increments thereafter, which will make it more difficult for PLDT tomaintain compliance with this ratio in the future.  Inability to comply withour financial ratios and covenants or raise new financing could result in adeclaration of default and acceleration of some or all of our indebtedness.The terms of some of our debt instruments have no minimum amount forcross-default.

 

UnderPLDT's loan agreement that require maintenance of an interest coverage ratio ofat least 150%, interest coverage ratio is the ratio of (x) PLDT'snon-consolidated after-tax net income, excluding equity share in net earningsor losses of investees, after adding back interest charges, net of interestcapitalized to construction, on all indebtedness for the 12 months immediatelypreceding the calculation date to (y) the estimated aggregate interest chargespayable, net of interest to be capitalized to construction, during the 365-dayperiod following the calculation date on all of PLDT's indebtedness outstandingon such calculation date.

 

UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 180%, interest coverage ratio is the ratio of (x) our after-tax netincome for the 12 months immediately preceding the calculation date after (1)adding back interest charges, depreciation, amortization and other non-cashcharges (including equity share in net earnings or losses of investees butexcluding provision for doubtful accounts) and provision for income taxes, and(2) deducting capitalized subscriber acquisition costs, to (y) the estimatedaggregate interest charges payable during the 365-day period following thecalculation date on all of PLDT's indebtedness outstanding on such calculationdate.

 

UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 200%, interest coverage ratio is the ratio of (x) our after-tax netincome after adding back reserves for higher plant replacement costs, incometaxes, interest charges, depreciation and non-cash charges (including equityshare 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 to construction,plus (2) dividends on mandatorily redeemable preferred stock, in each casescheduled to be paid during the 12 months following the calculation date.

 

Non-consolidatedtotal debt to EBITDA is the ratio of (x) PLDT's total indebtedness (not includingamounts payable by PLDT to Piltel under the Letter of Support) to (y) netincome for the preceding 12 months, after adding back interest accrued on allindebtedness, depreciation, amortization and other non-cash charges (includingequity share in net earnings or losses of investees, but excluding provisionfor doubtful accounts) and provision for income taxes and deducting anycapitalized subscriber acquisition costs.

 

Debtservice coverage ratio is the ratio of (x) PLDT’s cash flow from operations afteradding back interest charges (to the extent previously deducted) plus (1)dividends received from investees, cash received upon any redemption ofredeemable preferred shares issued by Smart, any cash received under PLDT’ssubscriber investment plan and interest income received less (2) capitalexpenditures (excluding capitalized interest) and investments in investees forthe 12 months immediately preceding the calculation date plus (3) PLDT’sclosing cash balance of the last day of the calculation date to (y) the sum ofthe projected interest charges and principal debt repayments (excluding debt tobe repaid with a refinancing facility) during the 12 months following thecalculation date.

 

Debtto free cash flow ratio is the ratio of (x) PLDT’s debt less PLDT’s closingcash balance of the last day of the calculation period to (y) PLDT’s cash flowfrom operations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from investees, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s subscriber investment plan and interest income received less (2)capital expenditures (excluding capitalized interest) and investments ininvestees for the 12 months immediately preceding the calculation date.  

 

Non-consolidatedlong-term indebtedness to appraised value of equity (or under some covenants,to tangible net worth) is the ratio of (x) PLDT's aggregate indebtedness (orportion of such indebtedness) due more than one year following the calculationdate and par value of all mandatorily redeemable preferred stock to (y) the sumof the aggregate par value of all of PLDT's outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT's retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT's telephone plantapproved by the NTC.

 

Non-consolidatedcurrent ratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.

 

PLDT'sdebt instruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT's ability to take certainactions without lenders' approval, including:

 

•              incurring additional indebtedness;

 

•              prepaying other debt; 

 

•              making investments; 

 

•              extending loans; 

 

•              extending guarantees or assumingthe obligations of other persons;

 

•              paying dividends or otherdistributions or redeeming, repurchasing or otherwise acquiring shares ofPLDT’s capital stock; 

 

•              disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth;

 

•              entering into management contractsproviding for the management of its business or operations by a third party;

 

•              creating any lien or securityinterest; 

 

•              permitting set-off against amountsowed to PLDT; 

 

•              merging or consolidating with anyother company;

 

•              entering into transactions withshareholders and affiliates; and

 

•              entering into sale and leasebacktransactions.

 

Underthe indenture of PLDT's 10.625% Notes due 2007 and 11.375% Notes due 2012, PLDTis required to comply with a number of additional covenants, includingcovenants that, subject to certain exceptions, restrict PLDT's ability to (1)incur debt in the event its ratio of debt to EBITDA (calculated on anon-consolidated basis based on definitions provided in the same indenture,except under certain circumstances), after giving effect to the incurrence ofsuch debt, would be less than 5.5 to 1 on or prior to December 31, 2003, 5.0 to1 from January 1, 2004 to December 31, 2004 and 4.5 to 1 thereafter and (2) paydividends, repurchase or redeem its capital stock, make investments and prepaysubordinated debt, among other things.  Subject to certain restrictions, thesecovenants also restrict our ability to sell assets and to use the proceeds ofthese asset sales. 

 

Underthe terms of the US$149 million facility with KfW, PLDT is prohibited frompaying any dividends on common stock until after December 31, 2004.  In addition,under the terms of PLDT's US$145 million multicurrency term facility agreementand JP¥5,615 million loan agreement, PLDT is restricted from distributingdividends to common stockholders unless (i) no default has occurred which iscontinuing, and (ii) its debt to free cash flow ratio, after giving effect tothe distribution of such dividends and, under certain circumstances, otheradjustments to PLDT’s closing cash balance, would be less than 4.0 to 1.0.Under other loan agreements, PLDT may not declare or pay dividends on any ofits capital stock without the prior written consent of the lenders (i) if PLDTis in default in the payment of any amounts due and payable under such loanagreement or after the occurrence and during the continuance of any other eventof default or potential event of default under such agreements, (ii) if aftergiving effect to such action the current ratio would be less than 1.2 to 1 or(iii) in an amount greater than PLDT’s net income after taxes during the fiscalyear to which such payment or distribution relates.

 

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

 

Underthe terms of PLDT’s JP¥9,760 million loan from JBIC, in the event of anyproposed sale or transfer of PLDT's stock that would result in NTTCommunications holding less than 14.95% of PLDT's voting stock, we will berequired to prepay, immediately upon effectiveness of such sale or transfer,all principal outstanding under the loan, together with accrued interest.However, prepayment will not be required if, following such sale or transfer,(1) NTT Communications continues to have prior approval rights with respect toall matters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT or (2)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart's GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as ofthe date of the loan agreement.

 

Underthe terms of both PLDT’s US$145 million multicurrency term facility agreementand JP¥5,615 million loan agreement, if any lender so requests in writing, PLDTshall prepay in full such lender’s participation in the loan within 45 daysfrom notification of the change in control and no later than the date on whichPLDT is required to repurchase its 10.625% Notes due 2007 and 11.375% Notes due2012 (“Bonds”) from bondholders accepting the change in control offer.  Achange in control is deemed to occur when (1) the aggregate of NTTCommunications’ and First Pacific’s direct and indirect voting interest inPLDT’s outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT’s outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (3) if a rating agency at such time maintains a rating on the Bonds, therating agency downgrades its credit rating on the Bonds within 90 days (ormore, in certain circumstances) following notice of the occurrence of theevents specified in (1) and (2) above.

 

PLDT’sdebt instruments contain customary and other default provisions that permit thelender to accelerate amounts due or terminate their commitments to extendadditional funds under the debt instruments.  These default provisions include:

 

•              cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument; in some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated. In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments;

 

•              failure by PLDT to meet certainfinancial ratio covenants referred to above;

 

•              the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender; 

 

•              the revocation, termination oramendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;

 

•              the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender;

 

•              the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and

 

•              other typical events of default,including the commencement of bankruptcy, insolvency, liquidation or winding upproceedings by PLDT.

 

*Financing Requirements*

 

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

 

Wecontinue to pursue various initiatives and financing transactions with theobjective of further improving the balance between our cash flows and debtservice requirements and reducing our overall indebtedness.  In addition, PLDThas reduced its capital expenditures and investments, suspended dividendpayments to common shareholders and increased its application of available cashto reduce its indebtedness.  Further, we expect to benefit from increasingrevenue and cash flow contributions from our subsidiaries, particularly Smart.After receiving approvals from Finnvera and certain lenders for the payment ofdividends to PLDT in an amount not to exceed 40% of Smart’s net income in 2001,Smart made its first dividend payment of Php1,540 million to PLDT in December2002.  In June 2003, Smart paid dividends in the amount of Php4,300 million toPLDT, representing 70% of Smart’s 2002 net income, and in November 2003, Smart paid additional dividends to PLDT equivalent to theremaining 30% of its 2002 net income or Php1,866 million, afterreceiving the necessary approvals from Finnvera and certain lenders.  Smart will be required to obtain further waiversto pay additional dividends in future periods.  We cannot assure you that Smartwill be able to obtain such waivers in the future, or what amount, if any,Smart would be permitted or financially able to distribute.  We expect that wewill have difficulty meeting our debt payment obligations if we do not continueto receive cash dividends from Smart.  

 

Ourability to continue to refinance our debts and the terms on which suchrefinancing can be obtained will depend on our successful financial and operatingperformance, conditions affecting the Philippine and international financialmarkets, the Philippine peso-to-U.S. dollar exchange rate, our credit ratingsand other factors, many of which are beyond our control.  An inability to repayor refinance our debts could materially and adversely affect our results ofoperations and financial condition and could result in default on such debtsand cross-default and acceleration of substantially all of our other debts.

 

*Credit Ratings*

 

Ourcredit ratings may significantly affect the terms of our prospectivefinancings, particularly financing costs.  On July 29, 2003, Moody’s InvestorsService changed its outlook on PLDT to positive and affirmed its credit ratingof “Ba3” and its preferred stock rating of “B2”. On May 30, 2003, Fitch Ratings alsochanged its outlook on PLDT to stable with a credit rating of “BB-”.  On April 22, 2003,Standard & Poor's Ratings Group affirmed its “BB” rating and stable outlookon PLDT.  However, none of our existing indebtedness contains provisions underwhich credit rating downgrades would trigger a default, changes in applicableinterest rates or other similar terms and conditions. 

 

On October 29, 2002, Philippine Rating ServicesCorporation, or PhilRatings, a credit rating agency in the Philippines,announced its “PRS 1” rating for PLDT’s Php2.0 billion One-Year Peso Notes forwhich the registration was rendered effective by the Philippine Securities andExchange Commission on April 9, 2003.  PRS 1 is the highest rating possible on PhilRatings’scale for short-term securities and is based on the issuer’s “strongestcapability for timely payment of debt on both principal and interest.”

 

*Off-BalanceSheet Arrangement*

 

On October 10, 2002,PLDT entered into a Receivables Purchase Deed with a foreign institution, orthe Purchaser, under which PLDT agreed (1) to sell its receivables from certaineligible foreign carriers for an advance payment of US$50 million and (2) toservice, administer and collect the receivables on behalf of the Purchaser.The Purchaser will have no recourse to PLDT should the eligible carrier fail orrefuse to settle the assigned/purchased receivables, except if PLDT commits abreach of its representations and warranties under the Receivables PurchaseDeed.  For the nine months ended September 30, 2003, receivables sold under theReceivables Purchase Deed amounted to US$8 million (Php444 million).

 

*EquityFinancing*

 

Throughour subscriber investment plan, which provides postpaid fixed line subscribersthe opportunity to buy shares of our 10% Cumulative Convertible Preferred Stockas part of the upfront payments collected from subscribers, PLDT was able toraise Php47 million in the first nine months of 2003 and Php390 million in thesame period in 2002.

 

Cashdividend payments in the first nine months of 2003 amounted to Php1,213million, compared to Php1,178 million in the first nine months of 2002, all ofwhich were paid solely to preferred shareholders of PLDT.  The most recent cashdividend paid by PLDT to its common shareholders was in April 2001, and it doesnot expect to pay its common shareholders any dividends in 2003.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

The following table discloses our contractualobligations outstanding as of September 30, 2003: 

 

 

**Payments Due by Period**

 

**Total**

** **

**Within 1 year**

** **

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

** **

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

** **

**After 5 years**

 

 

 

**(in millions)**

 

 

Long-term debt obligations

Php156,438

 

Php21,498

 

Php57,618

 

Php33,284

 

Php44,038

Long-term lease obligations

7,361

 

1,758

 

3,059

 

1,899

 

645

Unconditional purchase obligations(1)

10,315

 

1,216

 

2,240

 

2,195

 

4,664

Other long-term obligations

21,322

 

–

 

–

 

–

 

21,322

Total contractual cash obligations

Php195,436 

 

Php24,472

 

Php62,917

 

Php37,378

 

Php70,669 

_____________

 

(1)  Under the Air Time Purchase Agreement with ACeSInternational Limited, the amount disclosed in the table above for payments duewithin 1 year reflects a reduction in PLDT’s required payments agreed under aStandstill Agreement, while the amounts disclosed for payments due from 2 yearsonwards are based on the original Air Time Purchase Agreement.  The parties tothe Standstill Agreement have also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on a revised ATPA before November 15, 2003 thatwill cover, among other matters, the amended minimum and supplemental air timepayment provisions subject to the approval of ACeS International Limited’screditors.

 

*Long-termDebt Obligations*

* *

Fora discussion of our long-term debt obligations, see Note 13 of the accompanyingfinancial statements.

* *

*Long-termLease Obligations*

 

***TransponderLease Agreement***.   On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, whichwas amended on May 10, 2000.  This agreement has a term of ten years commencingon December 18, 1997, unless terminated earlier in accordance with theterms thereof.  The annual basic rent for the transponders is US$18 million in2002.  As of September 30, 2003, PLDT’s aggregate remaining obligation under thisagreement was approximately Php3,291 million.

 

***MunicipalTelephone Projects***.   In 1993,PLDT entered into two lease agreements with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a period of 15 years.Title to the properties shall be transferred to PLDT upon expiration of thelease term.  As of September 30, 2003, PLDT’s aggregate remaining obligation under theseagreements amounted to approximately Php909 million.  In case of cancellation,PLDT is liable to pay Php100 million under each of the two contracts asliquidated damages. 

 

***DomesticFiber Optic Network Submerged Plant Agreement***.   On July 4, 2000, PLDT entered into an agreementwith NTT World Engineering Marine Corporation for submarine cable repair andrelated services for the maintenance of PLDT's domestic fiber optic networksubmerged plant for a period of five years up to July 4, 2005.  Under thisagreement, PLDT is required to pay NTT World Engineering Marine Corporation afixed annual standing charge of US$2 million, excluding cost for the use of aremotely-operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair.  As of September 30, 2003,the aggregate remaining obligation under this agreement was approximatelyPhp259 million.

 

***Digital Passage Service Contracts***.****PLDThas existing Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As of September 30, 2003, PLDT’saggregate remaining obligation under these contracts amounted to approximatelyPhp140 million.

 

***LicenseAgreement with Mobius Management Systems (******Australia******) Pty Ltd., or Mobius****.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, Mobius is alsorequired to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As of September 30, 2003, PLDT’s aggregate obligation under this agreement wasapproximately Php71 million.

 

***OtherLong-term Lease Obligations***.  Wehave various long-term lease contracts for periods ranging from two to tenyears covering certain offices, warehouses, cell sites, telecommunicationequipment locations and various office equipment.

 

*UnconditionalPurchase Obligations*

 

***AirTime Purchase Agreement with ACeS International Limited***.  PLDT is a party to a Founder NSP Air Time PurchaseAgreement, or ATPA, with AIL, which was amended in December 1998, under whichPLDT is granted the exclusive right to sell ACeS services in the Philippines.In exchange, 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, PLDT is required to makesupplemental air time purchase payments not to exceed US$15 million per yearduring the ten-year term. 

 

InMarch 2003, PLDT, together with the other founder shareholders, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original ATPA.  In lieu ofthese payments, the parties agreed that AIL shall provide PLDT and the otherfounder shareholders with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT is obliged to purchase from AIL 13,750 satellite phone units for the year2003 at US$395 F.O.B. per unit, subject to quarterly price adjustments.  Theparties to the Standstill Agreement also agreed to negotiate in good faith anduse their best efforts to reach an agreement on a revised ATPA before November15, 2003 that will cover, among other matters, the amended minimum andsupplemental air time payment provisions subject to the approval of AIL’screditors. 

 

Asof September 30, 2003, PLDT’s aggregate remaining minimum obligation underthis agreement was approximately Php10,087 million.

 

***InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.***  On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right andlicense to use the VeriSign software, brand and Certification PracticeStatement for the purpose of approving, issuing, suspending or revoking digitalcertificates for users of the Internet or similar open systems in the Philippinesfor a period of seven years.  Under this agreement, ePLDT is required to payVeriSign a certain percentage of the revenue derived from the services subjectto minimum annual royalty payments aggregating to US$1.2 million, which wassubsequently reduced to US$0.9 million, for the seven-year contract period.  Inaddition, ePLDT was required to pay an annual support fee totaling US$0.5million during the first year and US$0.3 million in each year thereafter.

 

Effective July 1, 2003, VeriSign has agreed to amend the agreementand issued Addendum 6 to write-off all past dues invoices and payments owed toVeriSign, which were invoiced or scheduled to be invoiced under the agreementprior to this Addendum 6.  All royalty payments and annual support fees due throughJune 2003 will be part of the write-off in the amount of US$0.8 million.  Forcontract year 4 (September 2003-August 2004), the annual support fee will bereduced from US$0.3 million to US$ 40,000 and for contract years 5-7 (September2003-August 2007) from US$0.3 million to US$0.16 million.  In addition,VeriSign agreed to reduce the affiliate revenue sharing rates from 50% ofsuggested retail price to 25% of suggested retail price for both enterprise andinternet products for 12 months starting July 2003 and negotiable thereafter.As of September 30, 2003, ePLDT’s aggregate remaining minimumobligation under this agreement was approximately Php26 million pertaining toannual support fee.

 

***License Purchase Agreement with I-Contact Solutions Pte. Ltd.***  On April 2, 2003, iPlus Intelligent Network Inc., oriPlus, entered into an Application Services Provider, or ASP, and ResellerContract with I-Contact Solutions Pte. Ltd., or I-Contact, of Singapore.Under the agreement, iPlus will purchase licenses of the CosmoCall Universe TM IP-basedcontact center solution.  CosmoCall Universe supports multi-channel customerinteractions including telephone, web chat, web voice, web video, webcollaboration, email and voicemail in one high capacity, high availability,multi-tenant platform.  CosmoCall Universe is a complete, unified contactcenter suite that includes ACD, IVR, CTI, predictive dialing, multimediarecording and a complement of powerful management applications.  The aggregate value of these licenses is US$2.1million and these will be delivered quarterly over a two-year period.  Furtherto the agreement, I-Contact will appointiPlus as the exclusive reseller and ASP for the Philippine market and willprovide iPlus with all the necessary support in terms of sales, marketing, and technicalservices.  As of September 30, 2003, iPlus’ aggregate remaining obligation under thisagreement was approximately Php82 million. 

 

***OtherUnconditional Purchase Obligations.***PLDT has various purchase contracts for periods ranging from two to threeyears covering the use of fraud management system and satellite hub and remoteVSAT network systems.

 

*OtherLong-term Obligations*

 

***MandatoryConversion and Purchase of Shares***.As of September 30, 2003, PLDT had issued a total of 3 million shares of SeriesV Convertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for a total of 58 million shares of Piltel’s Series K, Class IConvertible Preferred Stock pursuant to the debt restructuring of Piltel.  Ofthese PLDT issued preferred shares, 99% of Series V, close to 100% of 

Series VI and 100% of SeriesVII Convertible Preferred Stock were issued on June 4, 2001.  In 2002, PLDTissued additional 30,100 shares of Series V Convertible Preferred Stock and14,087 shares of Series VI Convertible Preferred Stock in exchange for a totalof 220,935 shares of Series K, Class I Convertible Preferred Stock of Piltel.In March 2003, PLDT issued 92,413 more shares of Series VI ConvertiblePreferred Stock in exchange for 462,065 shares of Piltel’s Series K, Class IConvertible Preferred Stock.  Each share of Series V, VI and VII ConvertiblePreferred Stock is convertible at any time at the option of the holder into onePLDT common share.  On the date immediately following the seventh anniversaryof the issue date of the Series V and Series VI Convertible Preferred Stock andon the eighth anniversary of the issue date of the Series VII ConvertiblePreferred Stock, the remaining outstanding shares under these series will bemandatorily converted to PLDT common shares.  Under a put option exercisablefor 30 days, holders of common shares received on mandatory conversion will beable to require PLDT to purchase such PLDT common shares for Php1,700 or US$36.132 or JP¥4,071.89 per share,depending on the series.

 

Asof September 30, 2003, 145,320 shares of Series V Convertible PreferredStock and 529,400 shares of Series VI Convertible Preferred Stock had beenconverted to PLDT common shares.  The aggregate value of the put option basedon outstanding shares as of September 30, 2003 was Php21,322million, of which Php13,622 million is payableon June 4, 2008 and Php7,700 million on June4, 2009 if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stock were mandatory converted and all the underlying common shareswere put to PLDT.  The market value of the underlying common shares was Php7,091 million, based on the market price ofPLDT’s common stock of Php640 per share as of September 30, 2003.

 

*CommercialCommitments*

 

Asof September 30, 2003, our outstanding commercial commitments, in the formof letters of credit, amounted to Php1,910million.  These commitments will expire within one year.

 

InOctober 1998, Smart entered into a Frame Supply Contract with NokiaTelecommunications OY for the supply of hardware, software and documentationfor its GSM cellular network.  In the same month, Smart and Nokia (Philippines),Inc., or Nokia, signed a Frame Services Contract that covers the design,planning, installation, commissioning, integration, acceptance testing,training, and handling of the GSM network.  In 2001, Smart issued a MasterPurchase Order, or MPO, in the amount of US$200 million in favor of NokiaNetworks OY for the purchase of additional equipment to expand its GSM cellularnetwork.  As of September 30, 2003, the balance due under this MPO amounted to US$12million.  In addition, on May 30, 2003, Smart entered into a Technical Support Services Order,or TSSO, with Nokia in the amount of US$8 million.  As of September 30, 2003,the commitment due under this TSSO which is valid until December 31, 2003,amounted to US$2 million.  See Note 21 to the accompanying financial statementsfor further discussion.

 

**Quantitative andQualitative Disclosures about Market 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 RiskManagement***

 

Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets. 

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.

 

***Foreign Exchange Risk Management***

 

As of September 30, 2003, the Philippine pesodepreciated against the U.S. dollar to Php54.877 toUS$1.00 from Php53.254 to US$1 as of December 31, 2002.As of September 30, 2002, the Philippine peso depreciated against the U.S.dollar to Php52.410 to US$1.00 from Php51.690 to US$1.00 as of December 31, 2001.  Inthe first nine months of 2003, PLDT capitalized net foreign exchange losses of Php3,117 million, as compared to Php2,187 million in the same period in 2002.  Ofthese capitalized net foreign exchange losses Php2,997million in the first nine months of 2003 and Php1,868million in the same period in 2002, were attributable to foreigncurrency-denominated liabilities used to finance our capital investments andwere therefore recorded as additions to the carrying value of the relatedproperty accounts. 

 

Thefollowing table shows our consolidated and non-consolidated foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsas of September 30, 2003 and December 31, 2002:

 

 

**September 30, 2003**(1)

 

**December 31, 2002**(2)

** **

**U.S. dollars**

** **

**Pesos**

** **

**U.S. dollars**

** **

**Pesos**

** **

**(Unaudited)**

 

**(Audited)**

** **

 

 

**(in millions)**

 

 

**Consolidated**

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

US$122

 

Php6,687

 

US$76

 

Php4,033

Accounts receivable

191

 

10,504

 

148

 

7,910

 

313

 

17,191

 

224

 

11,943

Liabilities

 

 

 

 

 

 

 

Accounts payable

40

 

2,222

 

56

 

2,969

Accrued expenses and other current liabilities

140

 

7,702

 

165

 

8,782

Notes payable

–

 

–

 

6

 

320

Long-term debt

2,707

 

145,890

 

2,957

 

156,398

Deferred credits and other noncurrent liabilities

91

 

4,987

 

98

 

5,205

 

2,978

 

160,801

 

3,282

 

173,674

Net foreign currency-denominated liabilities

US$2,665

 

Php143,610

 

US$3,058

 

Php161,731

**Non-Consolidated**

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

US$54

 

Php2,979

 

US$49

 

Php2,602

Accounts receivable

130

 

7,123

 

116

 

6,158

 

184

 

10,102

 

165

 

8,760

Liabilities

 

 

 

 

 

 

 

Accounts payable

7

 

382

 

23

 

1,220

Accrued expenses and other current liabilities

9

 

474

 

47

 

2,476

Notes payable

–

 

–

 

6

 

320

Long-term debt

2,401

 

129,131

 

2,558

 

135,158

Deferred credits and other noncurrent liabilities

91

 

4,987

 

98

 

5,205

 

2,508

 

134,974

 

2,732

 

144,379

Net foreign currency-denominated liabilities

US$2,324

 

Php124,872

 

US$2,567

 

Php135,619

________________

 

(1)  The exchange rate used was Php54.877 to US$1.00.

(2)  The exchange rate used was Php53.254 to US$1.00.

 

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

* *

Asof September 30, 2003, approximately 96% of both our total consolidated andnon-consolidated debts were denominated in foreign currencies.  Of our foreigncurrency-denominated debts, 5% and 6% 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 62% and 59% of our consolidated and non-consolidated debts,respectively), and interest expense on our debt in peso terms.  In addition,many of our financial ratios and other financial tests will be negativelyaffected.  If, among other things, the value of the peso against the U.S.dollar drops from its current level, we may be unable to maintain compliancewith these ratios, which could result in acceleration of some or all of ourindebtedness.  For further information on our loan covenants, see “Liquidityand Capital Resources — Financing Activities — Covenants” above and Note 13 tothe accompanying financial statements.

 

Tomanage our foreign exchange risks, stabilize cash flows, and improve investmentand cash flow planning, we enter into forward foreign exchange contracts,foreign currency swap contracts, currency options and other hedging productsaimed at reducing and/or managing the adverse impact of changes in foreign exchangerates on our operating results and cash flows.  However, these hedges do notcover all of our exposure to foreign exchange risks, and hedges to cover all ofour exposure are not currently nor readily available.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign exchange risk associated withour foreign currency-denominated loans.  As of September 30, 2003, PLDT’soutstanding forward foreign exchange contracts, principal-only long-termcross-currency swap contracts and currency option contracts amounted to US$142million, US$725 million and US$70 million, respectively. 

 

Smart’soutstanding forward foreign exchange contracts amounted to US$68 million as of September 30, 2003.Also, Smart had a long-term cross-currency swap contract which matured on April 30, 2003.  Thefinal exchange has been made and the contract has been terminated.

 

Forfurther discussions of these contracts, see Note 24 to the accompanying financialstatements.

 

***Interest Rate RiskManagement***

 

Fromtime to time and on a limited basis, we enter into interest rate swapagreements in order to manage our exposure to interest rate fluctuations.

 

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

 

**Effect of PesoDepreciation**

** **

Inthe first nine months of 2003 and 2002, our operating revenues, which have beenreceived in U.S. dollars or in respect of which we have been able to adjust ourservice fees to reflect changes in the peso-to-dollar exchange rate exceededour U.S. dollar-linked operating expenses.  As a result, the depreciation ofthe peso against the dollar over this period had a positive net impact on ouroperating profit.  However, since substantially all of our indebtedness isdenominated in U.S. dollars, such depreciation has also increased our interestexpense in peso terms and increased the peso amounts of our U.S.dollar-denominated indebtedness.  PLDT has capitalized its foreign exchangelosses in respect of its U.S. dollar-denominated indebtedness, and net incomein future periods is expected to be negatively affected as a result of higherdepreciation expense resulting from such capitalization.  Our cash flows arenegatively affected by the higher peso cost of repaying U.S. dollar-denominateddebts, and our ability to comply with financial covenants and ratios isnegatively affected by the increase in the amount of our debts and our interestexpenses in peso terms.

** **

**Impact of Inflation andChanging Prices**

** **

Inflationcan be a significant factor in the Philippine economy, and we are continuallyseeking ways to minimize its impact.  In recent periods, while decreases in therelative value of the peso have had a significant effect on us, we do notbelieve inflation has had a material impact on our operations.  The averageinflation rate in the Philippines in the first nine months of 2003 was 2.9%, comparedto 3.3%, in the first nine months of 2002.

** **

**OTHER INFORMATION**

** **

**Related Party Transactions**

 

Inthe ordinary course of business, companies belonging to the PLDT Group areengaged in arm’s-length intercompany transactions.  We believe that the termsof these transactions are comparable with those available from unrelatedparties. 

 

•              *Telecommunications servicesprovided within the PLDT Group* —interconnection agreements among/between PLDT, Smart, Piltel, Clark Telecom,Subic Telecom, MaraTel and PLDT Global under terms similar with those agreedwith other telecommunications providers outside the PLDT Group.

 

•              *Transponder Lease Agreementbetween PLDT and Mabuhay Satellite*—an agreement pursuant to which Mabuhay Satellite leases to PLDT C-bandtransponders on board the Agila II satellite, in consideration of a basicrent.  Rentals under this agreement totaled Php550 million and Php613 millionfor the nine months months ended September 30, 2003 and 2002, respectively. PLDT’soutstanding obligations under this agreement amounted to Php73 million as of September 30, 2003and Php269 million as of December 31, 2002.

 

•              *Facilities Management Agreementbetween PLDT and Piltel*— anagreement under which PLDT undertakes the management, operation and maintenanceof Piltel’s regional telecommunications facilities as well as Executive OrderNo. 109, network operations and services, including E.O. 109 fixed linebuild-out installations, public calling offices, payphone facilities, and thesystems required to support these services.  Management fees under thisagreement totaled Php56 million and Php64 million for the nine months ended September 30, 2003and 2002, respectively.  PLDT’s outstanding receivables under this agreementamounted to Php338 million as of September 30, 2003 and Php258 million as of December 31, 2002.

 

•              *Facilities Management Agreementbetween Subic Telecom and Piltel*— anagreement under which Subic Telecom manages the regional telephone network,customer operations, network operations and payphones of Piltel in Subic and Olongapo City.Management fees under this agreement totaled Php16 million for the nine monthsperiod ended September 30, 2003 and 2002.  Subic Telecom’s outstanding receivablesunder this agreement amounted to Php7 million as of September 30, 2003 and Php2 millionas of December 31, 2002.

 

•              *Agreements between Smart andPiltel*— agreements relating to theintegration of Smart’s and Piltel’s operations under which Smart undertakes tomanage Piltel’s facilities, customer services and administrative support andmanagement services.  In addition, Smart also entered into a facilities serviceagreement with Piltel under which Piltel accesses Smart's existing GSM networkand facilities to enable Piltel to offer prepaid cellular service using GSMtechnology in exchange for approximately 50% of Piltel's revenues, net ofinterconnection expenses.  Total fees under these service agreements totaledPhp3,428 million and Php2,218 million for the nine months ended September 30, 2003and 2002, respectively.  Smart’s outstanding receivables under these agreements amounted to Php1,587million as of September 30, 2003 and Php1,027million as of December 31, 2002.

 

•              *Air Time Purchase Agreementbetween PLDT and AIL and Related Agreements*— an agreement under which PLDT has been granted the exclusive right tosell ACeS services in the Philippines.  In March 2003, PLDT, together with the foundershareholders, entered into a Standstill Agreement in respect of the Air TimePurchase Agreement.  See Notes 16 and 21 to the accompanying financialstatements for further discussion.

 

•              *Agreements between Smart andACeS Philippines*— agreements underwhich Smart (1) provides ACeS Global Mobile Personal Communications by Satellite, or GMPCS,services, in the Philippines under a revenue-sharing agreement, (2) undertakesthe management, maintenance and operations of GMPCS, and (3) provides certainadministrative support and services in certain aspects of ACeS Philippines’business operations.  Fees under these agreements, net of ACeS Philippines’share, totaled Php52 million and Php36 million for the nine months ended September 30, 2003and 2002, respectively.  Under these agreements, Smart had outstanding payablesof Php137 million as of September 30, 2003, and no outstanding obligation asof December 31, 2002.

 

In addition, transactions to which PLDT or itssubsidiary is a party, in which a director or key officer or owner of more than5% of the common shares of PLDT, or any member of the immediate family of adirector or key officer or owner of more than 5% of the common shares of PLDThad a direct or indirect material interest as of September 30, 2003 andDecember 31, 2002 and for the nine months ended September 30, 2003 and 2002 areas follows:

 

•              *Agreements with NTTCommunications and/or its Affiliates*—agreements under which (1) NTT Communications provides advisory services forvarious business areas of PLDT; (2) NTT World Engineering Marine Corporationprovides maintenance services to PLDT’s domestic fiber optic network; (3) PLDTis licensed to market managed data and other services using NTT Communications’Arcstar brand; and (4) PLDT and NTT Communications agreed to cooperativearrangements for international telecommunication services.  Fees under theseagreements totaled Php218 million and Php251 million for the nine months ended September 30, 2003and 2002, respectively.  PLDT’s outstanding obligations under these agreementsamounted to Php39 million and Php36 million as of September 30, 2003 and December 31, 2002.

 

•              *Agreements between Smart and**Asia**Link B.V*. — agreements under whichAsia Link undertakes to provide technical support services for the operationsand maintenance of Smart’s CMTS.  Fees under these agreements totaled Php223million and Php300 million for the nine months ended September 30, 2003and 2002, respectively.  Under these agreements, Smart had outstanding payablesof Php102 million as of September 30, 2003 and Php31 million as of December 31, 2002.Asia Link is a subsidiary of First Pacific.

 

•              *Agreement with Foote, Cone& Belding Worldwide, or FCB Worldwide*— an agreement under which FCB Worldwide provides consultancy andadvisory services to PLDT.  The chairman of PLDT’s board of directors is thenon-executive chairman of FCB Worldwide’s representative office in the Philippines.

 

•              *Agreements relating toinsurance companies* — Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurancecompanies to cover certain insurable properties of the PLDT Group.  Insurancepremiums are remitted to Gotuaco and the broker’s fees are settled betweenGotuaco and the insurance companies.  In addition, PLDT has signed an insurancepolicy with Malayan Insurance Co. Inc., or Malayan, wherein premiums are paiddirectly to Malayan.  Premium payments to Gotuaco and Malayan covering thetwelve-month period ending July 31, 2004 including payments subsequent to 2002totaled Php334 million.  Two directors of PLDT have a direct/indirect interestin or serve as director/officer of Gotuaco and Malayan.

 

Fora more detailed discussion of the related party transactions enumerated above,see Note 16 to the accompanying**financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**FINANCIALSTATEMENTS**

** **

AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003AND 2002

** **

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**BALANCE SHEETS**

**(in million pesos)**

 

** **

**Consolidated**

 

**Non-Consolidated**

** **

**September 30,  2003**

**(Unaudited)**

** **

December 31, 2002

(As restated – 

Note 3)

 

**September 30,  2003**

**(Unaudited)**

 

December 31, 2002

(As restated –

Note 3)

**ASSETS**

**Current Assets**

** **

** **

 

 

 

Cash and cash equivalents (Notes 5 and 23)

**11,430**

10,876

 

**3,235**

4,165

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

**20,321**

20,124

 

**16,970**

19,376

Inventories and supplies – net (Note 7)

**3,479**

4,507

 

**2,140**

2,709

Deferred income tax – net (Notes 3 and 19)

**4,166**

3,772

 

**3,962**

3,002

Prepayments and other current assets

**2,633**

1,879

 

**1,992**

1,403

Total Current Assets

**42,029**

41,158

 

**28,299**

30,655

**Noncurrent Assets**

 

** **

 

 

** **

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

**247,148**

252,025

 

**188,045**

190,722

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

**1,647**

5,470

 

**41,118**

39,425

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

**5,678**

4,677

 

**2,815**

1,613

Total Noncurrent Assets

**254,473**

262,172

 

**231,978**

231,760

 

**296,502**

303,330

 

**260,277**

262,415

 

** **

** **

 

** **

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

** **

 

** **

 

Notes payable (Notes 11 and 23)

**2,094**

760

 

**1,884**

720

Accounts payable (Notes 16 and 23)

**6,107**

9,694

 

**6,409**

7,396

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

**15,909**

12,531

 

**6,853**

5,537

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

**21,494**

19,176

 

**13,847**

11,962

Dividends payable (Note 15)

**949**

424

 

**524**

424

Income tax payable (Note 19)

**179**

982

 

–

538

Total Current Liabilities

**46,732**

43,567

 

**29,517**

26,577

**Noncurrent Liabilities**

 

** **

 

 

** **

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

**134,944**

148,587

 

**118,849**

127,362

Deferred income tax – net (Note 19)

**11,181**

10,699

 

**9,654**

9,231

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

**10,256**

11,540

 

**9,640**

11,157

Total Noncurrent Liabilities

**156,381**

170,826

 

**138,143**

147,750

**Minority Interest in Consolidated Subsidiaries**

**772**

849

 

–

–

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

**92,617**

88,088

 

**92,617**

88,088

 

**296,502**

303,330

 

**260,277**

262,415

*See accompanying Notes to Financial Statements.*

** **

** **

** **

** **
****
**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF INCOME**

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

** **

** **

**Consolidated**

 

**Non-Consolidated**

 

**Consolidated**

 

**Non-Consolidated**

** **

**Nine Months Ended September 30**

** **

**Three Months Ended September 30**

** **

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 

**2003**

2002

** **

(Unaudited)

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

** **

 

 

** **

 

 

 

 

 

 

 

Fixed line services:

** **

 

 

** **

 

 

 

 

 

 

 

Local exchange

**15,607**

15,936

 

**15,527**

15,859

** **

**5,142**

5,217

** **

**5,114**

5,199

International long distance

**9,247**

7,804

 

**8,826**

7,393

** **

**3,198**

2,581

** **

**3,108**

2,377

National long distance

**4,793**

5,837

 

**4,731**

5,772

** **

**1,500**

1,920

** **

**1,474**

1,897

Data and other network

**4,381**

4,126

 

**4,208**

4,031

** **

**1,505**

1,408

** **

**1,433**

1,359

Miscellaneous

**260**

226

 

**557**

569

** **

**80**

101

** **

**200**

271

 

**34,288**

33,929

 

**33,849**

33,624

** **

**11,425**

11,227

** **

**11,329**

11,103

Wireless services

**34,858**

23,622

 

–

–

** **

**12,365**

8,793

** **

–

–

Information and communications technology services

**1,257**

613

 

–

–

** **

**394**

217

** **

–

–

 

**70,403**

58,164

 

**33,849**

33,624

** **

**24,184**

20,237

** **

**11,329**

11,103

**OPERATING EXPENSES**

 

** **

 

 

 

** **

** **

 

** **

** **

 

Depreciation and amortization (Note 8)

**17,799**

17,852

 

**9,636**

9,682

** **

**6,082**

6,280

** **

**3,205**

3,222

Compensation and benefits (Note 17)

**8,192**

7,654

 

**5,287**

5,321

** **

**2,610**

2,537

** **

**1,650**

1,718

Selling and promotions (Note 3)

**7,307**

5,915

 

**986**

939

** **

**2,454**

2,418

** **

**357**

325

Maintenance (Note 16)

**4,031**

3,028

 

**2,361**

2,101

** **

**1,397**

843

** **

**807**

682

Provision for doubtful accounts (Note 6)

**3,058**

3,218

 

**2,106**

2,609

** **

**1,170**

1,624

** **

**702**

1,205

Rent (Note 16)

**2,413**

2,327

 

**1,330**

1,232

** **

**731**

1,071

** **

**484**

440

Professional and other service fees (Note 16)

**1,253**

1,195

 

**672**

711

** **

**412**

414

** **

**217**

242

Insurance and security

**1,109**

897

 

**562**

442

** **

**374**

357

** **

**185**

167

Taxes and licenses (Note 22)

**1,002**

655

 

**482**

389

** **

**367**

214

** **

**195**

116

Other operating costs (Note 16) 

**1,889**

1,258

 

**749**

607

** **

**511**

458

** **

**167**

189

 

**48,053**

43,999

 

**24,171**

24,033

** **

**16,108**

16,216

** **

**7,969**

8,306

**NET OPERATING INCOME**

**22,350**

14,165

 

**9,678**

9,591

** **

**8,076**

4,021

** **

**3,360**

2,797

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

**15,179**

9,341

 

**4,419**

5,186

** **

**3,610**

2,747

** **

**(522)**

1,627

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

**OF CONSOLIDATED SUBSIDIARIES**

**7,171**

4,824

 

**5,259**

4,405

** **

**4,466**

1,274

** **

**3,882**

1,170

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

**1,531**

1,176

 

**(536)**

739

** **

**389**

346

** **

**(133)**

212

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

**5,640**

3,648

 

**5,795**

3,666

** **

**4,077**

928

** **

**4,015**

958

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

**(155)**

(18)

 

–

–

** **

**62**

(30)

** **

–

**–**

**NET INCOME**

**5,795**

3,666

 

**5,795**

3,666

** **

**4,015**

958

** **

**4,015**

958

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

 

** **

 

** **

 

** **

** **

 

** **

** **

 

Basic

**25.20**

14.45

 

**25.20**

14.45

** **

**19.69**

3.19

** **

**19.69**

3.19

Diluted

**24.57**

14.41

 

**24.57**

14.41

** **

**19.06**

3.19

** **

**19.06**

3.19

*See accompanying Notes to Financial Statements.*

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

** **

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(in million pesos)**

** **

 

**Preferred Stock**

** **

**Common Stock**

** **

**Capital in Excess of  Par Value**

** **

**Retained Earnings**

** **

**Total**

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2002:

 

 

 

 

 

 

 

 

 

As previously reported

4,242

 

845

 

48,906

 

34,635

 

88,628

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

–

 

–

 

–

 

(2,066)

 

(2,066)

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

–

 

–

 

–

 

(186)

 

(186)

As restated

4,242

 

845

 

48,906

 

32,383

 

86,376

Net income for the period:

**–**

 

–

 

–

 

**–**

 

**–**

As previously reported

 

 

 

 

 

 

4,156

 

4,156

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

–

 

–

 

–

 

(468)

 

(468)

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

–

 

–

 

–

 

(22)

 

(22)

As restated

**–**

 

**–**

 

**–**

 

3,666

 

3,666

Cash dividends

**–**

 

–

 

–

 

(1,338)

 

(1,338)

Partial redemption of Series IV Preferred Stock  (Note 15)

(72)

 

**–**

 

**–**

 

**–**

 

(72)

Issuance of capital stock (Note 15)

370

 

2

 

20

 

–

 

392

Balances at September 30, 2002 (Unaudited)

4,540

 

847

 

48,926

 

34,711

 

89,024

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2003:

 

 

 

 

 

 

 

 

 

As previously reported

4,585

 

847

 

48,953

 

34,004

 

88,389

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

**–**

** **

**–**

** **

**–**

** **

(301)

 

(301)

As restated

4,585

** **

847

** **

48,953

** **

33,703

 

88,088

Net income for the period

**–**

** **

**–**

** **

**–**

** **

5,795

 

5,795

Cash dividends

**–**

** **

**–**

** **

**–**

** **

(1,313)

 

(1,313)

Issuance of capital stock (Note 15)

32

** **

**–**

** **

15

** **

**–**

 

47

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

4,617

** **

847

** **

48,968

** **

38,185

 

92,617

* *

*See accompanying Notes to Financial Statements.*

* *

* *

**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CASH FLOWS**

**(in million pesos)**

** **

** **

**Consolidated**

 

**Non-Consolidated**

 

**Consolidated**

 

**Non-Consolidated**

** **

**Nine Months Ended September 30**

** **

**Three Months Ended September 30**

** **

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 
** **

(Unaudited)

** **

** **

 

 

** **

** **

** **

** **

** **

** **

** **

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

** **

 

** **

** **

** **

** **

** **

 

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

**7,171**

4,824

 

**5,259**

4,405

** **

**4,466**

1,274

** **

**3,882**

1,170

Adjustments for:

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Depreciation and amortization

**17,799**

17,852

 

**9,636**

9,682

** **

**6,082**

6,280

** **

**3,205**

3,222

Provision for doubtful accounts

**3,058**

3,218

 

**2,106**

2,609

** **

**1,170**

1,624

** **

**702**

1,205

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

    for impairment in value of investment

**1,618**

1,038

 

**(7,256)**

(1,905)

** **

**2**

317

** **

**(4,054)**

(481)

Others

**3,498**

823

 

**1,805**

208

** **

**190**

449

** **

**564**

208

Interest expense

**9,173**

10,693

 

**7,369**

8,333

** **

**3,079**

3,484

** **

**2,539**

2,737

Interest income

**(597)**

(795)

 

**(80)**

(58)

 

**(121)**

(269)

** **

**(29)**

(22)

Operating income before working capital changes

**41,720**

37,653

 

**18,839**

23,274

** **

**14,868**

13,159

** **

**6,809**

8,039

Decrease (increase) in:

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Accounts receivable

**(3,227)**

(719)

 

**(424)**

40

** **

**(1,390)**

(1,119)

** **

**181**

2,048

Inventories and supplies

**536**

439

 

**375**

805

** **

**945**

(440)

** **

**176**

46

Prepayments and other current assets

**(45)**

124

 

**74**

(507)

** **

**(283)**

(66)

** **

**(257)**

(326)

Increase (decrease) in:

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Accounts payable

**(2,648)**

(1,474)

 

**(1,029)**

(1,323)

** **

**(230)**

3,407

** **

**219**

1,133

Accrued expenses and other current liabilities

**2,835**

2,569

 

**752**

211

** **

**833**

2,061

** **

**687**

(122)

Cash generated from operations

**39,171**

38,592

 

**15,587**

22,500

** **

**14,743**

17,002

** **

**7,815**

10,818

Income taxes paid

**(2,285)**

(299)

 

**(538)**

(181)

** **

**(872)**

(4)

** **

**–**

–

Net cash provided by operating activities

**36,886**

38,293

 

**18,049**

22,319

** **

**13,871**

16,998

** **

**7,815**

10,818

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Net additions to property, plant and equipment

**(10,252)**

(10,027)

 

**(3,127)**

(3,753)

** **

**(5,565)**

(3,327)

** **

**(2,272)**

(1,888)

Interest paid – capitalized to property, plant  and equipment

**(745)**

(1,084)

 

**(742)**

(914)

** **

**(204)**

(331)

** **

**(211)**

(274)

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

**39**

(393)

 

**–**

(389)

** **

**114**

(201)

** **

**–**

(203)

Dividends received

**–**

–

 

**4,300**

32

** **

**–**

–

** **

**–**

32

Increase in other noncurrent assets

**(1,462)**

(888)

 

**(1,371)**

(934)

** **

**(1,358)**

(742)

** **

**(1,263)**

(681)

Interest received

**647**

510

 

**81**

58

** **

**114**

164

** **

**30**

24

Net cash used in investing activities

**(11,773)**

(11,882)

 

**(859)**

(5,900)

** **

**(6,899)**

(4,437)

** **

**(3,716)**

(2,990)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Proceeds from long-term debt

**9,018**

31,944

 

**8,800**

25,720

** **

**1,456**

5,494

** **

**1,325**

5,335

Payments of long-term debt

**(24,110)**

(36,960)

 

**(18,423)**

(29,239)

** **

**(5,347)**

(15,645)

** **

**(3,432)**

(13,955)

Proceeds from (payments of) notes payable 

**1,330**

(4,703)

 

**1,158**

(1,279)

** **

**(696)**

(2,274)

** **

**(746)**

(300)

Interest paid – net of capitalized portion

**(8,486)**

(10,067)

 

**(6,937)**

(7,869)

** **

**(2,406)**

(3,540)

** **

**(2,028)**

(2,982)

Increase (decrease) in deferred credits and other noncurrent liabilities

**(1,157)**

(2,679)

 

**(1,599)**

(3,065)

** **

**786**

(317)

** **

**499**

(980)

Cash dividends paid

**(1,213)**

(1,178)

 

**(1,213)**

(1,178)

** **

**(519)**

(416)

** **

**(519)**

(416)

Proceeds from issuance of capital stock

**47**

390

 

**47**

390

** **

**4**

45

** **

**4**

45

Redemption of preferred stock

**–**

(72)

 

**–**

(72)

** **

**–**

–

** **

**–**

–

Net cash used in financing activities

**(24,571)**

(23,325)

 

**(18,167)**

(16,592)

** **

**(6,722)**

(16,653)

** **

**(4,897)**

(13,253)

*** ***

** **

 

 

** **

 

** **

** **

 

** **

** **

 

**EFFECT OF EXCHANGE RATE CHANGES**

**ON CASH AND CASH EQUIVALENTS**

**12**

59

 

**47**

53

** **

**64**

297

** **

**67**

223

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

**554**

3,145

 

**(930)**

(120)

** **

**314**

(3,795)

 

**(731)**

(5,202)

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

**10,876**

4,123

 

**4,165**

2,336

** **

**11,116**

11,063

** **

**3,966**

7,418

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

**11,430**

7,268

 

**3,235**

2,216

** **

**11,430**

7,268

** **

**3,235**

2,216

*See accompanying Notes to Financial Statements.*

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **
****
**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**NOTES TO FINANCIAL STATEMENTS**

 

 

 

**1.          ****CorporateInformation**

** **

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

 

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

 

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

 

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

 

Asof September 30, 2003, the PLDT Group had 18,007 employees while PLDT, on astand-alone basis, had 10,355 employees, compared to 19,139 and 12,131employees, respectively, as of December 31, 2002.  

 

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

 

 

 

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

** **

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

 

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

 

Inpreparing the unaudited September 30, 2003 financial statements, we followedthe same accounting policies, except as discussed in *Note 3 – AccountingChanges, Adoption of SFAS 38/IAS 38 “Intangible Assets”,* and methods ofcomputation that we had applied in the preparation of the audited December 31,2002 financial statements.

 

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

 

** **

** **

**Percentage of Ownership**

** **

** **

**As of September 30**

**Name of Subsidiary**

**Principal Activity**

**2003**

2002

** **

 

** **

** **

**Fixed Line**

 

** **

** **

PLDT Clark Telecom, Inc., or Clark Telecom

Telecommunications services

**100.0**

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

**100.0**

100.0

Smart–NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

PLDT Global Corporation, or PLDT Global,  and subsidiaries

Telecommunications services

**100.0**

100.0

Maranao Telephone Company, Inc.,  or MaraTel

Telecommunications services

**97.5**

92.3

Bonifacio Communications Corporation,  or BCC

Telecommunications, infrastructure and related value-added services

**75.0**

37.5

**Wireless**

 

 

** **

Smart Communications, Inc., or Smart, and subsidiaries

Cellular mobile services

**100.0**

100.0

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

**88.5**

88.5

Mabuhay Satellite Corporation, or Mabuhay Satellite

Satellite communications services

**67.0**

67.0

**Information and Communications Technology**

 

 

** **

ePLDT, Inc., or ePLDT, and subsidiaries

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

**100.0**

100.0

* *

 

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

 

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

 

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

* *

***Investments in Sharesof Stock***

 

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

 

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

 

 

**3.          ****AccountingChanges**

** **

***Revenue Recognition forPrepaid Cards***

 

In the fourth quarter of2002, we changed our revenue recognition policy for prepaid cards and have nowelected to recognize the revenue based on actual subscribers’ usage of theprepaid cards for better matching of revenues and expenses.  Prior to 2002, werecognized revenues at the time of sale.

 

We have accounted for thischange in accounting policy retroactively and have accordingly restated ourcomparative financial statements to conform to the changed policy.  Theafter-tax effect of the change was a decrease of Php468 million in consolidatednet income for the nine months ended September 30, 2002and a reduction of Php2,066 million in beginning retained earnings in 2002.Basic and diluted earnings per common share decreased by Php2.76 and Php2.60,respectively, for the nine months ended September 30, 2002.

 

Consolidated unearnedrevenues related to unused prepaid cards sold amounting to Php1,863 million andPhp2,022 million as of September 30, 2003 and December 31, 2002 andnon-consolidated unearned revenues amounting to Php580 million and Php431million as of September 30, 2003 and December 31, 2002, respectively, areincluded in “Accrued expenses and other current liabilities” in the balancesheets.

 

***Investments in Piltel***

 

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

 

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

 

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

 

Under the terms of Piltel’sdebt restructuring plan, Piltel is not permitted to declare or pay anydividends, repay or pay interest on any financial indebtedness to PLDT Groupand purchase, cancel, redeem or otherwise repay any of its share capital untilall amounts owed to Piltel creditors have been paid or discharged.  As of September 30, 2003and December 31, 2002, Piltel reported a capital deficiency of Php20,394million and Php19,100 million, respectively.

 

In addition, PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million, of which US$50 million (approximately Php2,757 million) remained undrawn as of September30, 2003.

 

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

 

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

 

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

 

TheASC approved the adoption of SFAS 38/IAS 38 “Intangible Assets”, which becameeffective in the Philippines for financial statements covering periods beginningon or after January 1, 2003.  SFAS 38/IAS 38 requires that expenditures on research, start-up, training, advertisingand relocation are to be expensed as incurred.  Further, SFAS 38/IAS 38prescribes the retroactive adjustment of unamortized intangible assets tobeginning retained earnings of 2003 and the restatement of comparative priorperiod financial statements.

 

As at January 1, 2003,ePLDT’s and certain of its subsidiaries’ consolidated unamortized preoperatingexpenses amounted to Php311 million, of which Php301 million, representingePLDT’s equity interest, was retroactively adjusted to beginning retainedearnings.  Preoperating expenses incurred for the nine months ended September 30, 2003were charged to operations.  The effect of the application of SFAS 38/IAS 38was a decrease of Php22 million in the consolidated and non-consolidated netincome for the nine months ended September 30, 2002 and reductions in beginningretained earnings amounting to Php301 million in 2003 and Php186 million in2002.  No tax effect adjustment was considered in the application of SFAS38/IAS 38 due to income tax holiday enjoyed by ePLDT and its subsidiaries.

 

 

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

 

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

 

***Revenue Recognition***

 

Revenue for services isstated at amounts invoiced to customers and excludes value-added tax.  Weprovide fixed-line communication services, wireless communication services, andinformation and communications technology services.  We provide such servicesto business, residential, payphone and wireless customers.  Revenue, whichexcludes value-added tax, represents the value of fixed consideration that hasbeen received or is receivable.  Revenue is recognized when there is evidenceof an arrangement, collectibility is reasonably assured, and the delivery ofthe product or service has occurred. 

 

*Productsand services*

 

*Subscriptions*

* *

We provide telephone and datacommunication services under postpaid and prepaid payment arrangements. Revenueincludes fees for installation and activation.   

 

*Airtime,traffic and value-added services*

* *

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

 

*Equipmentsales*

* *

Sales of communicationequipment are recognized upon delivery to the customer.

* *

***Cash and CashEquivalents***

 

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

***Accounts Receivable***

*** ***

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

 

***Allowance for Doubtful Accounts***

 

Allowancefor doubtful accounts is maintained at a level considered adequate to providefor potentially uncollectible receivables.  The level of allowance is based onhistorical collection, write-off experience, current economic trends, changesin our customer payment terms and other factors that may affectcollectibility.  An evaluation of the receivables, designed to identifypotential charges to the allowance, is performed on a continuous basis duringthe period.

 

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

 

***Inventories andSupplies***

 

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

 

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

 

***Property, Plant andEquipment***

 

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

 

The initial cost of property,plant and equipment comprises its purchase price and any costs directlyattributable to bringing the asset to its working condition and location forits intended use.  Expenditures incurred after the assets have been put intooperation, such as repairs and maintenance and overhaul costs, are normallycharged to income in the period the costs are incurred.  In situations where itcan be clearly demonstrated that the expenditures have resulted in an increasein the future economic benefits expected to be obtained from the use of an itemof property, plant and equipment beyond its originally assessed standard ofperformance, the expenditures are capitalized as an additional cost ofproperty, plant and equipment.  Cost also includes interest on borrowed fundsused during the construction period and capitalized foreign exchange losses andgains related to foreign currency-denominated liabilities used to acquire suchassets, net of foreign exchange gains on restatement of monetary assets.  Whenassets are sold or retired, their costs and accumulated depreciation, amortizationand impairment losses, if any, are eliminated from the accounts and any gain orloss resulting from their disposal is included in the statements of income ofsuch period.

 

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

 

**Property, Plant and Equipment**

**Estimated Useful Lives**

 

 

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Cellular facilities

10 years

Buildings

25 – 40 years

Vehicles and other work equipment

5 – 10 years

Furniture

3 – 10 years

Communications satellites

15 years

Information origination/termination equipment

5 – 15 years

Land improvements

10 years

 

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

 

Smart revised the estimatedremaining useful lives of its certain analog network assets to effectively endby December 2002 in order to reflect the effects of obsolescence, continuingdecline in analog subscribers, competition and other economic factors which areconsidered to have shortened the economic useful lives of these assets.  As aresult, depreciation charges increased by Php1,410 million for the nine monthsended September 30, 2002.  Having complied with the requirements set out bythe NTC, Smart closed down the operation of its analog network on December 31, 2002.

 

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

 

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

 

***Impairment of Assets***

 

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

 

***Goodwill***

 

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

 

***Deferred Charges***

 

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

 

***Borrowing Costs***

 

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

 

***Retirement Costs***

 

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

 

***Foreign CurrencyTransactions and Translations***

 

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

 

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

 

***Financial Instruments***

 

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

 

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

 

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

 

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

 

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

 

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

 

***Income Taxes***

 

Deferred income tax isprovided using the liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to: (a) temporarydifferences between the financial reporting bases of assets and liabilities andtheir related tax bases; and (b) net operating loss carryover, or NOLCO.Deferred tax assets and liabilities are measured using the tax rates applicableto taxable income in the years in which those temporary differences areexpected to be recovered or settled and NOLCO are expected to be applied.  Avaluation allowance is provided for deferred tax assets when it is more likelythan not that some or all of the deferred tax assets will not be realized inthe future.

 

***Earnings Per CommonShare***

 

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

 

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

 

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

 

***Segment Reporting***

 

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

 

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

 

***Use of Estimates***

 

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

 

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

 

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

 

•        SFAS 10/IAS 10, “Events After theBalance Sheet Date”;

•        SFAS 22/IAS 22, “BusinessCombinations”;

•        SFAS 37/IAS 37, “Provisions,Contingent Liabilities and Contingent Assets”; and 

•        SFAS 38/IAS 38, “IntangibleAssets”. 

 

The effects of adopting SFAS38/IAS 38 are discussed in *Note – 3, Accounting Changes, Investments* inePLDT.  Additional disclosure requirements by the new standards are included inthe financial statements where applicable.

 

***NewAccounting Standards Effective Subsequent to******September 30, 2003***

 

The ASChas approved the following accounting standards, which will be effectivesubsequent to 2003:

 

•        SFAS 17/IAS 17, “Leases”, whichprescribes the accounting policies and disclosures to be applied to finance andoperating leases.  Finance leases are those that transfer substantially allrisks and rewards of ownership to the lessee.  The standard provides certainguidelines on assessing whether leases or similar agreements would qualify as financeleases.  We will adopt SFAS 17/IAS 17 when it becomes effective in 2004 and weare currently evaluating any effect of the adoption of this accounting standardon our financial position and results of operations; and

 

•        SFAS 21/IAS 21, “The Effects of Changesin Foreign Exchange Rates”, which provides restrictive conditions for thecapitalization of foreign exchange losses.  As of September 30, 2003, undepreciatedcapitalized foreign exchange losses on a consolidated and non-consolidatedbasis included in property, plant and equipment amounted to Php61,488 millionand Php54,281 million, respectively.  Upon adoption in 2005 of SFAS 21/IAS 21,the proposed treatment is to adjust any undepreciated capitalized foreignexchange losses, net of exchange losses that qualify as borrowing cost andincome tax effect, against beginning retained earnings, to the extent thatamounts capitalized do not meet the conditions under the new standard, and torestate prior years’ financial statements.  As of September 30, 2003,undepreciated capitalized foreign exchange losses that qualify as borrowingcosts amount to approximately Php31,000 million on a consolidated basis andPhp25,000 million on a non-consolidated basis.  

 

 

**5.     ****Cash and Cash Equivalents**

** **

This account consists of:

** **

 

**Consolidated**

 

**Non-Consolidated**

 

September 30,  2003

**(Unaudited)**

December 31,

2002

(Audited)

 

**September 30,**

**2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

(in million pesos)

Cash on hand and in banks

**1,741**

3,053

 

**592**

856

Temporary investments

**9,689**

7,823

 

**2,643**

3,309

 

**11,430**

10,876

** **
**3,235**

4,165

** **

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

 

 

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

** **

This account consists ofreceivables from:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,**

**2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

**September 30,**

**2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

(in million pesos)

Customers and carriers

**29,170**

26,675

 

**22,434**

22,601

Others

**2,258**

1,950

 

**2,161**

2,758

 

**31,428**

28,625

 

**24,595**

25,359

Less allowance for doubtful accounts

**11,107**

8,501

 

**7,625**

5,983

 

**20,321**

20,124

** **
**16,970**

19,376

 

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

 

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

 

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

 

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

 

Sale of receivables under the RPD amounted to US$8 million(Php444 million) for the nine months ended September 30, 2003.No sale was made under the MRPSA agreements for the nine months ended September 30, 2002.  

 

 

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

 

This account consists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

 

**September 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

** **

**September 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

(in million pesos)

 

Spare parts and supplies

**1,774**

2,281

** **

**1,766**

2,272

Terminal and cellular phone units 

**1,817**

2,208

** **

**366**

369

Others

**592**

452

** **

**94**

68

 

**4,183**

4,941

** **

**2,226**

2,709

Less allowance for inventory obsolescence

**704**

434

** **

**86**

–

 

**3,479**

4,507

** **

**2,140**

2,709

 

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

 

 

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

 

This account consists of:

 

 

Cable  and wire  facilities

Central  office  equipment

Cellular  facilities

Buildings

Vehicles,  furniture,  and other  work  equipment

Commu- nications  satellites

Information origination/ termination equipment

Land and  land  improvements

Property  under  construction

Total

*** ***

(in million pesos)

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

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

Cost

111,117

97,414

55,632

25,016

19,090

10,767

5,705

2,528

20,170

347,439

Accumulated depreciation and amortization 

(23,671)

(31,717)

(18,587)

(4,467)

(11,536)

(3,088)

(2,108)

(240)

–

(95,414)

Net book value

87,446

65,697

37,045

20,549

7,554

7,679

3,597

2,288

20,170

252,025

**Nine months ended****September 30, 2003********(Unaudited)**

Opening net book value

87,446

65,697

37,045

20,549

7,554

7,679

3,597

2,288

20,170

252,025

Additions/Transfers

5,557

5,427

5,038

804

1,464

142

339

(1)

(3,836)

14,934

Disposals/Retirement

(16)

–

(28)

(40)

(169)

(380)

–

(22)

(71)

(726)

Impairment losses recognized in the income statement

–

–

–

–

(441)

(845)

(118)

–

–

(1,404)

Accumulated depreciation and amortization

(3,846)

(5,004)

(5,398)

(698)

(1,614)

(557)

(549)

(15)

–

(17,681)

Closing net book value

89,141

66,120

36,657

20,615

6,794

6,039

3,269

2,250

16,263

247,148

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

 

 

 

 

 

 

 

 

 

Cost

116,582

102,709

60,263

25,520

20,511

10,332

5,710

2,505

16,263

360,395

Accumulated depreciation, amortization and impairment losses

(27,441)

(36,589)

(23,606)

(4,905)

(13,717)

(4,293)

(2,441)

(255)

–

(113,247)

Net book value

89,141

66,120

36,657

20,615

6,794

6,039

3,269

2,250

16,263

247,148

 

 

 

 

 

 

 

 

 

 

 

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

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

 

 

 

 

 

 

 

 

 

Cost

101,912

96,245

–

23,143

11,358

–

5,441

2,116

18,652

258,867

Accumulated depreciation and amortization 

(22,685)

(31,377)

–

(3,544) 

(8,290) 

–

(2,013)

(236)

–

(68,145)

Net book value

79,227

64,868

–

19,599

3,068

–

3,428

1,880

18,652

190,722

**Nine months ended****September 30, 2003********(Unaudited)**

Opening net book value

79,227

64,868

–

19,599

3,068

–

3,428

1,880

18,652

190,722

Additions/Transfers

4,651

5,330

–

439

598

–

282

(3)

(4,220)

7,077

Disposals/Retirement

–

–

–

–

–

–

–

(12)

–

(12)

Accumulated depreciation and amortization 

(3,168)

(4,890)

–

(498)

(675)

–

(494)

(17)

–

(9,742)

Closing net book value

80,710

65,308

–

19,540

2,991

–

3,216

1,848

14,432

188,045

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

 

 

 

 

 

 

 

 

 

Cost

106,453

101,458

–

23,560

11,818

–

5,388

2,101

14,432

265,210

Accumulated depreciation and amortization 

(25,743)

(36,150)

–

(4,020)

(8,827)

–

(2,172)

(253)

–

(77,165)

Net book value 

80,710

65,308

–

19,540

2,991

–

3,216

1,848

14,432

188,045

 

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

 

**Consolidated**

** **

**Non-Consolidated**

** **

**Nine Months Ended September 30**

 

**2003**

2002

 

**2003**

2002

 

(Unaudited)

 

(in million pesos)

Interest

**745**

1,084

 

**742**

914

Foreign exchange losses - net

**3,611**

2,468

 

**3,021**

2,187

 

As of September 30, 2003and December 31, 2002, the undepreciated capitalized net foreign exchangelosses amounted to Php61,488 million and Php62,049 million, respectively, on aconsolidated basis and amounted to Php54,281 million and Php54,395 million,respectively, on a non-consolidated basis.  

 

In June 2003, ACeSPhilippines recognized an impairment provision of Php964 million in respect ofcertain equipment in relation to the business of AIL after having determinedcertain factors which raised substantial doubt about AIL’s ability to continueas a going concern.  *See Note 9 – Investments* for further discussion.

 

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

 

 

**9.     ****Investments**

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,  2003********(Unaudited)**

December 31,  2002 (Audited)

** **

**September 30,  2003********(Unaudited)**

December 31,  2002 (As restated –  Note 3)

 

(in million pesos)

Investments in shares of stock:

 

** **

 

** **

 

Cost:

 

** **

 

** **

 

Common

**5,814**

5,809

 

**26,366**

26,314

Preferred

**9,236**

9,309

 

**18,292**

18,296

 

**15,050**

15,118

 

**44,658**

44,610

Less cost of investment in Piltel

**(11,690)**

(11,689)

 

**(11,690)**

(11,689)

 

**3,360**

3,429

 

**32,968**

32,921

Accumulated equity share in net losses of investees

** **

**(13,403)**

(11,798)

 

** **

**(3,540)**

(7,237)

Less accumulated equity share in net losses of Piltel 

** **

**11,690**

11,689

 

** **

**11,690**

11,689

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

** **

**(1,713)**

(109)

 

** **

**8,150**

4,452

Total cost and accumulated equity share in net income of investees

**1,647**

3,320

 

**41,118**

37,373

Investments in debt securities

**–**

2,150

 

–

2,052

Total

**1,647**

5,470

 

**41,118**

39,425

Investments in shares of stock:

** **

** **

 

** **

** **

At equity:

** **

** **

 

** **

** **

Smart 

**–**

–

 

**38,246**

32,205

Mabuhay Satellite 

**–**

–

 

**1,486**

1,299

Subic Telecom 

**–**

–

 

**376**

728

ePLDT 

**–**

–

 

**243**

631

Clark Telecom 

**–**

–

 

**243**

221

Telesat 

**–**

–

 

**197**

179

SNMI

**–**

–

 

**115**

115

BCC

**–**

**–**

 

**75**

–

MaraTel

**–**

–

 

**85**

75

PLDT Global

**–**

–

 

**3**

3

ACeS Philippines

**–**

–

 

**–**

1,822

Others

**47**

31

 

**–**

–

 

**47**

31

 

**41,069**

37,278

At cost:

** **

** **

 

** **

** **

Piltel (Note 3)

**–**

–

 

**–**

–

ACeS International Limited 

**–**

1,614

 

**–**

–

Mabuhay Space Holdings Limited

**885**

885

 

**–**

–

Stradcom International Holdings, Inc.

**629**

616

 

**–**

–

Others

**86**

174

 

**49**

95

 

**1,600**

3,289

 

**49**

95

Total

**1,647**

3,320

 

**41,118**

37,373

 

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

 

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,  2003********(Unaudited)**

December 31, 2002 (Audited)

** **

**September 30,  2003********(Unaudited)**

December 31, 2002 (As restated – Note 3)

 

 

(in million pesos)

 

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

**(11,798)**

(7,628)

 

**(7,237)**

(6,427)

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

**(1,618)**

(4,163)

 

**7,256**

530

Dividends received

–

–

 

**(4,300)**

(1,340)

Others

**13**

(7)

 

**741**

–

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

**(13,403)**

(11,798)

 

**(3,540)**

(7,237)

Less accumulated equity share in net losses of Piltel

**11,690**

11,689

 

**11,690**

11,689

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

**(1,713)**

(109)

 

**8,150**

4,452

 

***Subscription for SmartPreferred Shares***

 

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

 

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

 

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

 

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

 

***Investment in ePLDT***

 

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

 

a.      Internet Data Center under the brand name VitroÔ; 

 

b.      100% investment in Vocativ SystemsInc., a 750-seat call center facility that commenced full commercial operationsin April 2002 exclusively for clients of a global provider of customerrelationship management services; 

 

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

 

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

 

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

 

f.       100% owned subsidiary, SideraTechnologies, Inc., incorporated to engage in the business of designing andmanaging reloadable chip-based cards.  In March 2003, ePLDT had written off itsinvestment, advances and related assets in Sidera Technologies, Inc. totalingPhp213 million;

 

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

 

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

 

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

 

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

 

On June 30, 2003, ePLDTsold its 51% interest in Contact World, Inc. and assigned its receivables fromthe same to Service Zone, Inc., a US-based call center operator, for a totalconsideration of US$700,000.  Contact World isa joint venture company with Salmat Pty Limited of Australiaengaged in the call center business.

 

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

 

On September 10, 2003, ePLDT sold its 45% equity interestin Mindstream, Inc. to Exceed Learning Institute, Inc. for a totalconsideration of Php11 million worth of training credits.  Mind Stream, Inc. isan information technology or IT learning center under license with the NationalInstitute of Information Technology of India for IT courseware.

 

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

*** ***

***Investment in BCC***

 

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

 

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

*** ***

***Investment in MaraTel***

 

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

 

MaraTel is a franchisedoperator of telecommunications services in the province of Lanao del Norteand the cities of Iligan and Marawi.  It has been in operation for fifty yearswith 17,603 subscribers and a switch capacity of 17,985 digital lines as of September 30, 2003.  

 

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

 

***Investment in PLDTGlobal***

 

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

 

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

*** ***

***Investments in Piltel***

 

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

 

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

 

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

 

In October 2002, holders ofPiltel’s convertible bonds, which had a redemption amount of US$7.7 million(principal amount of US$5.8 million including accretion costs up to June 4,2001), agreed to participate in the debt restructuring plan.  Consequently, 50%of the redemption amount was released in exchange for 532,500 shares ofPiltel’s Series K, Class I Convertible Preferred Stock or one Piltelconvertible preferred share for every Php340 of the redemption amount, whichwere exchangeable for 106,500 shares of PLDT’s Series VI Convertible PreferredShares.  In 2002, 70,435 out of the 532,500 shares of Piltel’s Series K, ClassI Convertible Preferred Stock were exchanged for 14,087 shares of PLDT’s SeriesVI Convertible Preferred Stock.  In March 2003, the remaining 462,065 shares ofPiltel’s Series K, Class I Convertible Preferred Stock were exchanged for92,413 shares of PLDT’s Series VI Convertible Preferred Stock.  The remaining50% of the redemption amount was exchanged for a participation in the“Convertible Notes Facility”.  

 

In July 2003, holders ofPiltel’s convertible bonds which had an aggregate amount of US$1.3 million(including accretion costs up to June 4, 2001) agreed to participate in the debtrestructuring plan.  Consequently, 50% of the redemption amount was released inexchange for 92,475 shares of Piltel’s Series K, Class I Convertible PreferredStock, which will be exchanged for 8,495 shares of PLDT’s Series VI ConvertiblePreferred Stock upon receipt of tax clearance from the Bureau of InternalRevenue, or BIR.  The remaining 50% of the redemption amount was exchanged fora participation in the “Convertible Notes Facility”.

 

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

 

 

**10-Year Loans**

**15-Year Loans**

**Term Notes Facility**

**Convertible Notes**

Final maturity

10 years from Effective Date

15 years from Effective Date

15 years plus 10 days from Effective Date

15 years from Effective Date

Amortization

per annum

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 3 to 9  –  0.10%

Years 3 and 4  –  0.10%

Years 3 to 14  –  0.10%

Years 3 and 4  –  0.10%

 

Year 10  –  99.30%

Year 5  –  2.00%

Year 15  –  98.80%

Year 5  –  1.05%

 

 

Years 6 to 14  –  10.00%

 

Years 6 to 9  –  5.05%

 

 

Year 15  –  7.80%

 

Year 10  –  54.65%

 

 

 

 

Years 11 to 14  –  5.00%

 

 

 

 

Year 15  –  3.90%

Interest rate

 

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

 

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

 

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

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

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

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

As of September 30, 2003 and December 31, 2002, total long-term debt of Piltel amountedto Php23,085million and Php22,124 million, respectively,with maturities of up to June 14, 2016,consisting of the following: 

 

** **

**September 30, 2003********(Unaudited)**

December 31, 2002 (Audited)

** **

** **

(in millions)

** **

**Restructured debt**

** **

** **

 

 

Philippine Pesos

** **

** **

 

 

10 year Tranche B

 

**Php2,166**

 

Php2,166

15 year Tranche C

 

**2,166**

 

2,166

15 year Term Notes Facility

 

**293**

 

293

 

 

**4,625**

 

4,625

U.S. Dollars

 

** **

 

 

10 year Tranche B

**US$33**

**1,822**

US$33

1,768

15 year Tranche C

**33**

**1,822**

33

1,768

15 year Conversion Notes Facility

**122**

**6,681**

122

6,449

 

**US$188**

**10,325**

US$188

9,985

Japanese Yen

** **

** **

** **

** **

10 year Tranche B

**JPY7,822**

**3,850**

JPY7,822

3,510

15 year Tranche C

**7,822**

**3,850**

7,822

3,510

 

**JPY15,644**

**7,700**

JPY15,644

7,020

Total

** **

**22,650**

 

21,630

**Unrestructured debt**

** **

** **

** **

** **

U.S. Dollars

** **

** **

 

 

Banks

**US$6**

**341**

US$6

331

Convertible bonds

**1**

**51**

2

120

 

**US$7**

**392**

US$8

451

**Liabilities under capital lease**

 

**43**

 

43

 

 

**Php23,085**

 

Php22,124

 

To date, Piltelis not in compliance with the terms of convertible bonds with principal amountof US$0.7 million (approximately US$0.9 million redemption price) and US$6million of other U.S. dollar denominated debt.

 

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

 

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

 

Until all amountsowed to participating creditors have been paid or discharged, PLDT will not bepermitted to demand or receive any payment, redeem, or distribute in respect ofany present and future liability owed by Piltel to PLDT or any affiliate ofPLDT, subject to specified exceptions.  These liabilities include equityfunding to Piltel and other financial indebtedness owed by Piltel to PLDT orany affiliate of PLDT, but exclude payments due in respect of transactionshaving arm’s-length terms and/or in which the pricing is based on marketterms.  These severe long-term restrictions significantly impair Piltel’sability to transfer funds to PLDT.  In addition, PLDT is subject to contractualrestrictions in the amount of financial support it can provide to Piltel underthe Letter of Support.

 

PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million less all amounts paid or committed to be paid to or on behalf ofPiltel by PLDT on or after March 23, 2000.  Under the Letterof Support, PLDT will provide funding to Piltel in the event that the cash flowfrom Piltel’s operations falls short of amounts required by it to discharge infull its obligations to any creditor of Piltel or any of its operating andfinancing investees.  PLDT is subject to contractual restrictions limiting theamount of financial support it can provide to Piltel up to US$150 million.  Theundrawn balance under the Letter of Support was US$50 million, which isequivalent to approximately Php2,757 million as of September 30, 2003 and Php2,676 million as of December 31, 2002, respectively, after taking into accountPLDT’s investments in Piltel as of and subsequent to March 23, 2000.  

 

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

 

In 2001, Piltelwrote down assets valued at Php13,984 million, which was reflected in Piltel’saccounts as of December 31, 2001.  The write-down, asapproved by Piltel’s Board of Directors, 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 recent success in marketing its GSM prepaid service using the GSMnetwork of Smart and the difficulty experienced in sourcing analog/CDMAhandsets.

 

Piltel’s networth amounted to Php1,900 million as of December 31, 2001 after taking into account the debtrestructuring and assets write down.  The balance of PLDT’s investments as of December 31, 2001 in Piltel amounted to Php948 million, representing theequity in net assets as of that date.

 

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

 

The impairment ofE.O. 109 assets brought down the net book value of these assets to theirrecoverable value, which was estimated using the net present value of futurecash flows from the E.O. 109 postpaid service.  Cash flows from the E.O. 109prepaid or limited mobility service were no longer considered in computing therecoverable value of the E.O. 109 assets as Piltel had to terminate thisservice in February 2003.  Revenues from the E.O. 109 prepaid or limitedmobility service, which uses N-AMPS cellular technology, were likewiseunfavorably affected by the success of Piltel’s and other cellular operators’prepaid GSM service.

 

The current levelof operation of Piltel indicates that it is unlikely that residual amounts maybe realized by PLDT from its investments in Piltel.  Piltel had a totalnegative net worth of Php20,394 million as of September 30, 2003 as a result ofcontinuing losses of Piltel and impairment losses amounting to Php16,790million in 2002 in respect of its AMPS/CDMA and E.O. 109 assets.  

 

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

 

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

 

As of September 30, 2003,ACeS Philippines had a 20.2% investment in ACeS International Limited, or AIL,a company incorporated under the laws of the island of Bermuda.  AILowns the Garuda I satellite and the related system control equipment in Batam, Indonesia.

 

In December 1998, AIL and its 95% owned subsidiary, PTAsia Cellular Satellite, entered into an Amended and Restated Credit Agreement,or Amended Agreement, to amend the original Credit Agreement entered into by PTAsia Cellular Satellite and its bank creditors in 1997.  Under the AmendedAgreement, AIL has, among others, assigned to the banks as collateral all ofits tangible properties, including the Garuda Satellite, the system controlfacilities and system control equipment.  On September 30, 2002, PT AsiaCellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia, assecurity agent, and various banks signed a Rescheduling Agreement, whichamended the terms of the Amended and Restated Credit Agreement dated December29, 1998 moving the principal repayment dates to agreed periods with the finalmaturity date on January 31, 2012. 

 

As of September 2003, AIL has incurred recurringsignificant operating losses, negative operating cash flows, and significantlevels of debt. The financial condition of AIL was partly due to the NationalService Provider’s inability to generate the amount of revenues originallyexpected as the growth in subscriber numbers has been significantly lower thanbudgeted.  These factors raise substantial doubt about AIL’s ability tocontinue as a going concern.  On this basis, we recognized an impairmentprovision in respect of our investment in AIL amounting to Php1,614 million andcertain equipment of ACeS Philippines in relation to the business of AILamounting to Php964 million (see *Note 8 – Property, Plant and Equipment*).

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

 

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

 

In 2000, SS/L filed a Noticeof Default 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 and interestamounting to about US$15 million as of June 30, 2003.On June 30, 2003, Mabuhay Satellite and SS/L concluded a settlementagreement whereby Mabuhay Satellite would lease two (2) transponders on alife-term basis to SS/L and offset the lease charges due from SS/L and its receivablesfrom Loral Skynet Network Services, Inc. (formerly Loral Cyberstar, Inc.) for afull and final settlement of the arbitration decision.  The agreement issubject to Mabuhay creditors’ approval.

 

In accordance with the settlement agreement, MabuhaySatellite and SS/L shall proceed to dissolve the joint venture under which eachof the parties shall receive title over such number of transponders owned bythe joint venture in proportion to their respective interests under such termsand conditions to be agreed upon by the parties.  Given the temporary nature ofthe joint venture, Mabuhay Satellite accounts for its investment under the costmethod.  

 

***Investments in DebtSecurities***

 

*UnilinkCommunications Corporation*

* *

PLDT’s total investments inconvertible notes of Unilink Communications Corporation, or Unilink, amountedto Php2,052 million as of December 31, 2002.  In June 2003, PLDT contributed tothe PLDT Beneficial Trust Fund, or BTF, its investment in convertible notes ofUnilink.

 

These notes are convertibleinto shares of common stock of Unilink or The Philippine Home Cable Holdings,Inc., or Home Cable, at the option of the holder, when the law limiting theownership of cable television systems to Philippine citizens or corporations,which are 100% owned by Philippine citizens is eventually changed.  Unilink isa Philippine corporation owning all the outstanding common shares of HomeCable, which is also a Philippine corporation licensed to own, maintain andoperate a cable television system in the Philippines.

 

All of Unilink’s shares inHome Cable have been pledged to a group of lenders as security for a loan ofHome Cable.  On April 10, 2002, the loan agent, at the request of the lenders,delivered a notice to Home Cable declaring an event of default and acceleratingthe loan.  Consequently, the lenders are entitled to foreclose on or sell thecollateral granted as security for the loan, including Unilink’s share in HomeCable.  In the event that Home Cable’s lenders were to foreclose on Unilink’sHome Cable shares, the lenders would be entitled to the proceeds from the salethereof or, if such shares were not sold, to the shares, and Unilink would besubrogated to the lenders’ claims against Home Cable.  On October 17, 2003,Home Cable signed a Memorandum of Agreement with its key creditors providingthe framework and indicative terms and conditions for the restructuring of itsdebt obligations.  

 

 

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

** **

Thisaccount consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,  2003********(Unaudited)**

December 31,  2002 (Audited)

 

**September 30,  2003********(Unaudited)**

December 31,  2002 (As restated – Note 3)

 

** **

(in million pesos)

 

Debt issuance expenses – net 

**2,143**

2,494

 

**1,017**

1,122

Refundable deposits

**591**

475

 

**229**

213

Others – net (Note 17)

**2,944**

1,708

 

**1,569**

278

 

**5,678**

4,677

 

**2,815**

1,613

 

 

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

** **

On April 28, 2003 and May 14, 2003, PLDTissued, at a discount, Php1,600 million and Php400 million One-Year Peso Notes,respectively, under its Php2 billion Peso Notes program registered with thePhilippine SEC.  Net proceeds of the issue totaled Php1,803 million.

 

As of September 30, 2003,Vocativ, a wholly-owned call center of ePLDT, had an outstanding Php150 millionshort-term bank loan facility.  It is anticipated that this short-term facilitywould be repaid from the proceeds of a prospective Php150 million 5-year termloan being arranged by the same lender for Vocativ.

 

As of September 30, 2003,ePLDT had an outstanding Php50 million short-term bank loan facility.  It isanticipated that this short-term facility would be repaid from the proceeds ofa prospective Php100 million 3-year term loan being arranged by the same lenderfor ePLDT.

 

 

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

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

**September 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

** **

(in million pesos)

 

Accrued utilities and general expenses

**4,360**

2,888

 

**1,459**

1,142

Accrued interest on various loans (Note 13)

**2,843**

2,717

 

**2,501**

2,069

Accrual for payment for unused sick leave and other employee benefits

** **

**2,523**

1,452

 

** **

**842**

584

Unearned revenues on sale of prepaid cards  (Note 3)

** **

**1,863**

2,022

 

** **

**580**

431

Accrued taxes and other expenses

**1,438**

1,461

 

**799**

752

Others

**2,882**

1,991

 

**672**

559

 

**15,909**

12,531

 

**6,853**

5,537

 

 

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

** **

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

 

 

Consolidated
 

**September 30,**

**2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

**(in million pesos)**
PLDT

**132,696**

139,324

Smart

**18,864**

22,891

Mabuhay Satellite

**4,728**

5,356

ePLDT

**120**

150

MaraTel

**30**

42

 

**156,438**

167,763

Less current portion

**21,494**

19,176

 

**134,944**

148,587

 

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

 

**Year**

**Consolidated**

**Non-Consolidated**

 

(in million pesos)

2003(1)              

3,475

1,697

2004

23,108

15,613

2005

29,649

22,114

2006

27,688

21,146

2007 and onwards

72,518

72,126

 

(1)  October 1, 2003 throughDecember 31, 2003
******
*** ***

***PLDT***

 

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

 

**Description**

**September 30, 2003********(Unaudited)**

December 31, 2002 (Audited) 

 

(in millions)

**U.S. Dollars**

** **

** **

 

 

Export Credit Agencies-Supported Loans

 
 

 

 

Kreditanstalt fur Wiederaufbau

**US$410**

**Php22,474**

US$437

Php23,265

JBIC/Co-financing Banks

**68**

**3,736**

87

4,657

Others 

**147**

**8,050**

161

8,575

 

**625**

**34,260**

685

36,497

Fixed Rate Notes

**1,420**

**75,267**

1,487

78,067

Term Loans

**200**

**10,999**

172

9,166

 

**US$2,245**

**120,526**

US$2,344

123,730

**Japanese Yen**

 

 

** **

** **

Term Loans 

**JP¥7,723**

**3,801**

JP¥15,641

7,049

JBIC OIL

**9,760**

**4,804**

9,760

4,379

** **

**JP¥17,483**

**8,605**

JP¥25,401

11,428

**Philippine Pesos**

 

 

** **

** **

Peso Fixed Rate Corporate Notes

 

**2,180**

** **

2,540

Term Loans

 

**1,385**

** **

1,626

 

 

**3,565**

** **

4,166

 

 

**132,696**

** **

139,324

Less current portion

 

**13,847**

** **

11,962

 

 

**Php118,849**

** **

Php127,362

 

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

 

 

**September 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

** **

Dollar-denominated loans

**8.1%**

8.3%

Yen-denominated loans

**1.9%**

1.2%

Peso-denominated loans

**13.7%**

13.8%

 

*Export CreditAgencies-Supported Loans*

 

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

 

Kreditanstalt fur Wiederaufbau, or KfW, a Germanstate-owned development bank, is our largest single creditor.  As of September 30, 2003, we owed US$410 million aggregate principal amount of debt to KfW, asfollows:

 

•        US$305 million provided undervarious export credit agency-backed facilities, of which US$230 million was inconnection with our expansion and service improvement programs and US$75million in connection with a refinancing facility; and

 

•        US$105 million provided for the15% downpayment portion and credit facilities without guarantee/insurance coverfrom the export credit agencies, of which US$19 million was in connection witha refinancing facility.

 

On January 25, 2002, PLDTsigned two loan agreements with KfW that provide PLDT with a new US$149 millionfacility to refinance in part the repayment installments under its existingloans from KfW due from January 2002 to December 2004.  The facility is anine-year loan, inclusive of a three-year disbursement period and a two-yeargrace period during which no principal is payable.  It partly enjoys theguarantee of HERMES, the export credit agency of the Federal Republic of Germany.Disbursements under this facility, which are made as the KfW loans to be repaidfall due, are currently available.  We have drawn US$94 million (Php5,171million) under this facility as of September 30, 2003.

 

After giving effect to therefinancing of facilities, US$11 million of our KfW loans will mature inOctober to December 2003, US$38 million in 2004, US$83 million in 2005, US$57million in 2006 and US$221 million in 2007 and onwards.  Principal and intereston these loans are generally payable in equal semi-annual installments.

 

PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, or JBIC, (formerly the Export-Import Bankof Japan), the Export-Import Bank of the United States, and the respectiveexport credit agencies of France, Italy, Israel, Sweden, Denmark, Canada,Australia, the United Kingdom and Singapore, in the aggregate outstandingprincipal amount of US$215 million as of September 30, 2003.  Of these loans,US$14 million will mature in 2003, US$63 million in 2004, US$52 million in2005, US$42 million in 2006 and US$44 million in 2007 or later.

 

*Fixed Rate Notes*

 

PLDT has eight series ofnon-amortizing fixed rate notes outstanding as of September 30, 2003, as follows:

 

**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$77,002,000

 

June 2, 1994

10.625%

 

June 2, 2004

US$144,385,000

 

July 31, 1995

9.875%

 

August 1, 2005

US$175,000,000

 

June 28, 1996

9.250%

 

June 30, 2006

US$200,000,000

 

March 6, 1997

7.850%

 

March 6, 2007

US$100,000,000

 

May 2, 2002

10.625%

 

May 15, 2007

US$175,000,000

 

April 13, 1999

10.500%

 

April 15, 2009

US$250,000,000

 

May 2, 2002

11.375%

 

May 15, 2012

US$300,000,000

 

March 6, 1997

8.350%

 

March 6, 2017

 

On May 2, 2002, PLDT issued10.625% Notes due 2007 in the aggregate principal amount of US$100 million and11.375% Notes due 2012 in the aggregate principal amount of US$250 million.The net proceeds from the issuance of the notes were used to effect the repurchaseof (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$6 million in principal amount of our 9.875% Notesdue 2005 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 maturing inDecember 2003.  

 

***Term Loans***

 

*Local Exchange Transfer Loans*

 

Inconnection with the transfer to PLDT of Smart’s local exchange business, PLDTentered into loan agreements with Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands, Exportkreditnamden, orEKN, of Sweden and Export Credits Guarantee Department, or ECGD, of the UnitedKingdom for loans in the principal amounts of US$135 million, US$36 million andUS$27 million, respectively.  These loans were amended in August and September2001 to increase the maximum total debt to earnings before interest, incometax, depreciation and amortization or EBITDA ratio that PLDT on anon-consolidated basis is permitted to maintain during the terms of therespective loans.  Approximately US$112 million of these loans was outstandingas of September 30, 2003.  The FMO loan matures on September 1, 2007, while the EKNand ECGD loans will mature on December 31, 2007. 

 

*US$150Million Term Loan*

 

In connection with PLDT’sfixed line expansion projects, PLDT obtained a US$150 million term loan, whichwas subsequently assigned to Norddeutsche Landesbank Girozentrale, SingaporeBranch, US$52 million of which was outstanding as of September 30, 2003.The outstanding principal amount of this loan is payable at maturity on December 22, 2003 andwill be partly refinanced by a multicurrency refinancing facility describedbelow.

 

*JPY19,807Million Term Loan*

* *

In December 1997, inconnection with a refinancing of its maturing debt, PLDT obtained a Japaneseyen term loan from a syndicate of foreign banks.  This loan with outstandingbalance of JP¥12,359 million matured on June 18, 2003 andwas partly refinanced by Tranche A of US$145 million multicurrency refinancingfacility in the amount of JP¥7,723 million and US$34 million.

 

*JBICJP¥ 9,760 Million Overseas Investment Term Loan*

 

On July 26, 2002, PLDTsigned a loan agreement with JBIC for a credit facility of JP¥9,760 millionunder the JBIC’s Overseas Investment Loan (OIL) Program.  The loan, which wasdrawn on July 31, 2002, will be amortized semi-annually beginning March 21, 2005 andwill mature on March 21, 2008.

 

*MulticurrencyRefinancing Facility*

* *

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

 
**
*US$12Million Term Loan Facility*

* *

On May 29, 2003, PLDTobtained a US$12 million term loan facility from DEG-Deutsche Investitions undEntwicklungsgesellschaft mbH.  As of September 30, 2003,this loan has an outstanding balance of US$4 million.  This loan will mature inDecember 2009 and is payable in semi-annual installments starting from June 15, 2004.

 

*JP¥5,615Million**Syndicated Term LoanFacility*

 

On June 11, 2003, PLDT signeda JP¥5,615 million syndicated term loan facility supported by Nippon Export andInvestment Insurance of Japan.  As of September 30, 2003,we have not made any drawdowns under this facility.

 

*JBIC4 Program of the Development Bank of the**Philippines*

 

In connection with the AsiaPacific Cable Network 2 project, PLDT entered into a loan agreement withCitibank, N.A., as facility agent, and a syndicate of banks in the aggregateprincipal amount of Php1,700 million, of which about Php1,343 million was outstandingas of September 30, 2003.  The loan, which is funded under the Japan Bank forInternational Cooperation Facility for Private Sector Development of theDevelopment Bank of the Philippines, matures on October 26, 2005and is payable in quarterly installments starting April 2002 as set forthbelow: 

 

**Quarterly Payment Number**

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

 

 

Payments 1–7 

3.500%

Payments 8–11

8.875%

Payments 12–15

10.000%

 

*Php2,770Million Peso Fixed Rate Corporate Notes*

 

In connection with PLDT’sservice improvement and expansion programs, PLDT has entered into two loanagreements, pursuant to each of which PLDT issued fixed rate corporate notes inthree tranches.  Interest on each tranche is payable semi-annually.

 

Under the first loanagreement, PLDT borrowed an aggregate amount of Php1,500 million, of whichPhp230 million matured on November 11, 2002, Php500 million matures on November 9, 2004, andPhp770 million on November 9, 2006.

 

Under the second loan agreement,PLDT borrowed an aggregate amount of Php1,270 million, of which Php360 millionmatured on June 9, 2003, Php100 million matures on June 9, 2005 andPhp810 million on June 9, 2010.

 

*Covenants*

 

Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests, calculated in accordance with accounting principlesgenerally accepted in the Philippines, at relevant measurement dates, principally at theend of each quarterly period.

 

The financial tests under ourdebt instruments, as amended, include maintaining a positive tangible net worthand compliance with the following ratios:

 

•        interest coverage ratio,calculated on a non-consolidated basis and excluding PLDT’s equity share in netearnings or losses of investees, of not less than 150%, 180% or 200%;

 

•        total debt to EBITDA on anon-consolidated basis of not more than 5.5:1  from September 2003 to December2003, not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1from September 2004 to December 2004 and not more than 4.0:1 from March 2005and thereafter;

 

•        long-term indebtedness toappraised value of equity/tangible net worth on a non-consolidated basisranging from not more than 1.1:1 to not more than 3.0:1; 

 

•        current ratio on anon-consolidated basis, ranging from not less than 0.9:1 to not less than1.2:1;

 

•        debt service coverage ratio on anon-consolidated basis of at least 1.1:1; and

 

•        debt to free cash flow ratio on anon-consolidated basis of not more than 5.5:1 from September 30, 2003 to June30, 2004, not more than 5.0:1 from September 30, 2004 to June 30, 2005, notmore than 4.5:1 from September 30, 2005 to June 30, 2006, and not more than4.0:1 from September 30, 2006 onwards.

 

Inaddition, some of PLDT’s debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis.  These include:

 

•        long-term debt to appraised valueof equity/tangible net worth of not more than 2.33:1;

 

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

 

•        current ratio of not less than0.75:1 to 0.9:1; and

 

•        interest coverage ratio of notless than 200%.

 

For purposes of derivingappraised value of equity/tangible net worth, we determined the revaluationsurplus in respect of PLDT’s properties.  PLDT’s properties in service as ofDecember 31, 1997 were reappraised by an independent firm of appraisers toreflect their sound value, as part of NTC’s financial reporting requirements,based on the December 29, 1997 exchange rate of Php40.116 = US$1.00.  As of December 31, 1997,the sound value was Php225,966 million and the revaluation surplus wasPhp82,723 million.  This reappraisal was approved by the NTC on January 28, 2000under NTC Case No. 98-183.  As of September 30, 2003and December 31, 2002, the revaluation surplus on PLDT’s 1997 appraisedproperties still in service, net of a 5% disallowance factor, amounted to Php40,074 million and Php44,984 million, respectively.

 

The principal factors thatcan negatively affect our ability to comply with these financial ratios andother financial tests are depreciation of the peso relative to the U.S. dollar,poor operating performance of PLDT and its consolidated subsidiaries,impairment or similar charges in respect of investments or other assets thatmay be recognized by PLDT and its consolidated subsidiaries and increases inour interest expenses.  Interest expense may increase as a result of variousfactors including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT’s credit ratings or the credit ratings of the Philippines,increase in reference interest rates, and general market conditions.  Sinceapproximately 96% of PLDT’s total debt is denominated in foreign currencies,principally in U.S. dollars, many of these financial ratios and other tests arenegatively affected by any weakening of the peso.  At September 30, 2003, the peso depreciated by 3% toPhp54.877 to US$1.00, from Php53.254 to US$1.00 at December 31, 2002.   The peso hasbeen subject to significant fluctuations.  During the first nine months of2003, the peso depreciated to Php55.075 to US$1.00 on March 12, 2003 thenrecovered to a high of Php52.021 to US$1.00 on May 8, 2003 only to depreciateagain to a low of Php55.532 to US$1.00 on August 26, 2003.   

 

PLDT’s ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of our fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of net revenues and cash flows generated by Smart and PLDT’s otherinvestees in assisting in complying with non-consolidated covenants.

 

We have maintained compliancewith all of our financial ratios and covenants as measured under our loanagreements.  However, if negative factors adversely affect our financialratios, we may be unable to maintain compliance with these ratios and covenantsor be unable to incur new debt.  Under some of our loan agreements, certain ofour financial ratios have become more restrictive at the end of the secondquarter of 2003 and will continue to become more restrictive in incrementsthereafter, which will make it more difficult for PLDT to maintain compliancewith this ratio in the future.  Inability to comply with our financial ratiosand covenants or raise new financing could result in a declaration of defaultand acceleration of some or all of our indebtedness.  The terms of some of ourdebt instruments have no minimum amount for cross-default.

 

Under PLDT’s loan agreementthat require maintenance of an interest coverage ratio of at least 150%,interest coverage ratio is the ratio of (x) PLDT’s non-consolidated after-taxnet income, excluding equity share in net earnings or losses of investees afteradding back interest charges, net of interest capitalized to construction, onall indebtedness for the 12 months immediately preceding the calculation dateto (y) the estimated aggregate interest charges payable, net of interest to becapitalized to construction, during the 365-day period following the calculation date on all of PLDT’s indebtednessoutstanding on such calculation date.

 

Under PLDT’s loan agreements thatrequire maintenance of an interest coverage ratio of at least 180%, interestcoverage ratio is the ratio of (x) our after-tax net income for the 12 monthsimmediately preceding the calculation date after: (a) adding back interestcharges, depreciation, amortization and other non-cash charges (includingequity share in net earnings or losses of investees but excluding provision fordoubtful accounts) and provision for income taxes, and (b) deductingcapitalized subscriber acquisition costs, to (y) the estimated aggregateinterest charges payable during the 365-day period following the calculationdate on all of PLDT’s indebtedness outstanding on such calculation date.

 

Under PLDT’s loan agreementsthat require maintenance of an interest coverage ratio of at least 200%,interest coverage ratio is the ratio of (x) our after-tax net income afteradding back reserves for higher plant replacement costs, income taxes, interestcharges, depreciation and non-cash charges (including equity share in netearnings or losses of investees and provision for doubtful accounts) during 12consecutive months within the 15 calendar months immediately preceding thecalculation date, to (y) the sum of (a) the estimated aggregate interestcharges on all indebtedness, net of interest capitalized to construction, plus(b) dividends on mandatorily redeemable preferred stock, in each case scheduledto be paid during the 12 months following the calculation date.

 

Non-consolidated total debtto EBITDA is the ratio of (x) PLDT’s total indebtedness (not including amountspayable by PLDT to Piltel under the Letter of Support) to (y) net income forthe preceding 12 months, after adding back interest accrued on allindebtedness, depreciation, amortization and other non-cash charges (includingequity share in net earnings or losses of investees, but excluding provisionfor doubtful accounts) and provision for income taxes and deducting anycapitalized subscriber acquisition costs. 

 

Debt service coverage ratiois the ratio of (x) PLDT’s cash flow from operations after adding back interestcharges (to the extent previously deducted) plus (1) dividends received frominvestees, cash received upon any redemption of redeemable preferred sharesissued by Smart, any cash received under PLDT’s subscriber investment plan andinterest income received less (2) capital expenditures (excluding capitalizedinterest) and investments in investees for the 12 months immediately precedingthe calculation date plus (3) PLDT’s closing cash balance of the last day ofthe calculation date 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.

 

Debt to free cash flow ratiois the ratio of (x) PLDT’s debt less PLDT’s closing cash balance of the lastday of the calculation period to (y) PLDT’s cash flow from operations afteradding back interest charges (to the extent previously deducted) plus (1)dividends received from investees cash received upon any redemption ofredeemable preferred shares issued by Smart, any cash received under PLDT’ssubscriber investment plan and interest income received less (2) capitalexpenditures (excluding capitalized interest) and investments in investees for the12 months immediately preceding the calculation date.  

 

Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio of (x) PLDT’s aggregate indebtedness (or portion ofsuch indebtedness) due more than one year following the calculation date andpar value of all mandatorily redeemable preferred stock to (y) the sum of theaggregate par value of all of PLDT’s outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT’s retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT’s telephone plantapproved by the NTC.  

 

Non-consolidated currentratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.  

 

PLDT’s debt instrumentscontain a number of other negative covenants that, subject to certainexceptions and qualifications, restrict PLDT’s ability to take certain actionswithout lenders’ approval, including:

 

•        incurring additional indebtedness;

 

•        prepaying other debt; 

 

•        making investments; 

 

•        extending loans; 

 

•        extending guarantees or assumingthe obligations of other persons;

 

•        paying dividends or otherdistributions or redeeming, repurchasing or otherwise acquiring shares of PLDT’scapital stock; 

 

•        disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth;

 

•        entering into management contractsproviding for the management of its business or operations by a third party;

 

•        creating any lien or securityinterest; 

 

•        permitting set off against amountsowed to PLDT;

 

•        merging or consolidating with anyother company;

 

•        entering into transactions withshareholders and affiliates; and

 

•        entering into sale and leasebacktransactions. 

 

Under the indenture of PLDT’s10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT is required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT’s ability to: (a) incur debt in the event itsratio of debt to EBITDA (calculated on a non-consolidated basis based ondefinitions provided in the same indenture, except under certaincircumstances), after giving effect to the incurrence of such debt, would beless than 5.5 to 1 on or prior to December 31, 2003, 5.0 to 1.0 from January 1,2004 to December 31, 2004 and 4.5 to 1 thereafter and (b) pay dividends,repurchase or redeem its capital stock, make investments and prepaysubordinated debt, among other things.  Subject to certain restrictions, thesecovenants also restrict our ability to sell assets and use the proceeds ofthese asset sales.

 

Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until after December 31, 2004.  In addition, under the terms ofPLDT’s US$145 million multicurrency term facility agreement and JP¥5,615million loan agreement, PLDT is restricted from distributing dividends tocommon stockholders unless (i) no default has occurred which is continuing, and(ii) its debt to free cash flow ratio, after giving effect to the distributionof such dividends and, under certain circumstances, other adjustments to PLDT’sclosing cash balance, would be less than 4.0 to 1.0.  Under other loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 1.2 to 1.0 or (iii) in anamount greater than PLDT’s net income after taxes during the fiscal year towhich such payment or distribution relates.  

 

In case of a change incontrol of PLDT, PLDT may be required to repurchase or prepay certainindebtedness.  Under the terms of the 10.625% Notes due 2007 and 11.375% Notesdue 2012, we are required to offer to purchase all outstanding notes due 2007and notes due 2012 for cash at a price of 101% of their principal amounts plusaccrued interest in the event that (a) the aggregate of NTT Communications’ andFirst Pacific’s direct and indirect voting interest in PLDT’s outstandingcapital stock having voting rights falls below 35% of such capital stock, (b)any person or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT’s outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (c) if a ratingagency at such time maintains a rating on either series of notes, the ratingagency downgrades its credit rating on the series within 90 days (or more, incertain circumstances) following notice of the occurrence of the eventsspecified in (a) and (b) above.

 

Under the terms of PLDT’sJP¥9,760 million loan from JBIC, in the event of any proposed sale or transferof PLDT’s stock that would result in NTT Communications holding less than14.95% of PLDT’s voting stock, we will be required to prepay, immediately uponeffectiveness of such sale or transfer, all principal outstanding under the loan,together with accrued interest.  However, prepayment will not be required if,following such sale or transfer, (a) NTT Communications continues to have priorapproval rights with respect to all matters as to which NTT Communications hasapproval rights under the stock purchase agreement pursuant to which itacquired its shares in PLDT or (b) JBIC, in its sole discretion, determinesthat NTT Communications’ participation in the expansion of Smart’s GSM networkcapacity to extend PLDT’s cellular business in Smart would not be reduced belowits level of participation as of the date of the loan agreement.

 

Under the terms of bothPLDT’s US$145 million multicurrency term facility agreement and JP¥5,615million loan agreement, if any lender so requests in writing, PLDT shall prepayin 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 (a) the aggregate of NTT Communications’ andFirst Pacific’s direct and indirect voting interest in PLDT’s outstandingcapital stock having voting rights fall below 35% of such capital stock, (b)any person or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT’s outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (c) if a ratingagency at such time maintains a rating on the Bonds, the rating agencydowngrades its credit rating on the Bonds within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(a) and (b) above.

 

PLDT’s debt instrumentscontain customary and other default provisions that permit the lender toaccelerate amounts due or terminate their commitments to extend additionalfunds under the debt instruments.  These default provisions include:

 

•        cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument; in some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments;

 

•        failure by PLDT to meet certainfinancial ratio covenants referred to above;

 

•        the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender; 

 

•        the revocation, termination oramendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;

 

•        the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender;

 

•        the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and

 

•        other typical events of default,including the commencement of bankruptcy, insolvency, liquidation or winding upproceedings by PLDT.

 

***Smart***

 

Smart’s long-term debtconsists of:

 

 

**September 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

(in millions)

 

U.S. Dollars

**US$328**

**Php17,984**

US$408

Php21,724

Philippine Pesos

** **

**880**

** **

1,167

 

** **

**18,864**

** **

22,891

Less current portion

** **

**6,300**

** **

6,173

 

** **

**Php12,564**

** **

Php16,718

 

Smart’s bank loan facilities,which are being used to finance its purchases of telecommunications equipment,are availed of through one or more drawdowns. 

 

The loan facilities forPhases 1 to 4 of the GSM network expansion, under which US$129 million wasoutstanding as of September 30, 2003, are repayable in ten equal semi-annual installmentswith final repayments due in October 2005 and April 2006.

 

On June 8 and June 14, 2001,Smart signed its GSM Phase 5A financing comprised of US$195 million andPhp1,000 million loans, respectively.  The US$195 million loans, US$124 millionof which was outstanding as of September 30, 2003, are payable over five to sixyears, with final repayments due in September 2006 and March 2007.  ThePhp1,000 million facility, of which Php600 million was outstanding as of September 30, 2003,is payable quarterly with final repayment in December 2005.

 

On December 13, 2001,Smart signed its GSM Phase 5B financing of US$100 million, of which US$61million was outstanding as of September 30, 2003. The loan is payable over fiveyears with final repayment due in September 2006.

 

Facilities under GSM Phases 1to 4, the Finnish Export Credit plc tranche of GSM Phase 5A facility and GSMPhase 5B facility are covered by guarantees from Finnvera, the Finnish exportcredit agency, for 95% of political risk and 50% of commercial risk.

 

On September 25, 2001,Smart obtained a US$5.9 million term loan facility from Electro Banque S.A., ofwhich US$4 million was outstanding as of September 30, 2003.On October 26, 2001, Smart obtained a US$10.6 million term loan facilityfrom Credit Lyonnais S.A., of which US$5 million was outstanding as of September 30, 2003.On January 9, 2002, Smart signed a loan facility in the amount of Php300million, of which Php280 million was outstanding as of September 30, 2003.This loan is payable quarterly over five years with final repayment in February2007.

 

On April 14, 2002, for thepurpose of financing the purchase of certain equipment, Smart obtained a US$7.2million term loan facility from Bayerische Hypo-und VereinsbankAktiengesellschaft, of which US$6 million was outstanding as of September 30,2003, pursuant to the standard loan agreement No. 1 dated August 14, 2002 underthe €50 million Framework Agreement for the financing of individual exportcontracts dated November 8 and 13, 2001.

 

On November 28, 2002,Smart signed a US$100 million term loan facility supported by Nippon Export andInvestment Insurance. This facility remains undrawn as of the date of thisreport. 

 

Interest on Smart’s dollardenominated loans is either fixed or based on LIBOR plus premium.  These loansare payable in semi-annual installments and have maturities of up to 2008.  Thepeso loans are payable quarterly and accrue interest based on the weightedaverage interest rate, or WAIR, plus Participating Financial Institution, orPFI, premium and will mature in December 2005 and February 2007 for thePhp1,000 million and Php300 million facilities, respectively.

 

Smart is subject to 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.  After receiving approvals fromFinnvera and certain lenders for the payment of dividends to PLDT in an amountnot to exceed 40% of Smart’s net income in 2001, Smart made its first dividendpayment of Php1,540 million to PLDT in December 2002.  In June 2003, Smart paiddividends in the amount of Php4,300 million to PLDT representing 70% of Smart’s2002 net income and in November 2003, Smart paid additional dividends to PLDTequivalent to the remaining 30% of its 2002 net income or Php1,866 million,after receiving the necessary approvals from Finnvera and certain lenders.Smart will be required to obtain further waivers to pay additional dividends infuture periods.

 

Smart’s debt instruments alsocontain certain restrictive covenants that require Smart to comply withspecified financial ratios and other financial tests at semi-annual measurementdates.  Smart has maintained compliance with all of the financial covenants.The financial tests under Smart’s loan agreements include compliance with adebt to equity ratio of not more than 1.50:1.00 and a debt service coverageratio of not less than 1.50:1.00.  The agreements also contain customary andother default provisions that permit the lender to accelerate amounts due underthe loans or terminate their commitments to extend additional funds under theloans.  These default provisions include:

 

•        Cross-defaults andcross-accelerations that permit a lender to declare a default if Smart is indefault under another loan agreement.  These cross default provisions aretriggered upon a payment or other default permitting the acceleration of Smartdebt, whether or not the defaulted debt is accelerated;

 

•        Failure by Smart to comply withcertain financial ratio covenants;

 

•        Any reduction in PLDT’s ownershipof Smart’s stock below 51% of the total of each class of Smart’s issued shares;

 

•        Any reduction in First Pacific’sand Metro Pacific Corporation’s collective direct and/or indirect ownership ofPLDT’s common stock below 17.5% of the total common stock outstanding or 17.5%of the voting power of the total common stock outstanding; and

 

•        The occurrence of any materialadverse change in circumstances that the lender reasonably believes materiallyimpairs Smart’s ability to perform its obligations under its loan agreementswith the lender or that the lender believes materially impairs an applicableguarantors’ ability to perform its obligations under an applicable guaranty.

 

In addition, some of theseloan agreements restrict Smart’s ability to enter into transactions withaffiliates except on arms length terms and for valuable consideration.

 
******
***Mabuhay Satellite***

 

Mabuhay Satellite’s long-termdebt consists of:

 

 

**September 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

(in millions)

U.S. Dollars

** **

** **

** **

** **

Credit Agreement 

**US$42**

**Php2,289**

US$55

Php2,925

Omnibus Agreement

**44**

**2,439**

46

2,431

 

**86**

**4,728**

101

5,356

Less current portion

**23**

**1,272**

18

980

 

**US$63**

**Php3,456**

US$83

Php4,376

 

*Credit Agreement*

 

Mabuhay Satellite has an existing Credit Agreement withthe Export-Import Bank of the United States (Ex-Im Bank) to finance a portionof the cost of purchasing the Agila II Satellite.  In 2000, Ex-Im Bank agreedto amend the repayment terms of the principal under the RestructuringAgreement.  Under the Amendment, the outstanding balance as of the effectivedate of the Amendment shall be amortized in 13 successive semi-annualinstallments due on January 15 and July 15 of each year, beginning January 15, 2000.  Interest rate remains at 6.6% per annum.  

 

*Omnibus Agreement*

 

Mabuhay Satellite also has anexisting Omnibus Agreement with a syndicate of local banks, or the Banks, whichincludes issuance of irrevocable standby Letters of Credit with an aggregatestated value not exceeding US$42 million (Php2,289 million)in favor of Ex-Im Bank, as security under the Credit Agreement and a term loanto Mabuhay Satellite in the aggregate amount of US$44 million (Php2,439 million). 

 

As security, MabuhaySatellite has constituted in favor of the Banks:

 

•        A first mortgage on its leaseholdrights under a lease agreement entered into with the Subic Bay MetropolitanAuthority, or SBMA, and the components of the satellite system;

 

•        An assignment of its rights underits Purchase Contract for the Satellite System;

 

•        An assignment of its rights underthe transponder lease contracts to be entered into with its stockholders andother parties and the revenues therefrom; and

 

•        An assignment of the applicableproceeds of insurance to be taken on the satellite system.

 

The Credit and Omnibus Agreements impose negativecovenants which, among others, restrict the material changes in MabuhaySatellite’s nature of business and ownership structure, any lien upon or withrespect to any of its assets or to any right to receive income, acquisition ofcapital stock, declaration and payment of dividends, merger, consolidation andsale with another entity and incurring or guaranteeing additional long-termdebt beyond prescribed amounts.

*** ***
******
***ePLDT***

 

On March 4, 2002, ePLDTentered into a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million with a grace period of one year.  The loan facilitywas fully drawn as of December 31, 2002.  The quarterly principal payments of Php15 millionstarted in June 2003 with a balloon payment of Php45 million in March 2005.Interest on this loan is equivalent to 91-day T-bill rate plus 4% per annumpayable quarterly in arrears.  The loan is secured by ePLDT’s investment in anaffiliate with a carrying value of Php629 millionas of September 30, 2003 and a deed of assignment of receivables of anassociate from a foreign customer.  As of September 30, 2003,the outstanding balance of this loan amounted to Php120 million, of which Php15million will mature in the fourth quarter of 2003.

 

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.

 

***MaraTel***

 

MaraTel’s long-term debtconsists of a Php60 million loan obtained on October 20, 1997 and a Php19million loan drawn on July 19, 1999.  The Php60 million loan carries an interest rateranging from 11.6% to 14.6% per annum and matures on October 16, 2005,while the Php19 million loan bears a fixed interest rate of 14.7% per annum andmatures on July 30, 2004.  As of September 30, 2003,the outstanding balances of these loans totaled Php30million, of which Php4 million willmature in the fourth quarter of 2003.

 

 

**14. ****Deferred Credits and Other Noncurrent Liabilities**

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**September 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

**September 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

(in million pesos)

 

Liability under Letter of Support (Note 3)

**2,757**

2,676

 

**2,757**

2,676

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

**2,286**

1,625

 

**2,074**

1,515

Advance payment under a receivables purchase facility (Note 6)

**2,195**

2,530

 

**2,195**

2,530

Customers’ deposits

**1,754**

2,162

 

**1,655**

2,055

Accrued pension cost (Note 17)

**–**

1,175

 

**–**

1,175

Others 

**1,264**

1,372

 

**959**

1,206

 

**10,256**

11,540

 

**9,640**

11,157

 

 

 

**15. ****Stockholders’ Equity**

** **

The movement of PLDT’scapital stock account follows:

 

** **

** **

**Preferred Shares –**Php10 par value

** **

** **

**Common Stock –** Php5 par value

** **

**Series  A to DD**

**III**

**IV**

**V**

**VI**

**VII**

** **

** **

** **

**No. of Shares**

**Amount**

**No. of Shares**

**Total  Preferred Shares**

**Amount**

** **

 (in millions)

**Authorized**

234

Php1,170

** **

** **

** **

** **

** **

** **

823

Php8,230

**Outstanding**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Balances at January 1, 2002

168

Php844

372

5

36

3

5

4

425

Php4,242

Issuance

–

–

37

–

7

–

–

–

44

441

Conversion

1

3

(3)

–

–

–

–

–

(3)

(26)

Redemption

–

–

–

–

(7)

–

–

–

(7)

(72)

Balances at December 31, 2002 (Audited)

169

Php847

406

5

36

3

5

4

459

Php4,585

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2003

169

Php847

406

5

36

3

5

4

459

Php4,585

Issuance

–

–

5

–

–

–

–

–

5

47

Conversion

–

–

(2)

–

–

–

–

–

(2)

(15)

Balances at September 30, 2003 (Unaudited)

169

Php847

409

5

36

3

5

4

462

Php4,617

 

***Preferred Stock***

 

Thepreferred stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.

 

The Series A to CC 10% CumulativeConvertible Preferred Stocks 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 September 30, 2003, is Php5 per share.  At PLDT’s option, the Series Ato CC 10% Cumulative Convertible Preferred Stock are redeemable at par valueplus accrued dividends five years after the year of issuance.

 

OnJanuary 22, 2002, the Board of Directors designated 10 million sharesof serial preferred stock as Series CC 10% Cumulative Convertible PreferredStock for issuance throughout 2002.  In addition, on February 26, 2002,the Board of Directors designated an additional 15 million shares of serialpreferred stock as Series AA 10% Cumulative Convertible Preferred Stock.  Theissuance of the 10 million shares of Series CC 10% Cumulative ConvertiblePreferred Stock and the additional 15 million shares of Series AA 10%Cumulative Convertible Preferred Stock is an exempt transaction under Section10.2 of the SRC, as confirmed by the Philippine SEC on March 13, 2002 and July 31, 2002,respectively.  PSE approved the listing of the 10 million shares of Series CC10% Cumulative Convertible Preferred Stock and the additional 15 million sharesof Series AA 10% Cumulative Convertible Preferred Stock on August 14, 2002.

 

On December 2, 2002, theBoard of Directors designated 10 million shares of serial preferred stock asSeries DD 10% Cumulative Convertible Preferred Stock for issuance throughout 2003and an additional 10 million shares of serial preferred stock as Series CC 10%Cumulative Convertible Preferred Stock.  The issuance of the 10 million sharesof Series DD 10% Cumulative Convertible Preferred Stock and the additional 10million shares of Series CC 10% Cumulative Convertible Preferred Stock is anexempt transaction under Section 10.2 of the SRC, as confirmed by the SEC on January 30, 2003.  Inan earlier letter dated October 24, 2002, PSE allowed PLDT to utilize 24,287,455 unissuedpreferred shares remaining listed with the PSE in order to cover the issuancerequirement of the other series under PLDT’s Subscriber Investment Plan.  Theissuance requirement for the 10 million shares of Series DD 10% CumulativeConvertible Preferred Stock and the additional 10 million shares of Series CC10% Cumulative Convertible Preferred Stock will be taken from the saidremaining listed and unissued preferred shares. 

 

The Series III ConvertiblePreferred Stock earns cumulative dividends at an annual rate of US$3.50 a sharepayable quarterly, free and clear of Philippine withholding taxes.  It isconvertible into common stock at the option of the holder at any time, at theconversion price of US$29.19 per share of common stock (equivalent to aconversion ratio of 1.7129 shares of common stock for each share of Series IIIConvertible Preferred Stock, each share of Series III Convertible PreferredStock being valued for this purpose at its reference amount of US$50 a share),subject to adjustment in certain events.  The Series III Convertible PreferredStock is not redeemable.  Upon liquidation of PLDT, holders of the Series IIIConvertible Preferred Stock will be entitled to receive liquidatingdistributions equivalent to Php11 a share, plus accrued and unpaid dividends tothe date of distribution, subject to the prior rights of creditors.

 

The Series IV CumulativeNon-Convertible Redeemable Preferred Stock earns cumulative dividends at anannual rate of 13.5% based on the paid-up subscription price.  It is redeemableat the option of PLDT at any time one year after subscription and at the actualamount paid for such stock, plus accrued dividends.  On February 26, 2002,the Board of Directors called for the payment of a portion of the balance ofthe subscription price of the Series IV Cumulative Non-Convertible RedeemablePreferred Stock amounting to Php72 million, which was paid on March 5, 2002.  OnMarch 22, 2002, PLDT redeemed 60 million shares out of the 360 millionsubscribed shares of its Series IV Cumulative Non-Convertible Preferred Stockand paid Php72 million, representing the redemption price plus unpaid dividendsup to the date of redemption.

 

On June 4, 2001, PLDT issued 2.7 million shares of SeriesV Convertible Preferred Stock, 5.1 million shares of Series VI ConvertiblePreferred Stock and 3.8 million shares of Series VII Convertible PreferredStock in exchange for a total of 58.1 million shares of Series K, Class IConvertible Preferred Stock of Piltel, pursuant to the debt restructuring planof Piltel.  Shares of Series V, VI and VII Convertible Preferred Stock areentitled to receive annual dividends of Php18.70 per share, US$0.397 per shareand JP¥40.7189 per share, respectively.  In addition, in 2002, PLDT issued30,100 shares of Series V Convertible Preferred Stock and 14,087 shares ofSeries VI Convertible Preferred Stock in exchange for a total of 220,935 sharesof Series K, Class I Convertible Preferred Stock of Piltel.  In March 2003,PLDT issued 92,413 more shares of Series VI Convertible Preferred Stock inexchange for 462,065 shares of Piltel Series K Class I Convertible PreferredStock.  Each share of Series V, VI and VII PLDT Convertible Preferred Stock isconvertible at any time at the option of the holder into one PLDT common share.On the date immediately following the seventh anniversary of the issue date ofthe Series V and Series VI Convertible Preferred Stock and on the eighthanniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorilyconverted to PLDT common shares, which will benefit from a put optionexercisable for thirty days to sell such PLDT common shares to PLDT forPhp1,700 or US$36.132 or JP¥4,071.89 per share depending on the series.  PLDTwould be obligated to pay up to Php4,379 million, US$168 million and JP¥15,644million under the put option if all the convertible preferred shares will bemandatorily converted and all the underlying common shares will be put to PLDT.

 

As of September 30, 2003and December 31, 2002, a total of 674,720 sharesof Series V and VI Convertible Preferred Stock have been converted to PLDTcommon shares.

 

The aggregate value of theput option as of September 30, 2003 was Php21,322 millionwhile the market value of the underlying common shares was Php7,091 millionbased on the market price of PLDT’s common stock of Php640per share as of September 30, 2003.

 

The shares of preferredstock, except shares of Series V, VI and VII Convertible Preferred Stock, redeemedor converted into common stock shall revert to and form part of the unissuedpreferred stock, and may be reissued in any other series that the Board ofDirectors may, from time to time, establish and designate.

 

The provisions of certainsubscription agreements involving preferred stock have an effect on the abilityof PLDT to, without written consent, sell certain assets and pay cash dividendsunless all dividends for all past quarterly dividend periods have been paid andprovision has been made for the currently payable dividends.

 

On January 31, 2003, the Board of Directors approved thedividend declaration of: (a) Php1.00 per outstanding share of 10% CumulativeConvertible Preferred Stock Series CC payable on March 31, 2003 to the holdersof record on February 27, 2003; and (b) Php12.15 million on the outstandingshares of Series IV Cumulative Non-Convertible Redeemable Preferred Stockpayable on March 15, 2003 to the holders of record on February 17, 2003.  OnFebruary 26, 2003, the Board of Directors approved the dividend declaration tothe holders of record on March 17, 2003 of: (a) US$1.029412 per outstandingshare of Series III Cumulative Convertible Preferred Stock; (b) Php4.675 peroutstanding share of Series V Convertible Preferred Stock; (c) US$.09925 peroutstanding share of Series VI Convertible Preferred Stock; and (d)JP¥10.179725 per outstanding share of Series VII Convertible Preferred Stock,respectively.  In addition, on June 10, 2003, the Board of Directors approvedthe dividend declaration to the holders of record on June 27, 2003 of: (a)US$1.029412 per outstanding share of Series III Cumulative ConvertiblePreferred Stock; (b) Php4.675 per outstanding share of Series V ConvertiblePreferred Stock; (c) US$.09925 per outstanding share of Series VI ConvertiblePreferred Stock; and (d) JP¥10.179725 per outstanding share of Series VIIConvertible Preferred Stock, respectively.  On July 8, 2003, the Board ofDirectors approved the dividend declaration of: Php1.00 per outstanding share ofSeries A, I, R, W, AA and BB 10% Cumulative Convertible Preferred Stock payableon August 29, 2003 to the holders of record on July 24, 2003.  On September 2,2003, the Board of Directors approved the dividend declaration of: (a)US$1.029412 per outstanding share of Series III Convertible Preferred Stock;(b) Php12.42 million on the outstanding shares of Series IV CumulativeNon-Convertible Redeemable Preferred Stock; (c) Php4.675 per outstanding shareof Series V Convertible Preferred Stock; (d) US$.09925 per outstanding share ofSeries VI Convertible Preferred Stock; (e) JPY10.179725 per outstandingshare of Series VII Convertible Preferred Stock; (f) Php1.00 per outstandingshare of Series B, F, Q, V and Z 10% Cumulative Convertible Preferred Stockpayable on September 30, 2003 to the holders of record on September 16, 2003and Series E, K, O and U 10% Cumulative Convertible Preferred Stock payable onOctober 31, 2003 to the holders of record on September 25, 2003.

 

***Employees’ Stock Purchase Plan***

 

TheEmployees’ Stock Purchase Plan, or ESPP, of PLDT provides an opportunity to itsregular rank-and-file and supervisory employees to purchase an ownershipinterest in PLDT’s common stock at a reduced price on a deferred payment basis.

 

On November 3, 1999, theBoard of Directors approved the Ninth Offering under the ESPP.  Up to 991,200shares of common stock have been made available for purchase under the NinthOffering.

Movements in the number ofstock purchase plan outstanding are as follows:

 

 

**September 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

Beginning balance

**55,124**

169,708

Exercised/cancelled

**55,124**

114,584

Ending balance

**–**

55,124

 

The purchase price is set atthe prevailing market price which should not exceed Php877.63 per share.  Thiscap represented 85% of the market price at offer date on January 3, 2000.  Theaverage market value of the shares exercised in 2002 was Php378 per share(total Php43 million).

***Executive Stock OptionPlan***

 

On April 27, 1999 andDecember 10, 1999, the Board of Directors and stockholders, respectively,approved the establishment of an Executive Stock Option Plan, or ESOP, and theamendment of the Seventh Article of the Articles of Incorporation of PLDTdenying the pre-emptive right of holders of shares of common stock to subscribefor any issue of up to 1,289,745 shares of common stock pursuant to the ESOP.The ESOP covers management executives, which include officers with rank of VicePresident up to the President, executives with the rank of Manager up to AssistantVice President, and advisors/consultants engaged by PLDT.  The ESOP seeks tomotivate option holders to achieve PLDT’s goals, reward option holders for thecreation of stockholder value, align the option holders’ interests with thoseof the stockholders of PLDT and retain the option holders to serve thelong-term interests of PLDT.  The ESOP is administered by the ExecutiveCompensation Committee of the Board of Directors.  About 1.3 million shares ofcommon stock of PLDT have been reserved as underlying shares of options underthe ESOP. 

 

Movements in the number ofstock option plan outstanding are as follows:

 

 

**September 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

Beginning balance

**1,226,395**

1,157,258

Granted

**–**

144,428

Cancelled

**316,202**

75,291

Ending balance

**910,193**

1,226,395

 

Since the date of the granton December 10, 1999, there were no officers or executives who exercisedtheir options.  Instead, there were cancellations of options due to officerresignations and retirements of officers and executives.

*** ***

***Retained Earnings***

 

This account consists of:

 

 

**September 30, 2003**

**(Unaudited)**

** **

December 31, 2002

(As restated –

Note 3)

 

(in million pesos)

Appropriated for plant expansion and higher replacement costs

**435**

435

Unappropriated

**37,749**

33,268

 

**38,184**

33,703

 

The most recent dividenddeclaration made by PLDT in respect of its common shares was in March 2001.PLDT continues to pay dividends in respect of its preferred shares.  Thecurrent policy of PLDT is to determine its ability to declare and paydividends, taking into consideration the interests of its shareholders as wellas PLDT’s working capital, capital expenditure and debt service requirements.Also taken into account are the prohibitions and restrictions under certain ofPLDT’s debt instruments with respect to the declaration and payment ofdividends.  The retention of earnings is necessary to meet the fundingrequirements of our business expansion, service improvement and developmentprograms.  The unappropriated retained earnings balance of PLDT as of September30, 2003 and December 31, 2002 includes accumulated equity share in net incomeof investees of Php8,150 million and Php4,452 million, respectively, which are not available fordistribution as dividends until declared by the investees. 

 

 

**16. ****Related Party Transactions**

** **

Companies within the PLDTGroup are engaged in arm’s-length transactions with each other in the ordinarycourse of business.  We believe that the terms of these transactions arecomparable with those available to unrelated parties. 

 

***Transactionswith/between Related Parties***

 

A description of majortransactions with/between related parties is as follows:

 

*a.   Telecommunications Services Provided within PLDTGroup*

 

Telecommunications carrierswithin the PLDT Group (namely, PLDT, Smart, Piltel, Clark Telecom, SubicTelecom, MaraTel and PLDT Global) have existing intercompany agreements, suchas interconnection agreements with one another under terms similar with thoseagreed with other telecommunications providers outside the PLDT Group (see *Note26 – Other Matters*).  Each of these carriers recognizes revenues, net ofinterconnection charges, for calls terminating with the customer of the othercarriers. 

 

*b.   Transponder LeaseAgreement between PLDT and Mabuhay Satellite*

 

On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, asamended on May 10, 2000, pursuant to which Mabuhay Satellite leases to PLDTC-band transponders on board the Agila II satellite, in consideration of abasic rent.  This agreement has a term of ten years commencing on December 18, 1997,unless earlier terminated in accordance with the terms thereof. 

 

Under an Acknowledgment andConsent Agreement dated January 4, 1996, PLDT acknowledged and consented to MabuhaySatellite’s:

 

•        transfer and assignment of allamounts payable by PLDT under the Transponder Lease Agreement; and

 

•        grant of a continuing securityinterest of first priority in all of Mabuhay Satellite’s rights, title andinterest in, to and under the Transponder Lease Agreement, in favor of thecollateral agent for the benefit of the lenders who are parties to the OmnibusCredit and Security Agreement dated December 14, 1995.

 

Total fees under theseagreements amounted to Php550 million and Php613 million for the nine months ended September 30, 2003and 2002, respectively.  Outstanding obligations of PLDT under these agreementsamounted to Php73 million and Php269 millionas of September 30, 2003 and December 31, 2002, respectively.

 

*c.   Facilities ManagementAgreement between PLDT and Piltel*

* *

On July 19, 2001, PLDTentered into a Facilities Management Agreement with Piltel under which PLDTundertakes the management, operation and maintenance of Piltel’s regionaltelecommunication and E.O. 109, network operations and services, including E.O.109 fixed line build-out installations, public calling offices and payphonefacilities and the systems required to support these services.

 

The agreement covers Piltel’s regional telecommunicationservices in Baguio, Puerto Princesa, Masbate, and Boac and E.O. 109 services inAlabel, Banga, Dapitan, Davao, Digos, Dipolog, General Santos, Kiamba,Koronadal, Pagadian, Polomolok and Surallah in Mindanao.

 

Under the agreement, PLDTalso undertakes the management of the computer system, billing, revenueassurance and inter-carrier settlements reporting of Piltel’s regionaltelecommunication services in Olongapo and Subic.

 

The monthly management feepayable by Piltel is based on cost, and for cost components where margin isallowed, 15% will be applied.  All third party invoices will be passed on toPiltel at cost, including value-added tax.

 

The agreement supersedes theFacilities Management Agreement between PLDT and Piltel, dated May 12, 2000,under which PLDT undertook the management, maintenance and operation of theregional telecommunication services of Piltel, including public calling officesand payphone operations located in Baguio City, Puerto Princesa, Boac andMasbate.  The new agreement is effective for three years from July 2001 to July2004.

 

Total management fees underthese agreements amounted to Php56 million and Php64 million for the nine months ended September 30, 2003and 2002, respectively.  Outstanding receivables of PLDT under these agreementsamounted to Php338 million and Php258 million as of September 30, 2003 and December 31, 2002, respectively.

 

*d.   Facilities ManagementAgreement between**Subic**Telecom and Piltel*

 

On September 5, 2001, Piltel and Subic Telecom enteredinto a Facilities Management Agreement of the regional telephone network,customer operations, network operations and payphones of Piltel in Subic and Olongapo City.  The monthly management fee payable by Piltel is based on cost, and forcost components where margin is allowed, 15% will be applied.  In addition,Piltel will pay a monthly variable cost per account in the amount of Php44 forrepairs and maintenance.  All third party invoices will be passed on to Piltelat cost, including value-added tax.  This agreement supersedes the facilitiesmanagement agreement entered into by Piltel and Subic Telecom on May 29, 2000.

 

Total management fees underthis agreement amounted to Php16 million forthe nine months ended September 30, 2003 and 2002.  The new agreement is effective for threeyears until September 2004.  Outstanding receivables of Subic Telecom underthis agreement amounted to Php7 million andPhp2 million as of September 30, 2003 and December 31, 2002, respectively.

 

*e.   Agreements betweenSmart and Piltel*

 

In connection with theintegration of their operations, Smart and Piltel have entered into thefollowing agreements:

 

•        An agreement for the co-location,or sharing, of cellular sites selected at the option of Smart, whereby Piltelis paid a usage fee of Php45,000 per shared site per month, subject to a 10%annual increase;

 

•        An agreement whereby Smart managesthe operation of Piltel’s cellular.  This agreement is divided into threesub-agreements as follows:

 

i.        A Facilities Management Agreementunder which Smart operates, maintains and manages the physical facilities andtechnical services of Piltel’s existing cellular. Piltel pays Smart a fixedmonthly fee of Php4 million and a variable monthly fee of Php13,735 per sitecovered by the agreement.  Additional fees of Php186,878 million per month andPhp624 per site per month are payable at the end of each calendar year uponrendition of the services in accordance with the agreement.  This agreement wasamended in May 2001 to include the management, operation and maintenance of Piltel’sprepaid wireless telecommunications network in the E.O. 109 areas in Mindanaoincluding the business and central offices, base stations, and public callingoffices of Piltel located in South Cotabato, Saranggani and General Santos,Davao City, Davao del Sur, Zamboanga del Norte, Zamboanga del Sur and MisamisOccidental;

 

ii.      A Customer Service ManagementAgreement under which Piltel outsources the operation of its customer serviceand billing functions for its cellular and paging systems to Smart for a fixedmonthly fee of Php8.8 million and a variable cost of Php57 and Php17 perpostpaid and prepaid cellular subscriber, respectively.  An additional fee ofPhp399,926 per month and Php1 per postpaid subscriber per month is payable atthe end of each calendar year upon rendition of the services in accordance withthe agreement; and

 

iii.     An Administrative Support andManagement Services Agreement under which Smart provides administrative supportand services to Piltel including payroll administration and training, financeand financial accounting, audit, legal, purchasing and materials management,public affairs, information technology, rates and tariffs administration, salesand marketing, product development and carrier services for a fixed monthly feeof Php7.8 million.  An additional fee of Php353,764 per month is payable at theend of each calendar year upon rendition of the services in accordance with theagreement. 

 

Thisagreement was amended in December 2002 to include the provision of sales anddistribution services for Piltel’s products and services.  Piltel pays Smartthe residual percentage discount between Piltel’s prescribed distributordiscount rate and the discount rate that Smart gives to its retailers andwholesalers for the sale of prepaid cards and the residual commission betweenPiltel’s prescribed commission and the commission that Smart extends to itsretailers and wholesalers for phonekit and SIMpack sales.

 

•        A Facilities Service Agreementunder which Piltel accesses Smart’s existing GSM network and facilities toenable Piltel to offer prepaid cellular service using GSM technology inexchange for approximately 50% of Piltel’s revenues, net of interconnectionexpenses; and  

 

•        A Billing Service Agreement forthe printing and delivery of the billing statements of Piltel’s LECsubscribers.  Under the agreement, Piltel agrees to pay Smart an average ofPhp4.60 per bill printed and an average of Php5.40 per bill delivered.

 

Total fees under thesemanagement agreements amounted to Php3,428 millionand Php2,218 million for the nine months endedSeptember 30, 2003 and 2002, respectively.  Under these agreements, outstandingreceivables of Smart as of September 30, 2003 and December 31, 2002 amounted toPhp1,587 million and Php1,027 million, respectively.

*f.    Air Time PurchaseAgreement between PLDT and AIL and Related Agreements*

* *

In March 1997, PLDT enteredinto a Founder NSP Air Time Purchase Agreement with PT Asia Cellular Satellite,as amended in December 1998, under which PLDT was granted the exclusive rightto sell ACeS services in the Philippines.  In exchange, PLDT is required topurchase from PT Asia Cellular Satellite at least US$5 million worth of airtimeannually over ten years commencing on the date of the satellite’s commercialoperations.  The commercial operations date is defined as the earlier of:

 

•        the day on which PT Asia CellularSatellite places the Garuda I satellite in commercial operation; and

 

•        the date of final acceptance ofthe Garuda I satellite and associated equipment under the terms of theSpacecraft Contract, dated August 28, 1995, between PT Asia Cellular Satelliteand Martin Marietta Overseas Corporation.

 

However, the commercialoperations date may not occur without the consent of PLDT if there is aconstructive total loss or partial loss of the satellite under its launchinsurance contract and the satellite cannot provide commercial service in the Philippines. 

 

In the event that PT AsiaCellular Satellite’s aggregate billing revenues is less than US$45 million inany given year, PLDT is required to make supplemental airtime purchase paymentsnot to exceed US$15 million per year during the ten-year term.

 

In March 2003, PLDT, togetherwith the founder shareholders, entered into a Standstill Agreement in respectof the Air Time Purchase Agreement.  See *Note 21 – Contractual Obligationsand Commercial Commitments* for further discussion.   

 

PLDT also entered into aFounder NSP Operating Agreement with PT Asia Cellular Satellite on March 12,1997, under which PLDT may:

 

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

 

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

 

Under an Assignment andAssumption Agreement dated December 29, 1998, PT Asia Cellular Satellite agreedto assign and transfer to AIL all of PT Asia Cellular Satellite’s rights underthe Founder NSP Airtime Purchase Agreement and Founder NSP Operating Agreement.

 

Under an Acknowledgment of Assignment of Airtime PurchaseAgreement entered into on December 29, 1998, by and among PLDT, P.T. BankInternasional Indonesia and AIL, PLDT consented to the assignment by AIL of theFounder NSP Airtime Purchase Agreement to P.T. Bank Internasional Indonesia, assecurity agent, for the benefit of the secured parties under the SecurityAgreement dated as of December 29, 1998, which was executed in connection withthe Amended and Restated Credit Agreement dated December 29, 1998 among PT AsiaCellular Satellite, AIL, P.T. Bank Internasional Indonesia and various otherbanks.

 

On September 30, 2002, PTAsia Cellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia,as security agent, and various other banks signed a Rescheduling Agreement,which amended the terms of the Amended and Restated Credit Agreement datedDecember 29, 1998, moving the principal repayment dates to agreed periods withthe final maturity date on January 31, 2012.
**
* *

*g.   Agreements between Smart and ACeS Philippines*

 

On July 18, 2000, Smartentered into a Service Distribution Agreement with ACeS Philippines under whichACeS Philippines appointed Smart as an authorized service provider of ACeSGlobal Mobile Personal Communication by Satellite Services, or GMPCS Services,in the Philippines having the task of exerting its best efforts to market andsell access to usage of the said services to prospective subscribers.  

 

An amendment to this ServiceDistribution Agreement was made on February 16, 2001, whereby Smart shall remitto ACeS Philippines a Facility Usage Fee based on a revenue sharing formula.ACeS Philippines shall in turn pay Smart’s charges for 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, ACeS International relations andother support services.

 

Total fees under theseagreements, net of ACeS Philippines share, amounted to Php52 million and Php36 million for the nine months ended September 30,2003 and 2002, respectively.  The outstanding payable of Smart amounted toPhp137 million as of September 30, 2003 and no outstanding obligations as ofDecember 31, 2002. 

* *

*h.**Other Transactions*

 

Equity investments insubsidiaries and associates are discussed in *Note 9 – Investments*.

 

On December 9, 2002, PLDTtransferred and conveyed to Smart certain inland and submarine domestic fiberoptic cable loops, digital transmission equipment and corresponding networkmanagement systems with an aggregate net book value of Php4,138 million, asconsideration and in exchange for 298 million preferred shares of Smartsubscribed by PLDT at Php13.875 per share, or a total subscription price ofPhp4,138 million.  

 

The following is a summary ofrelated party accounts with subsidiaries eliminated from the consolidatedbalance sheets as of September 30, 2003 and December 31, 2002 and from theconsolidated statements of income for the nine months ended September 30, 2003and 2002:

 

 

**2003**

2002

 

     (in million pesos)

Balance Sheets

 

*** ***

Accounts receivable

**7,016**

4,871

Other noncurrent assets 

**86**

2,421

Accounts payable 

**3,915**

2,073

Accrued expenses and other current liabilities

**546**

805

Deferred credits and other noncurrent liabilities

**2,641**

4,414

Statements of Income

** **

* *

Fixed line revenues

**2,293**

1,738

*(Forward)*

** **

 

Wireless revenues

**737**

613

Information and communications technology revenues

**64**

–

Rent expense

**2,769**

1,974

Maintenance expense

**326**

380

Miscellaneous income

**1**

3

 

The following is a summary ofrelated party accounts with Piltel as of September 30, 2003 (unaudited) andDecember 31, 2002 (audited) and for the nine months ended September 30, 2003and 2002: 

 

 

**2003**

2002

 

 (in million pesos)

Balance Sheets

 

*** ***

Accounts receivable

**1,413**

2,435

Statements of Income

** **

* *

Fixed line revenues

**228**

235

Miscellaneous income

**52**

79

*** ***

***Transactions with MajorStockholders, Directors and Officers***

 

Transactions to which PLDT orits subsidiary was a party, in which a director or key officer or owner of morethan 5% of the common shares of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 5% of the common shares of PLDThad a direct or indirect material interest as of September 30, 2003 andDecember 31, 2002 and for the nine months ended September 30, 2003 and 2002 areas follows:

 

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

 

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

 

•       *Advisory Services Agreement*.   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on September 30, 2003, under which NTTCommunications provides PLDT with technical, marketing and other consultantsfor various business areas of PLDT starting April 1, 2000;  

 

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

 

•        *Arcstar Licensing Agreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into an agreement withNTT Worldwide Telecommunications Corporation under which PLDT markets manageddata and other services under NTT Communications’ “Arcstar” brand to itscorporate customers in the Philippines.  PLDT also entered into a Trade Nameand Trademark Agreement with NTT Communications under which PLDT has been giventhe right to use the tradename “Arcstar” and its related trademark, logo andsymbols, solely for the purpose of PLDT’s marketing, promotional and salesactivities for the Arcstar services within the Philippines; and

 

•        *Conventional InternationalTelecommunications Services Agreement*.On March 24, 2000, PLDT entered into an agreement with NTT Communications underwhich PLDT and NTT Communications agreed to cooperative arrangements forconventional international telecommunications services to enhance theirrespective international businesses.  

 

Totalfees under these agreements amounted to Php218 million and Php251 million for the nine months ended September 30, 2003and 2002, respectively.  As of September 30, 2003 andDecember 31, 2002, outstanding obligations of PLDT amounted to Php39 million and Php36million, respectively.

 

*b.     **Agreements between Smartand Asia Link B.V., or ALBV.* Smarthas an existing Technical Assistance Agreement with ALBV for the latter toprovide technical support services and assistance in the operations andmaintenance of CMTS for a period of five years, subject to renewal upon mutualagreement between the parties.  The agreement provides for quarterly paymentsof technical service fees equivalent to 2% of the net revenues of Smart.  InJanuary 2003, the agreement was amended, reducing the technical service fees tobe paid by Smart to ALBV to 1% of net revenues effective January 1, 2003.

 

Smartalso has an existing Services Agreement with ALBV for a period of 25 yearsstarting January 1, 1999, which shall automatically expire unless renewed bymutual agreement of both parties.  Under the agreement, ALBV provides adviceand assistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other servicestherein consistent with and for the furtherance of the objectives of theservices.

 

ALBVis a subsidiary of the First Pacific Group.

 

Totalfees under these agreements amounted to Php223 million and Php300 million for the nine months ended September 30,2003 and 2002, respectively.  Outstanding payables of Smart under theseagreements amounted to Php102 million and receivablesof Php31 million as of September 30, 2003 andDecember 31, 2002, respectively.

 

*c.      **Agreement with Foote, Coneand Belding Worldwide, or FCB Worldwide.*FCB Worldwide provides consultancy and advisory services to PLDT.    Thechairman of PLDT’s Board is the non-executive chairman of FCB Worldwide’srepresentative office in the Philippines.

 

*d.     **Agreements relating toinsurance companies.*Gotuaco delRosario and Associates, or Gotuaco*,* acts as broker for certain insurancecompanies to cover certain properties of the PLDT Group.  Insurance premiumsare remitted to Gotuaco and the broker’s fees are settled between Gotuaco andthe insurance companies.  In addition, PLDT has signed an insurance policy withMalayan Insurance Co. Inc., or Malayan, wherein premiums are directly paid toMalayan.  Total payments to Gotuaco and Malayan covering the twelve-monthperiod ending July 31, 2004 including payments subsequent to 2002 amounted toPhp334 million.  Two directors of PLDT have adirect/indirect interest in or serve as director/officer of Gotuaco andMalayan.

 

 

**17. ****Employees’ Benefit Plan**

 

***PLDT***

 

PLDT has a trustee-managed,noncontributory defined benefit plan, or the Benefit Plan, providing forretirement and death benefits and service terminal pay to substantially allpermanent and regular employees.  Benefits under the Benefit Plan are based onfinal salary and length of service.

 

PLDT’s actuarial valuation isdone on an annual basis.  Based on the latest actuarial valuation datedFebruary 2003, the actuarial present value of accrued liability, net pensioncost and average assumptions used in developing the valuation at December 31,2002 and 2001 are as follows:

 

** **

**2002**

2001

** **

(in million pesos)

Actuarial accrued liability

**7,984**

6,638

Assets at fair value

**4,094**

4,592

Unfunded actuarial accrued liability

**(3,890)**

(2,046)

Unrecognized:

** **

 

Net transition liability

**2,889**

3,054

Net experience adjustment

**(174)**

(2,125)

Accrued pension cost as of December 31, 2002

**(1,175)**

(1,117)

 

Accrued pension cost as ofSeptember 30, 2003 and 2002 are as follows:

 

** **

**2003**

2002

** **

(Unaudited)

** **

(in million pesos)

Accrued pension cost as of January 1

**(1,175)**

(1,117)

Accrual of pension cost

**(494)**

(396)

Loss on settlement/curtailment (Note 18)

**(533)**

**–**

Contributions made to pension fund (Note 9)

**4,018**

363

Prepaid (accrued) pension cost 

**1,816**

(1,150)

 

The weighted averageassumptions used to determine pension benefits for 2003 and 2002 are asfollows:

 

** **

**2003**

2002

Discount rate

**9%**

12%

Rate of increase in compensation

**8%**

12%

Rate of return on plan assets

**9%**

11%

 

Net pension cost was computedas follows:

 

** **

**Nine Months Ended September 30**

** **

**2003**

2002

 

    (Unaudited)

 

(in million pesos)

Normal cost

**351**

303

Interest cost

**30**

36

Amortization of:

** **

 

Unrecognized net transition obligation

**123**

124

Unrecognized net experience adjustments

**(10)**

(67)

** **

**494**

396

 

In addition to PLDT’s cashcontribution in relation to the manpower reduction program, or MRP, in June2003, PLDT contributed to the PLDT BTF, its investment in convertible notes ofUnilink and a real property in Makati City. 

 

***Smart***

 

Smart has a trustee-managed,tax-qualified Provident Plan providing for retirement, death or serviceterminal pay to substantially all permanent and regular employees.  Under theProvident Plan, Smart contributes to the provident fund for the credit of eachmember’s Personal Retirement Account, or PRA, a percentage of such member’s monthlysalary.  The member has an option to contribute to the Provident Fund an amountnot to exceed 25% of the member’s monthly salary, which are credited to eachmember’s PRA; however, very few members contribute.  Net earnings of theProvident Fund are credited every nine months to the PRAs of the members basedon their proportionate share in the total value of the Provident Fund as of theend of the preceding period.

 

Any benefit payable underthis Plan shall be in lieu of or in compliance with, but not in addition to,the payment of similar benefits Smart is required to pay its employees underexisting or future laws, employment contracts or collective bargainingagreements, it being understood that the employee shall be entitled only to thehigher of the benefits and not to both.

 

Contributions by Smart to theProvident Plan charged to operations amounted to Php52 million and Php40 million for the nine months ended September 30, 2003and 2002, respectively.

 

 

**18. ****Other Expenses – Net**

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

** **

**Nine Months Ended September 30**

 
 

**2003**

2002

(As restated –

Note 3)

 

**2003**

2002

(As restated –

Note 3)

 
 

(Unaudited)

 

(in million pesos)

Interest expense and related items **–**

   net of capitalized interest (Notes 8 and 13)

**9,173**

10,693

 

**7,369**

8,333

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

**1,618**

1,038

 

**(7,256)**

(1,905) 

 
Manpower reduction cost (Note 17)

**1,955**

173

 

**1,955**

173

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

**785**

(519)

 

**766**

(906)

 
Interest income

**(597)**

(795)

 

**(80)**

(58)

 
Other expenses (income), net

**2,245**

(1,249)

 

**1,665**

(451)

 
 

**15,179**

9,341

 

**4,419**

5,186

 
 

Over the past years, PLDT hasbeen implementing the MRP in line with its continuing effort to reduce the costbase of the fixed line business.  The MRP cost charged to operations amountedto Php1,955 million, including loss onsettlement/curtailment of Php533 million in 2003, for the nine months ended September 30, 2003,and Php173 million in the same period in 2002, representing 1,681 and 374employees affected by the program, respectively.  Unrecognized past servicecosts and experience adjustments, which are normally amortized over the estimatedremaining working lives of employees, in respect of employees who availed ofthe manpower reduction program are recognized as loss onsettlement/curtailment. 

 

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

 

 

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

 

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

 

** **

**Consolidated**

** **

**Non-Consolidated**

 

**September 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

**September 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

(in million pesos)

Net current assets

**4,166**

3,772

** **

**3,962**

3,002

Net noncurrent liabilities

**(11,181)**

(10,699)

** **

**(9,654)**

(9,231)

 

The components of net deferred tax assets and liabilitiesare as follows:

 

** **

**Consolidated**

** **

**Non-Consolidated**

** **

**September 30,**

**2003**

**(Unaudited)**

December 31,  2002

(Audited)

** **

**September 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

** **

(in million pesos)

Current assets (liabilities) – net:

** **

** **

** **

** **

 

Allowance for doubtful accounts

**3,852**

2,760

** **

**2,960**

1,983

NOLCO

**915**

618

** **

**915**

618

Unearned revenues on sale of prepaid cards

**804**

710

** **

**186**

138

Accrued (prepaid) pension cost, net

**127**

571

** **

**(212)**

376

Allowance for inventory losses

**291**

192

** **

**27**

–

Current portion of unamortized past service cost

**165**

54

** **

**165**

54

Others

**61**

(81)

** **

**(10)**

(98)

 

**6,215**

4,824

** **

**4,031**

3,071

Less valuation allowance 

**(2,049)**

(1,052)

** **

**(69)**

(69)

Net current assets

**4,166**

3,772

** **

**3,962**

3,002

Noncurrent assets (liabilities) – net:

** **

 

 

** **

 

Interest charges capitalized, net of amortization

**(5,443)**

(5,536)

** **

**(4,816)**

(4,830)

Foreign exchange differential capitalized,  net of depreciation

**(4,906)**

(4,536)

** **

** **

**(4,848)**

(3,798)

Taxes and duties capitalized, net of amortization

**(662)**

(711)

** **

**(662)**

(711)

Prepaid pension cost

**(368)**

**–**

** **

**(****368****)**

–

Undistributed income of foreign subsidiaries

**(330)**

(333)

** **

**–**

–

Long-term portion of unamortized past service cost

**1,040**

108

** **

**1,040**

108

Others

**(512)**

309

** **

**–**

–

Net noncurrent liabilities

**(11,181)**

(10,699)

** **

**(9,654)**

(9,231)

 

The carryforward benefit ofNOLCO amounting to Php1,930 million in 2002 can be claimed as deductionsagainst taxable income until 2005.

 

Provision for income taxconsists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

** **

**Nine months ended September 30**

 

**2003**

2002

(As restated –

Note 3)

** **

**2003**

2002

(As restated –

Note 3)

 

(Unaudited)

 

(in million pesos)

Current

**1,343**

434

 

**–**

–

Deferred

**188**

742

** **

**(536)**

739

 

**1,531**

1,176

** **

**(536)**

739

 

The current provision for income tax, on a consolidatedbasis, for the nine months ended September 30, 2003 and 2002 mainly representsthe subsidiaries’ income tax under the regular corporate income tax.  PLDT’sminimum corporate income tax in 2002 amounting to Php638 million was chargeddirectly to “Prepayments and other current assets”.  The carryforward benefitof MCIT as of September 30, 2003, can be claimed as deductions against incometax payable until 2005.

 

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

 

** **

**Consolidated**

** **

**Non-Consolidated**

** **

**Nine months ended September 30**

 

**2003**

2002

(As restated – Note 3)

 

**2003**

2002

(As restated –

Note 3)

 

                  (Unaudited)

 

                 (in million pesos)

Provision at statutory tax rate

**2,295**

1,544

 

**1,683**

1,410

Tax effect of:

** **

 

 

** **

 

Non–deductible expenses 

**331**

88

** **

**273**

17

Income not subject to tax

**(146)**

(50)

 

**(146)**

(50)

Income subject to final tax

**(110)**

(55)

 

**(24)**

(29)

Income subject to income tax holiday

**(1,373)**

(621)

 

–

–

Income subject to lower tax rate

**(103)**

(91)

 

–

–

Equity share in net loss (income) of investees

** **

**518**

332

 

** **

**(2,322)**

(609)

Others

**119**

29

 

–

–

Actual provision for income tax

**1,531**

1,176

 

**(536)**

739

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

** **

**Nine Months Ended September 30**

 

**2003**

2002

** **

**Basic**

**Diluted**

Basic

Diluted

** **

(Unaudited)

** **

(in million pesos)

Net income

**5,795**

**5,795**

3,666

3,666

Less dividends on preferred stock

**1,526**

**1,361**

1,222

1,138

Net income applicable to common stock

**4,269**

**4,434**

2,444

2,528

 

 

 

(in thousand, except per share amounts)

Outstanding common shares, beginning

**169,393**

**169,393**

168,895

168,895

Effect of issuance of common shares during the period

–

**11,062**

182

6,565

Weighted average number of common shares, end

**169,393**

**180,455**

169,077

175,460

Earnings per common share

**Php25.20**

**Php24.57**

Php14.45

Php14.41

 

 

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

** **

***ContractualObligations***

 

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

 

 

**Payments Due by Period**

 

**Total**

**Within 1 year**

**2****-3**

**years**

**4****-5**

**years**

**After 5 years**

 

(in million pesos)

Long-term debt obligations

156,438

21,498

57,618

33,284

44,038

Long-term lease obligations 

7,361

1,758

3,059

1,899

645

Unconditional purchase obligations(1)

10,315

1,216

2,240

2,195

4,664

Other long-term obligations 

21,322

–

–

–

21,322

Total contractual cash obligations 

195,436

24,472

62,917

37,378

70,669

 

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

* *

*Long-term Debt Obligations*

* *

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

* *
**
*Long-term Lease Obligations*

*** ***

*Transponder LeaseAgreement.*   As discussed in *Note16 – Related Party Transactions*, PLDT and Mabuhay Satellite entered into aTransponder Lease Agreement on December 28, 1995, which was amended on May 10, 2000.  Thisagreement is for a period of ten years commencing on December 18, 1997,unless earlier terminated in accordance with the terms thereof.  The annualbasic rent for the transponders for 2002 is US$18 million.  As of September 30, 2003,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp3,291 million. 

 

*Municipal TelephoneProjects*.   In 1993, PLDT enteredinto two lease agreements with the Philippine Department of Transportation andCommunications, or DOTC, covering telecommunications facilities establishedunder the Municipal Telephone Act.  Under these agreements, PLDT was grantedthe exclusive right to perform telecommunications management services, toexpand services, and to promote the use of the DOTC-contracted facilities incertain covered areas for a period of fifteen years.  Title to the propertiesshall be transferred to PLDT upon expiration of the lease term.  As of September 30, 2003,the aggregate remaining obligation was approximately Php909 million.  In caseof cancellation, PLDT is liable to pay Php100 million under each of the twocontracts as liquidated damages.

 

*Domestic Fiber OpticNetwork Submerged Plant Agreement*.As discussed in *Note 16 – Related Party Transactions*, PLDT entered intoan agreement with NTT World Engineering Marine Corporation on July 4, 2000, forthe submarine cable repair and other allied services in relation to themaintenance of PLDT’s DFON submerged plant for a period of five years up toJuly 4, 2005.  Under the agreement, PLDT shall pay NTT World Engineering MarineCorporation a fixed annual standing charge of US$2 million excluding cost forthe use of a remotely-operated submersible vehicle at US$5,000 for every day ofuse and repair cost computed at US$19,000 per day of actual repair.  As ofSeptember 30, 2003, the aggregate remaining obligation was approximately Php259million.

 

*Digital PassageService Contracts*.   PLDT has existing Digital Passage Service Contractswith foreign telecommunication administrations for several dedicated circuitsto various destinations for 10 to 25 years expiring at various dates.  As ofSeptember 30, 2003, the aggregate remaining obligation was approximately Php140million.

 

*License Agreement withMobius Management Systems (**Australia**) Pty Ltd., or Mobius.*PLDT entered into a license agreement with Mobiuspursuant to which Mobius has granted PLDT a non-exclusive, non-assignable andnon-transferable license for the use of computer software components.  Underthe agreement, Mobius is also required to provide maintenance services for aperiod of one year at no additional maintenance charge.  PLDT may purchasemaintenance services at the expiration of the first year for a fee of 15% ofthe current published license fee.  As of September 30, 2003, the aggregateremaining obligation was approximately Php71 million.

 

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

 

*Unconditional Purchase Obligations*

 

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

 

In March 2003, PLDT, togetherwith the other founder shareholders, entered into a Standstill Agreement withAIL suspending the application and enforcement of the minimum and supplementalair time payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders, withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million for PLDT.  PLDT is also obliged to purchase from AIL13,750 satellite phone units for the year 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustment.  The parties to the Standstill Agreementalso agreed to negotiate in good faith and use their best efforts to reachagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.  

 

As of September 30, 2003,PLDT’s aggregate remaining minimum obligation under this agreement wasapproximately Php10,087 million.

 

*International AffiliateAgreement with VeriSign, Inc., or VeriSign*.   On September 15, 2000, ePLDT entered into an agreement withVeriSign for the non-exclusive, non-transferable right and license to use theVeriSign software, brand and Certification Practice Statement for the purposeof approving, issuing, suspending or revoking digital certificates for users ofthe Internet or similar open systems in the Philippines for a period of sevenyears.  Under this agreement, ePLDT is required to pay VeriSign a certainpercentage of the revenue derived from the services subject to minimum annualroyalty payments                                                          aggregating to US$1.2 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 of US$0.5 million for the first year and US$0.3million in each year thereafter.

 

Effective July 1,2003, VeriSign has agreed to amend the Agreement and issued Addendum 6 towrite-off all past dues invoices and payments owed to VeriSign which wereinvoiced or scheduled to be invoiced under the Agreement prior to this Addendum6.  All royalty payments and annual support fees due through June 2003 will bepart of the write-off in the amount of US$0.8 million.  For contract year 4(September 2003-August 2004), the annual support fee will be reduced fromUS$0.3 million to US$40,000 and for contract years 5-7 (September 2003-August2007) from US$0.3 million to US$0.16 million.  In addition, VeriSign agreed toreduce the affiliate revenue sharing rates from 50% of suggested retail priceto 25% of suggested retail price for both enterprise and internet productsstarting July 2003 for 12 months starting July 2003 and negotiable thereafter.As of September 30, 2003, ePLDT’s aggregate remaining minimum obligation underthis agreement was approximately Php26 million pertaining to annual supportfee.

 

*License Purchase Agreementwith I-Contact Solutions Pte. Ltd.*On April 2, 2003, iPlus Intelligent Network Inc., or iPlus, entered into anApplication Services Provider, or ASP, and Reseller Contract with I-ContactSolutions Pte. Ltd., or I-Contact, of Singapore.  Under the agreement, iPluswill purchase licenses 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, email 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 powerful management applications.  Theaggregate value of these licenses is US$2.1 million, and these will bedelivered quarterly over a two-year period.  Further to the agreement,I-Contact will appoint iPlus as the exclusive reseller and ASP for thePhilippine market and will provide iPlus with all the necessary support interms of sales, marketing, and technical services.  As of September 30, 2003,iPlus’ aggregate remaining obligation under this agreement was approximatelyPhp82 million. 

 

*Other UnconditionalPurchase Obligations.*   PLDT hasvarious purchase contracts for periods ranging from two to three years coveringthe use of fraud management system and satellite hub and remote Very Small Aperture Terminal, or VSAT, network systems.

* *

*Other Long-term Obligations*

 

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

 

As of September 30, 2003, 145,320 shares of Series V Convertible PreferredStock and 529,400 shares of Series VI Convertible Preferred Stock had beenconverted to PLDT common shares.  The aggregate value of the put option basedon outstanding shares as of September 30, 2003 was Php21,322 million, of which Php13,622 million is payable onJune 4, 2008 and Php7,700 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 common shares were put to PLDT.  The marketvalue of the underlying common shares was Php7,091 million,based on the market price of PLDT’s common stock of Php640 per share as of September 30, 2003.

*** ***

***Commercial Commitments***

* *

As of September 30, 2003, ouroutstanding commercial commitments, in the form of letters of credit, amountedto Php1,910 million.  These commitments will expirewithin one year.

 

In October 1998, Smartentered into a Frame Supply Contract with Nokia Telecommunications OY for thesupply of hardware, software and documentation for its GSM phone network.  Inthe same month, Smart and Nokia (Philippines), Inc., or Nokia, signed a FrameServices Contract that covers the design, planning, installation,commissioning, integration, acceptance testing, training and handling over ofthe GSM network.  In 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 phone network.  As of September 30,2003, the balance under this MPO amounted to US$12 million.

 

In addition, on May 30, 2003, Smart entered into aTechnical Support Services Order, or TSSO, with Nokia in the amount of US$8million.  As of September 30, 2003, the commitment under this TSSO which isvalid until December 31, 2003, amounted to US$2 million.

* *

 

**22. ****Contingencies**

** **

***PLDT***

 

*NTC supervision andregulation fees, or SRF.*   On variousdates in 1988, NTC served assessment notices and demands for payment of SRFpursuant to Section 40 of Commonwealth Act 146, otherwise known as the PublicService Act (PSA).  PLDT protested said assessments and demands for payment onthe grounds that (a) all assessments under Section 40 (e) of the PSA shouldlegally be based on the par value of a corporate utility operator’s outstandingcapital stock, exclusive of capital in excess of par; (b) the assessment werebeing levied to raise revenues and not as mere reimbursements for actualregulatory expenses in violation of the doctrine in PLDT vs. PSC, 66 SCRA 341(1975); (c) NTC had no authority to compel PLDT’s payment of the administrativefees under Section 40 (f) of the PSA for the increase of PLDT’s authorizedcapital stock, since NTC did not render any supervisory or regulatory activitynor incur any expenses in relation to such corporate act; and (d) NTC had noauthority to increase the rates of the administrative fees under Section 40 ofthe PSA from Php0.20 to Php0.50 per Php100.00 of the capital stock pursuant toBatas Pambansa, or B.P. 325 since the latter legislation was of generalapplication and thus, could not have legally or validly amended a special lawsuch as the PSA.

 

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

 

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

 

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

 

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

 

Without resolving or rulingon PLDT’s request, in September 2000, the NTC issued another assessment letterfor the balance of the SRF for previous years and the SRF for the year endedDecember 31, 2000.  Consequently, PLDT filed a Petition for Certiorari andProhibition with Urgent Prayer for the Immediate Issuance of a TemporaryRestraining Order with the CA.  The CA temporarily restrained the NTC from enforcing/implementingits February and September 2000 assessments and subsequently issued a Writ ofPreliminary Injunction.   In February 2001, the CA dismissed the Petition forCertiorari and Prohibition filed by PLDT and dissolved the Writ of Preliminary Injunctionearlier issued.

 

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

 

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

 

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

 

In light of the September 30statutory deadline for the payment of the SRF, PLDT filed with the SC an UrgentMotion for the Issuance of a Temporary Restraining Order to enjoin the NTC fromenforcing any SRF assessments against PLDT pending the resolution of itsPetition for Review on Certiorari.    Considering, however, that as of September 30, 2002,no decision had been promulgated by the SC on the aforementioned Motion, PLDTon the said date paid the SRF for the years 2000 and 2002 based on the paid-upcapital including premium but excluding stock dividends.

 

On January 16, 2003,PLDT filed a consolidated reply to the Solicitor General’s comment (dated October 4, 2002) witha motion for the early resolution of the case.  The case, upon the rules andpractice of Court, now stands submitted for decision.

 

Considering the September 30, 2003statutory deadline for the payment of the SRF, PLDT on the said date, paid theSRF for the year 2003 based on the paid-up capital including premium butexcluding stock dividends.

 

Since 1976, PLDT has receivedassessments from NTC for permit, SRF and other charges.  As of September 30, 2003, PLDT has paid a total amount of Php1,761 million inSRF, of which Php1,558 million were paid under protest.

 

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

 

PLDT believes, based on theopinion of its legal counsel, that it is exempt from payment of local franchiseand business taxes.  PLDT’s claim for exemption or exclusion from localfranchise and business taxes is grounded on Section 12 of Republic Act 7082, orthe PLDT Franchise, as implicitly amended and expanded by Section 23 ofRepublic Act 7925, or R.A. 7925, also known as the Public TelecommunicationsPolicy Act.  Further, PLDT claims that assuming that it is liable for localfranchise tax, R.A. 7160, or the Local Government Code, provides that localfranchise tax shall be based on the gross receipts of the preceding yearreceived or collected for services rendered within the jurisdiction of thetaxing authority.  Therefore, the use by some local government units of grossrevenues as the basis for computation of franchise tax is in gross violation ofthe law because it pertains to all income earned regardless of whether it wasreceived or not, unlike gross receipts which are essentially the amount ofmoney or its equivalent actually or constructively received.  Moreover, grossrevenues refer to all income earned by PLDT within and outside the jurisdictionof the local taxing authority; thus, the use thereof as a basis of computationwill exceptionally overstate the franchise tax.

 

To date, PLDT has receivedfrom several local government units’ assessments for local franchise and/orbusiness taxes covering various periods, in the aggregate amount of Php4,523million.  PLDT has invariably protested these assessments, appealed to the lowercourts denials of its protests by local government units, and elevated to theCA or the SC adverse decisions of the lower courts.

 

In a case entitled PLDT vs.the City of Davao, on August 22, 2001, the Supreme Court denied PLDT’s Petitionfor Review on Certiorari and affirmed the decision of the Davao City RegionalTrial Court upholding the assessment of local franchise tax in the amount ofPhp4 million for the year 1999 and denying PLDT’s claim for a refund oferroneously paid franchise tax for the year 1997 and the first to the thirdquarters of 1998.  The Supreme Court held that although the withdrawal of taxexemptions under the Local Government Code does not preclude Congress fromgranting subsequent exemptions, the issue is whether, after the withdrawal ofPLDT’s exemption under the Local Government Code, PLDT again became entitled tothe exemption by virtue of Section 23 of R.A. 7925.  The Supreme Court ruledthat PLDT is not entitled to this exemption, and cited rules in statutoryconstruction holding that tax exemptions are highly disfavored, and thatlegislative intent must be ascertained from a consideration of the statute as awhole and not merely of a particular provision.  The decision stated that theterm “exemption” in Section 23 is too general and it does not appear that, inapproving Section 23 of Republic Act No. 7925, Congress intended it to operateas a blanket tax exemption to all telecommunication entities.  As such, theSupreme Court held that Section 23 of the Republic Act No. 7925 cannot beconsidered as having amended PLDT’s franchise so as to entitle it to exemptionfrom local franchise tax.  On October 1, 2001, PLDT filed a Motion forReconsideration of the Supreme Court decision and a Motion to Refer the case tothe Court En Banc and for Oral Arguments.  The Oral Arguments were held onJanuary 21, 2003 and both parties submitted their Memorandum.  On March 25,2003, the Supreme Court decided by a 9-to-5 vote to deny PLDT’s Motion forReconsideration and affirmed the franchise tax assessment of Davao City in theamount of Php4 million.  Subsequently, PLDT paid the Davao City governmentfranchise taxes covering the period 1999 to 2003, including the Php4 million,but is seeking reconsideration of the surcharges and interests of about Php10million imposed by the Davao City government.  PLDT believes that although theSupreme Court decision would constitute a precedent, this will notautomatically result in the termination of the other pending local franchisetax cases with the courts rendering a decision adverse to us and PLDT willpursue all legal remedies with regard to all pending cases. 

 

On August 8, 2001, PLDTreceived a decision, dated July 16, 2001, on its petition filed with a RegionalTrial Court of the City of Makati appealing the denial of PLDT’s protest of theassessments for local franchise taxes in the aggregate amount of Php595 millionfor the years 1992 to 1994 and Php1,100 million for the last three quarters of1995 up to 1998.  This decision ordered PLDT to:

 

•        submit itsaudited financial statements showing its gross receipts for the period fromOctober to December 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998, so thatthe City of Makati can make the proper assessment of the tax due;

 

•        pay the Cityof Makati the sum equivalent to 0.5% of the total gross receipts realizedduring the period October 1 to December 31, 1992, 1993, 1994, 1995, 1996, 1997and 1998 after determination of PLDT’s annual gross receipts for the subjectyears; and

 

•        henceforthpay its franchise and business taxes pursuant to Section 137 of Republic Act7160.

 

PLDT filed an appeal with theSupreme Court on September 20, 2001.  In its appeal, PLDT argued, among other things,that:

 

•        the right ofthe City of Makati to assess PLDT for any alleged deficiency in franchise taxfor the years 1992 to 1994 in the approximate amount of Php595 million hasprescribed because the Local Government Code provides for a period of fiveyears within which an assessment can be made by the local government unit andthe City of Makati assessed these alleged taxes against PLDT only on May 24,1999;

 

•        PLDT isexempt from local franchise and business taxes by virtue of the equality oftreatment clause under the Public Telecommunications Policy Act as confirmed bythe Department of Finance through the Bureau of Local Government Finance and isnot therefore liable to pay the City of Makati deficiency tax for the years1995 to 1998 in the amount approximately Php1,100 million; and

 

•        Assuming(without admitting) that PLDT is liable to pay the franchise tax, theapproximate Php1,684 million total assessment is erroneous as it was based onPLDT’s total annual gross receipts derived from its overall businessoperations, while the Local Government Code provides that the franchise tax whichcan be imposed by the local government unit shall be based on the annual grossreceipts derived from within the taxing local government unit territory or, inthis case, from the operations of PLDT within the City of Makati only.

 

In a resolution dated October 22, 2001, theSupreme Court remanded the case to the Court of Appeals.  As required by theCourt of Appeals, the City of Makati filed its Comment and PLDT filed its Reply to theComment.  On August 21, 2002, the Court of Appeals suspended further proceedingsin the case until the Supreme Court resolved similar issues raised in the Cityof Davao case discussed above.  On April 28, 2003,the City of Makati filed a Motion to Resolve the Case citing thedecision of the Supreme Court resolving PLDT’s Motion for Reconsideration.  On July 15, 2003, theCourt of Appeals issued a decision modifying the decision of the Regional TrialCourt in respect of the assessment made by the City of Makati for theyears 1992 to 1994.  The Court of Appeals ruled that the City of Makati cannotimpose franchise tax while it was still a municipality.  In its decision, theCourt of Appeals held that PLDT is not liable to pay Makati City franschise taxfor the period from 1992 to 1994 since, during that period, a municipality wasnot empowered to impose franchise tax.  However, the Court of Appeals upheldthe right of Makati City to impose franchise tax starting the year 1995, whenit became a city.  This decision ordered PLDT to:

 

•        submit its audited financialstatements showing its gross annual receipts for the years 1995, 1996, 1997 and1998;

 

•        pay the City of Makati theamount of the tax due, after arriving at the proper assessment; and

 

•        henceforth pay its franchise taxpursuant to Section 137 for the Local Government Code

 

On September 1, 2003,the City of Makati partially appealed to the Supreme Court the decisionof the Court of Appeals in so far as the assessment for the period 1992 to 1994is concerned.  On September 3, 2003, PLDT also appealed to the Supreme Court the issue ofliability of PLDT for franchise tax for the period 1995 to 1998, by way ofpetition for review on certiorari based on the following grounds:

 

•         the Court of Appeals relied solelyon the Decision dated August 22, 2001 promulgated by the Supreme Court in the case of PLDTvs. the City of Davao, as well as on its Resolution dated March 25, 2003 in thesame case denying PLDT’s Motion for Reconsideration.  However, there are strongand valid reasons why the Decision in that case should be reexamined;

 

•         the Regional Trial Court erred innot holding that under PLDT’s franchise (Republic Act No. 7082), as amended andexpanded by Section 23 of Republic Act No. 7925 (Public TelecommunicationsPolicy Act), taking into account the “in lieu of all taxes” clause in the franchisesof Globe Telecom, Inc. (Republic Act No. 7229), Smart Telecommunications, Inc.(Republic Act No. 7294), and several other franchises which were grantedsubsequent to the Local Government Code, no franchise taxes and business taxesmay be imposed on PLDT by the City of Makati;

 

•         the Regional Trial Court erred inapplying Section 137 of the Local Government Code, which, in relation toSection 151 thereof, allows the City of Makati to impose the franchise tax;

 

•         the Court of Appeals erred inapplying the rule in statutory construction that tax exemptions are construedstrictly against the taxpayer;

 

•         the Court of Appeals and RegionalTrial Court erred in not giving weight to the ruling of the Bureau of LocalGovernment Finance of the Department of Finance;

 

•         the Court of Appeals erred in notholding that the City of Makati has no power to make an assessment for localfranchise tax against PLDT in view of its failure to enact an ordinanceimposing the aforesaid tax after it became a city on January 2, 1995;

 

•         the Court of Appeals erred in notholding that the assessments for franchise tax by the City of Makati againstPLDT for the period October 1 to December 31, 1992, 1993, up to 1994, hadalready prescribed; and

 

•         the Court of Appeals erred inordering PLDT to submit to the City of Makati its audited financial statementsshowing its gross receipts for the period 1995, 1996, 1997, up to 1998.

 

PLDT intends to furtherappeal the issue of liability of PLDT for franchise tax to the Supreme Court. 

 

PLDT is also protesting theassessment by the City of Makati of a franchise tax deficiency for 1999 in the amountof Php298 million.  On February 26, 2001, PLDT filed a petition in the Regional Trial Court of Makati City to compelthe Office of the Makati City Treasurer and the Makati City Law Department toact on PLDT’s protest of the assessed franchise tax deficiency for 1999.  Thiscase has been suspended pending review by the Court of Appeals of the decisionof the Makati City Regional Trial Court in the action in respect of the 1992 to1998 assessments described above or until further notice.  On June 17, 2003,the City of Makati filed an Ex-Parte Motion to Lift Order of Suspension.  Inits Order dated June 23, 2003, the Court granted the Motion and ordered thesuspension to be lifted.  During the pre-trial, considering that there were nofactual issues, the parties were directed to file their respective Memoranda.PLDT filed its Memorandum on September 25, 2003.

 

On December 7, 2001, anothercase was filed by PLDT against the City of Makati protesting the assessment oflocal franchise and business taxes for the year 2000 in the amount of Php307million.    During the pre-trial, considering that there were no factualissues, the parties were directed to file their respective Memoranda.  PLDTfiled its Memorandum on September 17, 2003.

 

On April 16, 2002,another case was filed by PLDT against the City of Manilaprotesting the assessment of local franchise and business taxes in the amountof Php2,228 million for the period covering 1997, 1998, 1999, 2000 and 2001,inclusive of penalties and interests.  PLDT filed a motion to suspendproceedings on March 10, 2003 pending the resolution by the Supreme Court of theCity of Davao case discussed above.  The City of Manila submittedits comments and oppositions on PLDT’ motion to suspend the proceedings on March 21, 2003 andthe motion is now deemed submitted for resolution.

 

PLDT has filed other casespertaining to the assessments made by other local government units, however,these cases involve amounts significantly lower than the assessments in thecases against the City of Makati and the City of Manila.  Some of these casesare pending decision by the respective regional trial courts.  In each of theother cases in which an unfavorable decision has been rendered by the lowercourts against PLDT, PLDT has filed a Petition for Review with the SupremeCourt.

 

PLDT is also a respondent ina case filed by the Province of Pangasinan with the Court of Appeals.  OnSeptember 12, 2001, the Court of Appeals reversed the decision of the RegionalTrial Court of Lingayen, Pangasinan and held that PLDT is exempt from thepayment of the local franchise and business taxes.  The Court of Appeals deniedthe Motion for Extension of Time to file a Motion for Reconsideration of thedecision of the Regional Trial Court filed by the Province of Pangasinan andalso denied the Motion for Reconsideration of the Court of Appeals’ denial ofthe Motion for Extension of Time.  On April 26, 2002, the Province ofPangasinan filed a Petition for Certiorari seeking to, among other things, setaside the decision of the Court of Appeals in respect of the Motion forExtension of Time to file a Motion for Reconsideration and affirm the decisionof the Regional Trial Court of Lingayen.  On May 29, 2002, the Supreme Courtdenied this petition on the ground that “the petition is evidently used as asubstitute for the lost remedy of appeal” and the Province of Pangasinan fileda Motion for Reconsideration.  The Motion for Reconsideration of the SupremeCourt resolution filed by the Province of Pangasinan was denied with finalityon June 26, 2002.

 

Similarly, in a case filed byPLDT against the City of Cebu, the Regional Trial Court declared PLDT exemptfrom payment of local franchise tax and granted PLDT’s claim for refund.  Thisdecision became final on July 6, 2001; however, the City of Cebu filed aPetition for Relief of Judgment with a prayer for preliminary injunction,citing the Supreme Court’s decision in the Davao case.  PLDT filed its Commentto the Petition.

 

As of September 30, 2003, theaggregate amount claimed by the local government units in these lawsuits wasPhp4,523 million with respect to PLDT and Php313 million with respect toSmart.  We believe that in the event these lawsuits are decided against us, ourpotential liability is likely to be significantly lower than the amountsclaimed by the plaintiffs.

 

In addition to the casesdiscussed above, we have received assessments for local business and franchisetaxes in the aggregate amount of Php624 million, all of which are underadministrative protest.

 

The outcome of these localfranchise assessments may have an effect on other taxes to which PLDT could besubject to.

 

***Smart***

 

*NTC SRF*.   Smart has been paying under protest the SRFassessed by the NTC.  On September 27, 2001, Smart paid the amount of Php86million representing SRF for 2001.  On September 30, 2002, Smart paid theamount of Php114 million representing SRF for 2002.  On September 30, 2003,Smart paid about Php122 million representing the SRF for 2003.

 

The above amounts and allother assessments for SRF in the past were paid under protest as Smart believesthat the same is exorbitant and unreasonable and contrary to Section 5(g) ofR.A. 7925.  R.A. 7925 states that the NTC should impose only reasonable feesand charges as may be necessary to cover reasonable costs and expenses for theregulation and supervision of the operation of the telecommunications entities.

 

In its protest, Smart alsocited the decision of the Court of Appeals in the case of ICC Corporation vs.NTC (CA-GR SP No. 45-100, September 30, 1999) which held that:  “In the guiseof taxation, respondent NTC has in fact arrogated upon itself the power to taxan entity, which it is not authorized by law to do, thereby exceeding itslawful jurisdiction and/or acting with grave abuse of discretion.  Thatrespondent NTC has been generating income from the collection of fees fromtelecommunication entities in the guise of regulation is evident and that theNTC is not classified as tax generating agency of the government.”

 

*NTC Spectrum User’s Fee,or SUF.*Smart has been paying underprotest the SUF, assessed by the NTC.  On January 31, 2002, Smart paid aboutPhp40 million representing SUF for 2002.  On January 31, 2003, Smart paid aboutPhp48 million representing SUF for 2003.

* *

The above amounts and other assessments for SUF were paidunder protest as Smart believes that the same are exorbitant and not reasonablefor the use of the radio frequency spectrum considering the present economicconditions and the expenses incurred in the operations and maintenance ofSmart’s telecommunications facilities.  Also, as provided in MemorandumCircular 10-10-97 of the NTC, “the SUF shall be based on the amount of spectrumused, the type of service being offered and the economical classification ofthe area covered by the radio station” and Section 15 of R.A. 7925 is clearwhen it mandates that the use of the radio frequency spectrum “shall be subjectto reasonable spectrum user fees”.

 

*NTC Radio Station License,or RSL.*   Smart filed a petition withthe NTC last March 4, 2003 for the refund or credit of overpaid RSL fees in theamount of Php31 million for the years 2000 to 2002. The overpayment was aresult of the redundancy in the computation of the SUF and RSL fees.

 

*Local franchise taxassessments.*   To date, Smart hasreceived assessments for local franchise and business taxes from certain citiesand municipalities in the aggregate amount of approximately Php313 million.Smart has formally protested these assessments based on the following:

 

•        An opinion issued by the Bureau ofLocal Government Finance, or BLGF, dated August 13, 1998 stating that Smartshould be considered exempt from the local franchise tax provided under Section137 of the Local Government Code, which exemption shall be applicable only tolocal franchise and business taxes.

 

•        R.A. 7925 was passed on February 20, 1995after the passage of the Local Government Code.  Under the ipso facto provisionof R.A. 7925, the holder of a franchise granted prior to or after the effectivedate of R.A. 7925 is entitled to the benefit or any favorable provisionscontained in any other franchises, regardless of whether such franchises weregranted prior to or after the passage of R.A. 7925.

 

•        Because Smart’s legislativefranchise took effect after the effective date of the Local Government Code,the franchise tax prescribed under Section 137 thereof should be deemed to bepart of the said franchise.  Section 137 states that “cellular operators shallonly pay a franchise tax equivalent to 3% of all gross receipts of the businesstransacted under the franchise, and the said percentage shall be in lieu of alltaxes on this franchise or earnings thereof.”

 

•        In the PLDT vs. City of Davaocase, the Supreme Court took cognizance of the BLGF opinion by stating thatSmart’s franchise granted after the effectivity of the Local Government Codeexempted it from the payment of local franchise and business taxes.

 

Smart’s administrativeprotest against the Makati and Iloilo assessments were denied, while thoseagainst the Digos and General Santos assessments in the aggregate amount ofPhp59,447 have not yet been decided.

 

Smart filed separatepetitions appealing the local franchise and business tax assessments of MakatiCity in the amount of Php196 million for the calendar years 2000 and 2001, andin the amount of Php116 million for the calendar years 1995, 1998 and 1999.These cases have been consolidated and are now pending before Regional TrialCourt, Branch 61 of Makati City.  Smart’s earlier motion to suspend trialpending resolution of the Smart franchise tax case in Davao wassubsequently denied by said court. 

 

Smart also filed a petitionappealing the local franchise and business tax assessment of Iloilo City in theamount of Php1 million.  This case is now pending before the Regional TrialCourt, Branch 28 of Iloilo City.

 

Smart also filed a Petitionfor Declaratory Relief with the SC questioning an ordinance issued by the CityCouncil of Davao on the local franchise and business taxes.  The SC decided infavor of the City of Davao and Smart’s Motion for Reconsideration of saiddecision was denied.  Smart filed with the SC a Petition for Review under Rule45 of the 1997 Rules of Procedure to appeal the aforestated decision.

 

***Mabuhay Satellite***

 

Mabuhay Satellite was the respondent in an arbitrationcommenced by SS/L as a result of a dispute between the two parties concerningtheir satellite joint venture.  On June 5, 2002, Mabuhay Satellite received anarbitration decision requiring Mabuhay Satellite to pay SS/L the principalamount of US$10 million plus interest representing Mabuhay Satellite’s unpaidbalance for the 65% equity share in the joint venture.  On June 30, 2003, MabuhaySatellite and SS/L concluded a settlement agreement whereby Mabuhay Satellitewould lease two (2) transponders on a life-term basis to SS/L and offset thelease charges due from SS/L and receivables from Loral Skynet Network Services,Inc. (formerly Loral Cyberstar, Inc.), an affiliate of SS/L for the full andfinal settlement of the arbitration decision.  The settlement is subject toMabuhay creditors’ approval.

 

PLDT and some of itssubsidiaries are involved in certain other legal actions and claims arising inthe ordinary course of business.  The respective managements of PLDT and saidsubsidiaries believe that any possible loss that they may incur as a result ofsuch legal actions, claims and assessments not covered by an allowance forlosses will not have a material effect on their respective financial positionsand results of operations.

 

 

**23. ****Foreign Currency-Denominated Monetary Assets andLiabilities**

 

PLDT’s and its subsidiaries’foreign currency-denominated monetary assets and liabilities and their pesoequivalents follow:

 

 

**September 30, 2003**

**(Unaudited)**

 

December 31, 2002

(Audited)

 

**U.S. Dollar**

**Peso Equivalent**

 

U.S. Dollar

Peso Equivalent

 

(in millions)

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

** **

** **

Cash and cash equivalents

**US$122**

**Php6,687**

 

US$76

Php4,033

Accounts receivable

**191**

**10,504**

 

148

7,910

 

**313**

**17,191**

 

224

11,943

Liabilities

** **

** **

 

 

 

Accounts payable

**40**

**2,222**

 

56

2,969

Accrued expenses and other current liabilities

**140**

**7,702**

 

165

8,782

Notes payable

**–**

–

 

6

320

Long-term debt

**2,707**

**145,890**

 

2,957

156,398

Deferred credits and other noncurrent liabilities

**91**

**4,987**

** **

98

5,205

**2,978**

**160,801**

 

3,282

173,674

Net foreign currency – denominated liabilities

**US$2,665**

**Php143,610**

 

US$3,058

Php161,731

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

** **

** **

Cash and cash equivalents

**US$54**

**Php2,979**

 

US$49

Php2,602

Accounts receivable

**130**

**7,123**

 

116

6,158

 

**184**

**10,102**

 

165

8,760

Liabilities

** **

** **

 

 

 

Accounts payable

**7**

**382**

 

23

1,220

Accrued expenses and other current liabilities

**9**

**474**

 

47

2,476

Notes payable

**–**

–

 

6

320

Long-term debt

**2,401**

**129,131**

 

2,558

135,158

Deferred credits and other noncurrent liabilities

**91**

**4,987**

** **

98

5,205

**2,508**

**134,974**

 

2,732

144,379

Net foreign currency – denominated liabilities 

**US$2,324**

**Php124,872**

 

US$2,567

Php135,619

 

In translating the foreigncurrency-denominated monetary assets and liabilities into peso amounts, theexchange rates used were Php54.877 to US$1.00and Php53.254 to US$1.00, the peso-dollar exchange rates as at September 30, 2003and December 31, 2002, respectively.

 

 

**24. ****Financial Instruments**

** **

***PLDT***

*** ***

*Long Term Currency Swaps*

 

PLDT entered into long-termprincipal-only currency swap agreements with various foreign counterparties tohedge the currency risk on its fixed rate notes maturing in 2009, 2012 and2017.  As of September 30, 2003 and December 31, 2002, these long term currency swapshave an aggregate notional amount of US$725 million and US$550 million,respectively.  Under the swaps, PLDT effectively exchanges the principal of itsUS dollar-denominated fixed rate notes into peso-denominated loan exposures atan agreed swap exchange rate.  The agreed swap exchange rate is reset to thelowest Peso/US$ spot exchange rate during the term of the swap, subject to aminimum exchange rate.  As of September 30, 2003 and December 31, 2002, theoutstanding swap contracts have been reset to average exchange rate ofPhp51.225 and Php51.266, respectively.  Inaddition, PLDT is required to make semi-annual fixed or floating swap costpayments to its counterparties, which amount to about 2.041% and 2.35% perannum on September 30, 2003 and December 31, 2002, respectively.  

 

Due to the amounts of PLDT’sforeign currency hedging requirements and the large interest differentialbetween the Philippine Peso and the US$, the costs to book long-term currency swaps can besignificant.  In order to manage such hedging costs, PLDT utilizes structuresthat include currency option contracts, credit linkage, and fixed to floatingcoupon-only swaps.  

 

The currency swap agreementrelating to the 2009 fixed rate notes has been structured to include currencyoption contracts.  If the Peso/US$ spot exchange rate on maturity date settlesbeyond an agreed threshold, PLDT will have to purchase US$ at the minimumexchange rate plus the excess above the agreed threshold rate.  On the otherhand, if on maturity, the Peso/US$ spot exchange rate is lower than the minimumexchange rate, PLDT will have the option to purchase at the prevailing Peso/US$spot exchange rate. 

 

US$575 million of thelong-term currency swaps outstanding as of September 30, 2003,have been structured to include credit-linkage with PLDT as the referenceentity.  The specified credit events include bankruptcy, failure to pay,obligation acceleration, moratorium/repudiation, and restructuring of PLDTbonds or all or substantially all of PLDT’s obligations.  Upon the occurrenceof any of these credit events, subject to agreed threshold amounts whereapplicable, the obligations of both PLDT and its counterparty under the swapcontracts terminate without further settlements to either party, including anymark-to-market value of the swaps.  

 

A portion of our currencyswap agreements to hedge our 2017 fixed rate notes carry fixed rate swap costpayments.  To effectively lower the running cost of such swap agreements, PLDT,in April 2003, entered into an agreement to swap the coupon on US$125 millionof its 2012 fixed rate notes into a floating rate JP¥ amount. Under this agreement,PLDT is entitled to receive the full equivalent of the fixed coupon providedthe US$/JP¥ exchange rate stays above a predetermined level. Below this level,only a fraction of the fixed coupon will be due PLDT. 

 

 
**
*ForwardExchange Contracts*

 

PLDT had the followingaggregate outstanding short-term forward exchange contracts to buy US$ and sellPesos as of September 30, 2003 and December 31, 2002: 

 

 

**September 30, 2003**

**(Unaudited)**

 

December 31, 2002

(Audited)

Aggregate notional amount (in millions)

**US$142.1**

 

US$211

Weighted average forward rate

**Php55.26 to US$1**

 

Php53.94 to US$1

 

*ShortTerm Currency Option Contracts*

 

In March 2003, PLDT utilizedstructures incorporating currency options to hedge the maturing principal onits fixed rate notes due June 2003 and June 2004.  As of September 30, 2003,PLDT had outstanding currency option contracts amounting to US$70 million.  

 

***Smart***

 

*CurrencySwaps*

 

Smart’s currency swap agreement with a foreign financialinstitution matured last April 30, 2003 with realized gain of Php1,179million.  Final exchange of funds was made and the contract is now terminated.

 

The complementary currency swap agreement entered into bySmart’s subsidiary also matured and was terminated on the same date.

 

*ForwardExchange Contracts*

* *

Smart has the followingoutstanding short-term forward exchange contracts to buy US$ and sell Pesos asof September 30, 2003 and December 31, 2002:

 

**September 30, 2003**

 

December 31, 2002

Aggregate notional amount (in millions)

**US$68.2**

 

US$5

Weighted average forward rate

**Php57.66 to US$1**

 

Php53.47 to US$1

 

 

**25. ****Reportable Segments**

 

Operating segments arecomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by management in deciding how to allocateresources and in assessing performance.  Generally, financial information isrequired to be reported on the basis that it is used internally for evaluatingsegment performance and deciding how to allocate resources to segments.

 

We have organized our businessinto three main segments:

 

•        Fixed Line — fixed line telecommunications services primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiaries ClarkTelecom, Subic Telecom, MaraTel, BCC which together account for approximately1% of our consolidated fixed lines in service, and PLDT Global; 

 

•        Wireless — wireless telecommunications services provided through our cellularservice provider, Smart, and satellite and VSAT operators, namely PLDT’ssubsidiaries Mabuhay Satellite, ACeS Philippines and Telesat; and 

 

•        Information and CommunicationsTechnology — information and communications infrastructure andservices for Internet applications, Internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary ePLDT, Internetaccess services provided by ePLDT’s subsidiary Infocom, and e-commerce, callcenters and IT-related services provided by other investees of ePLDT, asdescribed in *Note 9 – Investments*. 

 

The segment assets as of September 30, 2003and December 31, 2002 and results of operations of our reportable segmentsfor the nine months ended September 30, 2003 and 2002 reported under PhilippineGAAP are as follows:

 

 

**Fixed Line**

**Wireless**

**Information and  Communications  Technology**

**Eliminations**

**Total**

* *

(in million pesos)

*As of and for the nine months ended**September 30, 2003***

Operating revenues

36,581

35,596

1,321

(3,095)

70,403

External revenues

34,288

34,858

1,257

–

70,403

Inter-segment revenues

2,293

738

64

(3,095)

–

Operating expenses

27,197

22,558

1,406

(3,108)

48,053

External expenses

24,420

22,227

1,406

–

48,053

Inter-segment expenses

2,777

331

–

(3,108) 

–

Operating income (loss)

9,384

13,038

(85)

13

22,350

Segment assets

259,031

77,417

3,252

(47,364)

292,336

Segment liabilities

159,879

36,151

3,008

(7,106)

191,932

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

17,517

19,237

(121)

253

36,886

Investing activities

(967)

(6,433)

(26)

(4,347)

(11,773)

Financing activities

(17,968)

(10,874)

178

4,093

(24,571)

Depreciation and amortization

9,831

7,721

247

–

17,799

Provision for doubtful accounts

2,551

493

14

–

3,058

Capital expenditures

3,995

6,931

71

–

10,997

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

Operating revenues

35,667

24,235

613

(2,351)

58,164

External revenues

33,929

23,622

613

–

58,164

Inter-segment revenues

1,738

613

–

(2,351)

–

Operating expenses

25,964

19,423

966

(2,354)

43,999

External expenses

23,990

19,043

966

–

43,999

Inter-segment expenses

1,974

380

–

(2,354)

–

Operating income (loss)

9,703

4,812

(353)

3

14,165

Segment assets

263,043

77,035

3,651

(44,171)

299,558

Segment liabilities

167,427

39,894

3,060

(6,687)

203,694

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

23,031

15,039

92

131

38,293

Investing activities

(6,116)

(5,100)

(634)

(32)

(11,882)

Financing activities

(16,518)

(7,206)

498

(99)

(23,325)

Depreciation and amortization

9,818

7,817

217

–

17,852

Provision for doubtful accounts

2,730

475

13

–

3,218

Capital expenditures

5,011

5,492

608

–

11,111

 

 

 

**26. ****Other Matters**

** **

a.   Interconnection Agreements

 

PLDT has existinginterconnection agreements with nine International Gateway Facilities, or IGFoperators, six Inter Exchange Carriers, or IXCs, six Cellular Mobile TelephoneSystems, or CMTS operators, 70 LECs (including members of the PhilippineAssociation of Private Telephone Companies, Inc.), and 12 paging and trunkradio operators.  These interconnection agreements include provisions forsettlement and payment of charges.  Settlements with interconnecting IGFoperators and CMTS operators for local calls are in the form of accesscharges.  Settlements with interconnecting IXCs and LECs for toll calls arebased on hauling and access charges, and to some extent, revenue sharing.Settlement also involves payment of access charges, but settlement for tollcalls is on a revenue-sharing basis.  LEC to LEC interconnection with haulingfrom one service area to another service area is settled based on trunkcharges, while overlay LEC to LEC interconnection in a given service area iswithout charges.  Paging and trunk radio interconnection settlements are basedon fixed charges.  

 

b.   Proposed Metering of Local Exchange Service

 

The proposed metering ofPLDT’s local exchange service has been temporarily suspended for further reviewby the NTC.

 

c.      U.S. Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies

 

In May 2002, PLDT advisedAT&T Corp., or AT&T, MCI and other carriers of PLDT’s desire toincrease its termination rates by August 2002. Despite numerous negotiationsessions in 2002 and 2003, AT&T and MCI refused to accept any rateincreases.  PLDT unilaterally extended its prior termination charges to eachcarrier while continuing offers to negotiate, first from August 1, 2002 toOctober 1, 2002, then until December 31, 2002, and then, finally, despite thelack of a written agreement from AT&T and MCI, through January 31, 2003.While nearly 100 carriers worldwide, including more than 20 U.S. carriers,have then agreed to the new termination rates and entered into new terminationrate agreements with PLDT, the termination rate agreements with AT&T andMCI lapsed in December 2002, without either agreeing with PLDT on anyprovisional arrangement or final agreement on the new termination rates.  Facedwith the continuing stonewalling by AT&T and MCI, PLDT, in December 2002,was forced to notify each company that PLDT’s termination rates would finally beincreased as of February 1, 2003.  Because no agreement was reached with eitherAT&T or MCI, effective as of February 1, 2003, PLDT stopped terminatingtraffic sent directly by each of AT&T and MCI.

 

On February 7, 2003,AT&T and MCI filed separate petitions with the U.S. FCC requesting the U.S.FCC to take action to protect U.S. international carriers and U.S. consumersfrom alleged “whipsawing” behavior occurring on the U.S.-Philippine route.“Whipsawing” is a form of anti-competitive behavior that involves the abilityof foreign carriers to obtain unduly favorable terms and conditions from U.S.international service providers by setting competing U.S. carriersagainst one another.

 

On February 7, 2003, theNational Telecommunications Commission, or NTC, of the Republic of the Philippinesdirected Philippine carriers to take one of two different courses of action,depending on whether such carriers had effective termination rates with theircounterparties.  If PLDT had “existing and effective agreements with foreigntelecommunication carriers relative to termination rates”, it should “complywith the terms thereof, specifically in maintaining the flow of traffic in andbetween circuits and facilities covered by such agreements.”  If, however, thecounterparty and PLDT were “without existing and effective agreements relativeto termination rates,” then PLDT is “encouraged ... to negotiate and concludeagreements” with the counterparty, and “the parties may agree onprovisional/interim arrangements for continuity of service.”  Each of AT&Tand MCI immediately rejected PLDT’s offer for an interim termination rateagreement.

 

On February 26, 2003, the NTC issued an Order confirmingthat, pursuant to its February 7, 2003 Order, “it is understood that absent anyprovisional or interim arrangement or 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 the Philippines.”

 

On February 28, 2003, PLDTand MCI reached an “interim agreement” effective through March 31, 2003,whereby PLDT agreed to provide direct service under a revised termination ratestructure while the parties negotiated a final termination rate agreement.This interim agreement expired on April 15, 2003.

 

On March 10, 2003, theInternational Bureau of the U.S. FCC granted the request of AT&T and MCIand issued an Order directing all facilities-based carriers subject to U.S. FCCjurisdiction to suspend payments for termination services to Philippinecarriers, including PLDT, Globe Telecom, Inc., Bayan TelecommunicationsPhilippines, Inc., Digital Telecommunications Philippines, Inc., Smart andSubic Telecom until such time as the U.S. FCC issues a Public Notice that AT&T’scircuits on the U.S.-Philippine route are fully restored.  The Order alsoremoved the Philippines from the list of U.S.-international routes approvedfor the provision of International Simple Resale.  As of September 30, 2003,receivables from U.S. carriers amounted to approximately US$21  million, ofwhich US$10 million was attributable to PLDT, US$6 millionto Smart and US$5 million to Subic Telecom.

 

In response to the ruling ofthe International Bureau of the FCC, the NTC issued a Memorandum Order datedMarch 12, 2003 directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”

 

The NTC also stated in its March 12, 2003 Orderthat the termination rates offered by PLDT are “fair and reasonable.”  Theserates, US$0.12 per minute for calls terminating on the fixed-line network andUS$0.16 per minute for calls terminating on mobile networks, are well below theFCC benchmark settlement rate of US$0.19 per minute for low middle incomecountries such as the Philippines and also substantially below the settlementrate of US$0.238 per minute suggested by the International TelecommunicationUnion for countries with teledensity between 1 to 5 telephones per 100population.  

 

On April 9, 2003, wefiled with the FCC an application for review of the International Bureau’s March 10, 2003Order.  On April 24, 2003, AT&T and MCI filed Oppositions to ourapplication for review of the International Bureau’s March 10, 2003 Orderand on May 5, 2003, we filed our reply to these Oppositions. 

 

To resolve the long standingissue on termination rates and to allow Philippine and US carriers to freelynegotiate a mutually acceptable settlement of this issue, and to provide anappropriate atmosphere for commercial negotiations to prosper, on October 17,2003 the NTC lifted its March 12, 2003 Order and ordered all Philippinecarriers to immediately accept terminating traffic via direct circuits fromU.S. facilities based carriers on mutually acceptable final or interimtermination rates, on terms and conditions to be agreed upon by the parties.Based on the negotiations between the NTC and the U.S. FCC, the NTC stated inits October 17, 2003 Order that it expects the U.S. FCC to immediately lift itsMarch 10, 2003 Order, thereby canceling the non-payment provisions thereof andsubsequently returning the Philippines to the list of U.S.-international routesapproved for the provision of international simple resale. As of 

November 3, 2003, the U.S. FCC has yet to lift its March 10, 2003Order.  On September 30, 2003, SMART and AT&T signed an interim agreement thatwill pave the way for the resumption of services between the two companies.Under the interim agreement, SMART will restore bilateral facilities whileAT&T will settle all outstanding amounts and termination fees to SMART,once the FCC lifts the stop-payment order against Philippine carriers.  PLDT iscurrently in negotiations with AT&T and MCI with respect to new terminationrate agreements. 

 

 

**27. ****Reclassification of Accounts**

** **

We have reclassified certainaccounts in 2002 to conform with our 2003 financial statements presentation.

 

 

 

 

 

 

 

 

 

 

 

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