PSE Circular for Brokers No. 622-99

March 29, 1999 PSE CIRCULAR FOR BROKERS NO. 622-99 March 22, 1999 Philippine Stock Exchange PSE Center, Exchange Road Ortigas Center, Pasig City Attention: Listing and Disclosure Group Ladies and Gentlemen : RE : Philippine Long Distance Telephone Company We furnish you with the attached update on the Company's strategic business initiatives, a copy of which was filed with the Securities and Exchange Commission, for information purposes only. LexLib Very truly yours, (SGD.) MA. LOURDES C. RAUSA-CHAN Corporate Secretary PLDT'S STRATEGIC BUSINESS INITIATIVES Initiatives Philippine Long Distance Telephone Company (PLDT) is undertaking a number of strategic business initiatives to meet the challenges of competition and to enhance long-term growth with the aim of positioning PLDT as the preferred full-service telecommunications provider in the Philippines. These initiatives provide an indication of the intended direction of PLDT under its new management. These initiatives are driven by changes in the telecommunications environment in the Philippines and the position of PLDT in that environment. cdll Among the strategic business initiatives being undertaken by PLDT are the following: * The acquisition of Smart Communications, Inc. (SMART) to benefit from the operational and technological synergies that might be achieved. * Searching for a long-term strategic partner among international telecommunications companies to benefit further from access to new technologies and operating experience in order to increase competitiveness and maintain PLDT's market share in Philippine telecommunications markets. * Increasing operating revenues by maximizing capacity utilization, preparing PLDT for rapid growth in data transmission, Internet and other fixed line and wireless products, and diversifying revenue sources to reduce reliance on international revenues by offering broader products and services in fixed lines, wireless, Internet and data. * Rationalizing operating costs by reducing capital expenditures beginning in the year 2000 through efficiencies derived from the proposed combination of the telecommunications assets of PLDT and its subsidiaries and the subsequent focus on greater capacity utilization, disposing or rationalizing the allocation of resources of non-strategic assets, improving the procurement of goods and services to reduce current and future operating costs, realizing synergies from proposed functional mergers of certain operating departments of PLDT, and improving credit, billing and collection processes. PLDT is at a preliminary stage in the implementation of these strategic initiatives. Successful implementation of these initiatives may depend upon factors which are not within the control of PLDT, including decisions of independent parties such as the relevant governmental authorities in the Philippines to approve business combinations or implementation of certain of the strategic initiatives. In particular, achievement of strategic alliances and achievement of rehabilitation of particular businesses such as Piltel require the consent of a number of parties such as creditors of Piltel. There is no assurance that all required consents can be obtained, that such strategic initiatives can be implemented or that they will be successful if implemented. LLpr SMART Acquisition PLDT has begun initial consideration of the advisability of seeking to acquire the entire outstanding capital stock of SMART in consideration of the issuance of new shares in PLDT to SMART shareholders. SMART is affiliated with Metro Pacific Corporation, First Pacific Company Limited, and Nippon Telegraph and Telephone Company, Japan's leading telecommunications company. SMART operates a country-wide cellular telephone system in the Philippines using analog and digital technologies and an international gateway facility. At the end of 1998, SMART had 791,000 cellular subscribers and 108,000 fixed line subscribers, and 458 cell cites, 204 of which were in Metro Manila. SMART uses the Extended Total Access Communications System (ETACS) technology for its analog cellular system and is in the beginning of its launch of its digital system using Global System for Mobile Communication (GSM) technology. PLDT believes that combining certain aspects of the businesses of PLDT, including Pilipino Telephone Corporation (Piltel), with those of SMART should offer a number of benefits to PLDT in achieving its strategic business initiatives. Among the benefits that an acquisition of SMART should provide are increased operating and administrative efficiencies, local exchange service improvements and reduced capital expenditures, long distance traffic integration, and reduced aggregate financing costs and improved access to funding. Any future cooperation and coordination between PLDT and SMART, on the one hand, and Piltel, on the other hand, will be considered only after Piltel reaches an agreement with its creditors. For purposes of verifying the preliminary views of PLDT on the acquisition of SMART, PLDT is currently undertaking a due diligence investigation of SMART and has also appointed a financial advisor and a legal advisor to assist it in evaluating a potential acquisition of SMART. PLDT's Board of Directors has also created a special board committee of independent non-executive directors to evaluate a potential acquisition of SMART and to make appropriate recommendations to PLDT's Board of Directors. The special board committee has appointed a separate financial advisor to advise it and the shareholders of PLDT on any potential acquisition of SMART and to render an opinion to the shareholders of PLDT that the terms of such acquisition are fair from a financial point of view. Strategic Partner PLDT believes that to compete effectively in the Philippine telecommunications markets, it needs to have a strategic relationship with a significant international telecommunications provider. PLDT's financial advisor on the SMART acquisition will also assist PLDT in identifying potential strategic partners and to in evaluating the terms of such arrangement. PLDT believes such a strategic partner could bring assistance in technology through access to greater research and development resources and could assist in network management issues and in enhancing operations. Such a partner could also enhance international relationships with other telecommunications service providers, equipment suppliers and manufacturers. Potential strategic partners are being sought and evaluated. cdt PLDT intends to increase its equity capital in the latter part of 1999. It intends to obtain part of such capital from a potential strategic investor. Piltel Restructuring PLDT currently owns approximately 50.1% of the subscribed capital stock of Piltel and, if the decision in a pending arbitration action instituted by Piltel would have the effect of cancelling the subscription of certain Piltel shares by Philippine Global Communications, Inc., PLDT could own up to approximately 57.8% of Piltel. PLDT has not guaranteed any Piltel indebtedness and has no contractual obligation to invest additional funds in Piltel. Piltel has experienced significant financial difficulties arising from several factors affecting its business over the past few years. In 1996, Piltel's subscriber base was adversely impacted by increased cloning and subscription fraud, following which Piltel terminated one-third of its subscriber base in 1997. In subsequent years, Piltel was adversely impacted by the increasingly competitive environment in the Philippines telecommunications market and the downturn in the Philippine economy. Piltel's capital structure was weakened by heavy reliance upon U.S. dollar borrowings, with emphasis on short-term financing, to finance expansion and compliance with its local exchange network build-out under Executive Order No. 109. Several factors, including high peso interest rates and the decline in the relative value of the Peso, have left Piltel unable to service all of its outstanding obligations. PLDT's financial statements state that there is substantial doubt about Piltel's ability to continue as a going concern. LexLib As of December 31, 1998, Piltel had three major kinds of obligations: * unsecured bank debt and long-term commercial paper of P12.9 Billion (about US$330 Million); * unsecured convertible bonds (which are not likely to be converted into shares since the conversion price is higher than the current market price of Piltel shares) with principal and put premium of US$268 Million; and * a contractual obligation to Marubeni Corporation (Marubeni) for its build-transfer fixed line network in Mindanao undertaken pursuant to its obligation under Executive Order No. 109 expected to aggregate approximately U.S.$279 Million upon delivery and acceptance of the system. In early 1999, Piltel imposed a moratorium on payment of its outstanding indebtedness. Although it is currently making interest payments, it anticipates that it may not generate sufficient cash flow from operations to cover its interest obligations in 1999. Piltel is currently in default on substantially all of its outstanding debts. Piltel reported a net loss of P621 Million in 1997 and P4.1 Billion (US$104.7 Million) in 1998. It does not expect to return to profitability during the next two years. The board of directors of Piltel has added key advisors to Piltel's management who are evaluating the situation at Piltel to determine the extent of operational and financial difficulties and to determine how to rehabilitate Piltel. As the new management team at Piltel has been in place only for four months, it is too early to determine all of the steps that might be taken or the probability of success of any steps. Piltel, however, is implementing a business recovery plan focused on its organizational structure, billing and collection procedures, marketing and customer service functions, information technology, and network infrastructure. It intends to take steps that seek to reduce costs, strengthen financial controls and policies and improve internal communications and morale. In marketing, Piltel intends to attempt to rebuild its brand and image and refocus its marketing strategy toward a segmented customer base heavily focused in the near term on prepaid cellular services in which it is one of the market leaders. The fixed line operations for its regional telephone services will focus on increasing operating efficiencies and target new customers. The Mindanao fixed line service under Executive Order No. 109 will need to be addressed as part of the restructuring plan, given the contractual obligations to Marubeni in connection with its line build-out. In order for the business recovery plan to be successful and to achieve the maximum valuation of Piltel's business as a whole, Piltel will need to achieve concessions from its creditors. Under current assumptions, Piltel believes that such concessions will likely need to extend over at least a five-year to fifteen-Year period for principal repayments. To this end, Piltel is currently in discussions with its creditors to agree upon a restructuring plan. LLpr The objectives of the restructuring plan are to achieve a debt amortization profile which will allow sufficient time for the business recovery plan to be implemented and for Piltel's financial health to be restored. Whether a restructuring plan can be agreed upon and the terms of any such plan are not definite. Any such plan will require unanimous approval of all bank creditors, holders of convertible bonds and Marubeni. PLDT has indicated, preliminarily, that it is prepared, in connection with a mutually acceptable refinancing plan with Piltel's financial creditors to commit to invest in Piltel an additional amount which has yet to be finalized. PLDT believes that any rehabilitation plan of Piltel, to be successful, will likely require the participation of and strong management support from PLDT. Piltel and PLDT are exploring a number of options with respect to the Marubeni payment obligation owing in relation to the Mindanao fixed line operations. The payment obligation arises under the build-transfer contract Marubeni entered into to construct the Mindanao fixed line system for Piltel in connection with Piltel's obligation under Executive Order No. 109. Piltel has accepted delivery of the first phase of the contract. However, while Marubeni has substantially completed network installation under the second phase of the contract and acceptance of this phase is in process, Piltel is required to accept delivery of this phase under the contract only after determining that the network meets technical specifications. As Marubeni has not completed successful testing, Piltel has not yet accepted delivery. Piltel expects the technical specifications to be met in the future. Piltel will not own the assets of the system until it has accepted delivery of all phases, at which time the payment obligation to Marubeni will become firm. In addition to the alternative of extending payment terms for such obligation, Piltel is exploring joint venture, leasing or other arrangements that would allow operation of its fixed line system by Piltel or PLDT and reduce or defer the repayment obligation to Marubeni. cdlex There is no certainty that a debt restructuring plan between Piltel and its creditors can be agreed upon or implemented successfully or that, if implemented, a debt restructuring and business recovery plan will improve the financial or operating conditions of Piltel. PLDT has indicated that it will not invest additional funds in Piltel in the absence of an acceptable restructuring plan including acceptable concessions by creditors.