MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2004
In the following discussion and analysis of our financial condition and results of operations, unless the context indicates or otherwise requires, references to we, us, our or PLDT Group mean the Philippine Long Distance Telephone Company and its consolidated subsidiaries, and references to PLDT mean the Philippine Long Distance Telephone Company, not including its consolidated subsidiaries (see Note 2 Basis of Financial Statement Preparation to the accompanying financial statements for a list of these subsidiaries, including a description of their respective principal business activities).
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and the related notes. Our financial statements, and the financial information discussed below, have been prepared in accordance with Philippine generally accepted accounting principles, or Philippine GAAP, which differs in certain significant respects from generally accepted accounting principles in the United States.
The financial information appearing in this report and in the accompanying financial statements is stated in Philippine pesos. All references to pesos, Philippine pesos or Php are to the lawful currency of the Philippines; all references to U.S. dollars, US$ or dollars are to the lawful currency of the United States; all references to Japanese yen, JP¥ or ¥ are to the lawful currency of Japan and all references to Euro or are to the lawful currency of the European Union. Translations of Philippine peso amounts into U.S. dollars in this report and in the accompanying financial statements were made based on the exchange rate of Php56.216 to US$1.00, the volume weighted average exchange rate at March 31, 2004 quoted through the Philippine Dealing System.
Some information in this report may contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. We have based these forward-looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements generally are identified by forward-looking words such as believe, plan, anticipate, continue, estimate, expect, may, will or other similar words.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We have chosen these assumptions or bases in good faith, and we believe that they are reasonable in all material respects. However, we caution you that forward-looking statements and assumed facts or bases almost always vary from actual results, and the differences between the results implied by the forward-looking statements and assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the description of risks and cautionary statements in this report. You should also keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as of the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date hereof. In light of these risks and uncertainties, any forward-looking statement made in this report or elsewhere might not occur.
Financial Highlights
|
March 31, |
|
December 31, |
|
Increase (Decrease) |
||
(in millions) |
2004 |
|
2003(1) |
|
Amount |
|
% |
|
(Unaudited) |
|
(Audited) |
|
|
|
|
Consolidated Balance Sheets |
|
|
|
|
|
|
|
Total assets |
Php301,412 |
|
Php297,626 |
|
Php3,786 |
|
1 |
Property, plant and equipment - net |
243,455 |
|
244,427 |
|
(972) |
|
|
Total debt |
156,960 |
|
159,814 |
|
(2,854) |
|
(2) |
Total stockholders equity |
98,451 |
|
93,578 |
|
4,873 |
|
5 |
Debt to equity ratio |
1.59x |
|
1.71x |
|
|
|
|
|
|
||||||
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
2003(1) |
|
Amount |
|
% |
|
(Unaudited) |
||||||
Consolidated Statements of Income |
|
|
|
|
|
|
|
Operating revenues |
Php27,092 |
|
Php22,737 |
|
Php4,355 |
|
19 |
Operating expenses |
16,619 |
|
15,645 |
|
974 |
|
6 |
Net operating income |
10,473 |
|
7,092 |
|
3,381 |
|
48 |
EBIT(2) |
9,826 |
|
6,344 |
|
3,482 |
|
55 |
EBITDA(3) |
16,346 |
|
12,147 |
|
4,199 |
|
35 |
Net income |
5,240 |
|
2,483 |
|
2,757 |
|
111 |
Operating margin |
39% |
|
31% |
|
|
|
|
EBITDA margin |
60% |
|
53% |
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
|
|
|
|
|
Net cash provided by operating activities |
Php16,679 |
|
Php11,920 |
|
Php4,759 |
|
40 |
Net cash used in investing activities |
4,687 |
|
2,220 |
|
2,467 |
|
111 |
Capital expenditures |
4,299 |
|
1,890 |
|
2,409 |
|
127 |
Net cash used in financing activities |
7,237 |
|
8,038 |
|
(801) |
|
(10) |
_____________
(1) As restated to reflect the change in accounting policy on leases, as described in Note 3 Accounting Changes to the accompanying financial statements.
(2) EBIT is defined as earnings before minority interest in net (income) losses of consolidated subsidiaries, adding back interest expense and related items, taxes and deducting interest income. EBIT should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating activities and other income or cash flow statement data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity.
(3) EBITDA is defined as earnings before minority interest in net (income) losses of consolidated subsidiaries, adding back interest expense and related items, taxes, depreciation and amortization, deducting interest income and is presented because it is generally accepted as providing useful information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating activities and other income or cash flow statement data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity.
EBIT and EBITDA, on a consolidated basis for the three months ended March 31, 2004 and 2003, are derived as follows:
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
2003(b) |
|
Amount |
|
% |
|
(Unaudited) |
||||||
(in millions) |
|
||||||
Earnings before minority interest in net (income) losses of consolidated subsidiaries(a) |
Php5,236 |
|
Php2,487 |
|
Php2,749 |
|
111 |
Add: Interest expenses(a) |
2,948 |
|
2,956 |
|
(8) |
|
|
Provision for income tax(a) |
1,854 |
|
1,004 |
|
850 |
|
85 |
Less: Interest income(a) |
212 |
|
103 |
|
109 |
|
106 |
EBIT |
9,826 |
|
6,344 |
|
3,482 |
|
55 |
Add: Depreciation and amortization(a) |
6,520 |
|
5,803 |
|
717 |
|
12 |
EBITDA |
Php16,346 |
|
Php12,147 |
|
Php4,199 |
|
35 |
________________
(a) See statements of income in the accompanying financial statements.
(b) As restated to reflect the change in accounting policy on leases, as described in Note 3 Accounting Changes to the accompanying financial statements.
Overview
We are the largest and most diversified telecommunications company in the Philippines. We have organized our business into three main segments:
• Wireless wireless telecommunications services provided by PLDTs subsidiaries, Smart Communications, Inc., our cellular service provider, and Mabuhay Satellite Corporation, ACeS Philippines Cellular Satellite Corporation, and Telesat, Inc., our satellite and very small aperture terminal, or VSAT, operators;
• Fixed Line fixed line telecommunications services primarily provided through PLDT. We also provide fixed line services through PLDTs subsidiaries PLDT Clark Telecom, Inc., Subic Telecommunications Company, Inc., PLDT-Maratel, Inc. and Bonifacio Communications Corporation, which together account for approximately 1% of our consolidated fixed lines in service, and PLDT Global Corporation; and
• Information and Communications Technology information and communications infrastructure and services for internet applications, internet protocol-based solutions and multimedia content delivery provided by PLDTs subsidiary ePLDT, Inc.; internet access services provided by ePLDTs subsidiary Infocom Technologies, Inc.; and e-commerce, call centers and IT-related services provided by other investees of ePLDT, as described in Note 9 Investments to the accompanying financial statements.
Results of Operations
The table below shows the contribution by each of our business segments to our consolidated operating revenues, operating expenses and net operating income (losses) for the three months ended March 31, 2004 and 2003. Most of our revenues are derived from our operations within the Philippines. Our revenues derived from outside the Philippines consist primarily of revenues from incoming international calls to the Philippines.
|
Three Months Ended March 31, |
||||||||||
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
%(1) |
|
2003(2) |
|
%(1) |
|
Amount |
|
% |
|
(Unaudited) |
||||||||||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
Wireless |
Php14,956 |
|
55 |
|
Php10,940 |
|
48 |
|
Php4,016 |
|
37 |
Fixed line |
11,694 |
|
43 |
|
11,440 |
|
50 |
|
254 |
|
2 |
Information and communications technology |
442 |
|
2 |
|
357 |
|
2 |
|
85 |
|
24 |
|
27,092 |
|
100 |
|
22,737 |
|
100 |
|
4,355 |
|
19 |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
Wireless |
8,151 |
|
30 |
|
7,126 |
|
31 |
|
1,025 |
|
14 |
Fixed line |
8,101 |
|
30 |
|
8,077 |
|
36 |
|
24 |
|
|
Information and communications technology |
367 |
|
1 |
|
442 |
|
2 |
|
(75) |
|
(17) |
|
16,619 |
|
61 |
|
15,645 |
|
69 |
|
974 |
|
6 |
Net Operating Income (Losses) |
|
|
|
|
|
|
|
|
|
|
|
Wireless |
6,805 |
|
25 |
|
3,814 |
|
17 |
|
2,991 |
|
78 |
Fixed line |
3,593 |
|
13 |
|
3,363 |
|
14 |
|
230 |
|
7 |
Information and communications technology |
75 |
|
1 |
|
(85) |
|
|
|
160 |
|
(188) |
|
Php10,473 |
|
39 |
|
Php7,092 |
|
31 |
|
Php3,381 |
|
48 |
________________
(1) Operating expenses and net operating income (losses) are computed as a percentage of operating revenues.
(2) As restated to reflect the change in accounting policy on leases, as described in Note 3 Accounting Changes to the accompanying financial statements.
Consolidated Operating Revenues
Largely driven by the continued strong growth of our wireless business, particularly Smarts cellular business, our consolidated operating revenues for the first quarter of 2004 increased by Php4,355 million, or 19%, to Php27,092 million from Php22,737 million in the same period in 2003. The revenue contribution of our wireless business accounted for 55% of our consolidated operating revenues for the first quarter of 2004, compared to 48% in the same period in 2003. Smart contributed Php14,711 million in revenues for the first quarter of 2004 an increase of 37% over its revenue contribution of Php10,744 million for the same period in 2003.
Wireless
Our wireless business segment offers cellular services as well as satellite, VSAT, and other services.
The following table summarizes our consolidated operating revenues from our wireless business for the three months ended March 31, 2004 and 2003 by service segment:
|
Three Months Ended March 31, |
||||||||||
|
|
|
|
|
|
|
|
|
Increase |
||
|
2004 |
|
% |
|
2003 |
|
% |
|
Amount |
|
% |
|
(Unaudited) |
||||||||||
(in millions) |
|
||||||||||
Wireless services: |
|
|
|
|
|
|
|
|
|
|
|
Cellular |
Php14,711 |
|
98 |
|
Php10,744 |
|
98 |
|
Php3,967 |
|
37 |
Satellite, VSAT and others |
245 |
|
2 |
|
196 |
|
2 |
|
49 |
|
25 |
Total |
Php14,956 |
|
100 |
|
Php10,940 |
|
100 |
|
Php4,016 |
|
37 |
Our wireless service revenues increased by Php4,016 million, or 37%, to Php14,956 million in the first quarter of 2004 from Php10,940 million in the same period in 2003 mainly as a result of the continued strong growth in revenues generated from Smarts cellular service. Accordingly, as a percentage of our consolidated operating revenues, wireless service revenues increased to 55% in the first quarter of 2004 from 48% in the same period in 2003.
Cellular Service
Our cellular service revenues consist of:
• revenues derived from actual usage of the network by prepaid subscribers and any unused peso value of expired prepaid cards or electronic air time loads, net of discounts given to dealers;
• monthly service fees from postpaid subscribers, including (1) charges for calls in excess of allocated free local calls, (2) toll charges for national and international long distance calls, (3) charges for text messages of our GSM service customers in excess of allotted free text messages and (4) charges for value-added services, net of related content provider costs;
• revenues generated from incoming calls and messages to our subscribers, net of interconnection expenses; fees from reciprocal traffic from international correspondents; and revenues from inbound international roaming calls for the GSM service;
• service fees charged to Pilipino Telephone Corporation, or Piltel, for using Smart's GSM network for Piltel's Talk 'N Text prepaid cellular service; and
• other charges, including those for reconnection and migration.
Proceeds from the sale of handsets and SIM cards are not recorded as part of cellular service revenues. Gains on the sale of handsets are offset against selling and promotion expenses, while losses on the sale of handsets and SIM cards are included as part of selling and promotion expenses.
Our cellular service revenues in the first quarter of 2004 amounted to Php14,711 million, an increase of Php3,967 million, or 37%, from Php10,744 million in the same period in 2003. Cellular service revenues accounted for 98% of our wireless revenues and contributed 54% to our consolidated operating revenues in the first quarter of 2004, compared to 47% in the same period in 2003. This increase was primarily due to the growth in Smarts subscriber base, which increased by 3,795,371, or 51%, from 7,389,807 as of March 31, 2003 to 11,185,178 as of March 31, 2004. The strong subscriber growth offset the decline in blended monthly gross and net ARPU, which dropped by 12% and 8%, respectively.
Smart markets nationwide cellular communications services under the brand names Smart Buddy, Smart Gold, addict mobile and Smart Infinity. Smart Buddy is a prepaid service while Smart Gold, addict mobile and Smart Infinity are postpaid services, which are all provided through Smart's digital GSM network. Introduced in April 2003, addict mobile offers exclusive multimedia content to subscribers and features personalized means for internet surfing, allowing subscribers to apply their allocated free credits towards their choice of data and value-added services. Smart Infinity is a premium postpaid plan, launched in January 2004 that caters to affluent and highly mobile market, offering first class quality services, including a round-the-clock dedicated personal concierge service, international assistance services, premium handset packages and exclusive lifestyle content.
The following table summarizes key measures of our cellular business as of and for the three months ended March 31, 2004 and 2003:
|
Three Months Ended March 31, |
|||||||||
|
|
|
|
|
Increase |
|||||
|
2004 |
|
2003 |
|
Amount |
|
% |
|||
|
(Unaudited) |
|||||||||
(in millions) |
|
|
|
|
|
|
|
|||
Cellular revenues |
Php14,711 |
|
Php10,744 |
|
Php3,967 |
|
37 |
|||
|
|
|
|
|
|
|
|
|||
GSM |
14,595 |
|
10,662 |
|
3,933 |
|
37 |
|||
|
|
|
|
|
|
|
|
|||
By component |
12,954 |
|
9,648 |
|
3,306 |
|
34 |
|||
Voice |
6,876 |
|
5,656 |
|
1,220 |
|
22 |
|||
Data |
6,078 |
|
3,992 |
|
2,086 |
|
52 |
|||
|
|
|
|
|
|
|
|
|||
By service type |
12,954 |
|
9,648 |
|
3,306 |
|
34 |
|||
Prepaid |
11,911 |
|
8,686 |
|
3,225 |
|
37 |
|||
Postpaid |
1,043 |
|
962 |
|
81 |
|
8 |
|||
|
|
|
|
|
|
|
|
|||
GSM-Others(1) |
1,641 |
|
1,014 |
|
627 |
|
62 |
|||
|
|
|
|
|
|
|
|
|||
Others(2) |
116 |
|
82 |
|
34 |
|
41 |
|||
|
As of March 31, |
|||||||
|
|
|
|
|
Increase |
|||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
|
(Unaudited) |
|||||||
|
|
|
|
|
|
|
|
|
GSM Cellular subscriber base |
11,185,178 |
|
7,389,807 |
|
3,795,371 |
|
51 |
|
Prepaid |
10,919,335 |
|
7,176,196 |
|
3,743,139 |
|
52 |
|
Postpaid |
265,843 |
|
213,611 |
|
52,232 |
|
24 |
|
|
|
|
|
|
|
|
|
|
Systemwide subscriber base(3) |
14,356,186 |
|
9,368,513 |
|
4,987,673 |
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Three Months Ended March 31, |
|||||||
|
|
|
|
|
Increase (Decrease) |
|||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
|
(Unaudited) |
|||||||
|
|
|
|
|
|
|
|
|
Traffic volumes (in millions) |
|
|
|
|
|
|
|
|
Calls (in minutes) |
985 |
|
842 |
|
143 |
|
17 |
|
Domestic |
712 |
|
571 |
|
141 |
|
25 |
|
International |
273 |
|
271 |
|
2 |
|
1 |
|
Inbound |
236 |
|
237 |
|
(1) |
|
|
|
Outbound |
37 |
|
34 |
|
3 |
|
9 |
|
Text messages outbound |
8,214 |
|
5,114 |
|
3,100 |
|
61 |
|
________________
(1) Refers to other non-subscriber-related revenues, such as facility service fees from Smarts revenue-sharing agreement with Piltel and inbound international roaming fees.
(2) Refers to all other services consisting primarily of revenues from Smart Money Holdings Corporation, public calling offices and SMARTalk payphones, and a small number of leased line contracts.
(3) Includes Piltels TalkN Text subscribers of 3,171,008 and 1,978,706 as of March 31, 2004 and 2003, respectively. TalkN Text is a prepaid GSM service provided by Piltel using Smarts GSM network under a revenue-sharing agreement.
Voice Services
Smarts revenues from voice services, which include all voice traffic and value-added services such as voice mail and international roaming, increased by Php1,220 million, or 22%, to Php6,876 million in the first quarter of 2004 from Php5,656 million in the same period in 2003 mainly due to the increase in subscriber base.
Prior to January 2004, Smart Buddy subscribers were charged a rate of Php8.00 per minute for calls made during peak hours and Php4.00 per minute for calls made during off-peak hours regardless of whether the calls were made to subscribers within the Smart network or to other mobile operators networks. Beginning January 2004, Smart implemented all-day flat air time rates for calls made by its prepaid subscribers. Calls terminating to other Smart and Piltels Talk N Text subscribers are charged Php6.50 per minute, while an all-day flat rate of Php7.50 per minute is charged for calls terminating to other cellular network subscribers as well as local and NDD calls.
Air time rates for postpaid subscribers vary depending on type of postpaid plan selected by subscribers. Beginning January 25, 2004, Smart Gold and addict mobile launched flat rate-regular plans and consumable plans.
Data Services
Smarts revenues from cellular data services, which include all text messaging-related services as well as value-added services, increased by Php2,086 million, or 52%, to Php6,078 million in the first quarter of 2004 from Php3,992 million in the same period in 2003. Cellular data services accounted for 42% of Smart's GSM cellular revenues in the first quarter of 2004, compared to 37% in the same period in 2003. Text messaging-related services contributed revenues of Php5,549 million in the first quarter of 2004, compared to Php3,730 million in the same period in 2003, and accounted for 91% and 93% of the total cellular data revenues for the first quarter of 2004 and 2003, respectively. The increase in revenues from text messaging-related services resulted mainly from a 61% increase in volume of text messages to 8,214 million outbound messages in the first quarter of 2004 from the 5,114 million outbound messages handled in the same period in 2003. Value-added services contributed revenues of Php529 million in the first quarter of 2004, increasing by Php267 million, or 102%, from Php262 million in the same period in 2003.
The following table shows the breakdown of Smarts cellular data revenues for the three months ended March 31, 2004 and 2003:
|
|
||||||
|
March 31, |
|
Increase (Decrease) |
||||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
(Unaudited) |
||||||
(in millions) |
|
|
|
|
|
|
|
Text messaging |
|
|
|
|
|
|
|
Domestic |
Php5,146 |
|
Php3,323 |
|
Php1,823 |
|
55 |
International |
403 |
|
407 |
|
(4) |
|
(1) |
|
5,549 |
|
3,730 |
|
1,819 |
|
49 |
Value-added services |
|
|
|
|
|
|
|
Non-Zed(1) |
Php245 |
|
Php119 |
|
Php126 |
|
106 |
Smart ZedTM |
98 |
|
114 |
|
(16) |
|
(14) |
Mobile Banking, Roaming SMS, WAP, Smart Money |
186 |
|
29 |
|
157 |
|
541 |
|
529 |
|
262 |
|
267 |
|
102 |
Total |
Php6,078 |
|
Php3,992 |
|
Php2,086 |
|
52 |
________________
(1) Value-added services developed by Smart on its own platform.
Facility Services
Smarts revenues from GSM service in the first quarter of 2004 and 2003 included facility service fees totaling Php1,343 million and Php841 million, respectively, representing Smarts 50% share from Piltels Talk N Text revenues, net of interconnection fees. As of March 31, 2004, Piltel had 3,171,008 Talk N Text subscribers compared to 1,978,706 subscribers as of March 31, 2003 using Smarts GSM network pursuant to a facilities service agreement between Smart and Piltel. See Note 15 Related Party Transactions to the accompanying financial statements for a description of this agreement.
Subscriber Base, ARPU and Churn Rates
Of Smarts 11,185,178 GSM subscribers as of March 31, 2004, prepaid subscribers accounted for approximately 98% while postpaid subscribers accounted for the remaining 2%. Smart's prepaid GSM subscriber base grew by 52% to 10,919,335 as of March 31, 2004 from 7,176,196 as of March 31, 2003, whereas Smart's postpaid GSM subscriber base increased by 24% to 265,843 as of March 31, 2004 from 213,611 as of March 31, 2003. Smarts prepaid and postpaid net subscriber activations totaled 1,088,200 and 16,866, respectively, in the first quarter of 2004, or a monthly average addition of 362,733 prepaid and 5,622 postpaid subscribers.
Revenues attributable to Smarts prepaid service amounted to Php11,911 million in the first quarter of 2004, a 37% increase over the Php8,686 million earned in the same period in 2003. Net prepaid revenues in the first quarter of 2004 accounted for 92% of GSM voice and data revenues, compared to 90% in the same period in 2003. Revenues attributable to Smarts postpaid service amounted to Php1,043 million in the first quarter 2004, an 8% increase over the Php962 million earned in the same period in 2003. Net postpaid revenues in the first quarter of 2004 accounted for 8% of GSM voice and data revenues, compared to 10% in the same period in 2003.
The following table summarizes Smart's usage-based monthly ARPUs for the three months ended March 31, 2004 and 2003:
|
Three Months Ended March 31, |
||||||||||||||
|
Gross |
|
Increase (Decrease) |
|
Net |
|
Increase (Decrease) |
||||||||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
2004 |
|
2003 |
|
Amount |
|
% |
|
|
|
(Unaudited) |
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid |
Php463 |
Php533 |
|
Php(70) |
|
(13) |
|
Php383 |
|
Php416 |
|
Php(33) |
|
(8) |
|
Postpaid |
1,762 |
1,716 |
|
46 |
|
3 |
|
1,351 |
|
1,268 |
|
83 |
|
7 |
|
Blended |
495 |
565 |
|
(70) |
|
(12) |
|
406 |
|
439 |
|
(33) |
|
(8) |
ARPU is computed for each month by dividing the revenues for the relevant services for the month by the average of the number of subscribers at the beginning and at the end of the month. Gross monthly ARPU is computed by dividing the revenues for the relevant services, gross of dealer discounts and allocated content-provided costs, including interconnection income but excluding inbound roaming revenues, by the average number of subscribers. Net monthly ARPU, on the other hand, is calculated based on revenues net of dealer discounts and allocated content-provided costs and interconnection income net of interconnection expense. ARPU for any period of more than one month is calculated as the simple average of the monthly ARPUs in that period.
Smarts prepaid service revenues consist mainly of charges for subscribers' actual usage of their prepaid cards. Gross monthly ARPU for Smarts prepaid GSM service in the first quarter of 2004 was Php463, compared to Php533 in the same period in 2003. The decline was attributable mainly to a decrease in the average outbound local voice revenue per subscriber in the first quarter of 2004. On a net basis, ARPU in the first quarter of 2004 decreased by 8% to Php383 from Php416 in the same period in 2003. The lower rate of decrease in net ARPU compared to the decrease in gross ARPU resulted from lower average interconnection expense per subscriber due to an increasing percentage of Smart-to-Smart traffic to total voice traffic, to 61% in the first quarter of 2004 from 55% in the same period in 2003, as well as lower dealer discounts on Smart Load. Smart currently expects its prepaid ARPUs to continue to decline now that lower-denomination reloads are available and as it continues its expansion into the lower end of the market.
Monthly ARPU for Smarts postpaid GSM service is calculated in a manner similar to that of prepaid service, except that the revenues consist mainly of monthly service fees and charges on usage in excess of the monthly service fees. Until April 2003, pre-termination fees had been reported as part of usage revenues and included in the calculation of postpaid ARPUs; pre-termination fees of Php196 million were included in the ARPU computation during the first quarter of 2003. ARPU is a measure associated with a subscribers actual usage of the network on which pre-termination fees would have had no effect. Beginning the second quarter of 2003, pre-termination fees were included, upon collection, under Others of GSM Revenues and are therefore no longer included for the purpose of calculating ARPUs.
Gross monthly ARPU for postpaid GSM subscribers in the first quarter of 2004 was Php1,762, compared to Php1,716 in the same period in 2003. On a net basis, postpaid ARPU increased by 7% to Php1,351 in the first quarter of 2004 from Php1,268 in the same period in 2003. Smart's GSM monthly gross blended ARPU was Php495 in the first quarter of 2004, compared to Php565 in the same period in 2003. Blended net monthly ARPU decreased by 8% to Php406 in the first quarter of 2004 from Php439 in the same period in 2003.
Smart's 50% share of Piltel's revenues from Talk N Text under a revenue-sharing agreement between Smart and Piltel is not included in the computations of Smart's ARPUs.
Churn, or the rate at which existing subscribers have their service canceled in a given period, is computed based on total disconnections in the period, net of reconnections in the case of postpaid subscribers, divided by the average of the number of subscribers at the beginning and the end of a month, all divided by the number of months in the same period.
A prepaid cellular subscriber is recognized as an active subscriber when that subscriber activates and uses the SIM card in the handset, which already contains Php100 worth of pre-stored air time. Subscribers can then reload by purchasing prepaid call-and-text cards that are sold in denominations of Php300, Php500 and Php1,000 or, by purchasing additional air time over the air via Smart Load in smaller denominations of Php30, Php60, Php115 and Php200, by receiving loads of Php2, Php5, Php10 and Php15 via Pasa Load or through their handsets using Smart Money. Reloads have validity periods ranging from one day to two months, depending on the amount reloaded. A prepaid GSM account is disconnected if the subscriber does not reload within four months after the full usage or expiry of the last reload. As a result, a subscriber would not be included in our churn rate calculation for up to 121 days to six months after the subscriber may have stopped using the service to make calls or send messages (although the subscriber may continue to receive calls and messages). These effects may contribute to more rapid growth in calculated churn following periods of rapid subscriber growth.
For Smart's prepaid GSM subscribers, the average monthly churn rate for the first quarter of 2004 was 3.3%, slightly higher than the 3.2% average monthly churn rate in the same period in 2003. In line with the various churn management initiatives implemented to address increased churn rates, in May 2003, Smart introduced Smart Load, an over-the-air electronic loading facility designed to make reloading of air time credits more convenient for, and accessible to consumers. These over-the-air reloads, which have both voice and text functions, are packaged in smaller denominations of Php30, Php60, Php115 and Php200, but have shorter validity periods of three days, six days, 12 days and 30 days, respectively. Starting with just 50,000 outlets when it was launched, Smart Loads distribution network now encompasses over 400,000 retail agents, approximately 80% of which are micro businesses. As of March 31, 2004, approximately 85% of Smart Buddy subscribers were using Smart Load as their reloading mechanism. In the first quarter of 2004, Smart Load has accounted for approximately 59% of sales derived from reloads.
On December 24, 2003, Smart introduced Pasa Load (literally means transfer load), a derivative service of Smart Load that allows for Php10 load transfers to other Smart Buddy and Piltel Talk N Text subscribers. On January 25, 2004, denominations of Php2, Php5 and Php15 were added to the Pasa Load menu. All Pasa Load denominations have a one-day expiry period. We believe that Smart Load and Pasa Load will encourage subscribers to stay within our cellular network instead of churning and re-subscribing at a later time.
Beginning April 18, 2004, Pasa Load was also made available to Smart postpaid subscribers as well with identical denominations to those offered to prepaid subscribers. The denominations have a similar one-day load expiry. The sender will be billed the amount of the load and a Php1.00 transaction fee which will be added on top of the monthly service fee.
The average monthly churn rate for Smart's postpaid GSM subscribers for the first quarter of 2004 was 0.2%, compared to 3.6% in the same period in 2003. Smart's policy is to redirect outgoing calls to an interactive voice response system if the postpaid subscriber's account is either 45 days overdue or the subscriber has exceeded the prescribed credit limit. If the subscriber does not 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 collection messages via text messaging.
Satellite, VSAT and Other Services
Our revenues from satellite, VSAT and other services consist mainly of rentals received for the lease of Mabuhay Satellite's transponders and Telesat's VSAT facilities to other companies and charges for ACeS Philippines satellite phone service. Total revenues from these services for the first quarter of 2004 amounted to Php245 million, an increase of Php49 million, or 25%, from Php196 million in the same period in 2003.
Fixed Line
Our fixed line business provides local exchange service, international and national long distance services, data and other network services, and miscellaneous services. Revenues generated from this business for the first quarter of 2004 totaled Php11,694 million, an increase of Php254 million, or 2%, from Php11,440 million for the same period in 2003. This increase was due to higher revenues generated from our international and national long distance services and data and other network services, partially offset by decreased revenues from local exchange service and miscellaneous services. As a percentage of our consolidated operating revenues, however, fixed line revenues decreased for the first quarter of 2004 to 43% from 50% in the same period in 2003 principally due to the continued strong growth of our wireless business.
The following table summarizes our consolidated operating revenues from our fixed line business for the three months ended March 31, 2004 and 2003 by service segment:
|
Three Months Ended March 31, |
||||||||||
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
% |
|
2003 |
|
% |
|
Amount |
|
% |
|
(Unaudited) |
||||||||||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
Fixed line services: |
|
|
|
|
|
|
|
|
|
|
|
Local exchange |
Php5,188 |
|
44 |
|
Php5,248 |
|
46 |
|
Php(60) |
|
(1) |
International long distance |
3,218 |
|
28 |
|
3,053 |
|
27 |
|
165 |
|
5 |
National long distance |
1,798 |
|
15 |
|
1,638 |
|
14 |
|
160 |
|
10 |
Data and other network |
1,432 |
|
12 |
|
1,422 |
|
12 |
|
10 |
|
1 |
Miscellaneous |
58 |
|
1 |
|
79 |
|
1 |
|
(21) |
|
(27) |
Total |
Php11,694 |
|
100 |
|
Php11,440 |
|
100 |
|
Php254 |
|
2 |
Local Exchange Service
Our local exchange service revenues consist of:
• flat monthly fees for our postpaid service;
• installation charges and other one-time fees associated with the establishment of customer service;
• fixed charges paid by other telephone companies, charges retained by PLDT for calls terminating to cellular subscribers within the local area, and local access charges paid by cellular operators for calls by cellular subscribers that terminate to our local exchange network;
• revenues from usage of prepaid cards for calls within the local area and any unused peso value of expired prepaid cards;
• call revenues generated from payphones and coin-operated phones; and
• charges for special features, including bundled value-added services such as call waiting, call forwarding, multi-party conference calling, speed calling and caller ID.
The following table summarizes key measures of our local exchange service business segment as of and for the three months ended March 31, 2004 and 2003:
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
(Unaudited) |
||||||
|
|
|
|
|
|
|
|
Consolidated local exchange revenues (in millions) |
Php5,188 |
|
Php5,248 |
|
Php(60) |
|
(1) |
Number of fixed lines in service |
|
|
|
|
|
|
|
PLDT Group |
2,150,453 |
|
2,111,721 |
|
38,732 |
|
2 |
PLDT |
2,129,198 |
|
2,087,237 |
|
41,961 |
|
2 |
Number of PLDT employees |
10,127 |
|
11,777 |
|
(1,650) |
|
(14) |
Number of PLDT fixed lines in service per PLDT employee |
210 |
|
177 |
|
33 |
|
19 |
Revenues from our local exchange service for the first quarter of 2004 decreased by Php60 million, or 1%, to Php5,188 million from Php5,248 million for the same period in 2003. The decrease was primarily due to the (1) shifting subscriber preference from postpaid to prepaid services, which generate lower average revenue per subscriber, and (2) decline in installation revenues due to a promotion starting July 2003 which waived installation cost of subscribers in an effort to stimulate subscriber growth, partially offset by adjustments in our monthly local service rates. The percentage contribution of local exchange revenues to our total fixed line revenues also decreased for the first quarter of 2004 to 44% from 46% in for the same period in 2003.
Gross additions to PLDT's fixed lines in service for the first quarter of 2004 totaled 168,976, an increase of 76,347 from the gross additions of 92,629 for the same period in 2003. On a net basis, PLDTs fixed line additions for the first quarter of 2004 increased to 13,527 as against a decrease of 5,302 for the same period in 2003. While fixed line additions totaled 14,080 for PLDTs prepaid fixed line services, PLDTs postpaid fixed lines in service declined by 553 for the first quarter of 2004. As of March 31, 2004, PLDTs postpaid and prepaid fixed line subscribers totaled 1,757,814 and 371,384, respectively, which accounted for approximately 83% and 17%, respectively, of PLDTs total fixed lines in service.
Initially intended as an affordable alternative telephone service for consumers under difficult economic conditions, our prepaid fixed line services now forms an important part of PLDT's overall churn and credit risk exposure management and subscriber retention strategy. Prepaid phone kits, each containing Php500 worth of pre-stored call credits, are sold for Php1,900 per unit. Prepaid subscribers are charged based on usage at a rate of Php1.00 per minute for local calls and the same rates are applicable to postpaid fixed line subscribers for national and international long distance calls.
A prepaid fixed line subscriber is recognized as an active subscriber when that subscriber activates and uses a prepaid call card. Prepaid fixed line subscribers can reload their accounts by purchasing call cards that are sold in denominations of Php500, Php300 and Php150. Reloads are valid for two months for the Php500 and Php300 card. The lower denominated Php150 card, launched in September 2003, has an account life of 15 days. A prepaid fixed line subscriber is disconnected if that subscriber does not reload within one month for the Php500 card, four months for the Php300 card, and 15 days for the Php150 card after the expiry of the last reload. All sales of prepaid cards, whether through dealers or through PLDT's business offices, are non-refundable.
Pursuant to a currency exchange rate adjustment mechanism authorized by the Philippine National Telecommunications Commission, or the NTC, we adjust our monthly local service rates upward or downward by 1% for every Php0.10 change in the peso-to-dollar exchange rate relative to a base rate of Php11.00 to US$1.00. For the first quarter of 2004 and 2003, we implemented three upward adjustments in our monthly local service rates in both periods. The average peso-to-dollar rate for the first quarter of 2004 was Php55.991 to US$1.00, compared to the average of Php54.074 to US$1.00 for the same period in 2003. This change in the average peso-to-dollar rate translated to a peso depreciation of 4%, which resulted in an average net increase of 3% in our monthly local service rates for the first quarter of 2004.
To attract new fixed line subscribers and retain existing ones, PLDT has introduced various value-added services such as Hype in April 2003. Hype is a full two-way fixed line text messaging service, which allows subscribers to send and receive text messages to and from landline and mobile phones, and is capable of international text messaging. Hype also allows subscribers to join TV network-based and new PLDT-initiated texting services.
The ratio of PLDT fixed lines in service per PLDT employee improved from 177 as of March 31, 2003 to 210 as of March 31, 2004. This improvement resulted from the net decrease in PLDTs employee headcount. As of March 31, 2004, PLDTs workforce was reduced by 14% to 10,127 employees from 11,777 employees as of March 31, 2003, mainly on account of PLDTs manpower reduction program.
International Long Distance Service
Our international long distance revenues, which we generate through our international gateway facilities, consist of:
• inbound call revenues representing settlements from foreign telecommunications carriers for inbound international calls, virtual transit and hubbing service and reverse charged calls such as received collect and home country direct service;
• access charges paid to us by other Philippine telecommunications carriers for terminating inbound international calls to our local exchange network; and
• outbound call revenues representing amounts billed to our customers (other than our cellular customers) for outbound international calls, net of amounts payable to foreign telecommunications carriers for terminating calls in their territories.
The following table shows information about our international fixed line long distance business for the three months ended March 31, 2004 and 2003:
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
(Unaudited) |
||||||
|
|
|
|
|
|
|
|
Consolidated international long distance revenues (in millions) |
Php3,218 |
|
Php3,053 |
|
Php165 |
|
5 |
Inbound |
2,601 |
|
2,478 |
|
123 |
|
5 |
Outbound |
617 |
|
575 |
|
42 |
|
7 |
|
|
|
|
|
|
|
|
International call volumes (in million minutes, except call ratio) |
|
|
|
|
|
|
|
PLDT Group |
585 |
|
640 |
|
(55) |
|
(9) |
Inbound |
547 |
|
595 |
|
(48) |
|
(8) |
Outbound |
38 |
|
45 |
|
(7) |
|
(16) |
Inbound-outbound call ratio |
14.4:1 |
|
13.2:1 |
|
|
|
|
|
|
|
|
|
|
|
|
PLDT |
579 |
|
576 |
|
3 |
|
1 |
Inbound |
542 |
|
532 |
|
10 |
|
2 |
Outbound |
37 |
|
44 |
|
(7) |
|
(16) |
Inbound-outbound call ratio |
14.6:1 |
|
12.1:1 |
|
|
|
|
Our consolidated international long distance revenues increased by Php165 million, or 5%, to Php3,218 million in the first quarter of 2004 from Php3,053 million in the same period in 2003, primarily as a result of an increase of our inbound international long distance revenues principally driven by an increase in average inbound termination rates. Likewise, the percentage contribution of international long distance revenues to our total fixed line revenues slightly increased to 28% in the first quarter of 2004 from 27% in the same period in 2003.
Our revenues from inbound international long distance calls in the first quarter of 2004 increased by Php123 million, or 5%, to Php2,601 million from Php2,478 million in the same period in 2003 primarily due to an increase in PLDTs average inbound termination rates and the positive impact of the depreciation of the average value of the peso relative to the U.S. dollar, partially offset by the effect of lower inbound call volumes.
Our inbound international long distance call volumes in the first quarter of 2004 decreased by 8% to 547 million minutes from 595 million minutes in the same period in 2003, primarily due to increased competition from alternative means of long distance communications, particularly e-mailing, international text messaging and internet telephony and more inbound calls terminating directly to cellular subscribers. In addition, the increase in our average termination rates has also resulted in reduced inbound call volumes, principally those being routed through direct facilities from the U.S. to the Philippines.
After lengthy negotiations commencing in May 2002 with carriers around the world, PLDT increased its average termination rates with carriers that account for a substantial portion of its international inbound traffic terminating on its fixed line network to approximately US$0.12 per minute effective February 1, 2003. Prior to the increase in termination rates, a substantial portion of PLDTs international inbound traffic terminating on its fixed line network was charged an average termination rate of approximately US$0.08 per minute. For further discussion, please see Note 25 Other Matters U.S. Federal Communications Commission, or U.S. FCC, Ruling versus Philippine Telecommunications Companies to the accompanying financial statements.
The depreciation of the peso contributed to the increase in our inbound international long distance revenues in peso terms since settlement charges for inbound calls are billed in U.S. dollars or in special drawing rights, an established method of settlement among international telecommunications carriers using values based on a basket of foreign currencies, that are translated into pesos at the prevailing exchange rates at the time of billing.
Our revenues from outbound international long distance calls in the first quarter of 2004 increased by Php42 million, or 7%, to Php617 million from Php575 million in the same period in 2004. The growth was primarily due to an increase in net average revenue per minute as a result of a decrease in our average settlement rate for foreign administrations in dollar terms by US$0.04 per minute.
The depreciation of the peso also contributed to the outbound international long distance revenues in peso terms because outbound calls are charged at U.S. dollar rates and billed to our subscribers in pesos at the prevailing exchange rates at the time of billing.
Our outbound international long distance call volumes declined by 16% to 38 million minutes in the first quarter of 2004 from 45 million minutes in the same period in 2003, primarily due to cellular substitution (subscribers opting to use cellular for international outbound calls) and the popularity of alternative means of communications such as e-mailing, international text messaging and internet telephony.
National Long Distance Service
Our national long distance revenues consist of:
• per minute charges for calls made by our fixed line customers outside of the local service areas but within the Philippines, net of interconnection charges payable for calls carried through the backbone network of, and/or terminating to the customer of, another telecommunications carrier; and
• access charges received from other telecommunications carriers for calls carried through our backbone network and/or terminating to our customers.
The following table shows our national long distance revenues and call volumes for the three months ended March 31, 2004 and 2003:
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
2003 |
|
Amount |
|
% |
|
(Unaudited) |
||||||
|
|
|
|
|
|
|
|
Consolidated national long distance revenues (in millions) |
Php1,798 |
|
Php1,638 |
|
Php160 |
|
10 |
National long distance call volumes (in million minutes) |
|
|
|
|
|
|
|
PLDT Group |
489 |
|
500 |
|
(11) |
|
(2) |
PLDT |
483 |
|
492 |
|
(9) |
|
(2) |
Our national long distance revenues increased by Php160 million, or 10%, to Php1,798 million in the first quarter of 2004 from Php1,638 million in the same period in 2003 as a result of increased national direct dial, or NDD, rates and more beneficial interconnection agreements with cellular operators. Accordingly, the percentage contribution of national long distance revenues to our total fixed line revenues increased to 15% in the first quarter of 2004 from 14% in the same period in 2003.
Effective March 1, 2003, the rate for NDD calls originating from PLDT subscribers and terminating to other local exchange carriers increased to Php5.00 per minute from a flat rate of Php4.50 per minute. In addition, NDD calls originating from and terminating to PLDT was also adjusted to Php5.00 per minute from a flat rate of Php4.50 per minute effective June 8, 2003.
Further, we have entered into more beneficial interconnection agreements with cellular operators. Beginning January 2004, our settlement rate to cellular operators of Php4.50 per minute was reduced to Php4.00 per minute for calls terminating to cellular subscribers. At the same time, the cellular operators settlement rate for calls terminating to PLDT subscribers increased from Php2.50 per minute to Php3.00 per minute. In 2003, certain local exchange carriers, previously under revenue sharing arrangements, have entered into access charging agreements with PLDT. Under the revenue sharing agreements, charges are generally apportioned 30% for the originating entity, 40% for the backbone owner and another 30% for the terminating entity. Under these access charging agreements, the originating carrier generally pays access charges of (1) Php0.50 per minute for short haul traffic and Php1.25 per minute for long haul traffic to the carrier owning the backbone network; and (2) Php1.00 per minute to the terminating carrier. This change in interconnection charges resulted in a 54% decrease in average revenue per minute for calls originating from and terminating to other local exchange carriers.
Our national long distance call volumes, however, decreased by approximately 2% to 489 million minutes in the first quarter of 2004 from 500 million minutes in the same period in 2003. Cellular substitution and the widespread availability and growing popularity of alternative non-voice means of communications, particularly cellular text messaging and e-mailing, have negatively affected call volumes.
Data and Other Network Services
In the first quarter of 2004, our data and other network services posted a revenue of Php1,432 million, an increase of Php10 million, or 1%, from Php1,422 million in the same period in 2003. The revenue contribution of this service segment to our total fixed line revenues remained relatively flat at 12% in the first quarters of 2004 and 2003.
Data and other network services we currently provide include traditional bandwidth services, broadband/packet-based/internet-based services and other packet-based switching services.
The foregoing services are used for domestic and international communications, broadband data transmission services, internet exchange services, private networking services, switch-based services and international packet-based services.
Traditional
bandwidth services accounted for 40% of the total revenues from PLDTs data and
other network services in the first quarter of 2004, broadband/IP-based
services accounted for 54%, and other services accounted for the remaining 6%,
compared to 55%, 39% and 6%, respectively, in the same period in 2003. These
percentage changes indicate a continuing shift in data and other network
revenues from traditional bandwidth services to broadband/IP-based services.
We expect this trend to continue given the growing demand for broadband
transmission of voice, data and video due to the continued growth of the
internet,
e-commerce and other online services.
PLDT offers two residential internet service packages targeting separate markets: PLDT Vibe for light to medium internet users and DSL broadband for heavy internet users. As of March 31, 2004, the number of PLDTs fixed line subscribers that signed up for PLDT Vibe was 288,054, of which 160,711 were postpaid and 127,343 were prepaid subscribers, compared to 96,044 as of March 31, 2003, of which 72,263 were postpaid and 23,781 were prepaid subscribers, while the number of DSL subscribers reached 28,172 and 12,869 as of March 31, 2004 and 2003, respectively.
In March 2003, PLDT launched a number of data services, namely: Continuum, iView and Encompass, all under the Brains umbrella. Brains Continuum provides customers the ability to recover from service interruptions and offers network diversity, facility and hosting services in partnership with ePLDT. Brains iView enables customers to monitor the performance of their network, track bandwidth utilization patterns and identify the source of network problems. Brains Encompass provides a broad range of services for the customers managed networking needs, be it a wide area network or local area network.
During 2003, we also launched a variety of data network products and services to address the needs of large corporations, small and medium-sized enterprises and retail customers. These include: Resort Solutions, a network service that provides real-time communication links between the head office and remote offices of vacation resorts; Shops.work, a network service that allows the real-time linking of retail stores facilitating sales and inventory monitoring; Embed, a wholesale banking solution that enables banks to build a community among clients in a business-to-business or business-to-consumer arrangement; and High Bandwidth Optical Services or HBOS, a dedicated high-speed point-to-point optical access solution that enables data mirroring, storage area network and local area network connectivity within Metro Manila, which also offers an option for a virtually alternative data center.
Miscellaneous
Miscellaneous revenues are derived mostly from directory advertising and facilities rental. In the first quarter of 2004, these revenues decreased by Php21 million, or 27%, to Php58 million from Php79 million in the same period in 2003. The decline was mainly due to a decrease in royalty fee on account of a change in revenue sharing agreement from collection rate to a fixed/flat rate. Miscellaneous revenues accounted for approximately 1% of our total fixed line revenues in the first quarter of 2004 and 2003.
Information and Communications Technology
Our information and communications technology business is conducted by ePLDT, a wholly-owned subsidiary of PLDT. ePLDT's principal business is its operation of an internet data center under the brand name Vitroä. Granted pioneer status as an internet data center by the Philippine Board of Investments, Vitroä provides co-location services, server hosting, hardware and software maintenance services, website development and maintenance services, webcasting and webhosting, shared applications, data disaster recovery and business continuity services, intrusion detection, and security services such as firewall and managed firewall.
ePLDT is focused on developing its call center business which capitalizes on the availability of English-speaking labor in the Philippines. The call center service business is being undertaken by the following wholly-owned subsidiaries:
• Vocativ Systems, Inc., or Vocativ, which owns and operates a 722-seat call center facility with 883 customer service representatives, or CSRs, exclusively for clients of a global provider of customer relationship management services; and
• Parlance Systems, Inc., or Parlance, which owns and operates a 522-seat call center facility with 619 CSRs, exclusively for one of the largest direct-to-home satellite service providers in the United States for customer support and billing requirements.
ePLDT has also invested in a number of other e-commerce and internet-related businesses, including a 99.6% interest in Infocom, one of the countrys leading internet service providers. Infocom offers consumer prepaid and postpaid internet access, corporate leased lines, dedicated dial-up, multi-user dial-up, broadband internet access thru DSL or NOW cable internet; web consulting, development and hosting. Please refer to Note 9 Investments to the accompanying financial statements for further discussion on ePLDTs other information and communications technology services.
In the first quarter of 2004, our information and communications technology business generated total revenues of Php442 million, an increase of Php85 million, or 24%, from the Php357 million in the same period in 2003. These revenues accounted for 2% of our consolidated operating revenues for the first quarter of 2004 and 2003. Vitroä and others contributed revenues of Php111 million; ePLDTs call center business contributed revenues of Php241 million; and Infocom contributed revenues of Php90 million representing 25%, 55% and 20%, respectively, of the total revenues from our information and communications technology business in the first quarter of 2004, compared to 21%, 53% and 26% in the same period in 2003. Going forward, we expect revenues from our call center business to continue to contribute significantly to our information and communications technology revenues with the growing demand for call center services.
Consolidated Operating Expenses
Our consolidated operating expenses in the first quarter of 2004 increased by Php974 million, or 6%, to Php16,619 million from Php15,645 million in the same period in 2003. The increase was primarily due to higher non-cash expenses, mainly depreciation and amortization and higher cash expenses in our wireless business, mainly compensation and benefits and other operating costs. As a percentage of our consolidated operating revenues, however, consolidated operating expenses decreased to 61% in the first quarter of 2004 from 69% in the same period in 2003.
Wireless
Consolidated operating expenses associated with our wireless business in the first quarter of 2004 amounted to Php8,151 million, an increase of Php1,025 million, or 14%, from Php7,126 million in the same period in 2003. A significant portion of this increase was attributable to non-cash expenses mainly depreciation and amortization and provision for inventory obsolescence coupled with an increase in certain cash expenses. As a percentage of our wireless operating revenues, operating expenses associated with our wireless business decreased to 54% in the first quarter of 2004 from 65% in the same period in 2003.
The following table summarizes our consolidated wireless-related operating expenses for the three months ended March 31, 2004 and 2003 and the percentage of each expense item to the total:
|
Three Months Ended March 31, |
||||||||||
|
|
|
|
|
|
|
|
|
Increase (Decrerase) |
||
|
2004 |
|
% |
|
2003(1) |
|
% |
|
Amount |
|
% |
|
(Unaudited) |
||||||||||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
Wireless services |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization(2) |
Php2,985 |
|
37 |
|
Php2,403 |
|
34 |
|
Php582 |
|
24 |
Selling and promotions |
1,800 |
|
22 |
|
1,943 |
|
27 |
|
(143) |
|
(7) |
Compensation and benefits |
877 |
|
11 |
|
723 |
|
10 |
|
154 |
|
21 |
Maintenance |
463 |
|
6 |
|
502 |
|
7 |
|
(39) |
|
(8) |
Rent |
454 |
|
5 |
|
433 |
|
6 |
|
21 |
|
5 |
Provision for doubtful accounts |
387 |
|
5 |
|
348 |
|
5 |
|
39 |
|
11 |
Professional and other service fees |
192 |
|
2 |
|
147 |
|
2 |
|
45 |
|
31 |
Insurance and security services |
214 |
|
3 |
|
175 |
|
3 |
|
39 |
|
22 |
Taxes and licenses |
167 |
|
2 |
|
144 |
|
2 |
|
23 |
|
16 |
Provision for inventory obsolescence |
128 |
|
1 |
|
16 |
|
|
|
112 |
|
700 |
Other operating costs |
484 |
|
6 |
|
292 |
|
4 |
|
192 |
|
66 |
Total |
Php8,151 |
|
100 |
|
Php7,126 |
|
100 |
|
Php1,025 |
|
14 |
__________
(1) As restated to reflect the change in accounting policy on leases, as described in Note 3 Accounting Changes to the accompanying financial statements.
(2) Includes depreciation of capitalized foreign exchange losses from the revaluation of net dollar liabilities of Php332 million in the first quarter of 2004 and Php252 million in the same period in 2003.
Depreciation and amortization charges increased by Php582 million, or 24%, to Php2,985 million substantially due to an increase in the depreciable asset base owing to continuing network expansion and upgrade and an increase in depreciation charges of capitalized foreign exchange losses from revaluation of net dollar liabilities.
Selling and promotion expenses decreased by Php143 million, or 7%, to Php1,800 million due to lower dealer discounts. Smarts average subscriber acquisition cost, or SAC, for prepaid subscribers in the first quarter of 2004 was Php443, a decrease of 37% from Php703 in the same period in 2003. Discounts to dealers accounted for the highest percentage of prepaid SAC at 40% and 63% in the first quarter of 2004 and 2003, respectively. On the other hand, postpaid SAC in the first quarter of 2004 was Php19,614, an increase of 108% from Php9,443 in the same period in 2003. Handset subsidies accounted for 84% and 87% of postpaid SAC in the first quarter of 2004 and 2003, respectively. Blended SAC declined by 42%, to Php635 in the first quarter of 2004 from Php1,096 in the same period in 2003.
Compensation and benefits increased by Php154 million, or 21%, to Php877 million primarily due to increased salaries, benefits and performance bonuses of Smarts employees. In addition, Smart accrued for an additional share under the enhanced employee retirement fund approved by Smarts Board of Directors in October 2003. Smart's employee headcount increased from 5,252 as of March 31, 2003 to 5,445 as of March 31, 2004.
Maintenance expenses decreased by Php39 million, or 8%, to Php463 million mainly on account of lower repairs and maintenance costs, partially offset by higher site utility expenses due to the continued growth in the number of cell sites and other network facilities.
Rent expenses increased by Php21 million, or 5%, to Php454 million on account of higher transmission links and higher office space rentals for the increased number of wireless centers and space requirements for increased personnel. As of March 31, 2004, Smart had 3,082 GSM cell sites and 4,229 base stations, compared with 2,236 GSM cell sites and 2,953 base stations as of March 31, 2003.
Provision for doubtful accounts increased by Php39 million, or 11%, to Php387 million to cover for possible uncollectible carrier accounts.
Professional and other service fees increased by Php45 million, or 31%, to Php192 million mainly as a result of increased legal, consultancy and bill collection service fees.
Insurance and security services increased by Php39 million, or 22% to Php214 million mainly due to the growth in the number of Smarts cell sites and the increase in the cost of equipment insured as a result of the continued growth and expansion of its GSM network.
Taxes and licenses increased by Php23 million, or 16%, to Php167 million mainly due to an increase in Smarts business-related taxes, NTC supervision and regulation fees and disallowed input taxes.
Provision for inventory obsolescence increased by Php112 million, or 700%, to Php128 million to cover for specifically identified slow and non-moving handsets.
Other operating costs increased by Php192 million, or 66%, to Php484 million mainly due to increases in Smarts various business and operational-related expenses such as facility usage fees, training, travel, supplies, printing, communication and delivery expenses.
Fixed Line
Consolidated operating expenses related to our fixed line business in the first quarter of 2004 totaled Php8,101 million, an increase of Php24 million, compared to Php8,077 million in the same period in 2003. The increase was primarily due to higher non-cash expenses, mainly depreciation and amortization, partially offset by lower cash expenses, particularly compensation and benefits. As a percentage of our total fixed line operating revenues, fixed line-related operating expenses decreased to 69% in the first quarter of 2004, compared to 71% in the same period in 2003.
The following table shows the breakdown of our total consolidated fixed line-related operating expenses for the three months ended March 31, 2004 and 2003 and the percentage of each expense item to the total:
|
Three Months Ended March 31, |
||||||||||
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
||
|
2004 |
|
% |
|
2003(1) |
|
% |
|
Amount |
|
% |
|
(Unaudited) |
||||||||||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
Fixed line services: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization(2) |
Php3,468 |
|
43 |
|
Php3,297 |
|
41 |
|
Php171 |
|
5 |
Compensation and benefits |
1,760 |
|
22 |
|
1,901 |
|
23 |
|
(141) |
|
(7) |
Maintenance |
777 |
|
9 |
|
710 |
|
9 |
|
67 |
|
9 |
Provision for doubtful accounts |
708 |
|
9 |
|
776 |
|
10 |
|
(68) |
|
(9) |
Selling and promotions |
351 |
|
4 |
|
294 |
|
4 |
|
57 |
|
19 |
Professional and other service fees |
234 |
|
3 |
|
256 |
|
3 |
|
(22) |
|
(9) |
Rent |
224 |
|
3 |
|
234 |
|
3 |
|
(10) |
|
(4) |
Insurance and security services |
180 |
|
2 |
|
189 |
|
2 |
|
(9) |
|
(5) |
Taxes and licenses |
156 |
|
2 |
|
124 |
|
1 |
|
32 |
|
26 |
Other operating costs |
243 |
|
3 |
|
296 |
|
4 |
|
(53) |
|
(18) |
Total |
Php8,101 |
|
100 |
|
Php8,077 |
|
100 |
|
Php24 |
|
|
____________
(1) As restated to reflect the change in accounting policy on leases, as described in Note 3 Accounting Changes to the accompanying financial statements.
(2) Includes depreciation of capitalized foreign exchange losses from the revaluation of net dollar liabilities of Php1,157 million in the first quarter of 2004 and Php1,055 million in the same period in 2003.
Depreciation and amortization charges increased by Php171 million, or 5%, to Php3,468 million mainly due to an increase in depreciation of capitalized foreign exchange losses from the revaluation of our net dollar liabilities, which were incurred in acquiring various telecommunications equipment and higher depreciation of our regular asset base primarily resulting from additional completed projects.
Compensation and benefits decreased by Php141 million, or 7%, to Php1,760 million mainly due to a 14% reduction in headcount due to PLDTs manpower reduction program, partially offset by collective bargaining agreement-related increases in salaries and benefits of PLDT employees. See Note 17 Other Expenses Net to the accompanying financial statements for further discussion on PLDTs manpower reduction program.
Maintenance expenses increased by Php67 million, or 9%, to Php777 million primarily due to higher maintenance costs of inside plant facility, computer and peripherals and submarine cable in the first quarter of 2004 as compared to the same period in 2003, partially offset by lower maintenance costs on outside plant facilities.
Provision for doubtful accounts decreased by Php68 million, or 9% to Php708 million on account of lower provisions by PLDT for anticipated uncollectible accounts from various specifically identified domestic telecommunications carriers which have been provided for in 2003. PLDTs provision for doubtful accounts in the first quarter of 2004 and 2003 was equivalent to 6% and 6.2% of its operating revenues.
Selling and promotion expenses increased by Php57 million, or 19%, to Php351 million mainly as a result of PLDTs promotional activities in relation to various products and services, partially offset by reduced corporate public relations expenses.
Professional and other service fees decreased by Php22 million, or 9%, to Php234 million as a result of lower advisory fees due to a decrease in number of consultants in line with PLDTs cost management efforts, partially offset by higher collection agency fees on account of higher collection of final accounts and payment of higher legal fees in the first quarter of 2004 for various services.
Rent expenses decreased by Php10 million, or 4%, to Php224 million mainly due to reduced number of leased transponders, partially offset by higher rentals paid by PLDT to suppliers of customer premises equipment as part of its bundled services to corporate customers.
Insurance and security services decreased by Php9 million, or 5%, to Php180 million primarily due to lower amortization for prepaid insurance and a decrease in the number of security guards.
Taxes and licenses increased by Php32 million, or 26%, to Php156 million mainly on account of higher business-related taxes paid in 2004 as compared to 2003.
Other operating costs decreased by Php53 million, or 18%, to Php243 million mainly due to lower contracted employee cost, partially offset by higher office supplies consumption and printing costs.
Information and Communications Technology
Consolidated operating expenses associated with our information and communications technology business in the first quarter of 2004 totaled Php367 million, a decrease of Php75 million, or 17%, from Php442 million in the same period in 2003. The decline was largely due to the sale of our 51% interest in Contact World, a call center business, in June 2003. As a percentage of our information and communications technology operating revenues, operating expenses related to our information and communications technology business decreased to 83% in the first quarter of 2004 from 124% in the same period in 2003. The three largest expense items related to our information and communications technology business in the first quarter of 2004 were compensation and benefits, depreciation and amortization, and maintenance, representing 45%, 18% and 12%, respectively, of our total operating expenses related to this business. For the first quarter of 2003, compensation and benefits, depreciation and amortization and rent registered the largest expenses representing 27%, 23% and 17%, respectively.
Net Operating Income
Our consolidated net operating income in the first quarter of 2004 was Php10,473 million, an increase of Php3,381 million, or 48%, from Php7,092 million in the same period in 2003. Accordingly, our consolidated operating margin (net operating income as a percentage of operating revenues) improved to 39% in the first quarter of 2004 from 31% in the same period in 2003.
Wireless
Our wireless business segment recorded an operating income of Php6,805 million in the first quarter of 2004, an increase of Php2,991 million, or 78%, over Php3,814 million registered in the same period in 2003. Smart's operating income contribution in the first quarter of 2004 increased by Php2,961 million to Php6,804 million from Php3,843 million due primarily to the growth in Smarts subscriber base.
Fixed Line
In the first quarter of 2004, our fixed line business segment contributed a net operating income of Php3,593 million, higher by Php230 million, or 7%, than Php3,363 million in the same period in 2003 as the 2% growth of our fixed line operating revenues covered the slight increase in our fixed line-related expenses. PLDTs net operating income contribution to this business segment in the first quarter of 2004 was Php3,560 million, an increase of Php271 million, or 8%, compared to Php3,289 million in the same period in 2003.
Information and Communications Technology
In the first quarter of 2004, our information and communications technology business segment registered an operating income of Php75 million, compared to an operating loss of Php85 million posted in the same period in 2003. The significant turnaround reflects the contribution of ePLDTs call center business which contributed 55% of information and communications technology business operating income in the first quarter of 2004.
Interest Expense and Related Items - Net
Interest expense and related items net decreased by Php8 million, to Php2,948 million in the first quarter of 2004 from Php2,956 million in the same period in 2003 mainly due to the decrease in Smarts and Mabuhay Satellites interest expenses by Php95 million, and Php19 million, respectively, due to lower debt balances and lower interest rates mainly on foreign currency-denominated loans bearing floating interest rates. These decreases were partially offset by a net increase of Php104 million in PLDTs interest expense resulting from the peso depreciation that increased interest expense on foreign currency-denominated loans in peso terms and a decrease in interest charged to construction as more projects were completed.
Interest Income
Interest income increased by Php109 million, or 106%, to Php212 million in the first quarter of 2004 from Php103 million in the same period in 2003 mainly attributable to Smarts higher average cash balances.
Other Expenses Net
In the first quarter of 2004, consolidated other expenses net were Php625 million, a decrease of Php119 million, or 16%, compared to Php744 million in the same period in 2003 principally due to the decrease in manpower reduction cost of Php122 million, or 54%, to Php105 million in the first quarter of 2004 from Php227 million in the same period in 2003. The manpower reduction cost corresponded to 132 and 299 employees affected by PLDTs manpower reduction program in the first quarter of 2004 and 2003, respectively. See Note 17 Other Expenses Net to the accompanying financial statements for further discussion.
Income Before Income Tax and Minority Interest
Our income before income tax and minority interest in net income (losses) of consolidated subsidiaries in the first quarter of 2004 was Php7,090 million, representing an increase of Php3,599 million, or 103%, from Php3,491 million in the same period in 2003. On a non-consolidated basis, income before income tax and equity share in net income of our subsidiaries increased by Php88 million, or 34%, to Php344 million in the first quarter of 2004 as compared to Php256 million in the same period in 2003.
Our consolidated provision for income tax increased by Php850 million, or 85%, to Php1,854 million in the first quarter of 2004 from Php1,004 million in the same period in 2003. On a non-consolidated basis, our provision for income tax was Php127 million in the first quarter of 2004, an increase of Php61 million, or 92%, from Php66 million in the same period in 2003.
In the first quarter of 2004, our effective corporate tax rates were lower than the 32% statutory corporate tax rate due to differences between our consolidated and non-consolidated income as shown in our financial statements and our taxable income. These differences arose from the following:
• the effect of a three-year income tax holiday granted to Smart by the Philippine Board of Investments in connection with the pioneer status it awarded to Smart's
GSM network expansion project;
• income already subjected to final tax or lower tax rate; and
• equity in net income of our associates, which has already been subjected to tax and therefore, as income to PLDT, is no longer subject to income tax.
Smart's three-year income tax holiday, which will expire in May 2004, applies to the incremental income generated from its GSM network expansion. The income tax holiday is computed by applying the exemption rate against the income tax due on GSM operations. The exemption rate is computed by dividing the incremental GSM revenues by eligible GSM revenues (both gross of interconnection revenues) where the incremental GSM revenues are derived by deducting the BOI-prescribed base figure (Smarts gross GSM revenue in 2000) from the total GSM revenues. After adjusting for non-deductible items and unrealized and realized foreign exchange losses, Smarts net taxable income is multiplied by the statutory corporate income tax rate of 32% and the exemption rate. The resulting figure is the income tax holiday that will be deducted from the income tax due on GSM revenues with the difference being the income tax due for the period. We expect our consolidated effective tax rate to increase following the expiration of Smarts tax holiday.
Net Income
As a result of the factors discussed above, our consolidated net income for the first quarter of 2004 was Php5,240 million, representing an increase of Php2,757 million, or 111%, over our restated consolidated net income of Php2,483 million in the same period in 2003. This increase was principally due to Smarts net income contribution of Php5,152 million for the first quarter of 2004, a significant improvement of Php2,379 million, or 86%, over its net income contribution of Php2,773 million in the same period in 2003 and the non-recurrence of impairment losses of Php387 million recognized by ePLDT in the first quarter of 2003 relating to certain equipment of an investee company. On a non-consolidated basis, PLDT's net income in the first quarter of 2004, before taking into account its equity share in net income of investees, was Php217 million compared to Php190 million in the same period in 2003.
Basic and diluted earnings per share, or EPS, of common shares increased to Php28.32 and Php26.74, respectively, in the first quarter of 2004 from basic and diluted EPS of Php12.15 and Php11.31, respectively, in the same period in 2003, after giving retroactive effect to common share equivalents. See Note 19 Earnings Per Common Share to the accompanying financial statements for further discussion.
Liquidity and Capital Resources
The following table shows our consolidated and non-consolidated cash flows for the three months ended March 31, 2004 and 2003 as well as consolidated and non-consolidated capitalization and other selected financial data as of March 31, 2004 and 2003:
|
Consolidated |
|
Non-Consolidated |
|||||
|
|
Three Months Ended March 31, |
||||||
|
2004 |
|
2003(1) |
|
2004 |
|
2003(1) |
|
|
(Unaudited) |
|||||||
(in millions) |
|
|
|
|
|
|
|
|
Cash Flows |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
Php16,679 |
|
Php11,920 |
|
Php8,484 |
|
Php5,223 |
|
Net cash used in investing activities |
4,687 |
|
2,220 |
|
886 |
|
862 |
|
Capital expenditures |
4,299 |
|
1,890 |
|
797 |
|
706 |
|
Net cash used in financing activities |
7,237 |
|
8,038 |
|
4,923 |
|
5,640 |
|
Net increase (decrease) in cash and cash equivalents |
4,777 |
|
1,695 |
|
2,750 |
|
(1,266) |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Non-Consolidated |
|||||
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
|
|
2004 |
|
2003(1) |
|
2004 |
|
2003(1) |
|
|
(Unaudited) |
|
(Audited) |
|
(Unaudited) |
|
(Audited) |
|
(in millions) |
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
|
|
Notes payable |
Php2,132 |
|
Php2,133 |
|
Php1,982 |
|
Php1,933 |
|
Current portion of long-term debt |
25,701 |
|
23,742 |
|
17,758 |
|
15,850 |
|
Long-term debt - net of current portion |
129,127 |
|
133,939 |
|
113,262 |
|
116,392 |
|
Total debt |
Php156,960 |
|
Php159,814 |
|
Php133,002 |
|
Php134,175 |
|
Stockholders equity |
98,451 |
|
93,578 |
|
98,451 |
|
93,578 |
|
|
Php255,411 |
|
Php253,392 |
|
Php231,453 |
|
Php227,753 |
|
|
|
|
|
|
|
|
|
|
Other Financial Data |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
Php24,040 |
|
Php19,263 |
|
Php8,028 |
|
Php5,278 |
|
Property, plant and equipment - net |
243,455 |
|
244,427 |
|
186,716 |
|
188,152 |
|
Total assets |
301,412 |
|
297,626 |
|
266,244 |
|
261,184 |
|
Net debt(2) |
132,920 |
|
140,551 |
|
124,974 |
|
128,897 |
|
_______________
(1) As restated to reflect the change in accounting policy on leases, as described in Note 3 Accounting Changes to the accompanying financial statements.
(2) Total debt less cash and cash equivalents.
As of March 31, 2004, our consolidated cash and cash equivalents totaled Php24,040 million. Principal sources of consolidated cash and cash equivalents in the first quarter of 2004 were cash flows from operations amounting to Php16,679 million and drawings from long-term credit facilities aggregating Php1,143 million. These funds were used principally for capital outlays of Php4,299 million, including capitalized interest of Php152 million; debt principal payments of Php5,633 million; and interest payments of Php2,354 million.
Operating Activities
On a consolidated basis, net cash flows from operating activities in the first quarter of 2004 increased by Php4,759 million, or 40%, to Php16,679 million from Php11,920 million in the same period in 2003.
A growing portion of our consolidated cash flow is generated by our wireless business, which accounted for 55% of our consolidated operating revenues in the first quarter of 2004, compared to 48% in the same period in 2003. Revenues from our fixed line and information and communications technology services accounted for 43% and 2%, respectively, of our consolidated operating revenues in the first quarter of 2004 and 50% and 2%, respectively, for the first quarter of 2003.
PLDT's contribution to our consolidated cash flows from operations in the first quarter of 2004 was Php8,484 million, representing an increase of Php3,261 million, or 62%, from Php5,223 million in the same period in 2003. The increase was due to an improved collection of receivables from international carriers during the first quarter of 2004 and higher level of settlements of current liabilities in the first quarter of 2003.
Our subsidiaries, particularly Smart, made significant contributions to our cash from operations. In the first quarter of 2004, Smart generated cash from operations of Php7,707 million, or 46% of our consolidated cash flows from operations compared to Php5,981 million, or 50% in the same period in 2003. Smarts strong cash flows reflect the continuing strong performance of its cellular business. However, Smart is subject to loan covenants that restrict its ability to pay dividends, redeem preferred shares, make distributions to PLDT or otherwise provide funds to PLDT or any associate without the consent of its lenders. After receiving approvals from Finnvera and certain lenders for the payment of dividends to PLDT, Smart paid dividends in the amount of Php4,300 million to PLDT in June 2003, representing 70% of Smarts 2002 net income and paid additional dividends in the amount of Php1,866 million to PLDT in November 2003, equivalent to the remaining 30% of its 2002 net income. Similar waivers are currently being sought for payment of dividends to PLDT equivalent to 70% of Smarts 2003 net income. We cannot assure you that Smart will be able to obtain such waivers or any other waivers in the future, or what amount, if any, Smart would be permitted or financially able to distribute. We expect that we will have difficulty meeting our debt payment obligations if we do not continue to receive cash dividends from Smart.
As of March 31, 2004, related party liabilities included (1) PLDTs payables to Smart amounting to Php3,843 million, representing interconnection fees; (2) Smarts liabilities to Piltel totaling Php1,430 million, relating mostly to prepaid air time reloads for Talk N Text subscribers through Smart Load, and (3) Piltels liabilities to PLDT amounting to Php1,012 million, representing interconnection charges. See Related Party Transactions in this report and Note 15 Related Party Transactions to the accompanying financial statements for further discussion.
Investing Activities
On a consolidated basis, net cash used in investing activities in the first quarter of 2004 of Php4,687 million increased by Php2,467 million, or 111%, compared to Php2,220 million in the same period in 2003. This increase was primarily the result of higher aggregate capital spending. On a non-consolidated basis, net cash used in investing activities was Php886 million in the first quarter of 2004 compared to Php862 million in the same period in 2003.
Our consolidated capital expenditures in the first quarter of 2004 totaled Php4,299 million, an increase of Php2,409 million, or 127%, from Php1,890 million in the same period of 2003 primarily due to PLDTs and Smarts increased capital spending. Smart's capital spending of Php3,460 million in the first quarter of 2004 was used to further expand and upgrade its GSM
and transmission network facilities to increase capacity and coverage in respect of basic and advanced cellular services. PLDT's capital spending of Php797 million was principally used to finance the expansion of its fixed line data and network services. ePLDT and its subsidiaries capital spending of Php32 million was used to primarily fund its VitroTM, Infocom and call center business operations. The balance represented other subsidiaries capital spending. Consolidated capital expenditures in the first quarter of 2003 amounted to Php1,890 million, of which Php706 million, Php1,119 million, Php10 million and Php38 million were attributable to PLDT, Smart, ePLDT and PLDT Global, respectively.
Under the terms of Piltels debt restructuring plan, PLDT issued a Letter of Support for the benefit of Piltel and its creditors under which PLDT has agreed to cover any funding shortfalls of Piltel up to a maximum amount of US$150 million. 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 Php571 million (US$11 million) in 2002. There was no drawdown under the Letter of Support in 2003 nor in the first quarter of 2004. Drawings under the PLDT Letter of Support are converted into U.S. dollars at the prevailing exchange rates at the time of drawdown. As of March 31, 2004, the remaining undrawn balance under the Letter of Support was US$50 million (approximately Php2,822 million). If, among other things, Piltel's financial and operating performance were to deteriorate or any amounts were required to be paid to Piltel's unrestructured creditors in cash to settle their claims (aggregate principal of US$1 million as of December 31, 2003), additional drawings under the Letter of Support would likely be required to provide all or a portion of the funds needed by Piltel. We cannot assure that additional amounts will not have to be drawn under the Letter of Support nor can we predict when the remaining undrawn balance under the Letter of Support will be exhausted. See Note 9 Investments to the accompanying financial statements for further discussion.
Financing Activities
On a consolidated basis, we used net cash of Php7,237 million for financing activities in the first quarter of 2004, compared to Php8,038 million in the same period in 2003. On a non-consolidated basis, net cash used in financing activities in the first quarter of 2004 was Php4,923 million, compared to Php5,640 million in the same period in 2003. The net cash used in financing activities in the first quarter of 2004 was mainly attributable to debt repayments by PLDT in line with its ongoing debt reduction program.
Debt Financing
Additions to our consolidated long-term debt in the first quarter of 2004 totaled Php1,143 million, all of which came from PLDT's drawings, primarily from loan facilities extended and/or guaranteed by various export credit agencies and refinancing facilities used to repay maturing debts. Payments in respect of principal and interest amounted to Php5,633 million and Php2,354 million, respectively, in the first quarter of 2004.
Our consolidated indebtedness as of March 31, 2004 was Php156,960 million, representing a decrease of Php2,854 million, or 2%, compared to Php159,814 million as of December 31, 2003. This decrease was mainly due to the reductions of Php1,173 million and Php1,373 million in PLDTs and Smarts indebtedness, respectively. PLDTs indebtedness decreased by 1% to Php133,002 million as of March 31, 2004 from Php134,175 million as of December 31, 2003, due to PLDTs debt repayments in line with PLDTs efforts to reduce overall indebtedness. Smart's indebtedness as of March 31, 2004 was Php19,213 million, a decrease of 7% from Php20,586 million as of December 31, 2003.
As of March 31, 2004, PLDT had undrawn committed dollar-denominated long-term credit facilities in the aggregate amount of US$101 million, inclusive of the remaining US$30 million undrawn portion of the US$149 million KfW refinancing facility, US$8 million undrawn portion of the US$12 million term loan facility extended by DEG-Deutsche Investitions-und Entwicklungsgesellschaft mbH, or DEG, under an agreement dated May 29, 2003 and the undrawn JP¥5,615 million syndicated term loan facility supported by Nippon Export and Investment Insurance of Japan under an agreement dated June 11, 2003. Smart also had undrawn committed dollar-denominated long-term credit facilities as of March 31, 2004 in the aggregate amount of US$40 million under the US$100 million NEXI loan facility signed by Smart in November 2002 which was drawn on April 5, 2004. In addition, Smart still has available facilities under its 50 million Framework Agreement with HypoVereinsbank up to a maximum aggregate amount of 44 million.
After giving effect to the anticipated application of existing refinancing facilities, the scheduled maturities of our outstanding long-term debt as of March 31, 2004 are as follows:
|
Consolidated |
|
Non-consolidated |
|
(in millions) |
||
Maturity |
(Unaudited) |
||
|
|
|
|
2004(1) |
Php19,535 |
|
Php13,519 |
2005 |
30,579 |
|
22,524 |
2006 |
28,957 |
|
21,877 |
2007 |
28,263 |
|
25,611 |
2008 |
4,640 |
|
4,635 |
2009 and onwards |
42,854 |
|
42,854 |
___________
(1) April 1, 2004 through December 31, 2004.
Approximately Php111,974 million principal amount of our consolidated outstanding long-term debt as of March 31, 2004 is scheduled to mature over the period from 2004 to 2008. Of this amount, approximately Php88,166 million is attributable to PLDT, Php19,213 million to Smart, and the remainder to Mabuhay Satellite, PLDT-Maratel and ePLDT.
Covenants
Our debt instruments contain restrictive covenants, including covenants that prohibit us from paying common dividends, and require us to comply with specified financial ratios and other financial tests, calculated in conformity with accounting principles generally accepted in the Philippines, at relevant measurement dates, principally at the end of each quarterly period.
The financial tests under our debt instruments, as amended, include maintaining a positive tangible net worth and compliance with the following ratios:
• interest coverage ratio, calculated on a non-consolidated basis and excluding PLDTs equity share in net earnings or losses of investees, of not less than 180% or 200%;
• total debt to EBITDA on a non-consolidated basis of not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1 from September 2004 to December 2004 and not more than 4.0:1 from March 2005 and thereafter;
• long-term indebtedness to appraised 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 a non-consolidated basis, ranging from not less than 0.9:1 to not less than 1.2:1;
• debt service coverage ratio on a non-consolidated basis of at least 1.1:1; and
• debt to free cash flow ratio on a non-consolidated basis of not more than 5.5:1 from March 31, 2004 to June 30, 2004, not more than 5.0:1 from September 30, 2004 to June 30, 2005, not more than 4.5:1 from September 30, 2005 to June 30, 2006, and not more than 4.0:1 from September 30, 2006 onwards.
In addition, some of PLDTs debt instruments contain covenants requiring PLDT to comply with specified financial tests on a consolidated basis. These include:
• long-term debt to appraised value of equity/tangible net worth of not more than 2.33:1;
• total debt to EBITDA of not more than 4.5:1 in 2004 and not more than 4.0:1 in 2005 and thereafter;
• current ratio of not less than 0.75:1 to 0.9:1; and
• interest coverage ratio of not less than 200%.
The principal factors that can negatively affect our ability to comply with these financial ratios and other 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 that may be recognized by PLDT and its consolidated subsidiaries and increases in our interest expenses. Interest expense may increase as a result of various factors including issuance of new debt, the refinancing of lower cost indebtedness by higher cost indebtedness, depreciation of the peso, the lowering of PLDTs credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions. Since approximately 96% of PLDTs total debt is denominated in foreign currencies, principally in U.S. dollars, many of these financial ratios and other tests are negatively affected by any weakening of the peso. As of March 31, 2004, the peso depreciated by 1% to Php56.216 to US$1.00, from Php55.586 to US$1.00 as of December 31, 2003. The peso has been subjected to significant fluctuations. In 2003, the peso depreciated to Php55.075 to US$1.00 on March 12, 2003 then recovered to a high of Php52.021 to US$1.00 on May 8, 2003 only to depreciate again to a low of Php55.767 to US$1.00 on November 27, 2003. In the first quarter of 2004, the peso appreciated to a high of Php55.142 on January 6, 2004 but depreciated to a low of Php56.429 on March 22, 2004.
PLDT's ability to maintain compliance with financial covenant requirements measured on a non-consolidated basis is principally affected by the performance of PLDTs fixed line business. PLDT cannot be assured of the benefit of net revenues and cash flows generated by Smart and PLDTs other investees in assisting in complying with non-consolidated covenants.
We have maintained compliance with all of our financial ratios and covenants as measured under our loan agreements. However, if negative factors adversely affect our financial ratios, we may be unable to maintain compliance with these ratios and covenants or be unable to incur new debt. Under some of our loan agreements, certain of our financial ratios have become more restrictive at the end of the second and fourth quarters of 2003 and at the end of the first quarter of 2004 and will continue to become more restrictive in increments thereafter, which will make it more difficult for PLDT to maintain compliance with this ratio in the future. Inability to comply with our financial ratios and covenants or raise new financing could result in a declaration of default and acceleration of some or all of our indebtedness. The terms of some of our debt instruments have no minimum amount for cross-default.
Please see Note 12 Long-term Debt for a detailed discussion of our covenants.
Financing Requirements
We believe that our available cash, including cash flow from operations and drawings from existing and anticipated credit facilities, will provide sufficient liquidity to fund our projected operating, investment, capital expenditures and debt service requirements for the next 12 months.
We continue to pursue various initiatives and financing transactions with the objective of further improving the balance between our cash flows and debt service requirements and reducing our overall indebtedness. In addition, PLDT has reduced its capital expenditures and investments, suspended dividend payments to common shareholders and increased its application of available cash to reduce its indebtedness. Further, we expect to benefit from increasing revenue and cash flow contributions from our subsidiaries, particularly Smart. Smart is currently seeking to obtain waivers from certain lenders for the payment of dividends to PLDT equivalent to 70% of its 2003 net income. See Operating Activities for further details.
Credit Ratings
Our credit ratings may significantly affect the terms of our prospective financings, particularly financing costs. None of our existing indebtedness contains provisions under which credit rating downgrades would trigger a default, changes in applicable interest rates or other similar terms and conditions.
On April 8, 2004, Fitch Ratings upgraded PLDT's long-term foreign currency and local currency ratings to "BB" from "BB-" (BB minus) while the rating of PLDT's convertible preferred stock was similarly upgraded to "B+" (B plus) from "B". The rating action follows a sustained period of improvement in PLDT's operating and financial profile mainly due to the growth of Smart. The stable outlook also reflects Fitch's view that neither the existing competitive landscape nor the planned resumption of common share dividends by PLDT would materially disrupt our deleveraging efforts.
On March 23, 2004, Standard and Poor's Ratings Group affirmed its "BB" rating and stable outlook on PLDT.
On January 27, 2004, PLDTs foreign currency senior unsecured debt rating was upgraded by Moodys Investors Service to Ba2 from a recent Ba3 as of July 29, 2003 and preferred stock rating moved up to B1 from B2. The rating reflects continued improvements in the operating performance of Smart and the expectation of on-going free cash flow to help repay debt maturities in the coming years. The negative outlook on PLDT's rating is constrained, reflecting Moody's decision to downgrade the Philippine Government's long-term foreign currency bond rating to Ba2 with a negative outlook also on January 27, 2004.
On December 10, 2003, PhilRatings affirmed its rating of PRS1 for PLDTs Php2 Billion One-Year Peso Notes which registration was rendered effective by the Philippine Securities and Exchange Commission on April 9, 2003. PRS1 is the highest rating possible on PhilRatings scale for short-term securities and is based on the issuers strongest capability for timely payment of debt on both principal and interest.
Off-Balance Sheet Arrangement
On October 10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, with a foreign institution, or the Purchaser, under which PLDT agreed (1) to sell its receivables from certain eligible foreign carriers for an advance payment of US$50 million, with a balance of US$35 million as of March 31, 2004, and (2) to service, administer and collect the receivables on behalf of the Purchaser. Under the RPD, the Purchaser will have no recourse to PLDT should an eligible carrier fail or refuse to settle the assigned/purchased receivables, except if PLDT commits a breach on its representations and warranties. For the three months ended March 31, 2004 and 2003, receivables sold under the RPD amounted to US$3 million (Php167 million) and US$3 million (Php165 million), respectively.
Equity Financing
Through our subscriber investment plan, or SIP, which provides postpaid fixed line subscribers the opportunity to buy shares of our 10% cumulative convertible preferred shares as part of the upfront payments collected from subscribers, PLDT was able to raise Php3 million in the first quarter of 2004 and Php40 million in the same period in 2003. As approved by the NTC, the SIP was made optional in 2003 from being compulsory in earlier years.
Cash dividend payments in the first quarter of 2004 amounted to Php393 million, compared to Php368 million in the same period in 2003, all of which were paid solely to preferred shareholders of PLDT. The most recent cash dividend paid by PLDT to its common shareholders was in March 2001, no dividends were paid to common shareholders in 2003 and in the first quarter of 2004.
High and low sales prices for PLDT's common shares on the Philippine Stock Exchange, or PSE, and Amercian Depositary Shares, or ADSs, on the New York Stock Exchange, or NYSE, for the first quarter of 2004 and 2003 were as follows:
|
PSE |
NYSE |
||
|
High |
Low |
High |
Low |
2004 |
Php1,050.00 |
Php810.00 |
US$18.60 |
US$14.38 |
January |
1,050.00 |
860.00 |
18.60 |
14.90 |
February |
980.00 |
810.00 |
18.00 |
14.38 |
March |
970.00 |
885.00 |
17.43 |
15.38 |
|
|
|
|
|
2003 |
337.50 |
265.00 |
6.18 |
4.85 |
January |
337.50 |
265.00 |
6.18 |
4.85 |
February |
312.50 |
277.50 |
5.60 |
5.12 |
March |
315.00 |
285.00 |
5.81 |
5.11 |
Contractual Obligations and Commercial Commitments
Contractual Obligations
The following table discloses our contractual obligations outstanding as of March 31, 2004:
|
Payments Due by Period |
||||||||
|
Total |
|
Within |
|
2-3 |
|
4-5 |
|
After 5 |
|
|
|
(Unaudited) |
|
|
||||
(in millions) |
|
|
|
|
|
|
|
|
|
Long-term debt obligations |
Php154,828 |
|
Php25,701 |
|
Php67,535 |
|
Php18,903 |
|
Php42,689 |
Long-term lease obligations: |
|
|
|
|
|
|
|
|
|
Operating Lease |
5,391 |
|
1,374 |
|
2,249 |
|
1,029 |
|
739 |
Capital Lease |
1,162 |
|
401 |
|
594 |
|
167 |
|
|
Unconditional purchase obligations(1) |
12,730 |
|
3,986 |
|
2,279 |
|
2,249 |
|
4,216 |
Other long-term obligations |
22,315 |
|
|
|
|
|
13,881 |
|
8,434 |
Total contractual obligations |
Php196,426 |
|
Php31,462 |
|
Php72,657 |
|
Php36,229 |
|
Php56,078 |
_____________
(1) The amounts disclosed in the table above are based on the original Air Time Purchase Agreement with ACeS International Limited, or AIL. In 2003, a Standstill Agreement was executed to cover, among other matters, the amended minimum and supplemental air time payment provisions for the year 2003.
Long-term Debt Obligations
For a discussion of our long-term debt obligations, see Note 12 Long-term Debt to the accompanying financial statements.
Long-term Operating Lease Obligations
Transponder Lease Agreement. On December 28, 1995, PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, which was amended on May 10, 2000. This agreement has a term of ten years commencing on December 18, 1997, unless earlier terminated in accordance with the terms thereof. The annual basic rent for the transponders was US$13 million as of the first quarter of 2004, of which PLDTs aggregate remaining obligation under this agreement was approximately Php2,656 million.
Domestic Fiber Optic Network Submerged Plant Agreement. On July 4, 2000, PLDT entered into an agreement with NTT World Engineering Marine Corporation for submarine cable repair and related services for the maintenance of PLDT's domestic fiber optic network submerged plant for a period of five years up to July 4, 2005. Under this agreement, PLDT is required to pay NTT World Engineering Marine Corporation a fixed annual standing charge of US$2 million, excluding cost for the use of a remotely-operated submersible vehicle at US$5,000 for every day of use and repair cost computed at US$19,000 per day of actual repair. As of March 31, 2004, the aggregate remaining obligation under this agreement was approximately Php157 million.
Digital Passage Service Contracts. PLDT has existing Digital Passage Service Contracts with foreign telecommunication administrations for several dedicated circuits to various destinations for ten to 25 years expiring at various dates. As of March 31, 2004, the aggregate remaining obligation under these contracts amounted to approximately Php39 million.
License Agreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius. PLDT entered into a license agreement with Mobius pursuant to which Mobius has granted PLDT a non-exclusive, non-assignable and non-transferable license for the use of computer software components. Under this agreement, Mobius is also required to provide maintenance services for a period of one year at no additional maintenance charge. PLDT may purchase maintenance services upon expiration of the first year for a fee of 15% of the current published license fee. As of March 31, 2004, the aggregate obligation under this agreement was approximately Php60 million.
Other Long-term Operating Lease Obligations. We have various long-term lease contracts for periods ranging from two to ten years covering certain offices, warehouses, cell sites and telecommunication equipment locations. In particular, Smart has lease obligations aggregating Php2,410 million in respect of office and cell site rentals with over 2,000 lessors nationwide.
Long-term Capital Lease Obligations
Municipal Telephone Projects. In 1993, PLDT entered into two lease agreements with the Philippine Department of Transportation and Communications, or DOTC, covering telecommunications facilities established under the Municipal Telephone Act. Under these agreements, PLDT was granted the exclusive right to perform telecommunications management services, to expand services, and to promote the use of the DOTC-contracted facilities in certain covered areas for a period of 15 years. Title to the properties shall be transferred to PLDT upon expiration of the lease term. As of March 31, 2004, the aggregate remaining obligation under this agreement was approximately Php820 million. In case of cancellation, PLDT is liable to pay Php100 million under each of the two contracts as liquidated damages.
Other Long-term Capital Lease Obligations. The PLDT Group has various long-term lease contracts for a period of three years covering various office equipment. In particular, Smart has capital lease obligations aggregating Php337 million in respect of office equipment.
Unconditional Purchase Obligations
Air Time Purchase Agreement with ACeS International Limited. PLDT is a party to a Founder NSP, or National Service Provider, Air Time Purchase Agreement with AIL, which was amended in December 1998, under which PLDT is granted the exclusive right to sell ACeS services in the Philippines. In exchange, the Air Time Purchase Agreement states that PLDT has to purchase from AIL a minimum of US$5 million worth of air time annually over ten years commencing on the date of commercial operations of the Garuda I satellite. In the event AILs aggregate billing revenue is less than US$45 million in any given year, the Air Time Purchase Agreement also states that PLDT has to make supplemental air time purchase payments not to exceed US$15 million per year during the ten-year term.
As of March 31, 2004, PLDTs aggregate remaining minimum obligation under the original Air Time Purchase Agreement was approximately Php12,079 million. See Note 15 Related Party Transactions and Note 21 Provisions and Contingencies for further details relating to the Air Time Purchase Agreement with AIL.
International Affiliate Agreement with VeriSign, Inc., or VeriSign. On September 15, 2000, ePLDT entered into an agreement with VeriSign for the non-exclusive, non-transferable right and license to use the VeriSign software, brand and Certification Practice Statement for the purpose of approving, issuing, suspending or revoking digital certificates for users of the internet or similar open systems in the Philippines for a period of seven years. Under this agreement, ePLDT is required to pay VeriSign a certain percentage of the revenue derived from the services subject to minimum annual royalty payments aggregating to US$11 million, which was subsequently reduced to US$1 million, for the seven-year contract period. In addition, ePLDT was required to pay an annual support fee totaling US$0.5 million during the first year and US$0.3 million in each year thereafter.
Effective July 1, 2003, VeriSign has agreed to amend the agreement and issued Addendum 6 to write-off all past due invoices and payments owed to VeriSign, which were invoiced or scheduled to be invoiced under the agreement prior to this Addendum 6. All royalty payments and annual support fees due through June 2003 will be part 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 from US$0.3 million to US$ 40,000 and for contract years 5-7 (September 2004-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% of suggested retail price to 25% of suggested retail price for both enterprise and internet products for 12 months starting July 2003 and negotiable thereafter. As of March 31, 2004, ePLDTs aggregate remaining minimum obligation under this agreement was approximately Php27 million pertaining to annual support fee.
License Purchase Agreement with I-Contact Solutions Pte. Ltd. On April 2, 2003, iPlus Intelligent Network Inc., or iPlus, a wholly-owned subsidiary of ePLDT and the Philippines pioneer in IP-based IT response center, entered into an Application Services Provider, or ASP, and Reseller Contract with I-Contact Solutions Pte. Ltd., or I-Contact, of Singapore. Under the agreement, iPlus will purchase licenses of the CosmoCall Universe IP-based contact center solution. CosmoCall Universe supports multi-channel customer interactions including telephone, web chat, web voice, web video, web collaboration, email and voicemail in one high capacity, high availability, multi-tenant platform. CosmoCall Universe is a complete, unified contact center suite that includes ACD, IVR, CTI, predictive dialing, multimedia recording and a complement of powerful management applications. The aggregate value of these licenses is US$2.1 million and these will be delivered quarterly over a two-year period. Further to the agreement, I-Contact will appoint iPlus as the exclusive reseller and ASP for the Philippine market and will provide iPlus with all the necessary support in terms of sales, marketing, and technical services. As of March 31, 2004, iPlus aggregate remaining obligation under this agreement was approximately Php84 million.
Other Unconditional Purchase Obligations. PLDT has various purchase contracts for periods ranging from two to three years covering the use of fraud management system and satellite hub and remote VSAT network systems.
Other Long-term Obligations
Mandatory Conversion and Purchase of Shares. As of March 31, 2004, PLDT had issued a total of 3 million series V convertible preferred shares, 5 million series VI convertible preferred shares and 4 million series VII convertible preferred shares in exchange for a total of 58 million series K class I convertible preferred shares of Piltel pursuant to the debt restructuring of Piltel.
Each share of series V, VI and VII convertible preferred shares is convertible 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 of the series V and series VI convertible preferred shares and on the eighth anniversary of the issue date of the series VII convertible preferred shares, the remaining outstanding shares under these series will be mandatorily converted to PLDT common shares. Under a put option exercisable for 30 days, holders of common shares received on mandatory conversion will be able 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.
As of March 31, 2004, 145,320 series V convertible preferred shares and 531,251 series VI convertible preferred shares had been converted into PLDT common shares. The aggregate value of the put option based on outstanding shares as of March 31, 2004 was Php22,315 million, of which Php13,881 million is payable on June 4, 2008 and Php8,434 million on June 4, 2009 if all of the outstanding series V, VI and VII convertible preferred shares were mandatorily converted and all the underlying common shares were put to PLDT. The market value of the underlying common shares was Php10,541 million, based on the market price of PLDTs common share of Php950 per share as of March 31, 2004.
Commercial Commitments
As of March 31, 2004, our outstanding commercial commitments, in the form of letters of credit, amounted to Php4,405 million. These commitments will expire within one year.
In October 1998, Smart entered into a Frame Supply Contract with Nokia Telecommunications OY for the supply of hardware, software and documentation for 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 over of the GSM network. In August 2001, Smart issued a Master Purchase Order, or MPO, in the amount of US$200 million in favor of Nokia Networks OY for the purchase of additional equipment to expand its GSM cellular network. The US$200 million MPO was completed in November 2003. On May 30, 2003, Smart entered into a Technical Support Services Order, or TSSO, with Nokia in the amount of US$8 million. This TSSO has been fully served as of December 31, 2003.
In January 2004, Smart signed a new MPO in favor of Nokia amounting to US$117 million (Phase 7 under the Frame Supply Contract between Smart and Nokia). Smart is, however, under no legal obligation to incur these expenditures.
As of March 31, 2004, Smart had no guarantee obligations, standby repurchase obligations or other commercial commitments.
Quantitative and Qualitative Disclosures about Market Risks
Our operations are exposed to various risks, including liquidity risk, foreign exchange risk and interest rate risk. The importance of managing these risks has significantly increased in light of considerable change and continuing volatility in the Philippine and international financial markets. With a view to managing these risks, we have incorporated financial risk management functions in our organization, particularly in our treasury operations.
Liquidity Risk Management
We seek to manage our liquidity profile to be able to finance our capital expenditures and service our maturing debts. To cover our financing requirements, we intend to use internally generated funds and proceeds from debt and equity issues and sales of certain assets.
As part of our liquidity risk management program, we regularly evaluate our projected and actual cash flow information and continuously assess conditions in the financial markets for opportunities to pursue fund-raising initiatives. These initiatives may include bank loans, export credit agency-guaranteed facilities, and debt capital and equity market issues.
Foreign Exchange Risk Management
As of March 31, 2004, the Philippine peso had depreciated against the U.S. dollar to Php56.216 to US$1.00 from Php53.604 to US$1.00 as of March 31, 2003, which in turn represented a depreciation against the U.S. dollar from Php51.096 to US$1.00 at March 31, 2002. In the first quarter of 2004, PLDT capitalized net foreign exchange losses of Php1,217 million, as compared to Php910 million in the same period in 2003. Of these capitalized net foreign exchange losses, Php1,287 million in the first quarter of 2004 and Php819 million in the same period in 2003, were attributable to foreign currency-denominated liabilities used to finance our capital investments and were therefore recorded as additions to the carrying value of the related property accounts.
The following table shows our consolidated and non-consolidated foreign currency-denominated monetary assets and liabilities and their peso equivalents as of March 31, 2004 and as of December 31, 2003:
|
March 31, 2004(1) |
|
December 31, 2003(2) |
|||||||||||||
|
U.S. dollars |
|
Pesos |
|
U.S. dollars |
|
Pesos |
|||||||||
|
|
(Unaudited) |
|
|
(in millions) |
|
(Audited) |
|
|
|
||||||
Consolidated |
|
|
|
|
|
|
|
|||||||||
Assets |
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalents |
US$205 |
|
Php11,276 |
|
US$146 |
|
Php8,098 |
|||||||||
Receivables-net |
178 |
|
9,476 |
|
195 |
|
10,855 |
|||||||||
|
383 |
|
20,752 |
|
341 |
|
18,953 |
|||||||||
Liabilities |
|
|
|
|
|
|
|
|||||||||
Notes payable |
|
|
|
|
3 |
|
150 |
|||||||||
Accounts payable |
66 |
|
2,490 |
|
60 |
|
3,322 |
|||||||||
Accrued expenses and other current liabilities |
85 |
|
4,669 |
|
25 |
|
1,342 |
|||||||||
Long-term debt |
2,749 |
|
150,888 |
|
2,819 |
|
153,542 |
|||||||||
Deferred credits and other noncurrent liabilities |
206 |
|
11,584 |
|
209 |
|
11,613 |
|||||||||
|
3,106 |
|
169,631 |
|
3,116 |
|
169,969 |
|||||||||
Net foreign currency-denominated liabilities |
US$2,723 |
|
Php148,879 |
|
US$2,775 |
|
Php151,016 |
|||||||||
Non-Consolidated |
|
|
|
|
|
|
|
|||||||||
Assets |
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalents |
US$118 |
|
Php6,631 |
|
US$54 |
|
Php3,014 |
|||||||||
Receivables-net |
120 |
|
6,750 |
|
134 |
|
7,463 |
|||||||||
|
238 |
|
13,381 |
|
188 |
|
10,477 |
|||||||||
Liabilities |
|
|
|
|
|
|
|
|||||||||
Accounts payable |
8 |
|
464 |
|
16 |
|
874 |
|||||||||
Accrued expenses and other current liabilities |
65 |
|
3,655 |
|
7 |
|
386 |
|||||||||
Long-term debt |
2,337 |
|
127,707 |
|
2,373 |
|
128,757 |
|||||||||
Deferred credits and other noncurrent liabilities |
206 |
|
11,584 |
|
209 |
|
11,613 |
|||||||||
|
2,616 |
|
143,410 |
|
2,605 |
|
141,630 |
|||||||||
Net foreign currency-denominated liabilities |
US$2,378 |
|
Php130,029 |
|
US$2,417 |
|
Php131,153 |
|||||||||
________________
(1) The exchange rate used was Php56.216 to US$1.00.
(2) The exchange rate used was Php55.586 to US$1.00.
While a certain percentage of our revenues is either linked to or denominated in U.S. dollars, substantially all of our indebtedness, a substantial portion of our capital expenditures and a portion of our operating expenses are denominated in foreign currencies, mostly in U.S. dollars.
As of March 31, 2004, approximately 96% of both our total consolidated and non-consolidated debts were denominated in foreign currencies. Of our foreign currency-denominated debts, 7% and 8% are in Japanese yen, on a consolidated and 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 will increase both the principal amount of our unhedged foreign currency-denominated debts (representing 61% and 56% 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 negatively affected. 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 compliance with these ratios, which could result in acceleration of some or all of our indebtedness. For further information on our loan covenants, see Liquidity and Capital Resources Financing Activities Covenants above and Note 12 Long-term Debt to the accompanying financial statements.
To manage our foreign exchange risks, stabilize cash flows, and improve investment and cash flow planning, we enter into forward foreign exchange contracts, foreign currency swap contracts, currency options and other hedging products aimed at reducing and/or managing the adverse impact of changes in foreign exchange rates on our operating results and cash flows. However, these hedges do not cover all of our exposure to foreign exchange risks, and hedges to cover all of our exposure are not currently nor readily available.
Specifically, we use forward foreign exchange contracts, foreign currency swap contracts and currency option contracts to manage the foreign exchange risk associated with our foreign currency-denominated loans. As of March 31, 2004, PLDTs outstanding forward foreign exchange contracts, principal-only long-term cross-currency swap contracts and currency option contracts amounted to US$105 million, US$725 million and US$137 million, respectively.
Smarts outstanding forward foreign exchange contracts amounted to US$112 million as of March 31, 2004. Also, Smart had a long-term cross-currency swap contract which matured on April 30, 2003. The final exchange has been made and the contract has been terminated.
For further discussions of these contracts, see Note 12 Long-term Debt to the accompanying financial statements.
Interest Rate Risk Management
From time to time and on a limited basis, we enter into interest rate swap agreements in order to manage our exposure to interest rate fluctuations.
We make use of hedging instruments and structures solely for reducing or eliminating financial risks associated with our liabilities and not for trading or speculative purposes.
Effect of Peso Depreciation
In the first quarter of 2004 and 2003, our operating revenues, which have been received in U.S. dollars or in respect of which we have been able to adjust our service fees to reflect changes in the peso-to-dollar exchange rate exceeded our U.S. dollar-linked operating expenses. As a result, the depreciation of the peso against the dollar over this period had a positive net impact on our operating profit. However, since substantially all of our indebtedness is denominated in U.S. dollars, such depreciation has also increased our interest expense in peso terms and increased the peso amounts of our U.S. dollar-denominated indebtedness. PLDT has capitalized its foreign exchange losses in respect of its U.S. dollar-denominated indebtedness, and net income in future periods is expected to be negatively affected as a result of higher depreciation expense resulting from such capitalization. Our cash flows are negatively affected by the higher peso cost of repaying U.S. dollar-denominated debts, and our ability to comply with financial covenants and ratios is negatively affected by the increase in the amount of our debts and our interest expenses in peso terms.
Impact of Inflation and Changing Prices
Inflation can be a significant factor in the Philippine economy, and we are continually seeking ways to minimize its impact. In recent periods, while decreases in the relative value of the peso have had a significant effect on us, we do not believe inflation has had a material impact on our operations. The average inflation rate in the Philippines in the first quarter of 2004 was 3.5%, the same level as in the same period in 2003.
OTHER INFORMATION
Smarts Proposed Exchange Offer to Piltel Creditors
On March 23, 2004, Smart sent out invitations to the creditors of Piltel, subject to certain terms and conditions, to offer to sell their indebtedness to Smart in exchange for: (a) cash (in U.S. Dollars or Pesos); and/or (b) U.S. dollar-denominated loan obligations of Smart; and/or (c) in consideration of delivery of U.S. dollar-denominated bonds guaranteed by the Republic of the Philippines. The options available to Piltel creditors are as follows:
• Cash settlement, at a maximum exchange price of US$0.40 for each US$ equivalent of Piltel debt exchanged, Smart has allocated US$20 million to apply towards the cash offer;
• US$ Smart debt maturing in December 2007 at the rate of US$0.525 for each US$ equivalent of Piltel debt exchanged, with interest at US$ LIBOR plus 1% per annum, payable quarterly;
• US$ Smart debt maturing in December 2008 at the rate of US$0.575 for each US$ equivalent of Piltel debt exchanged, with interest at US$ LIBOR plus 1% per annum, payable quarterly;
• US$ Smart 10-year debt maturing in June 2014, at par by reference to the US$ equivalent of Piltel debt exchanged, with fixed interest at 2.25% per annum, payable quarterly,
• For Yen Trade creditor, US$ Smart 10-year debt maturing in June 2014, at par by reference to the US$ equivalent of Piltel debt exchanged, with fixed interest at 2.25% per annum, payable quarterly and with an option to elect, by not less than 15 months prior notice, for an early repayment at a discount either on December 2007 at 52.5% of the relevant debt amount or on December 2008 at 57.5% of the relevant debt amount; and
• 12-year US$ RoP-guaranteed bonds, at par, with a 2% coupon per annum, payable semi-annually (this option is not available to Piltel bondholders).
Piltel creditors were initially given four weeks from the date the letters of invitation were issued to respond to Smarts offer. Smart will only proceed with the debt transaction if the following conditions are met:
• At least 75% in aggregate of existing Piltel debt by value offered by the creditors is exchanged for one or more of the menu of options;
• Minimum acceptance thresholds for each facility are met, as follows:
- 100% by principal amount of Yen Trade Facility;
- 67% by principal amount of the Peso and US$ Facility Agreements;
- US$65 million face value of the bonds (Conversion Notes);
- 67% by principal amount of the US$ Trade Facilities; and
- 50.01% by principal amount of the Term Notes Facility Agreement.
• Certain waivers/amendments relating to Piltels existing indebtedness are obtained, including the termination of the PLDT Letter of Support.
Smart is in the process of securing the necessary consent and waivers from its financial creditors and guarantors of its debt to enable it to accept offers that may be made to it as a result of the letters of invitation it has issued. Further, Smart intends to request consents from its financial creditors and guarantors of its debts, subject to the debt exchange transaction described above being successfully completed, to allow it to acquire PLDTs interests in Piltel consisting of 767 million common shares (representing 45.3% of Piltels outstanding common shares) and 59 million Series K convertible preferred shares (convertible into Piltel common shares at a ratio of 170:1). The consideration for the share transfer will be determined at a later date. Should Smart acquire PLDTs interests in Piltel, it is not Smarts intention to enter into a legal statutory merger with Piltel nor does it intend to use Piltel as a backdoor listing vehicle.
On April 24, 2004, Smart extended the deadline for Piltel creditors to make an offer to sell their Piltel debt for 10 days until April 30, 2004. On May 3, 2004, Smart granted one further extension of the deadline to accept offers from creditors of Piltel to sell their Piltel debt. Accordingly, the deadline for Piltel creditors to make an offer to sell their Piltel debt has been extended to May 31, 2004. As of April 30, 2004, Smart had received offers in respect of more than 50% of the aggregate value of the Piltel debt. This level was, however, still below the thresholds (both in aggregate and in respect of certain individual facilities) set by Smart. All other material terms of the invitations issued by Smart on March 23, 2004 remain unchanged.
U.S. Federal Communications Commission, or U.S. FCC, Ruling versus Philippine Telecommunications Companies
In compliance with orders of the National Telecommunications Commission, or NTC, effective February 2003, PLDT stopped terminating traffic sent directly by each of AT&T and MCI, because PLDTs bilateral agreements with AT&T and MCI lapsed in December 2002, without either agreeing with PLDT on any provisional arrangement or final agreement on new termination rates. Upon petitions of AT&T and MCI, on March 10, 2003, the International Bureau of the U.S. FCC issued an Order directing all facilities-based carriers subject to U.S. FCC jurisdiction to suspend payments for termination services to Philippine carriers, including PLDT, Smart and Subic Telecom, until such time as the U.S. FCC issues a Public Notice that AT&Ts and MCIs circuits on the U.S.Philippine route are fully restored. The Order also removed the Philippines from the list of U.S.international routes approved for the provision of International Simple Resale, or ISR. In response to the International Bureaus Order, the NTC issued a Memorandum Order dated March 12, 2003, directing all affected Philippine carriers (1) not to accept terminating traffic via direct circuits from U.S. facilities-based carriers who do not pay Philippine carriers for services rendered; and (2) to take all measures necessary to collect payments for services rendered in order to preserve the viability, efficiency, sustained growth and development and continued competitiveness of the Philippine telecommunications industry.
On October 17, 2003, based on negotiations between the NTC and the U.S. FCC to resolve the issue regarding termination rates, the NTC, in the expectation that the U.S. FCC would fully lift its March 10, 2003 Order, lifted its March 12, 2003 Order and directed all Philippine carriers to immediately accept terminating traffic via direct circuits from U.S. facilities-based carriers at mutually acceptable final or interim termination rates and other terms and conditions agreed upon by the parties.
On November 17, 2003, after Smart reached interim agreements with each of AT&T and MCI on September 30 and November 12, 2003, respectively, the U.S. FCC lifted its March 10, 2003 Order with respect to Smart and ordered the U.S. carriers to resume making payments to Smart.
On January 15, 2004, after PLDT reached interim agreements with each of MCI and AT&T and reopened its circuits with these carriers on November 12, 2003 and January 9, 2004, respectively, the U.S. FCC lifted its March 10, 2003 Order also with respect to PLDT and ordered the U.S. carriers to resume making payments to PLDT.
However, the U.S. FCC has yet to restore the Philippines to the list of U.S.-international routes approved for the provision of ISR. In a recently announced order, the U.S. FCC has omitted the Philippines from the list of countries exempted from the U.S. FCCs International Settlements Policy.
Investigation by U.S. Department of Justice
In January 2004, PLDT and a PLDT employee received a grand jury subpoena, and an employee of Smart received a grand jury subpoena seeking documents and testimony in connection with a criminal investigation being conducted by the U.S. Department of Justice with respect to alleged antitrust violations relating to the provision of international termination services in the Philippines. The U.S. Department of Justice has also requested testimony and documents from Smart in connection with this investigation. Moreover, in March 2004, PLDT (U.S.) Ltd., a subsidiary of PLDT Global, also received a grand jury subpoena seeking documents in connection with this investigation. At this time, PLDT cannot predict the outcome of this investigation.
Related Party Transactions
In the ordinary course of business, companies belonging to the PLDT Group are engaged in arms-length intercompany transactions. We believe that the terms of these transactions are comparable with those available from unrelated parties.
• Telecommunications services provided within the PLDT Group interconnection agreements among/between PLDT, Smart, Piltel, Clark Telecom, Subic Telecom, PLDT-Maratel and PLDT Global under terms similar with those agreed with other telecommunications providers outside the PLDT Group.
• Transponder Lease Agreement between PLDT and Mabuhay Satellite an agreement pursuant to which Mabuhay Satellite leases to PLDT C-band transponders on board the Agila II satellite. Total fees under this agreement totaled Php149 million and Php194 million for the three months ended March 31, 2004 and 2003, respectively. PLDTs outstanding obligations under this agreement amounted to Php26 million as of December 31, 2003 and no outstanding obligations as of March 31, 2004.
• Facilities Management Agreement between PLDT and Piltel an agreement under which PLDT undertakes the management, operation and maintenance of Piltels regional telecommunications facilities as well as Executive Order No. 109, network operations and services, including E.O. 109 fixed line build-out installations, public calling offices, payphone facilities, and the systems required to support these services. Management fees under this agreement totaled Php17 million and Php21 million for the three months ended March 31, 2004 and 2003, respectively. PLDTs outstanding receivables under this agreement amounted to Php346 million and Php329 million as of March 31, 2004 and December 31, 2003, respectively.
• Facilities Management Agreement between Subic Telecom and Piltel an agreement 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 Php5 million for the three months ended March 31, 2004 and 2003, respectively. Subic Telecoms outstanding receivables under this agreement amounted to Php16 million and Php11 million as of March 31, 2004 and December 31, 2003, respectively.
• Agreements between Smart and Piltel agreements relating to the integration of Smarts and Piltels operations under which Smart undertakes to manage Piltels facilities, customer services, administrative support and management services and billing services. In addition, Smart also entered into a facilities service agreement with Piltel under which Piltel accesses Smart's existing GSM network and facilities to enable Piltel to offer prepaid cellular service using GSM technology in exchange for approximately 50% of Piltel's revenues, net of interconnection expenses. Total fees under these service agreements totaled Php217 million and Php168 million for the three months ended March 31, 2004 and 2003, respectively. Smarts outstanding receivables under these agreements amounted to Php123 million and Php906 million as of March 31, 2004 and December 31, 2003, respectively.
• Air Time Purchase Agreement between PLDT and AIL and Related Agreements an agreement under which PLDT has been granted the exclusive right to sell ACeS services in the Philippines. In March 2003, PLDT, together with the founder shareholders, entered into a Standstill Agreement in respect of the Air Time Purchase Agreement. On February 10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDT of the termination of the Standstill Agreement and the reinstatement of the terms of the original Air Time Purchase Agreement following the lapse of the November 15, 2003 deadline for the negotiation of a revised Air Time Purchase Agreement. See Note 20 Contractual Obligations and Commercial Commitments to the accompanying financial statements for further discussion.
• Agreements between Smart and ACeS Philippines agreements under which Smart (1) provides ACeS Global Mobile Personal Communications by Satellite, or GMPCS, services, in the Philippines under a revenue-sharing agreement,
(2) undertakes the management, maintenance and operations of GMPCS, and
(3) provides certain administrative support and services in certain aspects of ACeS Philippines business operations. Fees under these agreements, net of ACeS share, totaled Php20 million and Php16 million for the three months ended March 31, 2004 and 2003, respectively. Under these agreements, Smart had no outstanding obligation as of March 31, 2004 and December 31, 2003.
In addition, transactions to which PLDT or its subsidiary is a party, in which a director or key officer or owner of more than 10% of the common shares of PLDT, or any member of the immediate family of a director or key officer or owner of more than 10% of the common shares of PLDT had a direct or indirect material interest as of March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003 are as follows:
• Agreements with NTT Communications and/or its Affiliates agreements under which (1) NTT Communications provides advisory services for various business areas of PLDT; (2) NTT World Engineering Marine Corporation provides maintenance services to PLDTs domestic fiber optic network; (3) PLDT is licensed to market managed data and other services using NTT Communications Arcstar brand; and (4) PLDT and NTT Communications agreed to cooperative arrangements for international telecommunication services. Fees under these agreements totaled Php70 million and Php85 million for the three months ended March 31, 2004 and 2003, respectively. PLDTs outstanding obligations under these agreements amounted to Php28 million and Php40 million as of March 31, 2004 and December 31, 2003, respectively.
• Agreements between Smart and Asia Link B.V. agreements under which Asia Link undertakes to provide technical support services for the operations and maintenance of Smarts CMTS. Fees under these agreements totaled Php107 million and Php67 million for the three months ended March 31, 2004 and 2003, respectively. Under these agreements, Smart had outstanding payables of Php117 million as of March 31, 2004 and Php228 million as of December 31, 2003. Asia Link is a subsidiary of First Pacific.
• Agreements relating to insurance companies Gotuaco del Rosario and Associates, or Gotuaco, acts as the broker for certain insurance companies to cover certain insurable properties of the PLDT Group. Insurance premiums are remitted to Gotuaco and the brokers fees are settled between Gotuaco and the insurance companies. In addition, PLDT has signed an insurance policy with Malayan Insurance Co. Inc., or Malayan, wherein premiums are paid directly to Malayan. Premium payments to Gotuaco and Malayan covering the twelve-month period ending July 31, 2004 totaled Php321 million. Two directors of PLDT have a direct/indirect interest in or serve as director/officer of Gotuaco and Malayan.
For a more detailed discussion of the related party transactions enumerated above, see Note 15 Related Party Transactions to the accompanying financial statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
FINANCIAL STATEMENTS
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
AND FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
BALANCE SHEETS
(in million pesos)
|
Consolidated |
|
Non-Consolidated |
||
|
March 31, 2004 |
December 31, 2003 |
|
March 31, 2004 |
December 31, 2003 |
|
(Unaudited) |
(As restated |
|
(Unaudited)
|
(As restated |
ASSETS |
|||||
Current Assets |
|
|
|
|
|
Cash and cash equivalents (Notes 5 and 22) |
24,040 |
19,263 |
|
8,028 |
5,278 |
Receivables net (Notes 6, 15, 22 and 25) |
19,340 |
19,516 |
|
14,769 |
15,740 |
Inventories and supplies net (Note 7) |
2,527 |
2,421 |
|
1,392 |
1,513 |
Prepayments and other current assets (Notes 16 and 18) |
4,042 |
3,951 |
|
2,581 |
2,957 |
Total Current Assets |
49,949 |
45,151 |
|
26,770 |
25,488 |
Noncurrent Assets |
|
|
|
|
|
Property, plant and equipment net (Notes 3, 7, 8, 12 and 20) |
243,455 |
244,427 |
|
186,716 |
188,152 |
Investments net (Notes 2, 3, 9, 12, 14, 15 and 20) |
1,652 |
1,610 |
|
49,978 |
44,830 |
Deferred income tax net (Notes 3 and 18) |
325 |
254 |
|
|
|
Other noncurrent assets net (Notes 15 and 16) |
6,031 |
6,184 |
|
2,780 |
2,714 |
Total Noncurrent Assets |
251,463 |
252,475 |
|
239,474 |
235,696 |
|
301,412 |
297,626 |
|
266,244 |
261,184 |
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||
Current Liabilities |
|
|
|
|
|
Notes payable (Notes 10 and 22) |
2,132 |
2,133 |
|
1,982 |
1,933 |
Accounts payable (Notes 15 and 22) |
8,392 |
7,540 |
|
2,928 |
6,002 |
Accrued expenses and other current liabilities |
13,086 |
13,576 |
|
6,805 |
5,957 |
Current portion of long-term debt (Notes 8, 12, 22 and 23) |
25,701 |
23,742 |
|
17,758 |
15,850 |
Dividends payable (Note 14) |
550 |
572 |
|
550 |
572 |
Income tax payable (Note 18) |
2,547 |
762 |
|
466 |
466 |
Total Current Liabilities |
52,408 |
48,325 |
|
30,489 |
30,780 |
Noncurrent Liabilities |
|
|
|
|
|
Long-term debt net of current portion (Notes 8, 12, 22 and 23) |
129,127 |
133,939 |
|
113,262 |
116,392 |
Deferred income tax net (Note 18) |
5,647 |
5,990 |
|
5,647 |
5,990 |
Deferred credits and other noncurrent liabilities |
14,995 |
15,011 |
|
18,395 |
14,444 |
Total Noncurrent Liabilities |
149,769 |
154,940 |
|
137,304 |
136,826 |
Minority Interest in Consolidated Subsidiaries |
784 |
783 |
|
|
|
Shareholders Equity (Notes 3 and 14) |
|
|
|
|
|
Preferred share, Php10 par value,
authorized 822,500,000 shares; |
4,617 |
4,616 |
|
4,617 |
4,616 |
Common share, Php5 par value, authorized
234,000,000 shares; |
847 |
847 |
|
847 |
847 |
Capital in excess of par value |
49,019 |
49,017 |
|
49,019 |
49,017 |
Retained earnings |
43,968 |
39,098 |
|
43,968 |
39,098 |
Total Shareholders Equity |
98,451 |
93,578 |
|
98,451 |
93,578 |
|
301,412 |
297,626 |
|
266,244 |
261,184 |
See accompanying Notes to Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
STATEMENTS OF INCOME
(in million pesos, except per share amounts)
|
Consolidated |
|
Non-Consolidated |
||
|
Three Months Ended March 31, |
||||
|
2004 |
2003 |
|
2004 |
2003 |
|
(Unaudited) |
||||
OPERATING REVENUES (Note 15) |
|
|
|
|
|
Wireless services |
14,956 |
10,940 |
|
|
|
Fixed line services |
11,694 |
11,440 |
|
11,640 |
11,281 |
Information and communications technology services |
442 |
357 |
|
|
|
|
27,092 |
22,737 |
|
11,640 |
11,281 |
OPERATING EXPENSES |
|
|
|
|
|
Depreciation and amortization (Note 8) |
6,520 |
5,803 |
|
3,404 |
3,226 |
Compensation and benefits (Note 16) |
2,800 |
2,741 |
|
1,723 |
1,867 |
Selling and promotions |
2,158 |
2,246 |
|
350 |
293 |
Maintenance (Note 15) |
1,285 |
1,273 |
|
787 |
697 |
Provision for doubtful accounts (Note 6) |
1,098 |
1,130 |
|
694 |
702 |
Rent (Notes 3 and 15) |
714 |
743 |
|
341 |
397 |
Professional and other service fees (Note 15) |
437 |
421 |
|
224 |
241 |
Insurance and security services |
395 |
365 |
|
177 |
187 |
Taxes and licenses (Note 21) |
327 |
278 |
|
154 |
122 |
Provision for inventory obsolescence |
128 |
16 |
|
|
|
Other operating costs (Note 15) |
757 |
629 |
|
226 |
260 |
|
16,619 |
15,645 |
|
8,080 |
7,992 |
NET OPERATING INCOME |
10,473 |
7,092 |
|
3,560 |
3,289 |
INTEREST EXPENSE AND RELATED ITEMS NET (Notes 3, 8, 10 and 12) |
(2,948) |
(2,956) |
|
(2,682) |
(2,578) |
EQUITY SHARE IN NET INCOME (LOSSES) OF INVESTEES, INCLUDING GOODWILL AMORTIZATION AND
PROVISION FOR IMPAIRMENT IN VALUE OF INVESTMENTS |
(22) |
(4) |
|
5,023 |
2,293 |
INTEREST INCOME |
212 |
103 |
|
34 |
14 |
OTHER EXPENSES NET (Notes 6, 15, 17 and 22) |
(625) |
(744) |
|
(568) |
(469) |
INCOME BEFORE INCOME TAX AND MINORITY INTEREST IN NET LOSSES (INCOME) OF CONSOLIDATED SUBSIDIARIES |
7,090 |
3,491 |
|
5,367 |
2,549 |
PROVISION FOR INCOME TAX (Note 18) |
1,854 |
1,004 |
|
127 |
66 |
INCOME BEFORE MINORITY INTEREST IN NET LOSSES (INCOME) OF CONSOLIDATED SUBSIDIARIES |
5,236 |
2,487 |
|
5,240 |
2,483 |
MINORITY INTEREST IN NET LOSSES (INCOME) |
4 |
(4) |
|
|
|
NET INCOME |
5,240 |
2,483 |
|
5,240 |
2,483 |
Earnings Per Common Share (Note 19) |
|
|
|
|
|
Basic |
28.32 |
12.15 |
|
28.32 |
12.15 |
Diluted |
26.74 |
11.31 |
|
26.74 |
11.31 |
See accompanying Notes to Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in million pesos)
|
Preferred |
|
Common |
|
Capital in |
|
Retained |
|
Total |
|
(Unaudited) |
||||||||
Balances at January 1, 2003 |
|
|
|
|
|
|
|
|
|
As previously reported |
4,584 |
|
847 |
|
48,953 |
|
30,234 |
|
84,618 |
Effect of
change in accounting policy on leases |
|
|
|
|
|
|
(551) |
|
(551) |
As restated |
4,584 |
|
847 |
|
48,953 |
|
29,683 |
|
84,067 |
Net income for the period |
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
|
|
|
|
2,479 |
|
2,479 |
Effect of change in accounting policy on leases (Note 3) |
|
|
|
|
|
|
4 |
|
4 |
As restated |
|
|
|
|
|
|
2,483 |
|
2,483 |
Cash dividends |
|
|
|
|
|
|
(335) |
|
(335) |
Issuance of capital stock net (Note 14) |
36 |
|
|
|
5 |
|
|
|
41 |
Balances at March 31, 2003 |
4,620 |
|
847 |
|
48,958 |
|
31,831 |
|
86,256 |
Balances at January 1, 2004 |
|
|
|
|
|
|
|
|
|
As previously reported |
4,616 |
|
847 |
|
49,017 |
|
39,665 |
|
94,145 |
Effect of
change in accounting policy on leases |
|
|
|
|
|
|
(567) |
|
(567) |
As restated |
4,616 |
|
847 |
|
49,017 |
|
39,098 |
|
93,578 |
Net income for the period |
|
|
|
|
|
|
5,240 |
|
5,240 |
Cash dividends |
|
|
|
|
|
|
(370) |
|
(370) |
Issuance of capital stock net (Note 14) |
1 |
|
|
|
2 |
|
|
|
3 |
Balances at March 31, 2004 |
4,617 |
|
847 |
|
49,019 |
|
43,968 |
|
98,451 |
See accompanying Notes to Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
(in million pesos)
|
Consolidated |
|
Non-Consolidated |
|||||
|
Three Months Ended March 31, |
|||||||
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
(Unaudited) |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Income before income tax and minority
interest in net losses (income) |
7,090 |
|
3,491 |
|
5,367 |
|
2,549 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
6,520 |
|
5,803 |
|
3,404 |
|
3,226 |
|
Provision for doubtful accounts |
1,098 |
|
1,130 |
|
694 |
|
702 |
|
Provision for inventory obsolescence |
128 |
|
16 |
|
|
|
|
|
Equity share in net losses (income) of investees, including goodwill amortization and provision for impairment in value of investments |
22 |
|
4 |
|
(5,023) |
|
(2,293) |
|
Others |
547 |
|
837 |
|
234 |
|
120 |
|
Interest expense |
2,948 |
|
2,956 |
|
2,682 |
|
2,578 |
|
Interest income |
(212) |
|
(103) |
|
(34) |
|
(14) |
|
Operating income before working capital changes |
18,141 |
|
14,134 |
|
7,324 |
|
6,868 |
|
Decrease (increase) in: |
|
|
|
|
|
|
|
|
Receivables |
(520) |
|
(1,786) |
|
72 |
|
(609) |
|
Inventories and supplies |
(234) |
|
(281) |
|
120 |
|
(32) |
|
Prepayments and other current assets |
(593) |
|
68 |
|
(94) |
|
111 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
1,025 |
|
(1,404) |
|
900 |
|
(1,369) |
|
Accrued expenses and other current liabilities |
(1,140) |
|
1,204 |
|
162 |
|
254 |
|
Cash generated from operations |
16,679 |
|
11,935 |
|
8,484 |
|
5,223 |
|
Income taxes paid |
|
|
(15) |
|
|
|
|
|
Net cash provided by operating activities |
16,679 |
|
11,920 |
|
8,484 |
|
5,223 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
(4,147) |
|
(1,620) |
|
(669) |
|
(443) |
|
Proceeds from disposal of property, plant and equipment |
8 |
|
20 |
|
4 |
|
2 |
|
Interest paid capitalized to property, plant and equipment |
(152) |
|
(270) |
|
(128) |
|
(263) |
|
Purchase of investments |
(29) |
|
7 |
|
|
|
|
|
Interest received |
185 |
|
100 |
|
34 |
|
15 |
|
Increase in other noncurrent assets |
(552) |
|
(457) |
|
(127) |
|
(173) |
|
Net cash used in investing activities |
(4,687) |
|
(2,220) |
|
(886) |
|
(862) |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
1,143 |
|
1,245 |
|
1,143 |
|
1,158 |
|
Payments of long-term debt |
(5,633) |
|
(6,091) |
|
(3,654) |
|
(3,901) |
|
Proceeds from notes payable |
|
|
226 |
|
|
|
|
|
Payments of notes payable |
|
|
(106) |
|
|
|
|
|
Interest paid net of capitalized portion |
(2,354) |
|
(2,521) |
|
(2,110) |
|
(2,123) |
|
Cash dividends paid |
(393) |
|
(368) |
|
(393) |
|
(368) |
|
Increase (decrease) in deferred credits and other noncurrent liabilities |
(3) |
|
(463) |
|
88 |
|
(446) |
|
Proceeds from issuance of capital stock |
3 |
|
40 |
|
3 |
|
40 |
|
Net cash used in financing activities |
(7,237) |
|
(8,038) |
|
(4,923) |
|
(5,640) |
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
22 |
|
33 |
|
75 |
|
13 |
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
4,777 |
|
1,695 |
|
2,750 |
|
(1,266) |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
19,263 |
|
10,876 |
|
5,278 |
|
4,165 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
24,040 |
|
12,571 |
|
8,028 |
|
2,899 |
|
See accompanying Notes to Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
The Philippine Long Distance Telephone Company, or PLDT, was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephone companies under common U.S. ownership. In 1967, effective control of PLDT was sold by General Telephone and Electronics Corporation (a major shareholder since PLDTs incorporation) to a group of Filipino businessmen. In 1981, in furtherance of the then existing policy of the Philippine government to integrate the Philippine telecommunications industry, PLDT purchased substantially all of the assets and liabilities of the Republic Telephone Company.
The common 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 Stock Exchange and Pacific Exchange in the United States. On October 19, 1994, an American Depositary Receipts, or ADRs, facility was established pursuant to which Citibank N.A., as depositary, issued ADRs evidencing American Depositary Shares, or ADSs, with each ADS representing one PLDT common share. JP Morgan Chase Bank has been appointed as successor depositary for PLDTs ADRs effective February 10, 2003. The ADSs are listed and traded on the New York Stock Exchange and the Pacific Exchange in the United States.
PLDTs charter, like those of all other Philippine corporations, was initially limited to 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 its amended charter (Republic Act No. 7082), which became effective on August 24, 1991, PLDT is authorized to provide virtually every type of telecommunications service, both within the Philippines and between the Philippines and other countries.
PLDT operates under the jurisdiction of the Philippine National Telecommunications Commission, or NTC, which jurisdiction extends, among other things, to approving major services offered by PLDT and certain rates charged by PLDT.
As of March 31, 2004, we had 17,906 employees on a consolidated basis and 10,127 on a non-consolidated basis. As of December 31, 2003, we had 18,191 and 10,230 employees on a consolidated and non-consolidated basis, respectively.
The registered office address of PLDT is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.
2. Basis of Financial Statement Preparation
Our financial statements have been prepared in conformity with generally accepted accounting principles in the Philippines, or Philippine GAAP, based on the historical cost convention.
Our unaudited financial statements include, in our opinion, all adjustments consisting only of normal recurring adjustments, necessary to present fairly the results of operations for the interim periods. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations that may be expected for the full year.
In preparing the unaudited March 31, 2004 financial statements, we followed the same accounting policies, except as discussed in Note 3 Accounting Changes, Adoption of Statement of Financial Accounting Standards, or SFAS 12/International Accounting Standards, or IAS 12 Income Taxes and Adoption of SFAS 17/IAS 17 Leases, and methods of computation that we had applied in the preparation of the audited December 31, 2003 financial statements.
Our unaudited consolidated financial statements include the unaudited financial statements of PLDT and those of the following subsidiaries (collectively, the PLDT Group), which were all incorporated in the Philippines except for PLDT Global Corporation, which was incorporated in the British Virgin Islands.
|
|
Percentage of Ownership |
|
|
|
As of March 31, |
|
Name of Subsidiary/Investee |
Principal Activity |
2004 |
2003 |
|
|
|
|
Fixed Line |
|
|
|
PLDT Clark Telecom, Inc., or Clark Telecom |
Telecommunications services |
100.0 |
100.0 |
Subic Telecommunications Company, Inc., or |
Telecommunications services |
100.0 |
100.0 |
SmartNTT Multimedia, Inc., or SNMI |
Data and network services |
100.0 |
100.0 |
PLDT Global Corporation, or PLDT Global, |
Telecommunications services |
100.0 |
100.0 |
PLDTMaratel, Inc. (formerly Maranao Telephone Company, Inc.), or Maratel |
Telecommunications services |
97.5 |
97.5 |
Bonifacio Communications Corporation, or BCC |
Telecommunications, infrastructure and related value-added services |
75.0 |
75.0 |
|
|
|
|
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 |
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 |
100.0 |
100.0 |
Subsidiaries are consolidated from the date when control is transferred to the PLDT Group and cease to be consolidated from the date when control is transferred out of the PLDT Group.
We prepare unaudited consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. Intercompany balances and transactions, including intercompany profits and unrealized profits and losses, are eliminated.
Minority interests represent the equity interests in Maratel, BCC, Telesat and Mabuhay Satellite not held by the PLDT Group.
Investments in Shares of Stock
Investments in shares of stock of companies where our ownership interest ranges from 20% to 50% on the consolidated financial statements and 20% or more on the non-consolidated financial statements (collectibly referred to as associates), except for the investments in Pilipino Telephone Corporation, or Piltel, (see Note 9 Investments), are accounted for under the equity method of accounting. These are entities in which we have a significant influence and which are neither a subsidiary nor a joint venture of the PLDT Group. Under the equity method, our investments in associates are carried in the balance sheets at cost plus post-acquisition changes in our share in net assets of associates, less impairment in value, if any. The statements of income reflect our share in the results of operations of associates. Unrealized gains arising from transactions with our associates are eliminated to the extent of our interests in associates, against our investments in associates. Our investments in associates include goodwill (net of accumulated amortization) on acquisition, which are treated in accordance with the accounting policy for goodwill, see Note 4 Summary of Significant Accounting Policies.
Other investments in companies over which we exercise no significant influence and for which control is temporary are stated at cost, less allowance for any significant and permanent decline in market value.
3. Accounting Changes
Adoption of SFAS 12/IAS 12 Income Taxes
SFAS 12/IAS 12, Income Taxes, which prescribes the accounting treatment for current and noncurrent deferred income taxes. The standard requires the use of a balance sheet liability method in accounting for deferred income taxes. It requires the recognition of a deferred tax liability and, subject to certain conditions, a deferred tax asset, for all temporary differences with certain exceptions. The standard provides for the recognition of a deferred tax asset when it is probable that taxable income will be available against which the deferred tax asset can be used. It also provides for the recognition of a deferred tax liability with respect to asset revaluations. Our adoption of this standard only affected certain classifications in our balance sheets and did not have any effect in our statements of income.
Adoption of SFAS 17/IAS 17 Leases
The Philippine Accounting Standards Council, or ASC, approved the adoption of SFAS 17/IAS 17 Leases, which became effective in the Philippines for financial statements covering periods beginning on or after January 1, 2004. SFAS 17/IAS 17 requires capitalization of finance leases, which transfer substantially all the risks and benefits incidental to ownership of leased item, at the inception of the lease at the fair value of leased property or, if lower, at the present value of the minimum lease payments. SFAS 17/IAS 17 also requires that lease where the lessor retains substantially all the risks and benefits of ownership of the asset be classified as operating leases, which should be recognized as an expense in the income statement on a straight-line basis over the lease term.
As allowed under the transitory provisions of SFAS 17/IAS 17, we adopted the retroactive application of the standard and have accordingly restated our comparative financial statements. The after tax effect of the change was an increase of Php4 million in consolidated net income for the three months ended March 31, 2003 and a reduction of Php567 million and Php551 million in the beginning retained earnings in 2004 and 2003, respectively. Basic and diluted earnings per common share increased by Php0.03 and Php0.10, respectively, for the three months ended March 31, 2003. See Note 8 Property, Plant and Equipment for the related disclosure on capital lease.
4. Summary of Significant Accounting Policies
Our significant accounting policies and practices are discussed below to facilitate the understanding of our financial statements:
Revenue Recognition
Revenues for services are stated at amounts invoiced to customers and exclude value-added tax. We provide fixed-line communication services, wireless communication services, and information and communications technology services. We provide such services to business, residential, payphone and wireless customers. Revenues, which exclude value-added tax, represent the value of fixed consideration that have been received or are receivable. Revenues are recognized when there is evidence of an arrangement, collectibility is reasonably assured, and the delivery of the product or service has occurred.
Subscriptions
We provide telephone and data communication services under postpaid and prepaid payment arrangements. Revenues include fees for installation and activation.
Air time, traffic and value-added services
Prepaid service revenues collected in advance are deferred and recognized based on the earlier of actual usage or upon expiration of the usage period. Payphone service revenues are recognized upon provision of service. Interconnection revenues for call termination, call transit, and network usage are recognized in the period the traffic occurs. Revenues related to local, long distance, network-to-network, roaming and international call connection services are recognized when the calls are placed or connections are provided, net of amounts payable to other telecommunication carriers for terminating calls in their territories. Revenues related to products and value-added services are recognized upon delivery of the product or service.
Equipment sales
Sales of communication equipment are recognized upon delivery to the customer.
Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from the date of acquisition and that are subject to an insignificant risk of change in value.
Receivables
Receivables are stated at face value, net of allowance for doubtful accounts.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is maintained at a level considered adequate to provide for potentially uncollectible receivables. The level of allowance is based on historical collection, write-off experience, current economic trends, changes in our customer payment terms, age status of receivables and other factors that may affect collectibility. An evaluation of the receivables, designed to identify potential charges to the allowance, is performed on a continuous basis. The allowance is established by charges to income in the form of provision for doubtful accounts. Such provision is computed as a certain percentage of operating revenues.
Inventories and Supplies
Inventories and supplies which include, among others, cellular phone units, materials, spare parts, terminal units and accessories, are valued at the lower of cost or net realizable value.
Cost is determined using the moving average method. Net realizable value is the current replacement cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization and any impairment in value.
The initial cost of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset to its working condition and location for its intended use. Expenditures incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to income in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property, plant and equipment. Cost also includes interest on borrowed funds used during the construction period and capitalized foreign exchange losses related to foreign currency-denominated liabilities used to acquire such assets, net of foreign exchange gains on restatement of monetary assets. When assets are sold or retired, their costs and accumulated depreciation, amortization and impairment losses, if any, are eliminated from the accounts and any gain or loss resulting from their disposal is included in the statements of income of such period.
Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:
Property, Plant and Equipment |
Estimated |
|
|
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 and depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.
Property under construction is stated at cost. This includes cost of construction, plant and equipment and other direct costs. Property under construction is not depreciated until such time that the relevant assets are completed and put into operational use.
Borrowing costs that are directly attributable to the construction of plant and equipment are capitalized during the construction period, see Note 8 Property, Plant and Equipment.
Impairment of Assets
Property, plant and equipment, investments, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the statements of income. The recoverable amount is the higher of an assets net selling price or value in use. The net selling price is the amount obtainable from the sale of an asset in an armslength transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The reversal is recorded as income. However, the increased carrying amount of an asset due to a reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined had the impairment loss not been recognized for that asset in prior years.
Goodwill
Goodwill, included under Other noncurrent assets in the consolidated balance sheets, represents the excess of acquisition cost over the fair value of identifiable net assets of a subsidiary at the date of acquisition. With respect to an investment in subsidiaries, goodwill is included in the carrying amount of the investment. Goodwill is amortized on a straight-line basis over the estimated useful economic life up to a maximum of five years. It is stated at cost less accumulated amortization and any impairment in value.
Deferred Charges
Issuance costs, underwriting fees and related expenses incurred in connection with the issuance of debt instruments are deferred and amortized using the effective interest method. Deferred charges are included under Other noncurrent assets in the balance sheets.
Notes Payable
Notes payable are presented net of related discounts. Discounts are amortized over the life of the notes using the straight-line method.
Provisions
We recognize provisions when we have obligations, legal or constructive, as a result of past events, if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an additional provision.
Leases
Finance leases, which transfer to us substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.
Borrowing Costs
Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an
impairment loss is recorded. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, as well as differences arising from foreign currency borrowings used to finance these projects to the extent that they are regarded as an adjustment to interest cost.
Retirement Costs
PLDT and Smart have funded noncontributory retirement plans, administered by the respective companies Trustee, covering permanent employees. Retirement costs are actuarially determined using the projected unit credit of accrued benefit valuation method. This method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning employees projected salaries. Retirement costs include current service cost plus amortization of past service cost, experience adjustments and changes in actuarial assumptions over the expected average remaining working lives of the covered employees.
PLDTs other subsidiaries provide for estimated retirement benefits required to be paid under Republic Act, or R.A. No. 7641 to qualified employees. The benefit is computed as a certain percentage of basic monthly salary for every year of service.
Foreign Currency Transactions and Translations
Transactions in foreign currencies are recorded in Philippine pesos by applying to the foreign currency amount the spot exchange rate prevailing at the transaction date. Foreign exchange gains or losses arising on the spot settlements or restatement of monetary items at rates different from those at which they were initially recorded during the period or presented in the previous financial statements are recorded in the statements of income in the period in which they arise, except for exchange losses arising from borrowed funds used and liabilities incurred to finance the acquisition of property, plant and equipment, net of foreign exchange gains from all other foreign currency monetary items, if any, which are capitalized to the appropriate property, plant and equipment accounts, see New Accounting Standards Effective Subsequent to March 31, 2004, SFAS 21/IAS 21, The Effects of Changes in Foreign Exchange Rates.
Financial statements of consolidated foreign subsidiaries that are integral to our operations are translated as if the transactions of the foreign operation had been those of the PLDT Group. At each balance sheet date, foreign currency monetary items are translated using the closing rate, nonmonetary items which are carried at historical cost are translated using the historical rate as of the date of acquisition and nonmonetary items which are carried at fair value are translated using the exchange rate that existed when the values were determined. Income and expense items are translated at the exchange rates on the dates of the transactions. Resulting exchange differences are recognized in the statements of income.
Financial Instruments
PLDT and Smart use forward exchange contracts (including cash collateralized forwards used by Smart) to hedge foreign currency assets, liabilities and firm commitments. Translation gains or losses on these forward exchange contracts are computed by multiplying the forward notional amounts by the difference between the spot exchange rates prevailing on balance sheet dates and the spot exchange rates on the contract inception dates (or the last reporting dates). The resulting gains or losses are offset against the translation losses or gains on the underlying hedged transactions. Any premium or discount is amortized over the period of the contract and charged or credited to current operations. For short-term forward transactions, the contracted forward rates are used to record the underlying hedged transactions.
For the cash collateralized forward contracts of Smart, such cash collateral is recorded as a receivable from the counterparty bank and presented as part of Receivables account in the consolidated balance sheets. Payment of cash collateral entitles Smart to a discount on the contracted forward rate. The discount is recognized as income over the term of the related forward exchange contract.
PLDT also enters into currency swap contracts to hedge the currency risk on its fixed rate notes. With these swaps, PLDT effectively converts its U.S. dollar notes to peso notes. Thus, the underlying notes are no longer revalued to spot exchange rates 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 various structures incorporating currency option (both buy and sell) contracts to hedge the currency risk on its fixed rate notes and other short-term obligations. These contracts provide PLDT the right to purchase or the obligation to sell foreign currency at pre-determined prices. Premium payments due on the contracts are amortized over the contract term and charged to current operations. Changes in the options intrinsic values are also charged or credited to current operations.
Interest rate swap agreements are entered into to manage exposure to interest rate fluctuations. Net income/expense on the swaps is accrued as of balance sheet date.
Unrealized mark-to-market gains and losses on outstanding derivatives entered into as hedges are not included in the determination of net income but are disclosed in the related notes to financial statements.
Other derivative financial instruments entered into that are not designated as hedges are marked to market, with the revaluation gains and losses credited or charged to current operations.
Income Taxes
Deferred income tax is provided using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to: (a) temporary differences between the financial reporting bases of assets and liabilities and their related tax bases; (b) net operating loss carryover, or NOLCO; and (c) the carryforward benefit of the excess of the minimum corporate income tax, or MCIT, over the regular corporate income tax. Deferred tax assets and liabilities are measured using the tax rates applicable to taxable income in the period in which those temporary differences are expected to be recovered or settled and NOLCO and MCIT are expected to be applied. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.
Earnings Per Common Share
Basic earnings per share, or EPS, is calculated by dividing the net income for the period attributable to common shareholders (net income less dividends on all series of preferred shares) by the weighted average number of common shares outstanding during the period, after giving retroactive effect to any stock dividend declarations.
Diluted EPS is calculated in the same manner assuming that, at the beginning of the period or at the time of issuance during the period, all outstanding options are exercised and convertible preferred shares are converted to common shares. Outstanding stock options will have a dilutive effect under the treasury stock method only when the average market price of the underlying common share during the period exceeds the exercise price of the option.
Where the effects of the assumed conversion of the preferred shares and the exercise of all outstanding options have anti-dilutive effect, basic and diluted EPS are stated at the same amount.
If the required dividends to be declared on each series of convertible preferred shares divided by the number of equivalent common shares, assuming such convertible preferred shares are converted to common shares, would decrease the basic EPS, then such convertible preferred shares would be deemed
dilutive. As such, the diluted EPS will be calculated by dividing net income attributable to common shareholders (net income less dividends on the non-dilutive preferred shares) by the weighted average common shares including the common share equivalent arising from dilutive convertible preferred shares.
Segment Reporting
Segment assets include operating assets used by a segment and consist principally of operating cash, receivables, inventories and property, plant and equipment, net of allowances and provisions. Segment liabilities include all operating liabilities and consist principally of accounts payable, accrued expenses and long-term debt. Segment assets and liabilities do not include deferred income taxes.
Segment revenues, segment expenses and segment performance include transfers between business segments. The transfers are accounted for at competitive market prices charged to unaffiliated customers for similar products. Such transfers are eliminated in our consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, and revenue and expenses during the period reported. Actual results could differ from our estimates.
Adoption of New SFAS/IAS
We adopted the following SFAS/IAS, which became effective on January 1, 2004:
• SFAS 12/IAS 12, Income Taxes; and
• SFAS 17/IAS 17, Leases.
The effects of adopting SFAS 12/IAS 12 and SFAS 17/IAS 17 are discussed in Note 3 Accounting Changes, Adoption of SFAS 12/IAS 12 Income Taxes and SFAS 17/IAS 17 Leases. Additional disclosure requirements by the new standards are included in the financial statements where applicable.
New Accounting Standards Effective Subsequent to March 31, 2004
Philippine GAAP is expected to adopt the following accounting principles issued by International Accounting Standards Council, or IASC, including any subsequent improvements to IAS. The adoption of new accounting standards could have a significant impact on our financial statements in the year of change as well as in future years.
• The Philippine ASC has approved the adoption of SFAS 21/IAS 21, The Effects of Changes in Foreign Exchange Rates, effective January 1, 2005, which provides restrictive conditions for the capitalization of foreign exchange losses. As of March 31, 2004, undepreciated capitalized foreign exchange losses on a consolidated and non-consolidated basis included in property, plant and equipment amounted to Php60,892 million and Php54,720 million, respectively. Upon adoption in 2005 of SFAS 21/IAS 21, the proposed treatment is to adjust any undepreciated capitalized foreign exchange losses, net of exchange losses that qualify as borrowing cost and income tax effect, against beginning retained earnings, to the extent that amounts capitalized do not meet the conditions under the new standard, and to restate prior years financial statements;
• The IASC has approved the application for financial statements beginning on or after January 1, 2005 of the revised IAS 27 Consolidated and Separate Financial Statements, which supersedes IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries. Under the revised IAS 27, the exclusion of a subsidiary from consolidation when there are severe long-term restrictions that significantly impair a subsidiarys ability to transfer funds to the parent under the superseded standard will be removed. Upon the adoption of this new standard, Piltel will be required to be included in our consolidated financial statements retrospectively. See Note 2 Basis of Financial Statement Preparation, Note 4 Summary of Significant Accounting Policies and Note 9 Investments. Piltels net liability and net income as of and for the three month period ended March 31, 2004 amounted to Php22,231 million and Php8 million, respectively. See Note 25 Other Matters for Smarts invitations to the creditors of Piltel to offer to sell their indebtedness to Smart. In addition, investments in subsidiaries and associates are to be accounted for either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement in the separate (non-consolidated) financial statements of the parent. Accumulated equity in net earnings of subsidiaries and associates in PLDTs non-consolidated financial statements amounted to Php5,320 million and Php172 million as of March 31, 2004 and December 31, 2003, respectively;
• The Philippine ASC has approved the adoption of SFAS 39/IAS 39, Financial Instruments: Recognition and Measurement, effective January 1, 2005, which establishes the accounting and reporting standards for recognizing, measuring, and disclosing information about the PLDT Groups financial assets and financial liabilities. The Standard requires a financial asset or financial liability to be recognized initially at cost including related transaction costs. Subsequent to initial recognition, the PLDT Group should measure financial assets at their fair values, except for loans and receivables originated by the PLDT Group and held-to-maturity investments, which are measured at cost or amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at cost or amortized cost, except for liabilities held for trading and derivatives, which are subsequently measured at fair value;
SFAS 39/IAS 39 also covers the accounting for derivative instruments. The Standard has expanded the definition of a derivative instrument to include derivatives (derivative-like provisions) embedded in non-derivative contracts. Under the Standard, every derivative instrument is recorded in the balance sheet as either an asset or liability measured at its fair value. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in stockholders equity until the hedged item is recognized in earnings. The PLDT Group must formally document, designate, and assess the effectiveness of derivative transactions that receive hedge accounting treatment;
We have yet to determine the financial impact of adopting SFAS 39/IAS 39;
• The Philippine ASC has approved the adoption of SFAS 32/IAS 32, Financial Instruments: Disclosure and Presentation, effective January 1, 2005, which covers the disclosure and presentation of all financial instruments. The Standard requires more comprehensive disclosures about a companys financial instruments, whether recognized or unrecognized in the financial statements. New disclosure requirements include terms and conditions of financial instruments used by the company, types of risks associated with both recognized and unrecognized financial instruments (price risk, credit risk, liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized financial assets and financial liabilities, and the PLDT Groups financial risk management policies and objectives. The Standard also requires financial instruments to be classified as liabilities or equity in accordance with its substance and not its legal form. We have yet to determine the financial impact of adopting SFAS 32/IAS 32; and
• The Philippine ASC has issued Exposure Draft 56 proposed adoption of IAS 40 Investment Property. We are currently evaluating any effect the proposed adoption of this accounting standard may have on our financial position and results of operations.
5. Cash and Cash Equivalents
This account consists of:
Cash in banks earns interest at prevailing bank deposit rates. Temporary investments are made for varying periods of up to one month depending on our immediate cash requirements, and earn interest at prevailing short-term deposit rates.
6. Receivables
This account consists of receivables from:
|
Consolidated |
|
Non-Consolidated |
||
|
March 31, 2004 (Unaudited) |
December 31, 2003 (Audited) |
|
March 31, 2004 (Unaudited) |
December 31, 2003 (Audited) |
|
(in million pesos) |
||||
Customers and carriers |
28,478 |
28,662 |
|
22,371 |
22,603 |
Others |
3,955 |
2,777 |
|
2,122 |
2,168 |
|
32,433 |
31,439 |
|
24,493 |
24,771 |
Less allowance for doubtful accounts |
13,093 |
11,923 |
|
9,724 |
9,031 |
|
19,340 |
19,516 |
|
14,769 |
15,740 |
Receivables from carriers represent receivables arising from interconnection agreements with other telecommunications carriers. The aforementioned receivable balances are shown net of related payables to the same telecommunications carriers.
On October 10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, with a foreign financial institution, or the Purchaser, under which PLDT agreed (1) to sell its receivables from certain eligible foreign carriers for an advance payment of US$50 million, with a balance of US$35 million as of March 31, 2004, and (2) to service, administer and collect the receivables on behalf of the Purchaser. Under the RPD, the Purchaser has no recourse to PLDT should an eligible carrier fail or refuse to settle the assigned/purchased receivables, except when PLDT commits a breach on its representations and warranties under the RPD.
Sale of receivables under the RPD amounted to US$3 million (Php167 million) and US$3 million (Php165 million) for the three months ended March 31, 2004 and 2003, respectively.
7. Inventories and Supplies
This account consists of:
|
Consolidated |
|
Non-Consolidated |
||
|
March 31, 2004 (Unaudited) |
December 31, 2003 (Audited) |
|
March 31, 2004 (Unaudited) |
December 31, 2003 (Audited) |
|
(in million pesos) |
||||
Terminal and cellular phone units |
1,504 |
1,265 |
|
239 |
362 |
Spare parts and supplies |
1,376 |
1,318 |
|
1,366 |
1,308 |
Others |
419 |
486 |
|
24 |
80 |
|
3,299 |
3,069 |
|
1,629 |
1,750 |
Less allowance for inventory obsolescence |
772 |
648 |
|
237 |
237 |
|
2,527 |
2,421 |
|
1,392 |
1,513 |
Spare parts and supplies issued to various projects are included as part of property under construction shown under Note 8 Property, Plant and Equipment.
8. Property, Plant and Equipment
This account consists of:
|
Cable and wire facilities |
Central office equipment |
Cellular facilities |
Buildings |
Vehicles, furniture, and other work equipment |
Communications satellites |
Information origination/ |
Land and land improvements |
Property under construction |
Total |
|
|
(in million pesos) |
||||||||||
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003 |
|||||||||||
Cost |
117,992 |
104,406 |
63,488 |
25,544 |
23,393 |
10,392 |
5,733 |
2,619 |
14,525 |
368,092 |
|
Accumulated depreciation and amortization |
(29,409) |
(38,555) |
(29,081) |
(5,072) |
(14,180) |
(4,478) |
(2,507) |
(307) |
(76) |
(123,665) |
|
Net book value |
88,583 |
65,851 |
34,407 |
20,472 |
9,213 |
5,914 |
3,226 |
2,312 |
14,449 |
244,427 |
|
Three Months Ended March 31, 2004 (Unaudited) |
|||||||||||
Opening net book value |
88,583 |
65,851 |
34,407 |
20,472 |
9,213 |
5,914 |
3,226 |
2,312 |
14,449 |
244,427 |
|
Additions/Transfers |
2,573 |
959 |
2,077 |
114 |
569 |
68 |
112 |
1 |
(867) |
5,606 |
|
Disposals/Retirement |
(4) |
|
|
(5) |
(9) |
|
(29) |
|
|
(47) |
|
Accumulated depreciation and amortization |
(1,346) |
(1,741) |
(2,195) |
(220) |
(726) |
(174) |
(118) |
(11) |
|
(6,531) |
|
Closing net book value |
89,806 |
65,069 |
34,289 |
20,361 |
9,047 |
5,808 |
3,191 |
2,302 |
13,582 |
243,455 |
|
At March 31, 2004 (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
Cost |
120,501 |
105,363 |
65,665 |
25,648 |
23,906 |
9,494 |
5,492 |
2,619 |
13,669 |
372,357 |
|
Accumulated depreciation and amortization |
(30,695) |
(40,294) |
(31,376) |
(5,287) |
(14,859) |
(3,686) |
(2,301) |
(317) |
(87) |
(128,902) |
|
Net book value |
89,806 |
65,069 |
34,289 |
20,361 |
9,047 |
5,808 |
3,191 |
2,302 |
13,582 |
243,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Consolidated |
|
|
|
|
|
|
|
|
|
|
|