Annual Report Xl 2002

PT EXCELCOMINDO PRATAMA Annual Report 2002

BRAND

Through targeted marketing and continued expansion of its stable of services, excelcom has been successful in building a strong brand image with a single brand, “pro-XL”, which covers all prepaid and postpaid services on offer

DIRECT CUSTOMER CONNECTIONS

With more than 50 XL Shop outlets, 200 XL Ritel outlets, 2,000 XL Kita Outlets, and call centers, excelcom is committed to get closer to its subscribers. This positions us for growth thru provision of a customer-centric experience to our esteemed existing and potential customers

CORPORATE GOVERNANCE & OPERATING EFFICIENCY

excelcom has well established business processes and controls and operates on an integrated ERP platform using industry best practices for business processes. excelcom’s corporate governance framework provides for appropriate controls / reviews while allowing for prompt and informed decision making at the same time

QUALITY SERVICE

Operational excellence is the hallmark of our company, and service quality is at its heart. We offer customers a highly reliable wireless network, fully automated operating systems, and – most of all – the dedication of more than 1,300 employees for whom customer service is the highest and most overriding value

WORLD-CLASS NETWORK

excelcom owns an optical fiber backbone running through the length of Java and high capacity microwave transmission links covering most parts of the country with potential for high cellular usage. The above infrastructure ensures high quality transmission service and provides required redundancy

NATIONAL MARKET PRESENCE

excelcom’s network covers all the major provincial capitals in the country. Coverage is extensive in the densely populated islands of Java, Bali & Sumatra

GROWING MARKET

With a population of approximately 220 million and one of the lowest fixed line and cellular penetration rates in the region, highly attractive growth opportunities exist for telecommunications companies in the country. Indonesia has seen rapid cellular growth over the past five years, with over 60% annual growth in subscribers between 1997 and 2002. excelcom is strongly poised to take advantage of the growth opportunities

TABLE OF CONTENTS

MISSION & CORE STRATEGY

4

TO OUR SHAREHOLDERS

5

KEY MILESTONES

6

PRODUCTS & SERVICES

7

ECONOMIC OUTLOOK

9

INDUSTRY OUTLOOK

11

PERFORMANCE HIGHLIGHTS

12

MANAGEMENT DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

15

STRATEGIC FRAMEWORK AND COMPETITIVE LANDSCAPE

22

CORPORATE GOVERNANCE

23

CORPORATE CITIZENSHIP ROLE

24

HUMAN CAPITAL DEVELOPMENT

25

BOARD OF COMMISSIONERS

27

BOARD OF DIRECTORS

28

INDEPENDENT AUDITORS REPORT AUDITED FINANCIAL STATEMENT GLOSSARY

MISSION & STRATEGY

excelcom mission To become the premier Wireless Telephony service provider

excelcom core business strategies ⌦ Cost effectively provide competitive quality service ⌦ Be customer focused ⌦ Be the preferred employer in the telecoms industry

TO OUR SHAREHOLDERS

2002 was a challenging year for excelcom, as we were not immune to the pressures that impacted the Indonesian economy and some in our industry. But we were not nearly as vulnerable, either. While some companies took radical steps to keep pace – divestments, consolidation and business reengineering, excelcom stayed focus on effective use of our resources and pursuing our fundamental growth strategies: wireless and data. The true test of any company’s management expertise, strategic vision, ability to execute and employee talent comes when times get tough. We certainly saw our share of challenges in 2002, and we believe excelcom continues to make progress towards our ultimate goal of becoming the premier wireless telephony service provider in Indonesia. Having completed the debt restructuring exercise in 2002, we have been able to improve and expand our network infrastructure to meet the growing demand in the cellular market. Over US$ 350MM capital expenditure was made in 2001-2002 to improve service capability in existing areas and also to extend coverage to outer islands of Sumatra, Kalimantan, and Sulawesi where growth prospects are extremely lucrative. The company intends to be self-sufficient for transmission in the outer-islands as well by end-2003. This, in combination with our marketing strategies has enabled us to grow the total subscriber (including grace) base from 1.2 million in 2001 to 1.7 million in 2002. Our ARPUs have remained strong relative to competition, enabling the revenue to increase from Rp. 2.1 billion in 2001 to Rp. 2.5 billion in 2002. Our EBITDA also increased from Rp. 1.2 billion in 2001 to Rp. 1.4 billion in 2002.

The Company initiated and liaised with the other operators and tax authorities to obtain major tax concessions for corporate tax and abolishment of luxury sales tax for import of network infrastructure equipment. These initiatives have further reduced our overall costs and have improved our cash flows in 2002 and will continue to have a positive impact in the forthcoming years. To ensure successful execution of its strategy, excelcom’s staffing strategy emphasizes technical quality and world-class customer care. In terms of staffing goals, the Company believes that the number of subscribers per employee should be maintained at a manageable level to ensure high quality service for customers. excelcom continues to review its staffing levels in accordance with the economic and industry standards. Special focus has been provided for competency enhancement through continuous training and learning programs. With competition increasing, Year 2003-2004 will remain challenging years for the Company. The Company intends to achieve a no. 2 status in the industry (revenues & profitability) and is currently embarking on an aggressive program to achieve the same. The Company’s Management & employees are confident of achieving the above objective and are fully committed towards the accomplishment of the same.

Since mid-2002, the Company has been in the process of implementing a new integrated convergent billing and CRM system. This system has started functioning in early 2003 with further enhancements underway. The billing system will provide the Company with a strong edge over competition in terms of features and customer service capability. The Company has further enhanced its corporate governance framework, business processes and increased utilization of the ERP and other company wide software solutions. 5

KEY MILESTONES

KEY MILESTONES IN 2002

Restructured the US$ 380 million debt facility, including US$ 120 million of new financing from the major vendors at favorable terms. Network coverage extended to major provincial capitals of Sumatra, Sulawesi, and Kalimantan. Competency profiling for various jobs completed for enhancement of skills through training and learning. Established an effective defined contribution pension plan. Continued improvement in management of capital expenditures and inventory through more effective business processes and extensive use of the ERP and other software solutions. Obtained abolishment of the regulation on Sales Tax on Luxury Goods previously imposed on sale and imports of luxury goods, including telecommunications components.

Launched new lines of service, i.e. Leased Line and ISP Established an inter-carrier relation / corporate communication unit to ensure proactive management of interconnection related issues and ensured greater focus on external affairs to deal with regional autonomy / associated issues Improved channel distribution through a balanced combination of exclusive dealers, own retail outlets, XL Kita, and electronic reloads Entered into an interest rate hedge to safeguard against long term LIBOR fluctuations At the end of 2002 obtained significant corporate tax concessions from the tax office by way of faster tax depreciation for cellular equipment. This initiative had major impact on the 2002 cash flow and will continue to have significant positive impact in the forthcoming years.

6

PRODUCTS & SERVICES

PREPAID AND POSTPAID excelcom currently offers various products and services to fulfill the communication requirements of the Indonesian people, as follows: Prepaid service – provides instant connection to its high quality GSM network without hassles of administrative requirements, prompt service connection, anonymity and ability to monitor costs. Postpaid service – presents the subscribers with the ultimate service and customized solutions at competitive pricing including international roaming and privileged treatment to high users. International roaming (both ways) – offers international mobile services to more than 150 partners operators in more than 70 countries.

•

Cash received before service is provided;

•

No billing costs or requirement to store individual customer data; and

•

Higher airtime rates and greater flexibility on pricing structures (operators can charge up to 240% of regulated airtime rates).

These benefits of a prepaid subscriber base have enabled the Company to maintain a strong degree of control over its working capital and cash flow. The Company offers postpaid services principally to corporate customers and high ARPU users, where credit risk is generally lower. However, even as excelcom continues to focus on prepaid services, the Company intends to increase its postpaid subscriber base by offering customized packages to attract midhigh end subscribers from competition.

VALUE ADDED SERVICES Much of the growth in Indonesia’s cellular market has been driven by the introduction of prepaid services in 1998, which accounted for more than 90% of new market subscribers between 1999 and 2002. As a result, excelcom has focused on attracting only prepaid customers since early 1999, which currently make up approximately 98% of its current subscriber base. This has been achieved largely through the Company’s “single entry system” policy, whereby new subscribers (with the exception of corporate subscribers) are required to join the network on a prepaid package even if they intend to migrate to a postpaid package immediately. The Company believes that a prepaid subscriber base offers the following significant benefits: •

In addition to the basic voice services, excelcom also offers a variety of Value Added Services (“VAS”) to its subscribers. These services include voicemail, SMS messaging, caller line identification, call forwarding, call waiting and multi-party calling, all of which are charged on a monthly basis with additional monthly fees. The Company also offers a range of other Value Added Services such as mobile banking, location based services, games and downloads etc. The philosophy behind offering these services is to offer a comprehensive range on par with the competition while minimizing investments in those offerings that are unlikely to generate a reasonable return on investment.

No bad debt risk or administrative costs in checking creditworthiness;

7

PRODUCTS & SERVICES

LEASED LINE AND INTERNET ACCESS SERVICE In addition to its cellular services, excelcom optimizes its existing network capacity with new integrated telecommunication services for Corporate customer, to cater telecommunication requirements for both voice and data applications.

Leased Line This service was commercially launched in Q42002, providing high capacity, high reliability network, wide coverage, offering competitive price and utilizing state of the art technology. Broadband Internet Access Broadband Internet Access service enables our customer to acquire high speed, unlimited access to internet connectivity, both for domestic and international links. Customized Mobile solution This service provides a solution concept by utilizing current features and products, optimizing excelcom’s infrastructure capabilities, tailored to customer requirements.

CUSTOMER SERVICE In order to further serve its customers, excelcom currently operates 13 Walk in Centers in various cities throughout the country. In addition, customers can also access our call centers from anywhere, either using the toll-free short numbers 818 from their SIM card or through regular PSTN access number.

8

ECONOMIC OUTLOOK

INDONESIA’S 2002 ECONOMIC PERFORMANCE Year 2002 continues to show slow economic development. The impact of the Bali bombing on 12 October, 2002 may be softened by fiscal spending, but institutional change is the key to sustained economic growth. The target of 4,0% real GDP growth for the year 2002 was out of reach even before the Bali tragedy. On the whole, the macro economic performance in 2002 has remained weak despite some improvement compared with 2001. The condition is evidenced by GDP growth of 3,2% for 2002 compared with 3,3% in 2001. Various systemic issues like the weak banking sector, recurring manpower problems, security concerns, political instability, and social problems including illegal levies, thievery, etc, have made foreign investors reluctant to enter Indonesia. The maintenance of existing foreign investment and encouraging existing investors to remain is a problem. The small GDP growth rate means that Indonesia has yet to disentangling itself from the prolonged economic crisis. As an engine to reduce unemployment, the growth rate of less than 5% is still far below what would be required to resolve Indonesia’s unemployment problem.

Fundamentals boosting the value of the Rupiah included increased supply of foreign currency on the domestic market Consistent with the appreciating trend in the exchange rate, the year 2002 saw relatively manageable increases in price levels, a development also supported by lower public expectations of inflation. The inflation rate eased from 12.55% in 2001 to 10.03%, bringing it close to the 9%-10% target established by Bank Indonesia. The lower rate of inflation in 2002 resulted not only from appreciation in the exchange rate and declining public expectations of inflation, but also from the reduced impact of administered prices compared to 2001. Although increases in administered prices had less impact than in the previous year, the administered prices directly and indirectly triggered a broad range of increases, in fuel, electricity, telephone, transportation, retail cigarettes, LPG gas, and concomitant increases in minimum wage levels, The overall impact of administered prices on CPI-based inflation in 2002 came to about 3,31%, significantly higher than the assumed 2,57% impact projected at the beginning of the year.

Selected Macroeconomic Indicators Item GDP % growth SBI (1Month) (%) CPI Inflation (%) Gross Non Performing Loan CAR (Banking Sector) Average Exchange Rate (Rp/USD)

2001

2002

3.3 17.62 12.55 12.1 20.5 10,255

3.2 13.0 9.75 10.2 22.8 9,316

Source: CIC, BI

EXCHANGE RATE AND INFLATION In 2002 overall, the Rupiah exchange rate showed considerable strength during the year. The Rupiah appreciated by a significant 939 points (9.2%) from an average of Rp. 10,255 to the US dollar in the previous period to Rp. 9,316. On a point-to-point basis, the Rupiah posted even sharper gains, increasing 1,450 points (13.9%) from Rp. 10,400 at the end of 2001 to Rp. 8,950 at the end of 2002.

MONETARY POLICY AND INDICATORS To maintain price and currency stability, monetary policy in 2002 was aimed at maintaining control over base money supply growth by absorbing excess liquidity in the banking system. The base money supply expanded within controlled parameters during the year, remaining within targets with lower growth compared to the previous year. Controlled expansion in the base money supply accompanied by improvement in various macro indicators provided Bank Indonesia with greater room to signal further reductions in interest rates and stimulate the process of economic recovery. Signals of interest rate reductions were provided by setting lower targets for auctions of Bank Indonesia Certificates relative to those reaching maturity, setting a lower number of winning bids compared to number of bids placed and reductions in the interest rate for the Bank Indonesia Deposit Facility.

The strengthening of Rupiah in 2002 was driven by a number of factors, including market sentiment, economic fundamentals and measures implemented by Bank Indonesia to promote currency stability. 9

ECONOMIC OUTLOOK

Despite the limited improvement, banks took advantage of the positive climate created through interest rate reductions to proceed with debt restructuring, strengthen their capital, and increase lending, particularly in the short-term. Falling deposit rates also stimulated investor interest in bonds and mutual funds. In the real sector, stable monetary conditions have provided the business community with opportunity to proceed with internal financial restructuring while helping the public to sustain levels of consumption. The drop in interest rates has also encouraged reputable companies to seek alternative sources of financing on domestic and international financial markets.

BANKING POLICY AND INDICATORS Continuing the policy course charted in previous years, Bank Indonesia’s policies for the banking system in 2002 again focused on the continuation of the twin programs for restructuring of banking institutions and building resilience into the banking system. Under the bank restructuring program, Bank Indonesia has retained the government blanket guarantee scheme although phased reductions will be made in the scope of the blanket guarantee, while continuing to monitor progress in the recapitalization of commercial banks and restructuring or bank credit. The various policies adopted in banking, supported by improvements in macro indicators such as the Rupiah exchange rate and easing of SBI rates have helped bring about improved performance in the banking sector. This is demonstrated in growth in mobilized third party funds, increased capital and capital adequacy ratios, improvement in the non-performing loans ratio, and continued recovery in the bank intermediary function as evident from increased new loan disbursement, rising loan to deposit ratios, increased loan interest income, and change in composition of bank earning assets. Clearly, the banking sector is still not operating like a normal functioning intermediary despite the fact that the key barometers of health – the non-performing loan (NPL) ratio at 10.2% and capital adequacy ratio at 22.8% have improved. Indonesian banks remain reluctant to increase new loan disbursement which hampers the growth in investment activities, employment rate, consumption and economic activity as a whole.

2003 ECONOMIC OUTLOOK The world economy of 2003 is projected to register a faster growth than in 2002. This optimism is supported by the signs of economic restoration in the advanced countries like the United States, European and Asian countries. The improving and advancing world economy is also certain to make a positive impact on the Indonesian economy which can be expected, given a conducive climate in the country, for better growth in 2003. Despite the deadly Severe Acute Respiratory Syndrome (SARS) disease and the Iraqi war, World Bank projects Indonesian GDP growth rate to be around 3.3%. A possible negative impact of the slower growth rate in world trade is likely to be offset by an increase in oil prices. The Indonesian Government is expected to achieve its deficit target of 1.8% of GDP in 2003. The cut in luxury taxes and the costs of reversing the fuel subsidy cut are more than offset by additional oil revenues, and the likely savings in domestic interest payments due to the rapid interest rate decline. A 1% decline in SBI interest rate reduces domestic interest payment by Rp. 2 trillion. Bank Indonesia will maintain a consistent and prudent course in the pursuit of its monetary, banking and payment systems policies. Government took steps to speed up the economic recovery by improving the internal security conditions and enforcement of the rule of law. Nevertheless with strong commitment actualized through meticulous policy planning, solid condition, discipline, patience and diligent implementation of problem-solving measures, the multifold problems and challenges that lay a head can be overcome. Overall, Indonesia’s economy has shown remarkable resilience to the Bali bombing in October 02, and the impact of the Iraqi war is likely to be limited. The increased political stability since the start of the Megawati Government and the more consistent implementation of reforms under the IMF supported programs have been beneficial to macroeconomic stability, inflation, and interest rates, while the Rupiah has kept its strength towards the USD. These trends are expected to continue in 2003.

10

INDUSTRY OUTLOOK

Indonesia, with a population of approximately 220 million by end 2002, is the third most populous country in the Asia Pacific region behind China and India. The nominal GDP per capita in 2002 was US$767, compared with US$488 in India and US$964 in China. However, with one of the lowest fixed line and cellular penetration rates in the region, highly attractive growth opportunities exist for telecommunications companies in the country. Cellular Penetration Rate In Major Asian Countries 100.0

80.0

60.0

40.0

20.0

-

Singapore

Hong Kong

Korea

Malaysia 2002

Thailand

Phillippines

China

Indonesia

India

2005E

Source: Market Research

Prior to the Asian economic crisis, Indonesia’s telecommunications market enjoyed growth in line with a relatively strong overall economic performance. However, the industry was hit hard by the 1997 Asian financial crisis; network build-out in the fixed and cellular sectors slowed and a number of structural problems arose, including the Government’s policy on tariffs and problems between the partners of the Kerja Sama Operasi (“KSOs”)1. While GDP growth slowed sharply and liquidity remained tight, private sector consumption remained buoyant throughout the financial crisis. The cellular operators launched prepaid services in 1998 which were widely accepted in the market and also enabled the operators to overcome the increasing bad debts resulting from the advent of the monetary and economic crisis. Since then, the industry has seen exponential growth and with the worst of the economic crisis now seemingly passed, the Indonesian telecommunications sector growth and investment continue to increase and operators are upgrading networks to satisfy demand that remains strong due to consumer spending and gradual recovery of the economy. The attractive prospects for the industry as well as confidence in the broader Indonesian story have been

1

A type of build, operate and transfer arrangement with Telkom

validated by the two recent investments by SingTel in Telkomsel and ST Telemedia in Indosat. More importantly, the Government has introduced a range of policy initiatives aimed at improving both the telecoms industry structure and regulatory management. Rapid growth has been recorded in the development of the telecommunications and communications sector in 2002, marked by the beginning of duopoly by PT. Telkom and PT. Indosat following the terminations of PT. Telkom’s monopoly in the operation of local telecommunications. The duopoly will stimulate competition between the two state-owned companies in serving the public. As a compensation for the termination of PT. Telkom’s monopoly the government has allowed PT. Telkom to serve the public through DCS (cellular frequency) 1800 and SLI (direct International line) accessible through no. 017. With the termination of PT. Indosat’s monopoly of SLI, the government has permitted PT. Indosat to serve the public through DCS 1800, the local telephone network and the long distance direct telephone network. In the first case, PT. Indosat has been given PT. Telkom’s operational areas in Jakarta and Surabaya. Two other areas – Medan and Batam – have technically been ready to become part of PT. Indosat’s operational areas, but the permit has not been given as the two areas are involved in the operational system cooperation (KSO). Cellular Subscribers end 2002 Satelindo 27%

Other 5%

Telkomsel 53% Excelcom 15%

The progress of the telecommunication sector in 2002 was also marked by the development of the internet business, cellular telephone service, the voice over internet protocol (VoIP) business and an increase in the telephone tariff. PT. Telkom has launched the fixed wireless phone with CDMA technology using 1.9 GHz frequency access in East Java. Many telephone operators have shifted their systems from the wire line system to the fixed wireless CDMA system in building the fixed line telecommunication access for their customers. However, the viability of this CDMA system is yet to be proven elsewhere in the world considering its higher investment costs, higher handset costs, and its flexibility compared to the GSM system. 11

PERFORMANCE HIGHLIGHTS

In IDR Bio.

2000

2001

2002

Balance Sheet Current Assets Fixed Assets - Net Other Assets

156.7 2,005.3 470.9

258.4 3,172.1 465.1

401.2 4,173.1 172.2

Total Assets

2,632.9

3,895.6

4,746.6

Current Liabilities Long-term Liabilities Stockholders’ Equity

1,156.2 1,679.1 (202.4)

771.0 3,180.0 (55.4)

888.9 3,169.8 687.9

Total Liabilities & Stockholders Equity

2,632.9

3,895.6

4,746.6

1,330.5 1,062.0 (354.7) 707.4 372.3 (281.4)

2,073.0 1,783.6 (577.7) 1,205.9 691.0 147.1

2,483.8 2,138.8 (695.1) 1,443.6 752.7 743.3

Income Statements Gross Revenues Net Revenues Operating Expenses EBITDA EBIT Net Income

Selected Ratios EBITDA Margin EBIT Margin Net Income Margin Return on Assets1 Current Ratio

2000

2001

2002

53.2% 28.0% (21.1%) 14.1% 13.6%

58.2% 33.3% 7.1% 17.7% 33.5%

58.1% 30.3% 30.0% 15.9% 45.1%

1 EBIT / Total Assets

Total Subscribers (including grace) 000 subs

Num ber of Subscribers 000 subs

2,000

2,000

1,500

1,500

1,000

1,000

500

500

-

2000

2001 Prepaid

2002

Postpaid

Pre-Post Com position 2002

2%

98% 2000

2001 Prepaid

Postpaid

2002 Prepaid

Postpaid

12

PERFORMANCE HIGHLIGHTS

Net ARPU - Prepaid

Net ARPU - Postpaid

200,000

400,000

175,000

350,000

150,000

300,000

125,000

250,000

100,000

200,000

75,000

150,000

50,000

100,000

25,000

50,000

0

0

2000

2001

2002

2000

Gross Revenue 1,750

2,500

1,458

2,000

1,167

1,500

875

1,000

583

500

292

0

2002

EBITDA

IDR Bio 3,000

2001

Margin 75%

50%

25%

0%

0 2000

2001

2002

2000

2001

2002

13

PERFORMANCE HIGHLIGHTS

Net Incom e

IDR Bio 800

Margin

IDR Bio

50%

800

600

Shareholders' Equity

600 25%

400

200

400

200 0%

0 2000

2001

0

2002

2000

(200)

2001

2002

(200) -25%

(400)

(400)

Efficiency Ratio Subscribers/Em ployee

Total Assets IDR Bio 5,000

1,500

4,000

1,200

3,000

900

2,000

600

1,000

300

0

0 2000

2001

2002

2000

2001

2002

14

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

The following discussion and analysis of our results of operations should be read in conjunction with our audited consolidated financial statements for the year ended 2000, 2001, and 2002. Our audited consolidated financial statements and the financial information discussed below have been prepared in accordance with Indonesia GAAP, which differs in certain respects from U.S. GAAP and/or IAS. For the full year financial

performance against budget, kindly refer to the detailed Management Report.

INTRODUCTION The year 2002 saw further subscriber, revenue and EBITDA growth as the Indonesian cellular market continued to grow at a rapid pace. Total subscriber (including grace) base increased from 1.2 million at end2001 to 1.7 million by end-2002. Prepaid subscribers currently account for almost 97% of the total base with the postpaid subscribers confined to a very high ARPU subscriber segment. Overall EBITDA increased from IDR 1,206 billion in 2001 to IDR 1,444 billion in 2002 (approx. US$ 161 million at an exchange rate of 1 US$ = Rp 8,940 at yearend 2002). EBITDA margin was at approx. 58% and is expected to remain stable in 2003 with the introduction of sophisticated products and services using new convergent billing software supported by significant capital expenditure during the last 2 years ensuring high quality service provision over the coming years. This will be further supported by economies of scale and process improvements.

including the tariff structure, terms of interconnection, and technology and equipment standards and investments. Efficiencies resulting from better business process management and better management of capital projects also play an important role in further supplementing the operating performance and excelcom places significant emphasis on these areas.

COMPETITION Increased competition from existing operators has resulted in, and is expected to continue to result in, greater price competition and offering of innovative products and service packages. Thus, on one hand this would mean increasing pressures on ARPUs while on the other hand it would allow operators providing better value for money and high quality customer service an edge over the competition. Thus, excelcom’s key strategies have been, and will continue to be, maintenance of subscriber loyalty, operating within an effective cost structure to be able to price products competitively, continued focus on introducing of innovative and unique products and services to stimulate usage, quality improvement and coverage expansion, operational efficiency improvement through maximum utilization of ERP software with reference to industry best practice in formulation of business processes viz. e-TOMTM, proactive response to increasing competition, and last but not least, employee development.

RESULT OF OPERATIONS (IDR Bio.)

excelcom’s result of operations, like those of other cellular operators, are substantially dependent on the number of subscribers, the level of subscriber usage, the churn rate of subscribers, ARPU levels, the amount of capital expenditure, the cost of financing, the level and structure of tariffs, and interconnection arrangements. As excelcom operates in a competitive and regulated environment, its operations and financial performance are also affected by the Government’s regulation, and policies regarding the telecommunication industry

2001

%

2002

%

1,330.5

100.0%

2,058.4

99.3%

2,448.7

98.6%

0.0

0.0%

14.6

0.7%

35.1

1.4%

Gross Rev.

1,330.5

100.0%

2,073.0

100.0%

2,483.8

100.0%

268.5

20.2%

289.4

14.0%

345.0

13.9%

Net Revenue

1,062.0

79.8%

1,783.6

86.0%

2,138.8

86.1%

Op. Expense

354.7

26.7%

577.7

27.9%

695.1

28.0%

EBITDA

707.4

53.2%

1,205.9

58.2%

1,443.6

58.1%

(335.1)

(25.2%)

(514.9)

(24.8%)

(690.9)

(27.8%)

372.3

28.0%

691.0

33.3%

752.7

30.3%

Depreciation & Amortization EBIT Int. Exp (Net) Other Income (Losses)

(171.8)

(12.9%)

(249.8)

(12.1%)

(131.6)

(5.3%)

(596.6)

(44.8%)

(219.2)

(10.6%)

446.0

18.0%

EBT

(396.1)

(29.8%)

222.1

10.7%

1,067.2

43.0%

114.7

8.6%

(75.0)

(3.6%)

(323.9)

(13.0%)

(281.4)

(21.1%)

147.1

7.1%

743.3

30.0%

Taxes

2

Net Income

2

%

Cellular Leased Lines and Others

COGS

FACTORS AFFECTING EXCELCOM’S FINANCIAL CONDITION AND RESULT OF OPERATIONS

2000

Includes deferred tax provision

15

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Gross Revenues 2002 Gross Revenue was IDR 2,484 billion, an increase of 19.8% above 2001 gross revenue of Rp. 2,073 billion as number of subscribers increased by 48.6% from 1,073K at end-2001 to 1,595K at end-2002 (total subscribers including grace increased by 37.5% from 1,220K at the end of 2001 to 1,677K at the end of 2002). Revenue growth was below subscriber growth owing to reduction in ARPUs especially after the launch of inter-operator SMS in mid2001. Cellular service remains the main revenue driver accounting for 99% of total revenues. Leased lines revenue showed strong growth in 2002 and increased contribution to overall revenue from 0.7% in 2001 to 1.4% in 2002. The leased line business was commercially launched in mid2002 after a 9 month pilot project starting in the 3rd quarter of 2001.

Cellular Business Cellular service revenues consist of: Revenues derived from sales of cellular starter packs for prepaid and activation fees for postpaid Revenues from outgoing calls from our customers, while at home base or while roaming Revenues from incoming calls to our customer by other operators Charges for SMS and other value added services Monthly service fees from postpaid customers Other charges including replacement SIMs and special numbers Revenues from outgoing calls, incoming calls and SMS usage of international visitors using excelcom network Revenue composition

Operating Revenues - Cellular

2001

%

2002

%

1,717.9

83.5%

2,117.4

86.5%

Postpaid services

189.3

9.2%

207.9

8.5%

Int’l Roaming

151.1

7.3%

123.4

5.0%

2,058.4

100.0%

Prepaid services

Total

2002 prepaid revenue was IDR 2,117.4 billion, a 23.3% increase from 2001 revenue of IDR 1,717.9 billion as total minutes of use increased from 1,725 million minutes in 2001 to 1,802 million minutes in 2002 complimented by the growing popularity of SMS. Year end 2002 prepaid subcribers reached 1,556K, an increase of 50.0% compared to 1,037K in 2001 (Total prepaid subscribers including grace increased by 38.4% from 1,184K in 2001 to 1,639K in 2002) The churn rate for prepaid subscribers increased marginally from 30.6% to 33.0%. The 2002 MOU average was 119, decreasing from 177 in 2001 mainly due to the surge in SMS usage after inter-operator SMS was launched in mid-2001. Thus, ARPU (net) declined from IDR 157,000 in 2001 to IDR 121,000 in 2002. Prepaid Revenues (IDR Bio.) - Voice

- Others Total

80%

100.0%

Prepaid Service

- SMS

100%

2,448.7

2001

%

2002

%

1,573.3

91.6%

1,727.3

81.6%

101.0

5.9%

278.1

13.1%

43.7

2.5%

112.0

5.3%

1,717.9

100.0%

2,117.4

100.0%

60% 40% 20% 0% 2001 Prepaid services

2002 Postpaid services

Voice Revenue for Prepaid increased by 9.8%, from IDR 1,573.3 billion in 2001 to IDR 1,727.3 billion in 2002. Despite this, the voice contribution to the total prepaid revenues decreased from 91.6% in 2001 to 81.6% in 2002 due to increasing SMS usage as explained above. SMS contributed 13.1% of total prepaid revenues in 2002 compared to 5.9% in 2001.

International Roaming

16

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Leased Lines and Other Business

Postpaid Service The postpaid revenue increased by 9.8% from IDR 189.3 billion in 2001 to IDR 207.9 billion in 2002 as total minutes increased from 184 million minutes in 2001 to 190 million minutes in 2002 and with substantial increase in the usage of SMS. Postpaid usage remains high mainly due to the small postpaid base which is comprised of mainly very high usage subscribers. The total year end 2002 postpaid subcribers was 39K, an increase of 8.3% compared to 36K in 2001. The churn rate for postpaid subscribers in 2002 improved from 23.7% in 2001 to 18.8% in 2002. SMS postpaid revenue accounted for 6.7% of the total postpaid revenue in 2002 compared to 3.3% in 2001. The 2002 MOU average was 436, slightly below 452 in 2001. Despite the decrease in MOU, ARPU (net) increased from IDR 342,000 in 2001 to IDR 343,000 due to higher SMS usage. Postpaid Revenues (IDR Bio.)

2001

%

2002

%

- Voice

176.0

92.9%

187.3

90.1%

- SMS

6.2

3.3%

13.8

6.7%

- Others

7.1

3.7%

6.7

3.2%

189.3

100.0%

207.9

100.0%

Total

IDR Bio.

2001

%

2002

%

1.3

8.9%

9.7

27.6%

- Others

13.4

91.8%

25.4

72.4%

Total

14.6

100.0%

- Leased Line

35.1

100.0%

Leased line and other revenues increased from IDR 14.6 billion in 2001 to IDR 35.1 billion in 2002 mainly because the Company commerically launched the leased lines business only in mid-2002. Other revenues within leased line revenue consist of revenues from ISP business. Consolidated Operating Expenses Our consolidated operating expenses increased from IDR 1,382.0 billion in 2001 to 1,732.4 billion in 2002, an increase of 25.4%. This was mainly due to increases in depreciation expenses and selling, general and administrative expenses.

Voice Revenue for Postpaid increased by 6.4% from IDR 176.0 billion in 2001 to IDR 187.3 billion in 2002. Voice revenue contribution to total postpaid revenues decreased from 92.9% in 2001 to 90.1% in 2002. SMS revenue increased from 3.3.% of postpaid revenue in 2001 to 6.7% in 2002.

Operating Expenses Composition 2001 Starter packs and SIM cards 2%

Cellular costs 19%

International roaming Inroamers Revenue for the year 2002 was IDR 123.4 billion, 18.3% below IDR 151.1 billion in year 2001. This was mainly due to a stronger Rupiah and fewer travellers roaming in Indonesia in Q4 2002 owing to the uncertain security situation which has since then recovered. Selling, G&A 33%

Salaries & benefits 9%

Depr'n 37%

17

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Operating Expenses Composition 2002 Starter packs and SIM cards 4%

Cellular costs 16%

Selling, G&A 32%

Cellular costs increased by 11.1% from IDR 256.2 billion in 2001 to IDR 284.7 billion in 2002 as interconnection costs increased following increases in gross revenues. % increase in cellular costs was below % increase in gross revenues due to the full impact of the 2001 retail price increase reflected in the 2002 results and changes in calling pattern. Cost of starter packs and sim cards sold increased by 81.6 %, from IDR 33.2 billion in 2001 to IDR 60.3 billion in 2002 due to increases in sim cards sold in 2002 of around 1 million units compared to around 0.75 million units in 2001. The new sim card production costs per unit in 2002 was also higher than that of 2001 due to the introduction of new sim card with STK technology with microbrowser for “Life in Hand” program in 2002.

Depr'n 40%

Salaries & benefits 8%

Depreciation increased by 34.9%, from IDR 511.2 billion in 2001 to IDR 689.4 billion in 2002 mainly due to acquisition of new fixed assets and accelerated depreciation for certain assets (mainly software) following more rapid upgrades for MSC / BSS equipments.

The following table summarizes our consolidated operating expenses for the year ended December 31, 2002 and 2001 and percentage of each expense item to the total.

2002 salary & benefits increased by 17.4% from IDR 122.7 billion in 2001 to IDR. 144.1 billion in 2002, mainly due to increases in headcount from 1,158 at the end of 2001 to 1,355 at the end of 2002 and annual salary increase.

IDR Bio.

2001

%

2002

%

Cellular costs

256.2

18.5%

284.7

16.4%

33.2

2.4%

60.3

3.5%

Depreciation

511.2

37.0%

689.4

39.8%

Salaries and benefits

122.7

8.9%

144.1

8.3%

Selling, G&A Expenses

458.7

33.2%

552.6

31.9%

Sales commissions

108.6

7.9%

123.5

7.1%

A&P

52.2

3.8%

98.1

5.7%

Rental expenses

49.8

3.6%

60.3

3.5%

Repair & Maintenance

71.4

5.2%

91.6

5.3%

Office expenses

21.1

1.5%

31.6

1.8%

Traveling expenses General & Admin. expenses

14.2

1.0%

16.9

1.0%

Interest Expense

88.4

6.4%

41.6

2.4%

Professional fees Bad Debts : write-offs + provision

40.9

3.0%

69.7

4.0%

2.9

0.2%

2.0

0.1%

9.2

0.7%

17.3

1.0%

1,382.0

100.0%

1,731.1

100.0%

Despite the higher amount of outstanding debt, the net interest expenses decreased by 47.3% from IDR 249.8 billion in 2001 to IDR 131.6 billion in 2002 mainly due to the steep decline in US LIBOR. Also, the net interest expenses in 2001 was higher as it reflected required one time adjustments to reflect the agreed restructuring terms with the lenders.

Cost of starter packs and SIM cards sold

Other Opex Total Operating Expenditure

2002 selling, general and administrative expenses increased by 20.5% from IDR 458.7 billion in 2001 to IDR 552.6 billion in 2002, mainly due to increases in advertising & promotion expenses and non-recurring professional fees mainly relating to the debt restructuring exercise (approximately IDR 30 billion). These increases were partly offset by a 53% decline in general and administration expenses mainly due to negotiations with the regulator on BTS and microwave frequency fees and reversal of IDR38.6 billion of overaccrued frequency fees from previous years.

18

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Consolidated Other (Expenses)/ Income Full year foreign exchange gain was IDR 483 billion as opposed to a 2001 forex loss of IDR 219 billion in 2001 due to appreciation of IDR vs. US$ over the year from IDR 10,400/US$ at the end of 2001 to IDR 8,940/US$ at the end of 2002. Other expenses increased from IDR 0.4 billion in 2001 to IDR 37.4 billion in 2002 mainly due to amortization of the option premium for the interest rate hedge which effectively caps the US$ LIBOR exposure of the Company starting early 2004.

IDR Bio

2000

2001

2002

824.7

1,156.3

1,454.5

871.4

1,746.8

1,642.0

-

607.2

351.5

18.2

35.1

198.6

Cash Flows Net Cash provided operating activities Cash used activities

in

by

investing

Net Cash provided by (used in) financing activities Cash and Cash equivalents

Capitalization

Consolidated Income/ (Loss) Before Income Tax Expenses

Current portion of long term debt

-

31.2

134.1

2002 net income before taxes increased by 380.5% from IDR 222.1 billion in 2001 to IDR 1,067.2 billion in 2002 mainly due to forex gain as explained above.

Long term debt - net of current portion

1,679.1

3,173.6

3,140.8

Stockholder equity

(202.4)

(55.4)

687.9

2,632.9

3,895.6

4,746.6

2,005.3

3,172.1

4,173.1

752.2

1,678.0

1,711.7

Consolidated Income/ (Loss) After Income Tax Expenses 2002 net income after tax increased by 405.3% from IDR 147.1 billion in 2001 to IDR 743.3 billion in 2002 mainly due to higher forex gain as explained above. In December 2002, the Company convinced the tax office to allow faster tax depreciation for cellular capital equipment which enabled the Company to significantly reduce its tax liability for 2002 and will have positive effects on Company cash flows on a going forward basis. Now that the tax depreciation is more in line with the accounting depreciation, deferred tax adjustments are expected to decline on a going forward basis.

Other Financial Data Total assets Property, plant equipment - net

and

Total Capex (cash payments and vendor financing)

As of December 31, 2002, the consolidated cash and cash equivalents amounted IDR 198.6 billion. Principal source of cash in 2002 was cash flows from operations amounting to IDR 1,454.5 billion. These funds were used principally for capital outlays (purchase of fixed assets).

LIQUIDITY AND CAPITAL RESOURCES Cash Flows From Operations The following table shows our consolidated cash flows, capitalization and other selected audited financial data as of and for the years ended December 31 2000, 2001 and 2002:

excelcom has generated strong cash flows from operating activities since 1998, achieved principally through tight cost control and a shift towards a prepaid customer base which has substantially reduced working capital requirements.

19

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

For the year ended December 31, 2002, net cash flow from operating activities increased by 25.8% from IDR 1,156.3 billion in 2001 to IDR 1,454.5 billion in 2002 mainly due to increases in our Income before income tax expense from IDR 222.1 billion in 2001 to IDR 1,067.2 billion in 2002. Investing Activities The majority of excelcom’s capital expenditure is denominated in US Dollars and has been directed towards network equipment to build and subsequently maintain both the cellular network and the Company’s transmission backbone. Capex of IDR 1,711.7 billion. in 2002 was principally used to finance the continued build-out of network coverage and transmission throughout major islands in Indonesia (Java, Bali, Lombok, Sumatra, Batam, Kalimantan, Sulawesi). Majority of the capex was funded by cash from operations and the balance by way of vendor financing under the facility provided as part of the debt restructuring agreement. Financing Activities In 2002, there was vendor financing amounting to approximately US$ 61.1 million as part of the debt restructuring agreement. This facility was used to purchase network equipment from major vendor for coverage expansion and transmission. In 2002, interest and principal repayment of loan amounted US$ 21.4 million (equivalent to IDR. 233 billion) and US$ 3.0 million (equivalent to Rp. 27 billion), respectively. Fixed Assets & Operating Facilities

Network Equipment (Rp. 3,139 billion) Land rights & Buildings (Rp. 68 billion) Office Machinery and Equipment (Rp. 50 billion) Software (Rp 28 billion) Improvements

Assets under Construction (Rp. 839 billion). Assets are predominantly located in Java, and some locations beyond Java such as Sumatra, Bali, Batam, Bintan, Lombok, Kalimantan, and Sulawesi.

Risk Management The Company’s network is comprehensively insured against a wide range of eventualities, with insurance coverage for both the repair / replacement of any damaged physical property and equipment as well as the gross profit foregone during the period of network outage as a result of such damaged property / equipment. Additionally, excelcom entered into interest rate hedge to neutralize the impact of the negative movements of medium and long-term LIBOR rate related to the Restructured Debt beyond the Company’s capacity limit while still availing of the low short term interest rates. The interest rate hedge was done in accordance with excelcom’s Debt Restructuring documents. Currently, excelcom is liaising with its insurance broker to develop the Company’s Business Continuity Plan (BCP) as an ongoing effort to ensure that any risk exposure is recognized and handled appropriately. BCP is also to demonstrate Excelcom's commitment to sound risk management.

CONCLUSION & 2003 FORECAST

Total Net Fixed Assets increased by 31.6% from Rp. 3,172 billion in 2001 to Rp. 4,173 billion in 2002. Fixed assets consist of:

Leasehold

Furniture, Fixtures and Motor Vehicle (Rp. 21 billion), and

(Rp.

26

billion)

The year 2002 was marked by launches in 3 new areas i.e. Kalimantan, South Sumatra, and Sulawesi. This helped in restoring Company’s image and changing the perception of having a limited coverage. Since the last two quarters 2002, excelcom has been exploring the feasibility and possibility to launch MMSrelated (Multi-media services) services in Indonesia after qualitative consumer research. 20

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Competition in 2002 was tight, and is expected to continue in 2003. Following the selective price decline pioneered by excelcom in February 2003, Telkomsel and IM3 followed a similar path. A price war between operators could intensify which will further force the Company to develop more creative product offerings. The implementation of the convergent billing system will allow the introduction of distinctive features which cannot be easily followed or imitated by the competitors, i.e. customized billing, customized product packages, multiple rate plans, hybrid postpaid-prepaid account, etc. This would shift excelcom’s brand from “price quality coverage” to “customer centric experience”, making it synonymous with ‘value for money’. Hence, this will also enable excelcom to maintain strong edge over competition in terms of maintaining high ARPU subscribers. The Company since February 2003 reduced its dependence on Main Distributors for starter packs and vouchers sales, and has relied on its own sales channel of XL Retail and XL Kita shops, specifically in areas other than Jabotabek and East Java where sales are still being handled by Distributors. The goal of this exercise is to obtain a better picture and first-hand information of the market conditions and customers, which will enable the Company to adapt and adjust swiftly to any change in the market. In Q2-2003, excelcom will be launching the MMS-related services and starting Q4-2003, the Company plans to offer few packet based data applications using 2.5G /GPRS technology.

Cautionary Statement Concerning Forward-Looking Statements In this Management’s Discussion and Analysis, and elsewhere in this Annual Report, we have made forward looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates”, “believes”, “estimates”, “hopes”, or similar expressions. The following important factors, along with those discussed elsewhere in this Annual Report could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: Materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments; Material changes in available technology The final outcome of Indonesian Government, Ministry of Transport, Post and Telecommunications regulatory initiatives and proceedings, including arbitration proceedings, and judicial review of those initiatives and proceedings, pertaining to, among other matters, the terms of interconnection, access charges, universal service, and unbundled network elements, etc. The extent, timing, success, and overall effects of competition from others in the GSM markets; The timing and profitability of our entry into the regional market Changes in the accounting regulations by Indonesian GAAP which could result in an impact on earnings.

21

STRATEGIC FRAMEWORK AND COMPETITIVE LANDSCAPE

EXCELCOM ’S COMPETITIVE POSITION There are three major cellular operators in the country accounting for approximately 95% of the total cellular market: 1. Telkomsel (Telkom Group) 2. Satelindo (Indosat Group) 3. excelcom Telkomsel (Telkom Group) Current market leader with over 50% market share. Started operations in 1995 and was the 2nd operator to rollout its network after Satelindo. As a subsidiary of state-owned PT Telkom, it has a relative edge over the competition in terms of securing interconnection, sharing sites with the holding company and availability of PT Telkom’s transmission capability for carrying traffic. With the privatization of the telecommunications industry, the regulatory environment is expected to establish a level playing field for all operators. Satelindo (Indosat Group) The first cellular operator in Indonesia to launch its service in 1994. Currently, it is the second largest cellular operator in Indonesia. ST Telemedia has recently invested in Indosat and has retained consultants to assist it in the vertical merger of Satelindo & IM3. Management attention will likely be somewhat diverted during the course of the restructuring exercise. excelcom Started operations in late 1996. It is currently the third largest cellular operator in Indonesia in terms of subscribers. However, as a result of having the highest ARPUs in the industry, the gap in terms of revenue and EBITDA between excelcom and Satelindo is narrower than the gap in subscriber numbers.

excelcom has a clear strategy to aggressively increase market share and attain the number two market position in the near-term especially in terms of revenue and EBITDA share. The management believes that it is well positioned to achieve their objective in account of the following: Significant network infrastructure spending in 20012002 to improve capacity, quality and coverage: Well positioned to offer tailored product packages to target market segments keeping in mind the regional requirements at all times. Take advantage of the ongoing consolidation / restructuring in the cellular industry by maintaining its strong focus on improving operating performance. The privatization of the telecommunications industry, the regulatory environment is expected to establish a level playing field for all operators.

EXCELCOM ’S KEY STRATEGIES Continue to focus on the prepaid market and offer differentiated products to target market segments Expand postpaid subscriber base by offering customized packages to attract mid-high end subscribers from competition Shift from “Price Quality Coverage” to “Customer Centric Experience”, making the excelcom‘s brand synonymous with ‘value for money’ Increase direct reach to end customers, through excelcom branded retail outlets Continue to improve business processes and leverage information systems to maximize operating and capex efficiency. Reduce overall capex cost through introduction of alternative suppliers for infrastructure equipment

22

CORPORATE GOVERNANCE

In order to enhance the decision-making process at excelcom, the Company implemented a corporate governance structure under the umbrella of the Company’s Articles of Association and the Joint Venture Agreement in February 1998 as set out in the diagram below: Shareholders

Commissioners

Board of Directors Committees Marketing

Network

Corporate Affairs

HR/Comp.

Finance & Audit

Each Committee is responsible for ensuring that all capital projects have been evaluated (and monitored) in the context of consistency with the business plan, financial returns and measurable milestones. The Board of Directors is responsible for the day-to-day operation of the Company’s business and acts as the primary approval and decision-making body of the business for transactions up to an agreed set limit in US dollar terms. The Board of Commissioners supervises the management of the Company by the Board of Directors. The governance process in the Company is evaluated continuously so that the Company can improve its internal process constantly in the light of the rapid development of the telecommunication industry.

23

CORPORATE CITIZENSHIP ROLE

excelcom FOR COMMUNITY Beside its existence as a hi-tech telecommunication service company, excelcom is also playing an important role in supporting and catering to public interest, social life and surrounding environment. These efforts will enable excelcom to portray itself as a Good Corporate Citizen. excelcom’s Good Corporate Citizenship entails support and care to National Education, Original Arts and Surrounding Environment. Several activities related to the aforementioned are as follows: •

Assisted United Nation Organization (UNO) in The

Fourth Preparatory Committee Meeting World Summit On Sustainable Development (Prepcom-IV) which was

held in Bali last May 2002. excelcom received a Certificate of Appreciation from UNO signed by Nitin Desai, Secretary General of The World Summit on Sustainable Development dated July 4, 2002. •

Sponsor to Tim Olimpiade Fisika Indonesia (TOFI) (Indonesian Physics Olympiad Team) as one of Indonesia’s educational treasures specialized in physics for its debut in 33rd International Physics Olympiad (IPhO) 2002 in Bali, Indonesia dated July 21st to 30th, 2002.

•

excelcom donated 100 Used Personal Computer to PT Kereta Api Indonesia, in addition to that around 100 Used PCs were donated to several Educational Institution.

•

excelcom Award, appreciation for Indonesia’s telecommunication observers. This activity is a print and cyber media article writing contest for public and print and cyber media reporters/journalists dated July 1st to October 15th, 2002. excelcom Award is the umbrella name for all excelcom birthday celebration activities. This is a regular based activity started on July 2002 and planned to be conducted every year with more exploration such as Content Application Contest

•

excelcom delivered aid to Bali bombing victims and local government.

A moment of grieve... A moment of peace... A time to embrace the scattered, A time to rise and get started, poem A moment of joy This free style poetry is a reflection of our thoughtfulness and caring related to the bombing incident in Bali on October 12th, 2002 that shocked the world. What excelcom gave was not in any way equal to the pain and wounds experienced by the victims, but excelcom believes in a saying “My endowment is worthless, but my sincerity is true” Besides funds donation to the deceased and wounded victims’ families and local government, excelcom employees also supplied food and drink to all volunteers, Sanglah Hospital, Kuta sector Police Office, and Kuta’s villagers institution (LKMD) directly in the location. All the activities were then closed with joy by having a musical concert called "Bali For The World: Voice of Stars". excelcom’s Good Corporate Citizenship will remain one of its priorities for participation in the development of The Republic of Indonesia.

24

HUMAN CAPITAL DEVELOPMENT

excelcom is a lean organization staffed with 1,355 employees (as of December 31, 2002) who represent a young and dynamic workforce. Average age of the non-managerial staff is 32 years old, while the average age of the senior management is 40 years old. excelcom’s organization is designed to be customer focused. The chart below sets out the organization structure and key functions of the Company’s management divisions.

Employee by age 51-60 1.8%

41-50 7.5%

31-40 44.6%

>60 years 0.4%

<30 years 45.7%

President Director

Network Operations

Network Planning & IT / Switching Design Engineering Network Operation Center (NOC) Field Operation Software Applications

Sales & Marketing, Consumer Solution

Sales & Marketing, Business Solution

Finance

Marketing & Product Management, Voice Marketing & Product Management, Non-Voice Marketing Communication Sales Operation Retail Operation Contact Management

Sales Product Marketing & Development Inter – carrier Relations Corporate Business Solutions

Financial Accounting Management Accounting & Corporate Finance Treasury Revenue Assurance

Human Capital Development

Human Capital Learning & Development Knowledge Management / Elearning

Corporate Logistical Services

CPU & Contract Management Logistics & Fleet Management Real Estate & Facility Management

Corporate Assurance Corporate Communication Corporate Planning & Process

25

The senior management applies an “Open Door” policy MAN flows APIofTcommunication AL EVELand OPideas. M EN T to ensureUcontinuous

H

C

D

Staffing & Hiring Strategy excelcom’s staffing strategy emphasizes technical quality and world-class customer care. In terms of staffing goals, the Company believes that the number of subscribers per employee should be maintained at a manageable level to ensure high quality service for customers. excelcom continues to review its staffing levels in accordance with the economic condition and industry standards. To get closer to pools of high quality fresh graduates, excelcom regularly conducts apprenticeship programs and direct recruitment from universities.

This open communication policy is further strengthened through its Corporate Communication group that actively informs the employees about high-level strategy, progress on key ongoing projects, operating performance etc. on a need to know basis. Such positive culture helps create a healthy working environment with few labor disputes. Furthermore, the Company does not need to carry out any retention program to decrease employee turnover.

Career Planning

Career Path excelcom has implemented a competence-based career advancement project (“CBHRM”). The competencies required for specific jobs or job families are identified, and all staff is required to go through a competency assessment process carried out by an independent consultant. The gap between the competencies required for a job and an individual’s competency levels determines types of training to be conducted and possible job rotation or promotion.

Rewards

Competencies Performance Management

• Competency Assessment

Recruitment & Selection

• Competency Profile

Succession Planning

Training & Development

Learning Program To ensure the successful execution of its strategy, excelcom has been investing considerable resources in extensive world-class training programs for its employees. Learning program in excelcom is grouped into the following sections: Technical learning: for telecommunications network technology areas

personnel in and information

Sales and Marketing learning: for sales and marketing personnel and customer service representatives Generic learning: trainings in managerial behavior, culture building, leadership and teamwork, communication skills, etc. In addition, staff with responsibilities in certain job qualification must take regular certified tests. This is to ensure service quality and conformance to safety regulations and standards.

Culture excelcom is an organization with a vibrant culture, which encourages innovative ideas and full participation of the employees while promoting a solid teamwork environment.

26

BOARD OF COMMISSIONERS

The Members of the Board of Commissioners as at 31 December 2002 were as follows: Peter Sondakh

President Commissioner (Telekomindo representative)

Philip Wang

Commissioner (Telekomindo representative)

Y.W. Junardy

Commissioner (Telekomindo representative)

Sugianto Himawan

Commissioner (Telekomindo representative)

Tan Tjoe Liang

Commissioner (Telekomindo representative)

John Lack

Commissioner (NYNEX Indocel Holding SDN representative)

Stephen Grout Parker

Commissioner (NYNEX Indocel Holding SDN representative)

Lim Lek Suan

Commissioner (AIF representative)

Masami Kobayashi

Commissioner (Mitsui representative)

PAYMENT TO BOARD OF COMMISSIONERS No salaries / commissioners’ fee was paid to the member of the Board of Commissioners in 2002.

27

.

BOARD OF DIRECTORS

The Members of the Board of Directors at 31 December 2002 were as follows: G.F.Rossi

President Director

Navin Sonthalia

Director - Finance

Rudiantara

Director - Strategy & Governance

Kusnadi Sukarja

Director - Sales & Marketing

T.I. Surjo

Director - HR & Support Service

Note: *) Voting right of Director of Network Operation in any Company’s formal Board of Directors meeting has been given to Mr. Mark Denesevich as Foreign Shareholders Representative as stipulated in Deed #100. *) Werner Noz is appointed as a Network Director as of March 1, 2003. The credentials of the Company’s key management personnel are set out below:

President Director - G E R A L D F . R O S S I Mr. Rossi is the President Director of excelcom and has extensive experience in the Indonesian telecommunications industry. He was transferred to excelcom from an executive director position at PT Telekomindo Pratama in August 1998. Mr. Rossi worked for NYNEX Corporation for over 25 years in network and international business development and most recently as Indonesia’s country manager.

Director of Network - W E R N E R N O Z Mr. Noz will commence the position of Director of Network by 1 March 2003. He has been with excelcom since 1996 and held subsequently the position of General Manager Information Technology and General Manager Corporate Operations, which included the functions of Internal Audit, Business Transformation, SAP, and Billing. Before joining excelcom, Mr. Noz held senior positions in a number of large companies, such as Fajar Surya Wisesa, Raja Garuda Mas, and Saudi Technologists in Dhahran-Al Khobar, Saudi Arabia. Mr. Noz holds a master degree in Science Electrical Engineering from Delft University.

28

Director of Sales & Marketing - K U S N A D I S U K A R J A Mr. Sukarja is the Director of Sales & Marketing for excelcom. Mr. Sukarja has over 20 years of experience in sales and marketing. Prior to joining excelcom, he held senior positions in a number of hi-tech and IT-related corporations, including IBM, Astra International and Metrodata Electronics. Mr. Sukarja graduated from ITB (Bandung Institute of Technology) in 1980, majoring in electronics and telecommunication engineering.

Director of Corporate Strategy & Governance - R U D I A N T A R A Mr. Rudiantara has held the position of Director of Corporate Strategy and Governance at excelcom since July 2000, having previously been the Director of Marketing and Customer Services for four years. He holds strong relationships with key telecommunications regulators and operators in Indonesia. Before joining the Company in 1996, Mr. Rudiantara held executive positions at Indosat and its affiliated company Telkomsel for 11 years. Mr. Rudiantara is also currently the co-chairman of the Indonesia Cellular Telecommunication Operators Association.

Director of Finance - N A V I N S O N T H A L I A Mr. Sonthalia has held the position of Director of Finance at excelcom since September 1999, having joined the Company in 1996 as the head of Management Accounting and Treasury & Financial Control shortly after the Company commenced operations. Prior to excelcom, Mr. Sonthalia was the head of Corporate Planning and Management Accounting at one of Indonesia’s largest clove cigarette manufacturers and manufacturer & distributor of cigarettes in Indonesia under license from Philip Morris, USA. Mr. Sonthalia is a qualified Chartered Accountant (ACA), Chartered Management Accountant (ACMA, England), Certified Accountant (ACCA, England), Corporate Treasurer (ACT, England), Cost & Works Accountant, Corporate Secretary and Information Systems Graduate.

Director of Human Resources & Support Services - T A R C I S S I U S I N D A R T O S U R J O Mr. Surjo has held the position of Director of Human Resources and Support Services in excelcom since October 1997. Mr. Surjo has over 20 years of working experience and held numerous senior management positions including senior roles in PT ICI Paints Indonesia and other major Indonesian corporate. Mr. Surjo obtained his engineering qualifications from Technische Hochschule, Darmstadt and Ruhr University, Bochum, West Germany.

PAYMENT TO BOARD OF DIRECTORS The total gross salaries paid to the members of the Board of Directors in 2002 was IDR 13.9 bio., compared to IDR 16.6 bio. in 2001.

29

APPROVAL TO ANNUAL REPORT SUBMISSION AND SIGNATURE PAGES FOR DIRECTORS & COMMISSIONERS (APPROVAL TO THE ANNUAL REPORT OF FINANCIAL YEAR 2002) With reference to the Article 57 of Law No. 1 / 1995, We, The Board of Directors of PT EXCELCOMINDO PRATAMA, hereby submits the attached ANNUAL REPORT to be SIGNED by all members of the Board of Directors and Commissioners:

BOARD OF DIRECTORS NAME

TITLE

GERALD F. ROSSI

PRESIDENT DIRECTOR

NAVIN SONTHALIA

DIRECTOR OF FINANCE

RUDIANTARA

KUSNADI SUKARJA

TI SURJO

SIGNATURE

DATE

DIRECTOR OF STRATEGY & GOVERNANCE

DIRECTOR OF SALES & MARKETING

DIRECTOR HR & SUPPORT SERVICE

30

BOARD OF COMMISSIONERS (APPROVAL TO THE ANNUAL REPORT OF FINANCIAL YEAR 2002) NAME

TITLE

PETER SONDAKH

PRESIDENT COMMISSIONER PT TELEKOMINDO PRIMABHAKTI representative

PHILIP WANG

COMMISSIONER PT TELEKOMINDO PRIMABHAKTI representative

Y.W. JUNARDY

COMMISSIONER PT TELEKOMINDO PRIMABHAKTI representative

SUGIANTO HIMAWAN

COMMISSIONER PT TELEKOMINDO PRIMABHAKTI representative

TAN TJOE LIANG

COMMISSIONER PT TELEKOMINDO PRIMABHAKTI representative

STEPHEN G. PARKER

COMMISSIONER NYNEX INDOCEL HOLDING SDN / BELL ATLANTIC representative

JOHN LACK

COMISSIONER NYNEX INDOCEL HOLDING SDN / BELL ATLANTIC representative

SIGNATURE

DATE

31

LIM LEK SUAN

COMMISSIONER AIF representative

MASAMI KOBAYASHI

COMMISSIONER MITSUI AND CO. LTD representative

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GLOSSARY ARPU

Average Revenue Per User

ATM

Automated Teller Machine

BHP Fee

Biaya Hak Pengelolaan, a concession fee of 1% on net revenue payable to the Government

BSC

Base Station Controller, a device that manages radio resources such as the BTS

BTS

Base Transceiver Station, an electronic equipment that connects mobile telephone calls to the GSM system

CAGR

Compound Annual Growth Rate

CLI

Caller Line Identification

CLIR

Caller Line Identification Restriction

DDI

Daya Dimensi Indonesia

DLD

Domestic Long Distance

E1

Data transfer capacity of 2.048 million bits per second

ERP

Enterprise Resource Planning

eTOMTM

enhanced Telecom Operations Map TM

excelcom

PT Excelcomindo Pratama

GPRS

General Packet Radio Services

Government

The Government of Indonesia

HLR

Home Location Register, a database used in cellular networks to identify / verify a subscriber

IDD

International Direct Dialing

Indosat

PT Indonesian Satellite Corporation

ISAT

PT Indonesian Satellite Corporation

KSO

Kerja Sama Operasi, a type of build, operate and transfer arrangement with Telkom

MOC

Ministry of Communication

MOU

Minutes of Use, the total minutes of use for both outgoing and incoming calls per month per subscriber

MSC

Mobile Switching Center

MTPT

Ministry of Transport, Post and Telecommunications. Formerly the ministry charged with regulating the telecommunications sector, the MTPT has been replaced by the MOC

OFB

Optical Fiber Backbone

OTA

Over the Air Reload

PBH

Pola Bagi Hasil, a type of revenue-sharing arrangement between Telkom and private investors. PBH is the precursor to KSO

PHS

Personal Handyphone System, a Japanese version of a low-powered high frequency alternative to traditional cellular operating in the 1.9GHz range 33

POC

Point Of Charge, the geographical starting point of a call to determine if the call is classified as local or DLD

Rp or Rupiah or IDR

Indonesian Rupiah, the legal currency of the Republic of Indonesia

SDH

Synchronous Digital Hierarchy, a set of international optic fiber transmission standards (for backbone access)

STK

SIM Tool Kit

STM-1

Data transfer capacity of 155.52 million bits per second

SLJJ

Sambungan Langsung Jarak Jauh. Domestic long distance voice traffic (same as DLD)

SMS

Short Messaging Service

Telkom

PT Telekomunikasi Indonesia

TLKM

PT Telekomunikasi Indonesia

US$ or US Dollar

United States Dollar, the legal currency of the United States of America

VAS

Value Added Services

Verizon

Verizon and its predecessor corporate entities, including Bell Atlantic, NYNEX and GTE

VoIP

Voice over Internet Protocol

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