1. business and industrial

COVER SHEET
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(Company's Full Name)
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(Business Address: No. Street City / Town / Province)
848-5643
Contact Person
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Company Telephone Number
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Month
Day
Fiscal Year
Month
Day
Annual Meeting
Secondary License Type, if Applicable
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Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
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Total No. Of Stockholders
Domestic
To be accomplished by SEC Personnel concerned
File Number
LCU
Document I.D.
Cashier
STAMPS
Remarks = pls. Use black ink for scanning purposes
Foreign
SEC No.
File No. _____
AYALA CORPORATION
(Company’s Full Name)
Tower One, Ayala Triangle
Ayala Avenue, Makati City
(Company’s Address)
848-56-43
(Telephone Number)
December 31, 2008
(Fiscal Year Ending)
(Month & Day)
SEC Form 17- A
(Form Type)
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE
AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES
1.
For the fiscal year ended: December 31, 2008
2.
SEC Identification No.: 34218
3.
BIR Tax Identification No. 000-153-610-000
4.
Exact name of the registrant as specified in its charter: AYALA CORPORATION
5.
Province, country or other jurisdiction of incorporation or organization: Philippines
6.
Industry Classification Code: _______ (SEC Use Only)
7.
th
Address of principal office: 34 Floor, Tower One, Ayala Triangle, Ayala Avenue,
Makati City
Postal Code: 1226
8.
Registrant’s telephone number: (632) 848-5643
9.
Former name, former address, former fiscal year: Not applicable
10.
Securities registered pursuant to Sections 8 and 12 of the SRC, or Sections 4 and 8 of
the RSA:
Title of each class
Preferred A
Preferred B
Common*
Number of shares issued &outstanding
12,000,000
58,000,000
496,983,794
* Net of 1,378,044 treasury shares
Amount of debt outstanding as of December 31, 2008: P54.5 billion
11.
Are any or all of these securities listed in the Philippine Stock Exchange? Yes [x] No [ ]
A total of 495,150,872 Common shares, 12,000,000 Preferred “A” shares and 58,000,000
Preferred “B” shares are listed with the Philippine Stock Exchange as of December 31,
2008, excluding: i) the 3,048,335 Common shares allotted for the stock option/ownership
plans of the Company, the listing of which was approved in principle by the PSE; ii) the
re-issuance of Treasury Shares of 150,296 Common shares; iii) the 333 Common shares
representing the underlying shares for the conversion of Preferred Shares; iv) the
issuance of 958 Common shares to the minority holders of PF Prime Properties, Inc.
pursuant to its merger into the Company and which was approved and licensed by the
SEC; and v) the 1,367,000 Common shares bought under the Share Buyback Program of
the Company which were previously listed with the PSE.
12.
13.
Check whether the registrant:
(a)
has filed all reports required to be filed by Section 17 of the SRC and SRC Rule
17.1 thereunder or Section 11 of the RSA and RSA Rule 11 (a)-1 thereunder and
Sections 26 and 141 of the Corporation Code of the Philippines during the
preceding 12 months (or for such shorter period that the registrant was required to
file such reports): Yes [x] No[ ]
(b)
has been subject to such filing requirements for the past 90 days: Yes [x] No [ ]
Aggregate market value of the voting stock held by non-affiliates: About P53 billion
(based on closing stock prices of Ayala Corporation common shares as of April 8, 2009)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS
DURING THE PRECEEDING FIVE YEARS
14. Check whether the issuer has filed all documents and reports required to be filed by Section
17 of the Code subsequent to the distribution of securities under a plan confirmed by a court
or the Commission. Not applicable
Yes [ ]
No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
15. Briefly describe documents incorporated by reference and identify the part of the SEC Form
17-A into which the document is incorporated:
2008 Audited Consolidated Financial Statements of Ayala Corporation and Subsidiaries
(incorporated as reference for item 1,6,7, and 8 of SEC Form 17-A)
2008 Audited Consolidated Financial Statements of Bank of the Philippine Islands
(incorporated as reference for item 1 and 6 of SEC Form 17-A)
2008 Audited Consolidated Financial Statements of Globe Telecom, Inc. and Subsidiaries
(incorporated as reference for item 1 and 6 of SEC Form 17-A)
2008 Audited Financial Statements of Manila Water Company, Inc. (incorporated as
reference for item 1 and 6 of SEC Form 17-A)
TABLE OF CONTENTS
PART I
BUSINESS AND GENERAL INFORMATION
Item
Item
Item
Item
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
1
2
3
4
PART II
OPERATIONAL AND FINANCIAL INFORMATION
Item 5
Market for Issuer’s Common Equity and Related
Stockholder Matters
Management’s Discussion and Analysis or Plan of Operations
Financial Statements and Supplementary Schedules
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Item 6
Item 7
Item 8
PART III
CONTROL AND COMPENSATION INFORMATION
Item 9
Item 10
Item 11
Item 12
Directors and Executive Officers of the Issuer
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management
Certain Relationships and Related Transactions
PART IV
COPORATE GOVERNANCE
Item 13
Corporate Governance
PART V
EXHIBITS AND SCHEDULES
Item
Exhibits
Reports on SEC Form 17-C (Current Report)
14
SIGNATURES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
INDEX TO EXHIBITS
1
53
55
58
59
61
77
77
85
91
93
94
95
102
PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Description of Business
Ayala Corporation (the Company) is incorporated in the Republic of the Philippines. The
Company’s registered office and principal place of business is Tower One, Ayala Triangle, Ayala
Avenue, Makati City. The Company is a publicly listed company which is 50.92% owned by
Mermac, Inc., 10.58% owned by Mitsubishi Corporation and the rest by the public.
The Company is the holding company of the Ayala Group of Companies with principal business
interests in real estate and hotels, financial services and bancassurance, telecommunications,
electronics, information technology and business process outsourcing services, utilities,
automotives, international and others.
The company was founded in 1834, incorporated in 1968, and was listed on the Philippine Stock
Exchange (then Makati Stock Exchange) in 1976. The industry segments where the Company
and its subsidiaries and affiliates operate are as follows:
•
Real estate and hotels - planning and development of large-scale fully integrated
residential and commercial communities; development and sale of residential, leisure and
commercial lots and the development and leasing of retail and office space and land in
these communities; construction and sale of residential condominiums and office
buildings; development of industrial and business parks; development and sale of upper
middle-income and affordable housing; strategic land bank management; hotel, cinema
and theater operations; and construction and property management.
•
Financial services and bancassurance - universal banking operations, including savings
and time deposits in local and foreign currencies; commercial, consumer, mortgage and
agribusiness loans; leasing; payment services, including card products, fund transfers,
international trade settlement and remittances from overseas workers; trust and
investment services including portfolio management, unit funds, trust administration and
estate planning; fully integrated bancassurance operations, including life, non-life, preneed and reinsurance services; internet banking; on-line stock trading; corporate finance
and consulting services; foreign exchange and securities dealing; and safety deposit
facilities.
•
Telecommunications - provider of digital wireless communications services, wireline voice
communication services, consumer broadband services, other wireline communication
services, domestic and international long distance communication or carrier services and
mobile commence services.
•
Electronics, information technology and business process outsourcing (BPO) services –
electronics manufacturing services provider for original equipment manufacturers in the
computing, communications, consumer, automotive, industrial and medical electronics
markets; venture capital for technology businesses and emerging markets; provision of
value-added content for wireless services, on-line business-to-business and business-toconsumer services; electronic commerce; and technology infrastructure hardware and
software sales and technology services; and onshore- and offshore-business process
outsourcing services.
•
Water utilities - contractor to manage, operate, repair, decommission, and refurbish all
fixed and movable assets (except certain retained assets) required to provide water
delivery services and sewerage services in the East Zone Service Area.
•
Automotive - manufacture and sale of passenger cars and commercial vehicles.
•
•
International - investments in overseas property companies and projects.
Others - air-charter services, agri-business and others.
1
Based on SEC’s parameters, the significant subsidiaries of Ayala Corporation as of December 31,
2008 are AC International Finance, Ltd. (ACIFL - organized in 1995), Ayala Land, Inc. (ALI organized in 1988), and Integrated Micro Electronics, Inc. (IMI - organized in 1980). Except as
stated in the succeeding paragraphs and in the discussion for each of the Company’s significant
subsidiaries, there has been no other business development such as bankruptcy, receivership or
similar proceeding not in the ordinary course of business that affected the registrant for the past
three years.
As to the material reclassification, merger, consolidation or purchase or sale of a
significant amount of assets:
On various dates in 2008, the Company converted US$171.88 million of its deposits on future
subscriptions in AIVPL into equity, increasing the Company’s ownership from 68.71% to 97.78%.
Consequently, Azalea Technology’s ownership in AIVPL was diluted from 31.29% to 2.22%.
On May 1, 2008, AIVPL converted its US$124 million deposits on future subscription in LiveIt
Investments Ltd. (LIL) giving it 99.99% ownership interest in LIL. LSI, which previously held 100%
of LIL, now holds 0.01% stake in LIL. LIL carries the Group’s investments in Integreon Managed
Solutions Inc. (Integreon), Affinity Express Inc. and Newbridge International Investments.
On March 1, 2008, the Company entered into a Deed of Assignment with AIVPL to transfer the
Company’s shares of Bayantrade in exchange for AIVPL’s shares of stocks.
In February 2008, PPI, which is 99.85% owned by the Company and 0.15% owned by other
shareholders, was merged into the Company. This was executed via a share swap. The PPI
shares held by the other shareholders, which were valued at P
= 2.62 per share, were exchanged for
the appropriate number of newly issued Company shares valued at P
= 560.00 per share.
On December 19, 2007, the Company entered into a Subscription Agreement with Deed of
Conversion of deposits for future subscriptions with AIVPL whereby the Company converted its
deposits into equity by way of subscription to common shares of stock of AIVPL at an agreed
Philippine Peso equivalent amounting to P
= 407.8 million. This resulted in the Company having a
direct ownership of 68.71% in AIVPL with Azalea Technology’s ownership interest in AIVPL
reduced to 31.29 % as of December 31, 2007.
On November 29, 2007, the Company entered into a Deed of Assignment with AIVPL where the
Company assigned its 250,000 shares in HRMall, Inc. (with original acquisition cost of P
= 25.0 million
representing 100% of HRMall’s total outstanding stock) in exchange for 583,458 shares of AIVPL
(with par value of US$1.00 per share).
On June 20, 2007, Ayala International Pte. Ltd. (AIPL) and its subsidiaries (AIPL Group) have
undergone restructuring wherein intermediate Hong Kong holding companies, including AG
Holdings, were formed such that BHL became the Company’s holding company for the BHL Group
which now includes the AIPL Group. BHL is a private limited company incorporated under Hong
Kong laws.
The contribution of each segment of the business (in million pesos) to the consolidated
revenues of the Company is as follows:
The following tables regarding business segments present assets and liabilities as of December
31, 2008 and 2007 and revenue and profit information for each of the three years in the period
ended December 31, 2008 (in millions).
2
2008
Parent Company
Revenue
Sales to external
customers
Equity in net earnings of
associates and jointly
controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and
other financing
charges
Other charges
Provision for income tax
Income before income
associated with
noncurrent assets
held for sale
Income associated with
noncurrent assets
held for sale, net of
tax
Net income
Net income attributable
to:
Equity holders of
Ayala Corporation
Minority interests
Other Information
Segment assets
Investment in associates
and jointly controlled
entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
Segment additions to
property, plant and
equipment and
investment properties
Depreciation and
amortization
Non-cash expenses other
than depreciation and
amortization
Electronics,
Information
Technology and
Business Process
Real Estate
Outsourcing
and Hotels
Services
P
= 22,917
International
Automotive
and Others
Consolidated
P
=–
P
= 10,457
P
= 64,053
75
1
207
10,740
10,413
327
7,396
2,243
5,417
79,109
59,500
19,609
P
=–
P
= 30,679
6,702
1,234
3,436
11,372
1,424
9,948
885
855
1,331
33,750
24,613
9,137
(122)
60
265
23,120
22,779
341
(144)
93
178
127
271
(144)
(2,236)
(999)
(197)
(1,051)
(375)
(2,076)
(1,618)
(95)
(115)
(8)
(117)
2
(24)
(9)
(32)
(4,937)
(1,595)
(2,418)
P
= 6,516
P
= 5,635
(P
= 1,487)
(P
= 267)
P
= 262
P
= 10,659
–
P
= 6,516
–
P
= 5,635
–
(1,487)
–
(267)
–
P
= 262
–
P
= 10,659
P
= 6,516
–
P
= 6,516
P
= 2,879
2,756
P
= 5,635
(P
= 1,285)
(202)
(1,487)
(P
= 261)
(6)
(267)
P
= 259
3
P
= 262
P
= 8,108
2,551
P
= 10,659
P
= 34,625
P
= 91,376
P
= 19,016
P
= 3,574
P
= 2,188
P
= 150,779
50,857
–
P
= 85,482
9,916
1,042
P
= 102,334
3,906
55
P
= 22,977
2,952
–
P
= 6,526
509
36
P
= 2,733
68,140
1,133
P
= 220,052
37,606
–
P
= 37,606
45,022
162
P
= 45,184
7,747
12
P
= 7,759
537
6
P
= 543
903
6
P
= 909
91,815
186
P
= 92,001
P
= 84
P
= 4,918
P
= 1,377
P
=5
P
= 355
P
= 6,739
92
1,259
1,494
4
91
2,940
P
= 1,024
P
= 462
P
= 175
P
= 221
P
=–
P
= 1,882
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P 2,145 million, =
P 3,667 million and =
P 923 million, respectively.
3
2007
Parent Company
Revenue
Sales to external customers
Equity in net earnings of
associates and jointly
controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other
financing charges
Other charges
Provision for income tax
Income before income
associated with
noncurrent assets held
for sale
Income associated with
noncurrent assets held
for sale, net of tax
Net income
Net income attributable to:
Equity holders of Ayala
Corporation
Minority interests
Other Information
Segment assets
Investment in associates
and jointly controlled
entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
Segment additions to
property, plant and
equipment and
investment properties
Depreciation and
amortization
Non-cash expenses other
than depreciation and
amortization
Electronics,
Information
Technology and
Business Process
Outsourcing
Real Estate
Services
and Hotels
P
=–
P
= 22,962
P
= 21,655
8,697
903
8,670
18,270
1,819
16,451
804
597
1,464
25,827
17,970
7,857
(2,993)
(2)
(140)
(868)
(874)
(1,579)
13,316
4,536
7
–
P
= 13,316
599
P
= 5,135
–
P
=7
P
= 13,318
(2)
P
= 13,316
P
= 2,814
2,321
P
= 5,135
P
= 26,418
P
= 75,361
55,855
–
P
= 82,273
P
= 41,522
–
P
= 41,522
(28)
77
186
21,890
20,798
1,092
(234)
(685)
(166)
International
Automotive
and Others
Consolidated
(As Restated)
P
=–
P
= 11,961
P
= 56,578
226
114
143
483
242
241
68
2
265
12,296
11,838
458
9,767
1,693
10,728
78,766
52,667
26,099
(16)
(9)
(64)
(4,120)
(1570)
(1,972)
209
369
18,437
26
P
= 235
–
P
= 369
625
P
= 19,062
P
= 230
5
P
= 235
P
= 367
2
P
= 369
P
= 16,256
2,806
P
= 19,062
P
= 16,359
P
= 3,127
P
= 2,610
P
= 123,875
9,034
929
P
= 85,324
P
= 31,899
114
P
= 32,013
3,142
31
P
= 19,532
P
= 6,572
26
P
= 6,598
2,806
–
P
= 5,933
P
= 151
9
P
= 160
435
24
P
= 3,069
P
= 1,334
7
P
= 1,341
71,272
984
P
= 196,131
P
= 81,478
156
P
= 81,634
P
= 172
P
= 2,924
P
= 1,044
P
=–
P
= 92
P
= 4,232
89
1,558
1,251
4
80
2,982
P
= 291
P
= 267
P
= 688
P
=–
P
=–
P
= 1,246
(P
= 473)
480
P
=7
(9)
–
(23)
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P 3,291 million, =
P 4,546 million and =
P 800 million, respectively.
4
2006
Parent Company
Revenue
Sales to external customers
Equity in net earnings of
associates and jointly
controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other
financing charges
Other charges
Provision for income tax
Income before income
associated with
noncurrent assets held
for sale
Income associated with
noncurrent assets held
for sale, net of tax
Net income
Net income attributable to:
Equity holders of Ayala
Corporation
Minority interests
Electronics,
Information
Technology and
Business Process
Outsourcing
Real Estate
Services
and Hotels
P
= 20,557
International
Automotive
and Others
Consolidated
(As Restated)
P
=–
P
= 9,032
P
= 53,394
48
31
390
469
174
295
9
5
177
9,223
8,933
290
8,249
1,521
6,998
70,162
48,565
21,597
P
=–
P
= 23,805
7,926
771
5,040
13,737
1,700
12,037
291
659
1,054
25,809
18,952
6,857
(25)
55
337
20,924
18,806
2,118
(3,895)
(49)
(54)
(813)
(281)
(1,633)
(286)
(49)
(116)
8,039
4,130
1,667
251
222
14,309
–
P
= 8,039
155
P
= 4,285
–
P
= 1,667
–
P
= 251
–
P
= 222
155
P
= 14,464
P
= 8,040
(1)
P
= 8,039
P
= 2,466
1,819
P
= 4,285
P
= 1,195
472
P
= 1,667
P
= 250
1
P
= 251
P
= 222
–
P
= 222
P
= 12,173
2,291
P
= 14,464
(21)
–
(23)
(9)
(8)
(51)
(5,024)
(387)
(1,877)
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P 3,300 million, =
P 4,109 million and =
P 585 million,
respectively.
Please refer also to Note 26 (“Segment Information”) of the Notes to Consolidated Financial
Statements of the 2008 Audited Financial Statements which is incorporated herein in the
accompanying Index to Exhibits.
Distribution methods of the company’s products and services – Not applicable as the Company is
a holding company.
The Company is subject to significant competition in each of the industry segments where it
operates. Please refer to pages 7 – 58 for a discussion on Ayala Land, Inc. (ALI), and Integrated
Micro Electronic, Inc. (IMI), significant subsidiaries, and Globe Telecom (Globe), Bank of the
Philippine Islands (BPI), and Manila Water Company, Inc.(MWCI), significant associates.
The Company and its subsidiaries, in their regular conduct of business, have entered into
transactions with associates and other related parties principally consisting of advances and
reimbursement of expenses, various guarantees, construction contract, and management,
marketing, and administrative service agreements. Sales and purchases of goods and services to
and from related parties are made at normal market prices.
Being a holding company, the Company has no material patent, trademark, or intellectual property
right to its products. The Company’s operating companies, however, may have these material
intellectual property rights, but the dates and terms of their expiration or renewal is not perceived to
have a material adverse effect on the Company. The Company complies with all existing
government regulations and environmental laws, the costs of which are not material. As a holding
company, it has no material development activities.
Employees
Ayala Corp. has a total workforce of 117 employees as of December 31, 2008, classified as
follows:
Management
Staff
77
40
5
The Company expects to more or less maintain its number of employees in the next 12 months.
AC Employee's Union successfully renewed its Collective Bargaining Agreement (CBA) for a
period of 3 years up to end-2009. AC management had not encountered difficulties with its labor
force, and no strikes had been staged in the past.
In addition to the basic salary and 13th month pay, other supplemental benefits provided by AC to
its employees include: mid-year bonus, performance bonus, monthly rice subsidy, medical
expense allocation, dental benefits, various loan facilities and stock ownership plan among others.
Risks
The Group’s risk management policies are summarized below:
Interest Rate Risk
The Group’s exposure to market risk for changes in interest rates relates primarily to the
Company’s and its subsidiaries’ long-term debt obligations. The Group’s policy is to manage its
interest cost using a mix of fixed and variable rate debt.
Foreign Exchange Risk
The Group’s foreign exchange risk results primarily from movements of the Philippine Peso (PHP)
against the United States Dollar (USD). The Company may enter into foreign currency forwards
and foreign currency swap contracts in order to hedge its USD obligations.
Liquidity Risk
The Group seeks to manage its liquidity profile to be able to service its maturing debts and to
finance capital requirements. The Group maintains a level of cash and cash equivalents deemed
sufficient to finance operations. As part of its liquidity risk management, the Company regularly
evaluates its projected and actual cash flows. It also continuously assesses conditions in the
financial markets for opportunities to pursue fund-raising activities. Fund-raising activities may
include bank loans and capital market issues both on-shore and off-shore.
Credit Risk
The Group’s holding of cash and short-term investments exposes the Group to credit risk of the
counterparty. Credit risk management involves dealing only with institutions for which credit limits
have been established. The treasury policy sets credit limits for each counter party. Given the
Group’s diverse base of counterparties, it is not exposed to large contractions of credit risk.
From an organizational standpoint, the respective lead directors/company presidents/chief risk
officers have ultimate accountability and responsibility for ensuring that risk management
initiatives at the subsidiary level are aligned with those of Ayala Corporation. They are
responsible for the preparation/submission of risk reports which reflect that key risks are wellunderstood, assessed/measured and managed. Internal audit units provide risk management
support by performing regular process audits.
The Audit Committee of the Board meets regularly and exercises an oversight role in managing
the risks involved in the operations of the company.
For further details on the company’s financial condition and operations, please refer to the 2008
Audited Financial Statements which is incorporated herein in the accompanying index to exhibits.
AC International Finance Ltd. (ACIFL) - This company (registered in the Cayman Islands)
organized in 1995, was established, inter alia, to raise financing for the registrant and its Group. It
has not engaged, since incorporation, in any material activities other than those related to
financing and has no regular employees. As such, information required by Part 1, Paragraph A of
Annex C, SRC Rule 12 may not be applicable. ACIFL currently wholly owns AYC Holdings ltd.
which in turn owns 67.7% of IMI.
Ayala Land, Inc. (ALI) – organized in 1988 when Ayala Corporation decided to spin off its real
6
estate division into an independent subsidiary to enhance management focus on its real estate
business. ALI went public in July 1991 when its Class “B” Common shares were listed both in the
Manila and Makati Stock Exchanges (the predecessors of the Philippine Stock Exchange - PSE).
On September 12, 1997, the Securities and Exchange Commission (SEC) approved the
declassification of the Company’s common class “A” and common class “B” shares into common
shares.
Products / Business Lines
Ayala Land is the largest and most diversified real estate company in the Philippines. It has
organized its operations into several core businesses and support businesses.
Core Businesses
· Strategic Landbank Management - acquisition, development and sale of large, mixed-use,
masterplanned communities; sale of override units or Ayala Land's share in properties made
available to subsidiaries for development; lease of gas station sites and carparks outside
Ayala Center;
·
Residential Business - sale of high-end residential lots and units (including leisure community
developments), middle-income residential lots and units, and affordable housing units and
lots; lease of residential units; marketing of residential developments;
·
Shopping Centers - development of commercial centers and lease to third parties of retail
space and land therein; operation of movie theaters, food courts, entertainment facilities and
carparks in these commercial centers; management and operations of malls which are coowned with partners;
·
Corporate Business - development and lease or sale of office buildings; sale of industrial lots
and lease of factory buildings; fee-based management and operations of office buildings;
·
Geographic Businesses:
Visayas-Mindanao – development, sale and lease of the Company and subsidiaries' product
offerings in key cities in the Visayas and Mindanao regions
International – investment in an Asian real estate private equity fund and a fund management
company
Support Businesses
·
Construction – land development and construction of ALI and third-party projects
·
Hotels – development and management of hotels; lease of land to hotel tenants
·
Property management – facilities management of ALI and third-party projects
·
Waterworks operations – operation of water and sewage treatment facilities in some ALI
projects
In addition to above business lines, Ayala land also derives other income from its investment
activities and sale of non-core assets.
Products / Business Lines (with 10% or more contribution
revenues):
Residential development
(high-end lots and units, leisure, upper mid-income
housing, affordable housing)
Construction
Shopping centers
to 2008 consolidated
46%
17%
13%
Distribution Methods of Products
The Company’s residential products are distributed to a wide range of clients through various
sales groups.
Ayala Land (parent company) has its own in-house sales team. In addition, it has a wholly-owned
7
subsidiary, Ayala Land Sales, Inc., which employs commission-based sales people. ALI also
formed Ayala Land International Sales, Inc. (ALISI) to tap the overseas Filipino market. ALISI has
established representative offices abroad, particularly in key cities with high concentration of
overseas Filipino workers. In addition, it also developed broker-tie-ups in other countries.
Separate sales groups have also been formed for certain subsidiaries which cater to different
market segments such as Avida Land Corp. (affordable housing) and Alveo Land Corp. (formerly
Community Innovations, Inc.; upper middle-income housing). To complement these sales groups,
Ayala Land and its subsidiaries also tap external brokers.
Development of the business of the registrant and its key operating subsidiaries/affiliates during
the past three years
Ayala Land, Inc. - parent company (incorporated in 1988), pursued major land development
projects, residential and office condominium development, leisure community project and
shopping center operations. Its ongoing land development projects include Abrio at NUVALI,
Ayala Westgrove Heights, Ayala Greenfield Estates and Ayala Northpoint.
Residential
condominium and townhouse projects undertaken in the past three years included The
Residences at Greenbelt (Laguna Tower, San Lorenzo Tower, and Manila Tower). Shopping
center operations at Ayala Center continued while the further redevelopment of both Glorietta and
Greenbelt were pursued. In addition to traditional headquarter-type office buildings and three
older BPO buildings, ALI completed ten BPO buildings in 2008. The company also introduced in
2005 its first leisure community project, Anvaya Cove.
Strategic landbank management
Aurora Properties, Inc. (incorporated in 1992) and Vesta Property Holdings, Inc. (incorporated in
1993) are 70% owned by Ayala Land while Ceci Realty, Inc. (incorporated in 1974) is 60% owned.
These companies, joint ventures with the Yulo Family, finalized plans for the development of
nearly 1,700 hectares of land in Canlubang, Laguna called NUVALI.
Emerging City Holdings, Inc. and Berkshires Holdings, Inc. (incorporated in 2003), both 50%
owned, serve as ALI’s corporate vehicles in the acquisition of a controlling stake in Bonifacio Land
Corp. / Fort Bonifacio Development Corp. through Columbus Holdings, Inc. in 2003. FBDC
continued to sell commercial lots and condominium units at the Bonifacio Global City while it
leased out retail spaces.
Regent Time International Limited (incorporated in 2003), 100% owned by ALI, also owns a stake
at Bonifacio Land Corp. / Fort Bonifacio Development Corp.
Residential development
Alveo Land Corp. (formerly Community Innovations, Inc.) incorporated in 2002, 100% owned by
ALI, offers various residential products to the upper middle-income market. Alveo’s projects over
the past three years include Verdana Homes Mamplasan, The Columns at Ayala Avenue, The
Columns at Legazpi Village and Celadon Residences, Celadon Park, Treveia, Marquee and
Senta.
Avida Land Corp. (incorporated in 1990), a wholly-owned subsidiary, continued to develop
affordable housing projects which offer house-and lot packages and residential lots. Avida also
ventured into the development and sale of farm/hacienda/commercial lots. Project launches in
the past three years included Avida Towers Sucat, Avida Towers New Manila, Avida Towers San
Lazaro, Avida Towers Makati West, Avida Settings NUVALI, Avida Settings Cavite and Avida
Residences San Fernando,.
Serendra, Inc. (incorporated in 1994), 28%-owned by ALI and 39%-owned by Community
Innovations, is engaged in residential development. In 2004, it launched Serendra, a residential
complex at the Bonifacio Global City in Taguig.
Ayala Greenfield Development Corporation (incorporated in 1997), 50-50% owned by ALI and
Greenfield Development Corporation, started development of Ayala Greenfield Estates in
Calamba, Laguna in 1999. Over the past three years, AGDC continued to develop and sell lots in
this high-end residential subdivision.
8
Roxas Land Corp. (incorporated in 1996), 50% owned, sold-out One Roxas Triangle in 2007. The
project was started in 1996 and was completed in September 2001.
Ayala Land Sales, Inc. (incorporated in 2002), wholly-owned, continued to sell ALI’s residential
projects. ALSI employs commission-based brokers.
Ayala Land International Sales, Inc. (incorporated in 2005), wholly-owned, was formed to tap
the overseas Filipino market. It also sells ALI’s various residential projects.
Shopping centers
Northbeacon Commercial Corporation – formerly Alabang Theatres Management Corporation
(incorporated in 1970), is ALI’s wholly-owned vehicle for its Q mall project in Pampanga which
commenced development in March 2007.
Station Square East Commercial Corporation (incorporated in 1989), 69% owned subsidiary of
ALI, broke ground in 2002 for Market! Market!, a 150,000-sqm mall along C-5 Road in Taguig. It
opened Phase 1A of the mall in 2004 and Phase 1B in 2005.
Alabang Commercial Corp. (incorporated in 1978), 50% owned by ALI, continued to manage and
operate the Alabang Town Center.
North Triangle Depot Commercial Corp. (incorporated in 2001), 49% owned by ALI, commenced
development of TriNoma (formerly referred to as North Triangle Commercial Center), a 191,000sqm mall constructed at the main depot of MRT-3 in Quezon City. TriNoma broke ground in June
2005 and partially open in May 2007.
ALI-CII Development Corporation (incorporated in 1997), a 50-50% joint venture with Concepcion
Industries, continued to operate Metro Point, a mid-market mall at the corner of EDSA and Taft
Avenue which was completed in the fourth quarter of 2001.
Accendo Commercial Corp. (incorporated in 2008), 46% owned by ALI, is a joint venture company
with the Floirendo family for the development of a mall in a nine-hectare parcel of land in Bajada,
Davao City.
Lagoon Development Corporation (incorporated in 1996), 30% owned by ALI, is a joint venture
company with Extraordinary Development Corporation. It continued to operate Pavilion Mall
which is located in Biñan, Laguna.
Ayala Theaters Management, Inc. (incorporated in 1984), 100% owned, continued to manage and
operate theaters at the Ayala Center in Makati.
Five Star Cinema, Inc. (incorporated in 2000), also wholly-owned, continued to manage and
operate theaters at the Alabang Town Center.
Food Court Company, Inc. (incorporated in 1997), a 100% owned subsidiary of ALI, continued to
manage and operate a high-end, trend-setting foodcourt known as Food Choices at the Glorietta
4. Similar projects were also established at the Alabang Town Center expansion area and Ayala
Center Cebu.
Leisure and Allied Industries Phils., Inc. (incorporated in 1997), a 50-50% joint venture of ALI with
Australian company, LAI Asia Pte. Ltd., continued to operate family entertainment centers called
TimeZone in various Ayala malls, as well as other malls.
Corporate business
Laguna Technopark, Inc. (incorporated in 1990), 75% owned, continued to sell industrial lots to
local and foreign company locators. It also leases a ready-built factory units within the Laguna
Technopark.
ALI Property Partners Holdings Corp. (incorporated in 2006), is the Company’s 60%-owned
9
vehicle for its partnership with MLT Investments (Goldman Sachs) and Filipinas Investments
(Capmark Asia). ALI has an effective stake of 36% in the joint venture company, ALI Property
Partners Corp., which will handle various BPO projects and investments.
Asian I-Office Properties, Inc. (incorporated in 2008), is the Company’s 60%-owned vehicle that
undertook the construction of Cebu E Bloc, a BPO building within Asiatown IT Park.
Visayas-Mindanao
Cebu Holdings, Inc. (incorporated in 1988), 47% owned by ALI, continued to manage and operate
the Ayala Center Cebu and sell condominium units and lots within the Cebu Business Park. The
company also launched Amara, a high-end seaside residential subdivision, and continued to sell
club shares at City Sports Club Cebu. Through Cebu Property Ventures Development
Corporation, CHI also continued to sell lots at the Asiatown IT Park.
International
First Longfield Investments Limited (incorporated in 2006) is wholly owned by ALI. Through
Green Horizons Holdings Limited, it has a 17% stake in Arch Capital Management Co. Ltd, the
fund management company established to handle the US$330 million Asian private real estate
equity fund which is co-sponsored by ALI with Ayala Corporation.
Construction
Makati Development Corporation (incorporated in 1974), 100% owned by ALI, continued to
engage in engineering, design and construction of horizontal and low-rise vertical developments.
It continued to service site development requirements of Ayala-related projects while it provided
services to third-parties in both private and public sectors.
Property management
Ayala Property Management Corp. (incorporated in 1957), wholly-owned by ALI, continued to
manage properties of ALI and its subsidiaries. It also provided its services to third-party clients.
Hotels
Ayala Hotels, Inc. (incorporated in 1991), 50% owned, continued to operate Hotel InterContinental
Manila and Cebu City Marriott Hotel. In November 2006, AHI sold its 60% stake in Oakwood
Premier Ayala Center to Ascott Residences.
Bankruptcy, Receivership or Similar Proceedings
None for any of the subsidiaries and affiliates above.
Material Reclassification, Merger, Consolidation or Purchase or Sale of a Significant Amount of
Assets (not ordinary) over the past three years
Since 2003, Ayala Land has implemented an asset rationalization program involving, among
others, the sale of installment receivables and divestment of some non-core assets.
Asset sales in 2006 included sale of the Company’s investment in Makati Property Ventures, Inc.,
the corporate vehicle for Oakwood Premier Ayala Center, and of P1.9 billion of accounts
receivables to a bank and a non-bank financial institution. Makati asset sales in 2007 were
bannered by the sale of preferred shares in KHI-ALI Manila, Inc. (KAMI) to Kingdom Manila, B.V.,
in connection with the development of a luxury hotel complex within Ayala Center. In 2008, the
Company sold its shares in three subsidiaries (namely Piedmont Property Ventures, Inc.,
Stonehaven Land, Inc. and Streamwood Property, Inc.) to Megaworld as well as P1.4 billion of
accounts receivable.
Various diversification/ new product lines introduced by the company during the last three years
BPO office buildings and campuses
ALI ventured into the development of office buildings catering to business process outsourcing
firms and call centers in 2004 with the construction of PeopleSupport Center and Convergys.
InfoNXX Building was constructed and completed the following year. In October 2006, ALI signed
a Contract of Lease with the University of the Philippines for a 38-hectare BPO campus project
10
which broke ground in March 2007. As of end-2008, 10 new BPO buildings were completed and
added to the Company’s portfolio such as the first six buildings of the U.P.-AyalaLand
TechnoHub, Solaris, Vertex San Lazaro, NUVALI Technopod and Cebu E Bloc.
Competition
ALI is the only full-line real estate developer in the Philippines with a major presence in almost all
sectors of the industry. ALI believes that, at present, there is no other single property company
that has a significant presence in all sectors of the property market. ALI has different competitors
in each of its principal business lines.
With respect to its mall business, ALI’s main competitor is SM Prime whose focus on mall
operations gives SM Prime some edge over ALI in this line of business. Nevertheless, ALI is
able to effectively compete for tenants primarily based on its ability to attract customers -- which
generally depends on the quality and location of its shopping centers, mix of tenants, reputation
as a developer, rental rates and other charges.
For headquarter-type office rental properties, ALI sees competition in smaller developers such as
Kuok Properties (developer of Enterprise Building), Robinsons Land (developer of Robinsons
Summit Center) and non-traditional developers such as the AIG Group (developer of Philam
Towers) and RCBC (developer of RCBC towers). For BPO office buildings, ALI competes with
the likes of Megaworld and Robinsons Land. ALI is able to effectively compete for tenants
primarily based upon the quality and location of its buildings, reputation as a building owner,
quality of support services provided by its property manager, rental and other charges.
With respect to residential lot and condominium sales, ALI competes with developers such as
Megaworld, Robinsons Land, Filinvest Land and Rockwell Land. ALI is able to effectively
compete for purchasers primarily on the basis of reputation, price, reliability, and the quality and
location of the community in which the relevant site is located.
For the middle-income/affordable housing business, ALI sees the likes of Megaworld, Filinvest
Land, Fil-Estate Land and Empire East as key competitors. Alveo and Avida are able to
effectively compete for buyers based on quality and location of the project and availability of
attractive in-house financing terms.
Suppliers
The Company has a broad base of suppliers, both local and foreign.
Customers
Ayala Land has a broad market base including local and foreign individual and institutional clients.
Licenses
Phenix Building System
A joint venture agreement between Maison Individuelles, S.A. (MISA) of France and Avida Land
was organized in June 1998 and subsequently registered with the SEC as Laguna Phenix
Structures Corporation (LPSC) in July 1999.
LPSC, a 50%-50% joint venture, is primarily engaged in the business of manufacturing,
installation, erection and construction, marketing and promotion, and wholesaling of buildings,
houses and other structures and accessories using the “Phenix” technology (for which a patent
has been registered and issued in the Philippines under RP Patent No. 29862). Both MISA and
Avida Land assigned their respective license rights to LPSC since the latter’s incorporation.
Tex Building System
By virtue of the license rights granted in 1996, Avida Land operates the manufacturing of pre-cast
concrete panels and columns/other components using the TEX Building System with RP Patent
No. 30327.
The on-site battery casting system and the plant facilities were procured from TEX Holdings PLC,
a limited company organized and existing under the laws of England.
11
Government approvals/regulations
The Company secures various government approvals such as the ECC, development permits,
license to sell, etc. as part of the normal course of its business.
Employees
Ayala Land - parent company has a total workforce of 533 employees (2,234 including operating
subsidiaries’ manpower – both consolidated and equitized companies) as of December 31, 2008.
The Company expects to more or less maintain its number of employees in the next 12 months.
The breakdown of the 533 ALI - parent company employees according to type is as follows:
Business Units
248
Project Development Group
134
Support Group
151
Total
533
In 2007, ALI successfully renewed its Collective Bargaining Agreement (CBA) for a period of 3
years up to end-2009. In the same year, ALI also rolled out the Employee Housing program for
employees of ALI and its subsidiaries as well as employees of companies in the Ayala Group.
The prime objective of the program is to provide employees who have rendered at least one (1)
year of service the privilege of owning an ALI property at a special price.
Risks
Ayala Land is subject to significant competition in each of its principal businesses. Ayala Land
competes with other developers and developments to attract purchasers of land and
condominiums, retail and office tenants, and customers for the retail outlets, restaurants and
hotels in its commercial centers.
However, Ayala Land believes that, at present, there is no single property company that has a
significant presence in all sectors of the property market.
High-End, Middle-Income and Affordable Residential Developments With respect to high-end
land and condominium sales, Ayala Land competes for purchasers primarily on the basis of
reputation, reliability, price and the quality and location of the community in which the relevant site
is located. For the middle-income and affordable housing markets, Ayala Land competes for
buyers based on quality of projects, affordability of units, and availability of in-house financing.
Ayala Land is also actively tapping the growing OFW market.
Office Space, Retail and Land Rental For its office rental properties, Ayala Land competes for
tenants primarily based upon the quality and location of the relevant building, the reputation of the
building's owner, the quality of support services provided by the property manager, and rental and
other charges. The Company is addressing the growing demand from BPOs and call centers
through its build-to-suit office buildings and campus-type developments.
With respect to its retail properties, Ayala Land competes for tenants primarily based upon the
ability of the relevant retail center to attract customers - which generally depends on the quality
and location of, and mix of tenants in, the relevant retail center and the reputation of the owner of
the retail center- and rental and other charges. The market for shopping centers has become
especially competitive and the number of competing properties is growing. Some competing
shopping centers are located within relatively close proximity of each of Ayala Land's commercial
centers.
Industrial Property Business The industrial property business is affected by an oversupply which
limits industrial expansion. The entry of China into the World Trade Organization in 2003 poses
strong competition for foreign direct investment. Overall, the industrial property segment is not
likely to show significant demand improvement in the near term.
Hotel Operations The Company's hotels, known for their premium value and service, performed
strongly in each of their respective markets. Any slowdown in tourism could potentially limit
growth of the Company's hotels.
Construction Ayala Land's construction business benefitted from the strong performance of the
construction industry in recent years, particularly from an uptick in development activities mostly
12
from the residential and retail sectors. Any slowdown in the construction business could
potentially cap growth of the Company's construction arm.
Other risks that the company may be exposed to are the following:
-
Changes in Philippine and international interest rates
Changes in the value of the Peso
Changes in construction material and labor costs, power rates and other costs
Changes in laws and regulations that apply to the Philippine real estate industry
Changes in the country's political and economic conditions
To mitigate the above mentioned risks, Ayala Land shall continue to adopt appropriate risk
management tools as well as conservative financial and operational controls and policies to
manage the various business risks it faces.
Working Capital
Ayala Land finances its working capital requirements through a combination of internallygenerated cash, pre-selling, joint ventures and joint development agreements, borrowings and
proceeds from the sale of non-core assets and installment receivables.
Domestic and Export Sales
Amounts of revenue, profitability, and identifiable assets attributable to domestic and foreign
operations for 2008, 2007 and 2006 follow: (in P 000)
2008
2007
2006
33,748,983
-
25,707,229
-
25,558,842
-
9,330,605
-
7,704,392
-
7,422,165
-
Net income (Attributable to equity holders of ALI)
Domestic
4,812,348
4,386,362
Foreign
-
3,865,602
-
Consolidated revenues
Domestic
Foreign
Net operating income
Domestic
Foreign
Total assets
Domestic
Foreign
100,452,961
-
82,981,245
78,250,161
-
-
Compliance with leading practice on Corporate Governance
The evaluation system which was established to measure or determine the level of compliance of
the Board of Directors and top level management with its Manual of Corporate Governance
consists of a Customer Satisfaction Survey which is filled up by the various functional groups
indicating the compliance rating of certain institutional units and their activities. The evaluation
process also includes a Board Performance Assessment which is accomplished by the Board of
Directors indicating the compliance ratings. The above are submitted to the Compliance Officer
who issues the required certificate of compliance with the ALI’s Corporate Governance Manual to
the Securities and Exchange Commission.
To ensure good governance, the Board establishes the vision, strategic objectives, key policies,
and procedures for the management of the company, as well as the mechanism for monitoring
and evaluating Management’s performance. The Board also ensures the presence and adequacy
of internal control mechanisms for good governance.
There were no deviations from ALI’s Manual of Corporate Governance. ALI has adopted in the
Manual of Corporate Governance the leading practices and principles of good corporate
governance, and full compliance therewith has been made since the adoption of the Manual.
ALI is taking further steps to enhance adherence to principles and practices of good corporate
governance.
13
Integrated Microelectronics, Inc. (IMI)- Integrated Microelectronics, Inc. is a stock corporation
organized under the laws of the Republic of the Philippines on August 8,1980, which has three
wholly-owned subsidiaries, namely: IMI USA, Inc., IMI International (Singapore) Pte. Ltd. (IMI
Singapore) and IMI Japan, Inc. (“IMI Japan”) (collectively referred to as the IMI Group).IMI’s
parent company is AYC Holdings, Ltd. (AYC), a corporation incorporated in British Virgin Islands.
AYC is a subsidiary of Ayala Corporation (AC), a corporation incorporated in the Republic of the
Philippines and listed in the Philippine Stock Exchange. The registered office address of IMI is
North Science Avenue, Laguna Technopark, Biñan, Laguna. IMI is registered with the Philippine
Economic Zone Authority (PEZA) as an exporter of Printed Circuit Board Assembly (PCBA), Flip
chip assembly, Box build, Sub-assembly, Enclosure system and provider of electronics product
design, research and development, product development outsourcing and other electronic parts.
IMI is also engaged in the business of providing test development and systems integration
services and distributing related products and equipment. These PEZA registrations entitle IMI to
a four-year income tax holiday (ITH) and an option to apply for ITH extension for a maximum of
three (3) years subject to various PEZA requirements wherein projects and activities are qualified.
IMI’s entitlements to ITH under the current PEZA registrations have expirations beginning July
2008, for which extension has been applied for, up to December 2012 for the different registered
activities. Under its PEZA registrations, IMI’s projects and activities are subject to certain
requirements and are entitled to certain incentives, which include, but are not limited to, ITH and
tax and duty free importation of inventories and capital equipment. Upon the expiration of the ITH
on these projects and activities, IMI will be subject to a five percent (5%) final tax on gross income
earned after certain allowable deductions provided under the Republic Act (R.A.) No. 7916
(otherwise known as the “Special Economic Zone Act of 1995”) in lieu of payment of national and
local taxes.
IMI Singapore was incorporated and domiciled in Singapore having a wholly-owned consolidated
subsidiary incorporated and domiciled also in Singapore which is Speedy-Tech Electronics Ltd.
(STEL). STEL’s subsidiaries are located in Hong Kong, China, Singapore,and Philippines. IMI
Singapore is engaged in the procurement of raw materials, supplies and provision of customer
services while STEL and its subsidiaries are principally engaged in the provision of Electronic
Manufacturing Services (EMS) and Power Electronics solutions to original equipment
manufacturing customers in the consumer electronics, computer peripherals/IT, industrial
equipment, telecommunications and medical device sectors.
IMI USA is at the forefront of technology with regard to precision assembly capabilities including
Surface Mount Technology (SMT), Chip on Flex (COF), Chip on Board (COB), and Flip Chip on
Flex. It specializes in prototyping, low to medium PCBA and sub-assembly. It is also engaged in
engineering, design for manufacturing (DFM) technology, advanced manufacturing process
development, new product innovations (NPI), direct chip attach and small precision assemblies.
IMI Japan was registered and is domiciled in Japan. IMI Japan’s primary purpose is to transact
business with Japanese customers in the following areas: (a) turnkey EMS; (b) engineering and
design services; and (c) original design manufacturing (ODM) solutions. IMI Japan also functions
as central program management for new business in coordination with the Parent Company
(wireless), STEL and Subsidiaries (power management) and IMI USA (film chip). IMI Japan will
secure programs/projects from Japanese customers and then endorse these to IMI or IMI
Singapore. There is no manufacturing operation in IMI Japan.
The global economic crisis that affected most industries in 2008 resulted in a sharp downturn in
consumer spending and layoffs by electronic manufacturing companies in the fourth quarter. The
International Data Corporation estimated 2008 global EMS revenues at US$175.1 billion, a 7.7%
growth from previous year, but a slowdown from the 12.9% growth posted in 2007.
Amidst this environment, IMI’s revenues reached US$441 million, 5% higher than in 2007. The
expansion of business with a leading Chinese telecommunications company and the generation
of 10 new customers or customer programs partly cushioned the slowdown.
The company’s top customer, which belongs to the optical disk drive (ODD) industry, generated
14
6.7% lower revenues than the previous year. It started to decrease its volume orders by the
fourth quarter of 2008 as it faced fierce competition in the super multi-drive market and lukewarm
market acceptance of its next-generation ODD product.
IMI’s Design and Engineering group upgraded its automotive camera platforms and wireless
sensor network designs, and introduced a new platform – a grid-connected solar inverter. The
strategic procurement and materials management system were enhanced to strengthen IMI’s
overall capability and readiness to compete in the turnkey business.
During the year, IMI’s new corporate brand of “Flexible Expertise” was launched in plants in
Singapore, China, Cebu and Cavite, thereby reinforcing its identity both internally and externally.
To further enhance financial safeguards, management established a more defined hedging policy
for the company’s currency and interest rate exposure. The board of directors also created a
finance committee to oversee the implementation of an enterprise-wide risk management program
and major financial policies.
As the global economic crisis continues to unfold, demand particularly in consumer electronics, is
expected to remain soft in 2009.
The long-term prospects of the electronics industry remain positive. IMI is thus constantly on the
lookout to expand its business as more applications for electronics in the automotive, medical,
and industrial industries emerge. There will be an insistent demand for environment-friendly
technology and renewable energy, which IMI is vigorously pursuing as well. Increasingly, Japanbased OEMs have also become more receptive to the idea of outsourcing, while China remains
strategic as the world’s low-cost EMS location in the foreseeable future.
With this vision in mind, IMI seeks to be a US$10-billion revenue electronics solution provider by
2020. It is equipped for an upturn when the global economy stabilizes. With the constantly
shifting business environment, the company’s flexible expertise in its processes and customer
approach is IMI’s blueprint for growth.
Bankruptcy, receivership or similar proceeding: None
Material reclassification, merger, consolidation, purchase or sale of significant amount of assets
not in the ordinary course of business:
On September 27, 2006, IMI’s Board of Directors (BOD) passed and approved the merger of
Eazix, Inc., a wholly-owed subsidiary, with IMI as the surviving entity. The application for the
merger has been approved by Philippine Securities and Exchange Commission (SEC) on
December 28, 2007.
On July 25, 2006, IMI entered into an Asset Purchase Agreement (APA) with M. Hansson
Consulting, Inc. (MHCI) for the purchase of certain assets and existing service contracts with
prevailing customers, and the assumption of certain liabilities of MHCI for a total consideration of
$521,179.
Principal Product lines indicating the relative contribution to sale or revenues:
Computer peripherals
Telecom
Consumer products
Industrial
24%
22%
20%
18%
Percentage of sales or revenues and net income contributed by foreign sales (broken down into
major markets such Western Europe, Southeast Asia, etc.) for each of the last three years:
2008
2007
2006
15
Japan
USA
Europe
Asia & others
40%
23%
23%
14%
48%
21%
18%
13%
53%
19%
12%
16%
Distribution method of the products or services: Direct Sales/Sales Agent
Competition:
IMI is registered with the Philippine Economic Zone Authority (PEZA) as an exporter of Printed
Circuit Board Assembly (PCBA), Flip Chip Assembly, Box build, Sub-assembly, Enclosure system
and provider of electronics product design, research and development, product development
outsourcing and other electronic parts. IMI is also engaged in the business of providing test
development and systems integration services and distributing related products and equipment.
IMI’s subsidiaries are engaged in: power electronics solutions to original equipment manufacturing
customers; precision assembly capabilities including Surface Mount Technology, Chip on Flex,
Chip on Board and Flip Chip on Flex as well as specializing in prototyping low to medium PCBA
and sub-assembly and engineering/design for manufacturing technology, advanced
manufacturing process development, new product innovations, direct chip attach and small
precision assemblies.
Part of the industry and the geographic area in which the business competes or will compete:
IMI competes with leading EMS providers all over the world. Its immediate customers are
Japanese, American and European, but the end customers are predominantly Asia-based. IMI
ranked 2 7th in Manufacturing Market Insider’s list of top 50 EMS companies in 2008 based on
2007 revenues.
Japan
Computer Peripherals, Consumer, Telecom, Industrial, Automotive and
Medical Products
USA
Industrial, Telecom, Consumer, Automotive, Medical and Computer
Peripheral Products
Europe
Industrial, Automotive, Telecom, Consumer and Medical Products
Asia/Others Telecom, Industrial, Consumer, Automotive, Medical and Computer
Peripheral products
Principal methods of competition:
Price and Quality of Products
Principal competitors:
IMI competes with leading EMS providers worldwide. Some of the competitors include Hon Hai,
Flextronics/Solectron, Jabil, Sanmina SCI, Elcoteq, Venture, Benchmark, USI, Plexus and
Celestica.
IMI upholds its expertise in the industry by continuously upgrading its processes, equipment, and
manpower skills. It is known for its flexibility in responding to the demands of its partners for
innovations and new ideas. Customers are assured that IMI will come up with solutions for them.
In terms of business process, IMI is at par with other leading global EMS companies. IMI possess
the same support, materials management, and other value added services. Through the past 28
years, IMI has progressed from a basic assembler of integrated circuits into a complete end-toend Electronics Manufacturing Solutions provider.
Information on the sources and availability of raw materials and the names of principal suppliers:
IMI’s principal suppliers are SIIX, Analog Devices, Austria Microsystem, Global IDI, Future
Electronics, Fuqiang Accurate PCB, and Zilog International the distributors of raw materials.
Dependency of the company on a single customer or a few customers:
The top 10 customers of IMI comprise 53% of the total revenues
The customer that accounts for, or based upon existing orders will account for 20% or more of the
company’s sales: None
Transactions with and/or dependence on related parties: Ayala Corporation and Bank of the
16
Philippine Islands
Patents, trademarks, copyrights, licenses, franchises, concessions, and royalty agreements held:
None
Research and development activities:
undertaken in the last three years.
No material research and development activities
Governmental Regulations
IMI is registered with the Philippine Economic Zone Authority (PEZA), as new export producer of
various projects. IMI is subject to certain requirements and is entitled to certain incentives, which
include but not limited to, income tax holiday (ITH) and duty free importation of inventories and
capital equipment.
Upon the expiration of ITH, IMI will be liable for payment of a 5% final tax on gross income earned
after certain allowable deductions provided under the Republic Act (R.A.) No. 7916 (otherwise
known as the “Special Economic Zone Act of 1995”) in lieu of payment of all other national and
local taxes.
Compliance with Environmental Laws
In 2008, IMI Laguna has completed the identification and assessment of all risks for labor and
ethics, aside from already established management systems on environment, health and safety
and Laguna and Cebu plants harmonization was completed June last year, hence, a single ISO
14001 (International Standard on Environment Management Systems) certification was received
for the Philippines. IMI has been ISO 14001- certified since the year 2000. In addition, QC
080000 certificates granted to Singapore and China-Jiaxing plants after the audit conducted by
SGS ICS Singapore.
Employees:
As of December 31, 2008, the Group had 19,611 broken down as follows:
Senior personnel
Supervisor & Rank & File
Direct Labor
276
4,350
14,985
The group expects to have about 13,968 employees within the next 12 months. The company’s
employees are not on strike, nor are they threatening to strike.
Major risk:
The Group faces four key risk classifications: (1) Industry/Competition Risk, (2) Financial Risk,(3)
Operations Risk and (4) Organization/ Knowledge Capital Risk. To manage industry/competition
risks (i.e. pricing, overall market stresses of the global recession-affected industry which the
Group belongs), a number of action items were identified to address the key risk such as focus
on customer engagement planning, review of pricing algorithms/formation of a Pricing Cluster and
focus on high growth-potential markets i.e. telecommunications, medical and renewable energy.
The action items to manage financial risk (i.e. currency volatility, credit squeeze and customer
balance, low margins and overall financial stability) include stringent monitoring of forex
movements, credit/ customer monitoring, balance sheet stress testing and focus on cost
rationalizations, working capital, operating cost and tax management. Operations risks such as
quality and technological innovation are assessed and managed by means of the creation of a
Quality Cluster, the deployment of the Balanced Scorecard and the definition of R&D platforms
and road map. To assess and manage Organization/Knowledge Capital risk (i.e. integration and
change management as well as talent retention and motivation in the light of current headcount
rationalization as the Group’s response to the effect of the global economic crisis, Global Human
Resource programs and skills planning and other action items to address possible employee
morale issues.
Investments in Bank of the Phil. Islands (BPI), Globe Telecom (Globe) and Manila Water Co., Inc.
(MWC) are significant associates. Their summarized financial information are therefore presented
separately.
17
Bank of the Philippine Islands (BPI) - balance sheets and income statements are shown below:
Balance Sheets
(In Million Pesos)
December 31, 2008
December 31, 2007
Total Resources
666,612
637,285
Total Liabilities
Capital Funds for Equity Holders
Minority Interest
602,740
62,934
938
566,154
70,011
1,120
Total Liabilities and Capital Funds
666,612
637,285
December 31, 2008
December 31, 2007
Interest Income
Other Income
Total Revenues
33,297
10,321
43,618
32,415
13,604
46,019
Operating expenses
Interest expense
Impairment losses
Provision for Income Tax
Total Expenses
18,312
13,834
1,930
2,985
37,061
18,311
13,465
1,250
2,767
35,793
Net Income for the period
6,557
10,226
6,423
134
6,557
10,012
214
10,226
1.98
3.09
Statements of Income
(In Million pesos)
Attributable to:
Equity holders of BPI
Minority Interest
EPS:
Based on 3,246 M common shares as of
December 31, 2008 and 3,245 M common shares
as of December 31, 2007
BPI is the third largest commercial bank in the country in terms of total assets. It has a significant
market share in deposits, lending and asset management and trust business. It is recognized as
the top commercial bank in OFW remittances and enjoys a significant presence in the finance and
operating lease business, government securities dealership, securities distribution and foreign
exchange business. BPI is a recognized leader in electronic banking, having introduced most of
the firsts in the industry, such as automated teller machines (ATMs), a point-of-sale debit system,
kiosk banking, phone banking, internet banking and mobile banking.
Historical Background. Founded in 1852, BPI is the country’s oldest bank and was the issuer of
the country’s first currency notes in 1856. It opened its first branch in Iloilo in 1897 and pioneered
in sugar crop loans thus paving the way for Iloilo and Negros to emerge as prime sugar exporters.
It also financed the first tram service, telephone system, and electric power utility in Manila and
the first steamship in the country.
Business Evolution. In the post World War II era, BPI evolved from a purely commercial bank to a
fully diversified universal bank with activities encompassing traditional commercial banking as well
18
as investment and consumer banking.
This transformation into a universal bank was
accomplished mainly through mergers and acquisitions in the eighties when it absorbed an
investment house, a stockbrokerage company, a leasing company, a savings bank, and a retail
finance company.
BPI consummated three bank mergers since the late 1990s. In 1996, it merged with City Trust
Banking Corporation, a medium sized bank, which further solidified its stronghold in consumer
banking and in 2000, it consummated the biggest merger then in the banking industry when it
merged with the former Far East Bank & Trust Company (FEBTC). This merger established its
dominance in the asset management & trust services and branch banking as well as enhanced its
penetration of the middle market. In 2000, it also formalized its acquisition of three major
insurance companies in the life, non-life and reinsurance fields, a move that further broadened its
basket of financial products. In 2005, BPI acquired and merged with Prudential Bank, a medium
sized bank with a clientele of middle market entrepreneurs.
BPI evolved to its present position of eminence via a continuing process of enhancing its array of
products and services while attaining a balanced and diversified risk structure that guaranteed the
stability of its earning streams.
Business Milestones (2006-2008).
In October 2006, BPI/MS Insurance Corporation, the bank’s non-life insurance company, acquired
the insurance portfolio in the Philippines of Aviva General Insurance Pte, Ltd. of Singapore, a
wholly owned subsidiary of Mitsui Sumitomo. The addition of the Aviva’s balanced portfolio
strengthened and improved BPI/MS healthy mix of retail and corporate accounts.
In December 2006, BPI sold its entire shareholdings in Far East Savings Bank, Inc. (FESBI), a
wholly-owned subsidiary to JTKC Equities, Inc., Surewell Equities Inc. and Star Equities, Inc.
In April 2007, BPI obtained a UK Banking licence from the Financial Services Authority to operate
the Bank of the Philippine Islands (Europe) Plc, a wholly owned subsidiary. This was officially
opened to the public in October 2007. This will serve as the Bank’s gateway to all countries in the
European Union and the rest of Europe.
In October 2008, BPI, Ayala Corporation and Globe Telecom signed a Memorandum of
Agreement to form the country’s first mobile microfinance bank. The venture will extend
wholesale microfinance loans to microfinance institutions and offer other microfinance products in
the future, and will use mobile technology to deliver financial services and expand its retail client
base. BPI and Globe will have an equal stake of 40% while Ayala Corporation will own 20% of
the bank.
Principal Subsidiaries. The bank’s principal subsidiaries are:
(1)
BPI Family Savings Bank, Inc. (BFSB) serves as BPI’s primary vehicle for retail
deposits, housing loans and auto finance. It has been in the business since 1985.
(2)
BPI Capital Corporation is an investment house focused on corporate finance and
the securities distribution business. It began operations as an investment house in
December 1994. It merged with FEB Investments Inc. on December 27, 2002. It wholly
owns BPI Securities Corporation, a stock brokerage company.
(3)
BPI Leasing Corporation is a quasi-bank concentrating on lease finance. Its
quasi-banking license was inherited from the merger with Citytrust Investment Phils. Inc.
in May 1998. It was originally established as Makati Leasing and Finance Corporation in
1970. It merged with FEB Leasing & Finance Corporation on February 20, 2001. It
wholly owns BPI Rental Corporation which offers operating leases.
(4)
BPI Direct Savings Bank is a savings bank that provides internet and mobile
banking services to its customers. It started operating as such on February 17, 2000
upon approval by the Bangko Sentral ng Pilipinas.
(5)
BPI International Finance Limited, Hong Kong is a deposit taking company in
19
Hong Kong. It was originally established in August 1974.
(6)
BPI Express Remittance Corp. (U.S.A) is a remittance center for overseas Filipino
workers and was incorporated on September 24, 1990.
(7)
Bank of the Philippine Island (Europe) Plc is a wholly owned subsidiary of BPI,
which was granted a UK banking license by the Financial Services Authority on April 26,
2007. It was officially opened to the public on October 1, 2007.
(8)
Ayala Life Assurance Inc. is a life insurance company acquired by BPI through its
merger with Ayala Insurance Holdings Corp. (AIHC) in April 2000. It was originally
established in 1933 as Filipinas Life Assurance Co. and has a 100% owned subsidiary,
Ayala Plans, a pre-need company.
(9)
BPI/MS Insurance Corporation is a non-life insurance company formed through a
merger of FGU Insurance Corporation and FEB Mitsui Marine Insurance Company on
January 7, 2002. FGU and FEB Mitsui were acquired by BPI through its merger with
AIHC and FEBTC in April 2000.
Principal Products & Services
The bank has two major categories for products & services. The first category covers its deposit
taking and lending / investment activities. Revenue from this category is collectively termed as
net interest income and accounts for about 65% of revenues. The second category covers
services other than and auxiliary to the core deposit taking, lending, and investing business and
from which is derived commissions, service charges & fees from turnover volume. These include
investment banking & corporate finance fees, asset management & trust fees, foreign exchange,
securities distribution fees, securities trading gains, credit card membership fees, rental of bank
assets, income from insurance subsidiaries and service charges/ commissions earned on
international trade transactions, drafts, fund transfers, various deposit related services, etc. Nonrecurring gains are derived from the disposal of foreclosed/acquired properties.
The Bank of the Philippine Islands (BPI) delivered growth and profitability despite the financial
turmoil and global economic slowdown. The effectiveness of the bank’s risk management
practices was tested and proven during the year. Net income reached P6.4 billion, with return-onequity at 10%. It remained the most profitable local bank among its peers even without the
restatement of its financial statements to reflect back-valuing of investment securities. It was the
only local bank with no exposure to any distressed foreign financial institution. Revenues fell
8.5%, as non-interest income contracted by 24.1%. With the volatile financial markets, securities
trading income fell by P2.8 billion following several cut-loss strategies executed during the year.
The contribution of the insurance companies likewise decreased as a result of a non-recurring
investment income booked in 2007. Net interest income increased by 2.7% as the P30.5 billion
expansion in the average asset base offset the narrowing spreads. BPI set aside an additional
P679 million in impairment losses to reach P1.9 billion. Operating expenses were well managed
and contained at P18.3 billon. Total resources increased by 4.6% to P666.6 billion, as deposits
reached P540.3 billion, up 5.2% over the previous year. While the bank was adequately
capitalized at P63.9 billion, this was augmented by a P5.0-billion Peso Denominated Lower Tier 2
issue in December. Total risk-adjusted capital adequacy ratio was at 14.2%. The bank’s market
capitalization of P125.0 billion remained the highest among listed banks despite a 24.9% drop in
share price performance. The bank declared a cash dividend of P1.80 per share, equivalent to a
cash yield of 4.2%.
For the second year, net loans grew at a double-digit rate of 17% to P320.2 billion.
Notwithstanding, the net 30-day non-performing loans ratio improved from 3.5% a year ago to
3.0%. BPI recorded buoyant loan growth for all major business segments despite the difficult
business conditions. The corporate loan portfolio grew by 18.5% through term loans to power
projects, financing of food companies, and reputable real estate projects in the toptier corporate
segment as well as new trading communities in the middle market and small- and medium-scale
enterprise segment. Microfinance loans more than doubled in volume and yet posted a 100%
repayment rate. BPI also became the first bank to launch the Sustainable Energy Program in
partnership with the International Finance Corporation. The program aims to respond to the global
20
call for support on climate change mitigation. BPI garnered awards in the trade finance business,
the Best Local Trade Finance Bank from Euromoney PLC Trade Finance Asian Awards for
Excellence. Responding to the evolving needs of its corporate customers, the bank rolled out the
One-Government Business Solution. This payment system incorporates Pag-IBIG and PhilHealth
payments in addition to the existing Social Security System (SSS) and Bureau of Internal
Revenue payments within the ExpressLink Internet platform. The introduction of such new cash
management services merited various Best Cash Management Bank—Philippines awards. BPI
Family Savings Bank’s (BFSB) Build Your Dream Housing Loans generated 27.9% more new
housing loans in 2008. This merited BFSB the SSS Balikat ng Bayan award. BFSB was also the
first bank to offer free carinsurance which contributed to the 14% growth in new units financed,
outpacing industry growth of 5.5%. The BPI Real Thrills enlisted over 120 new merchants. The
program was further enhanced with awards and instant gifts for credit card purchases anywhere.
This helped push credit card billings by 27.4% during the year. BPI undertook a brand
revitalization program with a new logo and a brighter corporate color to symbolize the bank’s
friendliness and dynamism. The interiors of about 100 branches were remodeled to better serve
customer needs. Customers can also do financial and non-financial transactions in any branch.
This was complemented by the “Expect more in life with BPI” advertising campaign underscoring
the financial progress that customers can derive from BPI products. BPI Direct introduced SaveUp, an electronic-access-only savings account with free life insurance. Automated teller machines
(ATM) were equipped with Cardless Deposit and Bills Payment functionality which does not
require an ATM card for these transactions. A Software and Management System was likewise
installed to provide product and service updates and display ongoing marketing campaigns. A
Memorandum of Agreement signed between BPI and Smart Telecommunications for the BPI
Express Mobile will further boost the BPI 24/7 banking channels.
BPI was elevated to the first ever Hall of Fame by the Bangko Sentral ng Pilipinas for being the
Top Commercial Bank for OFW Remittances for three straight years. Remittance volume grew by
35.4% to US$4.4 billion, putting BPI’s market share at 27%. Bank of the Philippine Islands
(Europe) Plc was allowed by the Financial Services Authority in the U.K. cross-border services in
12 Eurozone countries which have the most number of overseas Filipinos. The performance of
BPI Asset Management was anchored on the strength of its well established risk management
policies. The peso bond funds consistently outperformed peers with positive returns. The team is
composed of certified financial planners accredited under the International Association of
Registered Financial Consultants. BPI Capital Corporation, the bank’s investment banking arm,
was once again the Joint Issue Manager for the P70 billion Bureau of Treasury’s Retail Treasury
Bond. The company led the capital raising activities of Ayala Land Inc., Manila Water Company
Inc., and Ayala Corporation, and arranged P40 billion worth of loan syndications and private
placements. Ayala Life Assurance Inc., the bank’s life insurance company, launched a series of
Personal Accident products and its web site www.ayalalife.com.ph on its 75th anniversary. BPI/MS
Insurance Corporation, the non-life insurance vehicle, implemented the Quality Management
System with the vision of becoming ISO 9001 certified. BPI was consistently recognized with
various Best Bank awards. While the bank views 2009 with caution given an anticipated economic
slowdown, it will ensure that customer funds are prudently managed and safeguarded. It will keep
its lending window open to support the Philippine economy but continue to exercise credit
discipline as it grows its presence in the credit card andinsurance businesses.
Distribution Network
BPI has 831 traditional branches across the country, including 161 Express Banking Centers
(EBCs) by the end of 2008. EBCs are kiosk branches much smaller than the traditional branch
but fully equipped with terminals allowing direct electronic access to product information and
customers’ accounts as well as processing of self service transactions. They serve as sales
outlets in high foot traffic areas such as supermarkets, shopping malls, transit stations, and large
commercial establishments
BPI’s ATM network, known as the ExpressNet, complements the branch network by providing
banking services to its customers at any place and time of the day. As of December 2008, the
ExpressNet consortium had a total of 3,597 ATMs servicing its customers nationwide. And with
the interconnection with Megalink and Bancnet since 1997 and 2006, respectively, BPI ATM card
holders have access to almost 8,000 ATMs. BPI’s ATM network is likewise interconnected with
the Cirrus International ATM network and VISA International. In addition, BPI also operates an
21
Express Payment System (point-of-sale/debit card system) involving 21,771 terminals in major
department stores, supermarkets, and merchant establishments. This facility, interconnected with
the Maestro international POS network, allows customers to pay for purchases electronically
through their ATM cards.
The BPI Express Phone Facility enables BPI depositors to inquire account balances and latest
transactions, request for bank statements, transfer funds to other BPI accounts real time, and pay
for their various bills (e.g., PLDT, Meralco, club dues, insurance premiums) and reload prepaid
cell phones electronically. To further enhance the Express Phone facility, a Call Center was
established in 1998 to provide phone banker assisted services to its customers. The bank also
provides Mobile banking service for busy and mobile depositors. In 2000, BPI launched its B2C
web-based platform, Express Online (EOL), which provides all the transactional services available
through the Express Phone plus the real-time convenience of viewing transactional history and
balances on screen. EOL now also allows investment transactions through its BPI Trade platform
where customers can invest in equities without the need of any dealer or broker.
BPI also maintains a specialized network of remittance centers for servicing overseas remittances
from contract workers and other Filipinos working abroad. To date, BPI has 21 Remittance
Centers and Desks located in Hong Kong, USA and Europe. BPI also maintains tie-ups with
various foreign entities in locations where this mode of operation is more effective and costefficient.
On the lending side, BPI maintains 8 Business Centers across the country to process loan
applications, loan releases, and international trade transactions, and provide after-sales servicing
to both corporate and retail loan accounts.
Competition
Mergers, acquisitions and closures trimmed down the number of players in the industry from a
high of 50 upon the liberalization of rules on the entry of foreign banks to 38 universal and
commercial banks in 2008.
In 2008, industry lending posted a substantial 20.5% growth. Corporate lending remained very
competitive resulting in even narrower spreads while pockets of growth were seen in the middle
corporate market segment and small and medium-sized enterprises. Recent trend towards
regionalization of multinational company as well as access to the debt and equity market
continued to weigh down on top tier corporate borrowings. Yields to the middle corporate market
segment were wider but can be highly vulnerable to economic shocks. Selected manufacturers
with 80% capacity presented some prospects for loan growth even as most corporate accounts
remained saddled with over-capacity.
The weak demand for corporate loans prodded banks to venture more extensively into consumer
lending. BPI, being a well-entrenched, long-term player enjoys the advantage of having an
undisputed depth of experience in this demanding business that spans origination/credit selection,
collection, and asset recovery activities.
The Overseas Filipino Workers (OFW) remained to be the focus market among banks as it
continued to post great potential despite the recent global financial crisis. In view of this, BPI
continued to strengthen its stake in this segment by actively cross selling products other than the
remittance service and exhibited growth in OFW deposits and housing loans. Over the years,
redeployment and migration is seen to be a preferred option for Filipino workers and professionals
as long as the domestic economy can not provide meaningful employment.
Based on required published statements by the Bangko Sentral ng Pilipinas (BSP) as of
December 2008, BPI is the third largest bank operating in the country in terms of assets,loans and
deposits, second in terms of asset management and trust business and the largest in terms of
capital. Total assets of BPI based on PFRS compliant audited financial statement are higher
though than the published statements prepared along BSP standards.
Patents, Trademarks, Licenses, Franchises, etc.
BPI sells its products and services through the BPI trademark and/or trade name. All its major
22
financial subsidiaries carry the BPI name e.g. BPI Family Savings Bank, BPI Capital, BPI
Securities, BPI Leasing, BPI Direct Savings, and so do its major product & service lines.
In addition to the BPI trademark, it markets its products through the “Express” brand name.
At BPI Family Savings Bank, the product trademarks include the Build Your Dream Housing Loan,
the Drive Your Dream Auto Loan and the Grow your SME Business Loan. Other product brands
of BPI and BFSB are Maxi-One, Platinum Savings, Multi Earner Savings, Jumpstart Savings, and
Get Started Savings Account and Plan Ahead Time Deposit. BPI Direct Savings bank products
are BPInoy Savings, BPInoy Housing Loan, BPInoy Auto Loan and BPI Direct Save-Up.
In terms of corporate business licenses, BPI has an expanded commercial banking license while
BPI Family Savings Bank and BPI Direct Savings have savings bank licenses. Both BPI and BPI
Direct Savings have e-banking licenses. BPI Capital Corporation has an investment house
license. BPI Leasing has a finance company as well as quasi-banking license.
Related Parties
BPI extends loans to its Directors, Officers, Stockholders and their Related Interests or DOSRI in
the normal course of business and on equal terms with those offered to unrelated third parties.
The Bangko Sentral ng Pilipinas (BSP) imposes an aggregate ceiling of 15% of the bank’s loan
portfolio for these types of loans with the unsecured portion limited to thirty percent (30%) of the
outstanding loans, other credit accommodations and guarantees. As of December 31, 2008,
DOSRI loans amounted to 2.3% of loans and advances as per Note 31 of the 2008 BPI Audited
Financial Statements.
Government Regulations
Under the General Banking Act, the Monetary Board of the BSP is responsible for regulating and
supervising financial intermediaries like BPI. The implementation and enforcement of the BSP
regulations is primarily the responsibility of the supervision and examination sector of the BSP.
The General Banking Act was revised in 2000. The revisions allow (1) the issuance of tier 2
capital and its inclusion in the capital ratio computation, and (2) the 100% acquisition of a local
bank by a foreign bank. The second item removes the advantage of a local bank over a foreign
bank in the area of branching. In 2005, the BSP issued Circular no. 494 covering the guidelines
in adopting the provision of Philippine Financial Reporting Standards (PFRS) and Philippine
Accounting Standards (PAS) effective the annual financial reporting period beginning 1 January
2005. These new accounting standards aim to promote fairness, transparency and accuracy in
financial reporting.
The Special Purpose Vehicle Law was passed in 2002 and allows the creation of special purpose
vehicles (SPV) to invest in and acquire non-performing assets of financial institutions.
Transactions eligible under the law are exempt from capital gains tax. Sellers who may incur
losses in their transactions which may result in negative tax positions may utilize their NOLCO for
a maximum period of 5 years.
Research and Development Activities
BPI spent the following for research and development activities during the last three years:
2006
2007
2008
228.7
209.3
200.8
% of Revenues
0.8
0.6
0.7
Employees
Below is a breakdown of the manpower complement of BPI in 2008 as well as the approved
headcount for 2009.
23
Unibank
Insurance Companies
TOTAL
December 31 2008
Officers
Staff
Total
4,090
7,358
11,448
157
484
641
4,247
7,842
12,089
2009
Plan
11,520
680
12,200
Majority of the rank and file employees are members of various unions. New Collective
Bargaining Agreements (CBAs) of the parent company with the employees union in different
areas were concluded/signed from June 30, 2006 to December 5, 2006. The new CBA will cover
the period 2006 – 2009.
Risk Management
The bank employs a disciplined approach to managing all the risks pertaining to its business to
protect and optimize shareholder value. The risk management infrastructure covers all identified
risk areas. Risk management is an integral part of day-to-day business management and each
operating unit measures, manages and controls the risks pertaining to its business. Functional
support on policy making and compliance at the corporate level is likewise provided for the major
risk categories: credit risks, market risks and operating risks. Finally, independent reviews are
regularly conducted by the Internal Audit group, regulatory examiners and external auditors to
ensure that risk controls are in place and functioning effectively.
Credit risk continues to be the largest single risk that the bank faces. Credit risk management
involves the thorough evaluation, appropriate approval, management and continuous monitoring
of counterparty risk, product risk, and industry risk relating to each loan account and/or portfolio.
The credit risk management process of the Unibank is anchored on the strict implementation of
credit risk management policies, practices and procedures, control of delegated credit approval
authorities and limits, evaluation of portfolio risk profile and the approval of new loan products
taking into consideration the potential risk. For consumer loans, credit risk management is
additionally supported by established portfolio and credit scoring models.
Market risk management involves liquidity risk and price risk. Both risks are managed thru a
common structure and process but use separate conceptual and measurement frameworks that
are compatible with each other. Liquidity risk management involves the matching of asset and
liability tenors to limit the bank’s vulnerability to abnormal outflows of funds.
Price risk
management involves measuring the probable losses arising from changes in the values of
financial instruments and major asset and liability components as a result of changes in market
rates, prices and volatility.
Operational risk management involves creating and maintaining an operating environment that
ensures and protects the integrity of the institution’s assets, transactions, records and data, the
enforceability of its claims, and compliance with all pertinent legal and regulatory parameters.
Corporate Governance
The Corporate Governance of the bank is a system of checks and balances among the Board of
Directors, management, and stockholders that is intended to efficiently increase long-term
stockholder value through ethical conduct, reportorial accuracy and transparency, and compliance
to all laws and regulations. The governance policies and guidelines are specified in the bank’s
Corporate Governance Manual that supplements and complements the Articles of Incorporation
and By-Laws.
The Bank considers the Bangko Sentral ng Pilipinas (BSP) Capital Adequacy, Asset Quality,
Management Quality, Earnings, Liquidity, and Sensitivity to Market Risk (CAMELS, 0 to 5) rating
as a measure of its governance quality. For 2008, BPI maintained its CAMELS 4 rating, the
highest among local banks.
An annual self-assessment of the Board of Directors is conducted to determine compliance not
only with the bank’s Manual of Corporate Governance but also with all other regulations and rules
24
that prescribe good corporate governance.
The Corporate Governance Committee is composed of five members of the Board including two
independent directors. This committee assists the Board in ensuring observance of sound
corporate governance principles and guidelines.
In 2008, the committee held one meeting where it deliberated and endorsed to the Board the
following:
i.
Review of the 2008 Corporate Governance Scorecard of BPI and Survey For
Publicly Listed Companies
ii.
Review of Bank’s compliance with BPI Corporate Governance Manual particularly
on the
attendance of the Board of Directors
and the qualification and
disqualification of board members pursuant to existing BSP Circulars, BPI By-Laws
, SEC rules.
iii.
Amendments to BPI Corporate Governance Manual and the BPI Corporate
Governance Committee Charter both to include the duty to conduct an annual
performance evaluation of the Board of Directors and Senior Management.
iv.
Review of Bank’s Board Committees, their organization and their function.
v.
Setting up of a Corporate Governance Seminar for Senior Officers including the
most recent member of the BPI Board of Directors, Mr. Wong Ann Chai of DBS
Bank, Ltd.
For further details on the BPI’s financial condition and operations, please refer to the 2008
Audited Financial Statements which is incorporated herein in the accompanying index to exhibits
Globe Telecom - balance sheets and income statements are shown below :
Balance Sheets
(In Million Pesos)
December 31, 2008
December 31, 2007
Total Current Assets
Non-current Assets
17,541
102,202
18,740
97,880
Total Assets
119,743
116,621
33,728
35,923
50,092
27,600
33,604
55,417
119,743
116,621
Current Liabilities
Non-current Liabilities
Stockholders' Equity
Total Liabilities & Stockholders' Equity
Globe Telecom
Statements of Income
(In Million Pesos)
25
December 31, 2008
December 31, 2007
Net Operating Revenues
Other Income
Total Revenues
64,818
1,146
65,964
65,509
2,533
68,042
Costs and Expenses
Provision for Income Tax
Total Expenses
48,118
6,570
54,688
47,991
6,773
54,764
Net Income
EPS:
Basic
Diluted
11,276
13,277
84.75
84.61
100.07
99.58
As of December 31, 2008
Basic based on 132,337K common shares
Diluted based on 133,273K common shares
As of December 31, 2007
Basic based on 132,184K common shares
Diluted based on 133,324K common shares
Form and date of organization
Globe Telecom is a leading telecommunications company in the Philippines whose mission is to
transform and enrich lives through communications, by way of a vision of making great things
possible. Globe aspires to enrich everyday communications through ease and relevance –
simplifying and removing the obstacles in communication technology so that the company brings
the customers closer to what matters to them most. Globe strives to create and deliver products
that are relevant to the customers’ needs and are easy to understand and use.
Globe Telecom is listed on the Philippine Stock Exchange with a market capitalization of P
=
100,579 million as of 31 December 2008. Its major shareholders are Ayala Corporation (“Ayala”),
Singapore Telecom International (“STI”), and Asiacom Philippines, Inc. (“Asiacom”).
In 1928, Congress passed Act No. 3495 granting the Robert Dollar Company, a corporation
organized and existing under the laws of the State of California, a franchise to operate wireless
long distance message services in the Philippines. The Robert Dollar Company was subsequently
incorporated in the Philippines as Globe Wireless Limited.
In 1934, Congress passed Act No. 4150 transferring the franchise and privileges of the Robert
Dollar Company to Globe Wireless Limited which was incorporated on 15 January 1935.
Globe Wireless Limited was subsequently renamed Globe-Mackay Cable and Radio Corporation
(“Globe-Mackay”). Its franchise was further expanded by Congress, through Republic Act (“RA”)
4630 enacted in 1965, to allow it to operate international communications systems. Shortly before
the expiration of this franchise, the Batasan Pambansa enacted Batas Pambansa 95 granting
Globe-Mackay a new franchise in 1980.
In 1974, Globe-Mackay sold 60% of its stock to Ayala, local investors and its employees. It
offered its shares to the public on 11 August 1975.
In 1992, the Philippine Congress passed RA 7229 approving the merger of Globe-Mackay and
Clavecilla Radio Corporation, a domestic telecommunications pioneer to form GMCR, Inc.
(“GMCR”). The merger gave GMCR the capability to provide all forms of telecommunications to
address the international and domestic requirements of its customers. Subsequently, GMCR was
renamed Globe Telecom, Inc. (“Globe Telecom”)
In 1993, Globe Telecom welcomed a new foreign partner, STI, a wholly-owned subsidiary of
26
Singapore Telecommunications Limited (“SingTel”) after Ayala and STI signed a Memorandum of
Understanding.
In 2001, Globe Telecom acquired Isla Communications Company, Inc. (“Islacom”) which became
a wholly-owned consolidated subsidiary of Globe Telecom effective 27 June 2001.
In 2003, the National Telecommunications Commission (“NTC”) granted Globe Telecom’s
application to transfer its wireline business assets and subscribers to Islacom pursuant to its
strategy to integrate all of its wirelines services under Islacom. The Philippine SEC also approved
the change in name of Islacom to Innove Communications, Inc. (“Innove”) on 21 August 2003.
In 2004, Globe Telecom invested in G-Xchange, Inc. (“GXI”), a wholly-owned subsidiary, which
handles the mobile payment and remittance service using Globe Telecom’s network as transport
channel under the GCash brand. GXI started commercial operations on 16 October 2004.
In November 2004, Globe Telecom and six other leading Asia Pacific mobile operators (‘JV
partners’) signed an agreement (‘JV agreement’) to form Bridge Alliance. The joint venture
company operates through a Singapore-incorporated company, BMPL which serves as a
commercial vehicle for the JV partners to build and establish a regional mobile infrastructure and
common service platform to deliver different regional mobile services to their subscribers. In 2008,
the Bridge Alliance had a combined customer base of 225 million subscribers among its partners
in India, Thailand, Hong Kong, South Korea, Macau, Philippines, Malaysia, Singapore, Australia,
Taiwan and Indonesia..
In 2005, Innove was awarded by the NTC with a nationwide franchise for its wireline business,
allowing it to operate a Local Exchange Carrier service nationwide and expand its network
coverage. In December 2005, the NTC approved Globe Telecom’s application for third
generation (3G) radio frequency spectra to support the upgrade of its cellular mobile telephone
system (“CMTS”) network to be able to provide 3G services. The Company was assigned with
10-Megahertz (MHz) of the 3G radio frequency spectrum.
On 19 May 2008, following the approval of the NTC, the contracts of our Touch Mobile or TM
prepaid service were transferred, from Innove, to Globe which now operates all wireless prepaid
services in its integrated cellular networks.
On 30 June 2008, Globe announced that it had acquired 100% ownership of Entertainment
Gateway Group (“EGG”) and its affiliated companies. The business combination was fully
consummated on 1 August 2008 upon release of the purchase consideration held in escrow
pending fulfillment of certain conditions. EGG is one of the leading mobile content providers in the
Philippines, offering a wide array of value-added services covering music, news and information,
games, chat and web-to-mobile messaging.
On 25 November 2008, Globe formed GTI Business Holdings, Inc. (GTI). GTI was incorporated
primarily to invest, purchase, subscribe for or otherwise acquire and own, hold, sell or otherwise
dispose of real and personal property of every kind and description.
Description of Business
(a) Overview of the Business
The Globe Group is composed of the following companies:
•
•
•
•
Globe Telecom, Inc. (Globe) provides our wireless telecommunications services;
Innove Communications Inc. (Innove), a wholly-owned subsidiary, provides our fixed line
telecommunications services, consumer broadband services, high-speed internet and
private data networks for enterprise clients, services for internal applications, internet
protocol-based solutions and multimedia content delivery;
G-Xchange, Inc. (GXI), a wholly-owned subsidiary, provides our mobile commerce
services under the GCash brand;
Entertainment Gateway Group Corp., EGGstreme (Hong Kong) Limited and Karton
27
•
Limited (collectively referred here as “EGG” or “EGG Group”), provide digital media
content and applications; and
GTI Business Holdings, Inc. (GTI) was incorporated primarily to invest, purchase,
subscribe for or otherwise acquire and own, hold, sell or otherwise dispose of real and
personal property of every kind and description. GTI was incorporated on November 25,
2008.
(b) Business Segments
Principal services and their markets indicating their relative contribution to sales or revenues
1. Wireless Business
Globe Telecom offers its wireless services including local, national long distance, international
long distance, international roaming and other value-added services through three brands: Globe
Postpaid, Globe Prepaid and TM. The TM consumer wireless prepaid service was previously
operated by Innove. However, starting last May 19, 2008 following the approval of the National
Telecommunications Commission (NTC), the TM contracts were transferred to Globe which now
operates all wireless prepaid services in the integrated cellular networks of Globe and Innove. In
2008 our wireless business accounted for 88% of consolidated service revenues and contributed
P
= 55.6 billion for the year compared to P56.4 billion in 2007. Our wireless subscriber base grew
22% from last year’s 20.3 million to reach 24.7 million as of year end.
Globe Postpaid includes all postpaid plans such as G-Plans and consumable G-Flex Plans, Load
Allowance Plans, Time Plans, Apple™ iPhone 3G Plans and Platinum Plans.
Globe Prepaid and TM are the prepaid brands of Globe. Each brand is positioned at different
market segments. Globe Prepaid is focused on the mainstream, broad market while TM is
focused on the value-conscious segment of the market. In addition to these brand offerings,
Globe has customized services and solutions to address specific market segments, each with its
own unique positioning and service offers. Prepaid segment comprises 97% of total wireless
base, with Globe Prepaid and TM accounting for 56% and 44% of total prepaid subscriber base.
Globe also provides its subscribers with mobile payment and remittance services under the
GCash brand. This service enables subscribers to perform international and domestic remittance
transactions, pay fees, utility bills, income taxes, avail of micro-finance transactions, donate to
charitable institutions, and buy Globe prepaid reloads. As of 31 December 2008, net registered
GCash user base reached 1.4 million.
(i) Products and Services
Voice Services
Globe wireless voice services include local, national and international long distance (ILD) access
throughout the Philippines and international roaming services through various arrangements with
foreign operators. Our wireless voice segment accounted for 53% of total wireless service
revenues, generating P29.2 billion in service revenues for the year ended 31 December 2008.
Data and Other Value-Added Services
Globe offers wireless data services such as basic SMS messaging, enhanced SMS, mobile
advertising and mobile commerce services. Data services accounted for approximately 47% of
total wireless net service revenues in 2008 and 2007. Person-to-person (P2P) SMS continues to
account for the majority of wireless data revenues.
a)
SMS
Globe pioneered basic SMS messaging service in the Philippines in 1994. SMS in the Philippines
is significantly higher than in most other countries as it is the most convenient and cost-efficient
alternative to voice and e-mail based communications. In 2008, subscribers’ SMS usage
averaged approximately 22 SMS messages per day, with our network processing over 490 million
SMS messages per day.
b)
Value Added Services
Globe offers a full range of value-added services covering the areas of information and
28
entertainment (‘infotainment’), messaging and mobile banking. These value-added services allow
subscribers to download icons and ring tones, perform mobile banking, do Wireless Application
Protocol (‘WAP’) browsing, send and receive Multimedia Messaging Service (‘MMS’) pictures and
video, as well as participate in interactive TV, mobile chat and play games, among others.
c)
M-Commerce Service
During the fourth quarter of 2004, Globe launched GCash, the first cashless and cardless
integrated payments service in the world. Globe’s flagship mobile commerce service GCash was
born from a simple goal of transforming a mobile phone into a wallet, enabling Globe and TM
subscribers to access a cashless and cardless method of money-transfer via text message.
GCash continues to establish its presence in the mobile commerce industry. GCash’s initial thrust
towards money-transfers, purchase of goods and services from retail outlets, and sending and
receiving domestic and international remittances has spurred alliances in the field of mobile
commerce.
Today, GCash allows Globe and TM subscribers to pay or transact for the following using their
mobile phone:
•
•
•
•
•
•
•
•
•
•
•
domestic and international remittances
utility bills
interest and amortization of loans
insurance premiums
donations to various institutions and organizations
sales commissions and payroll disbursements
school tuition fees
micro tax payments and business registration
electronic loads and pins
online purchases
airline tickets
In addition to the above transactions, GCash is also used as a wholesale payment facility. Net
registered GCash user base at the end of 2008 totaled 1.4 million.
(ii) Distribution - Sales and Distribution
To ensure that all subscribers’ needs are properly addressed and met, Globe have established
various sales and distribution channels.
Independent Dealers
Globe utilizes a number of independent dealers who have their own networks throughout the
Philippines to sell our prepaid wireless services to customers. These dealers include major
distributors of wireless phone handsets who usually have their own retail networks, direct sales
force and sub-dealers in the Philippines. The company compensate dealers based on the type,
volume and value of reload denominations for a period. This takes the form of fixed discounts for
prepaid airtime cards and SIM packs, and discounted selling price for phonekits.
Additionally, Globe also have dealers who offer prepaid reloading services to Globe and TM
subscribers nationwide. In 2003, the company launched Globe AutoloadMax service and
established a distribution network of dealers and institutions to offer prepaid reloading services.
As of 31 December 2008, Globe AutoloadMax was available in over 672,000 retailers nationwide.
Business Centers
In addition to independent dealers, Globe have 92 wireless business centers and Hub shops in
major cities across the country. Through the business centers, customers are able to subscriber
to wireless services, reload prepaid credits, make GCash transactions, purchase handsets,
accessories, request handset repairs, try out communications devices, ask questions about
Globe’s services and pay bills. Globe’s business centers are also registered with the Bangko
Sentral ng Pilipinas (BSP) as remittance outlets. The 3 Hub shops, located in strategic areas in
29
Makati City, San Juan and Mandaluyong City, sell state-of-the-art communications devices,
handsets and prepaid phonekits.
Others
Globe also distribute prepaid products (phonekits, SIM kits and prepaid call cards and credits)
through consumer distribution channels such as convenience stores, gas stations, drugstores,
bookstores. The company also have a dedicated direct sales force to manage our corporate
accounts and high-end customers. The retail business centers and internal corporate sales staff
also act as direct sales channels.
The Business CFUs, the SME and EBG groups, also provide wireless services and solutions
specific to the requirements of small and medium businesses, large enterprises and wholesale
customers backed up by a strong support organization and its own domestic and international
backbone networks. Corporate requirements are further served by dedicated account managers
through SPOCs or “single point of contact” to ensure faster service delivery.
Globe’s retail business centers and internal corporate sales staff act as direct sales channels.
2. Wireline Business
Globe provides wireline voice communications (local, national and international long distance),
broadband and data services to individuals, small and medium enterprises (SMEs), corporations
and enterprises in the Philippines through our wholly-owned subsidiary, Innove Communications,
Inc. (Innove).
Globe wireline business accounted for 12% of consolidated service revenues, contributing P
= 7.3
billion for the year ended 31 December 2008. Cumulative wireline voice subscribers for the year
increased by 1% from last year’s 420,182 to 422,859 in 2008 while the broadband subscribers
grew 84% from 127,672 in 2007 to 234,411 as of year end.
Globelines Payments and Services (‘GPS’) Centers
To better serve its wireline subscribers from various service areas such as Metro Manila, the
Visayas area and the fast growing provinces of Cavite, Batangas and Central Mindanao, Globe
has set up GPS centers in strategic locations in our service areas nationwide.
Globe GPS centers allow subscribers to sign up for wireline services, make GCash transactions,
inquire about services and make bill payments. As of 31 December 2008, we had a total of 46
GPS centers to cater to the various needs of our wireline subscribers.
Corporate Sales Team
Globe also sells its wireline data services through its internal corporate sales team composed of
account managers based in key cities nationwide. Sales to large businesses are managed by
specialized account managers who are each dedicated to managing large business customers
based on identified target segments. They are the appointed single points of contact (“SPOC”) for
any service or concern the corporate customer may have, backed up by a strong team of presales engineers, segment marketing managers and project managers. Sales to small and
medium-sized enterprises are handled by CSME while the Enterprise Business Group serves
markets for integrated wireless and wireline communications solutions. The Customer Support
Group and Fault Management Control Center handle after-sales support for non-technical and
technical concerns, respectively.
Reseller Network
Globe has its Channels program to manage its network of resellers. A Premium Business Partner
program was also developed to oversee a network of system integrators (“SI”) to support its sales
team and its overall value proposition.
Broadband Internet customers can subscribe to DSL access packages, Internet Direct services
for guaranteed service levels over leased line facilities, Broadband Internet Zones (BIZ) for
broadband to room internet access for hotels and transient travelers, or wholesale internet access
through Internet Exchange (GiX). Globe also offers bandwidth-on-demand packages based on
average usage payment schemes through its innovative GiX Burstable service, as well as
30
Freeway IP for wholesale internet access through its managed international private leased line
circuit to the United States. Dial-up customers can avail of dedicated dial-up services ideal for
small office environments, enabling multiple users on a small LAN to access the internet. The
service also includes an international roaming option which provides internet connection in over
150 countries using a local dial-up number and account.
(i) Products and Services
Voice services
Globe provides local, national long distance, international long distance and other value-added
services through postpaid, prepaid and payphone offerings:
Some of the products and services Globe offer are as follows:
(i)
Globe Private Networks offer a variety of dedicated communications services that
allow customers to run various data applications, access LANs or corporate intranets
and extranets with integrated voice services on high speed, efficient and reliable
connections;
(ii)
Globe Data Center provides managed space and carrier-class facility for co-location
requirements, dedicated hardware from leading partner vendors for off-site
deployment, 24x7 monitoring and management, maintenance for application hosting,
and high-speed and secure LAN-based internet connectivity to co-located and hosted
servers and applications. Solutions also include Business Continuity and Recovery
services such as offsite media storage and disaster recovery services to ensure
immediate availability of information technology resources to continue mission-critical
operations. A certified and skilled technical operations team is also available to
support hosting services such as email, storage, and managed security services;
(iii)
Globe Broadband Access is a network access solution that provides our customers
with ultra-high speed fiber optic network connectivity over a fully redundant and
diverse DWDM-based fiber backbone.
Broadband Internet customers can subscribe to DSL access packages, Internet Direct services
for guaranteed service levels over leased line facilities, Broadband Internet Zones (BIZ) for
broadband to room internet access for hotels and transient travelers, or wholesale internet access
through Internet Exchange (GiX). We also offer bandwidth-on-demand packages based on
average usage payment schemes through our innovative GiX Burstable service, as well as
Freeway IP for wholesale internet access through our managed international private leased line
circuit to the United States.
Globe also has a rich stream of product and service innovations customized for specific business
segments, such as the following:
(i)
Autoload Max Corporate Edition is the enterprise version of our leading electronic
prepaid credit loading system that allows a company to manage, schedule and
automatically reload prepaid credits to their employees’ mobile phones.
(ii)
Business Loop is a special billing feature that helps companies cut costs by providing
special calling rates for enrolled subscribers and simplified billing for easier
monitoring of business communications.
(iii)
I-cafe Kit or Internet Café Kit is a business-in-a-box solution to help entrepreneurs
start their own internet surfing or gaming businesses which includes hardware,
software, connectivity options, marketing support, consultancy and after-sales support
in partnership with other service providers.
Inventory Ordering System is a business solution specifically designed to cater to
retail requirements of SMEs by providing an easy-to-use platform and system
application that can be customized for any multi-site company with franchises,
commissaries, warehouses and backend ordering operations.
(iv)
31
(v)
Mobility Bundle is a special Visibility subscription packaged with a full-featured laptop
or other devices like PDAs and PC cards which allows entrepreneurs and executives
to access the internet and data via 3G with HSDPA, GPRS, EDGE, Wi-Fi and dial-up
transport channels.
(vi)
Store Express allows clients to conveniently link their retail branches to the head
office via IP-VPN using a combination of leased line, DSL or dial-up connection. This
service provides reliable and fast access to information on retail chain sales and
inventory systems at reasonable rates. The service also provides internet access,
web and email hosting, business continuity and recovery services, managed
customer premises equipment, remote video monitoring, POS software and hardware
bundles in partnership with leading equipment providers.
(vii)
Tracker Corporate Edition is the enterprise web-based application that enables a
company to monitor and track company personnel and resources such as vehicles
and mobile assets.
(viii)
TxtConnect allows subscribers to send high-volume text broadcasts to pre-registered
groups and include value added services such as generation of reports on sent and
received messages, sending messages on a set schedule and transmitting systemgenerated SMS messages.
(ix)
Webeye is a remote web-based video solution that complements any existing CCTV
set-up and allows subscribers to monitor physical resources in multiple outlets and
locations via a broadband internet connect
(ii) Distribution
Globelines Payments and Services (‘GPS’) Centers
To better serve wireline subscribers from various service areas such as Metro Manila, the Visayas
area and the fast growing provinces of Cavite, Batangas and Central Mindanao, Globe has set up
GPS centers in strategic locations in service areas nationwide.
GPS centers allow subscribers to sign up for wireline services, make G-Cash transactions, ask
questions about services, and pay bills. As of 31 December 2007, Globe had a total of 46 GPS
centers set up to cater to the various needs of wireline subscribers.
Others
Globe also sells wireline data services through internal corporate sales team
composed of account managers based in key cities nationwide. Sales teams have been
segmented to cater to various markets and their needs. Sales to large businesses are
managed by specialized account managers who are each dedicated to managing large
business customers based on identified target segments.
(c) Operating Revenues
Net Operating Revenues by Line of
Business:
(In Millions of Pesos)
Year Ended 31 December
2008
%
2007
%
2006
%
Net Service Revenues:
32
Wireless ……………………………………
55,635
88%
56,410
89%
50,672
89%
Voice 1……………………………………
Data 2…………………………………….
Wireline……………………………………
29,240
26,395
7,259
46%
42%
12%
29,870
26,540
6,799
47%
42%
11%
28,982
21,690
6,362
51%
38%
11%
Voice 3……………………………………
Broadband 4………………………………
Data 5……………………………………
Net Service Revenues………………………...
3,088
1,692
2,479
62,894
5%
3%
4%
97%
3,504
1,222
2,073
63,209
6%
2%
3%
96%
4,312
2,050
57,034
8%
4%
95%
Non Service Revenues 6……………………...
Net Operating Revenues………………………
1,924
3%
2,300
4%
2,915
5%
64,818
100%
65,509
100%
59,949
100%
____________________________________
1
Wireless voice service revenues include the following:
a) Monthly service fees on postpaid plans;
b) Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid
plans, including currency exchange rate adjustments, or CERA, net of loyalty discounts credited to subscriber
billings.
c) Airtime fees for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or
expiration of the unused value of the prepaid reload denomination (for Globe Prepaid and TM) which occurs
between 1 and 60 days after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus
credits and (ii) prepaid reload discounts; and revenues generated from inbound international and national long
distance calls and international roaming calls;
Revenues from (b) and (c) are net of any interconnection or settlement payouts to international and local carriers and
content providers.
2
Wireless data service revenues consist of revenues from value-added services such as inbound and outbound SMS and
MMS, content downloading and infotext, subscription fees on unlimited and bucket prepaid SMS services net of any
interconnection or settlement payouts to international and local carriers and content providers.
3
Wireline voice net service revenues consist of the following:
a) Monthly service fees including CERA of voice-only subscriptions;
b) Revenues from local, international and national long distance calls made by postpaid, prepaid wireline
subscribers and payphone customers, as well as broadband customers who have subscribed to data packages
bundled with a voice service. Revenues are net of prepaid and payphone call card discounts;
c) Revenues from inbound local, international and national long distance calls from other carriers terminating on our
network;
d) Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi-calling, voice
mail, duplex and hotline numbers and other value-added features; and
e) Installation charges and other one-time fees associated with the establishment of the service.
Revenues from (b) and (c) are net of any interconnection or settlement payments to domestic and international
carriers.
4
Broadband net service revenues consist of the following:
a) Monthly service fees of broadband data only and bundled voice and data subscriptions;
b) Value-added services such as games; and
c) Installation charges and other one-time fees associated with the service.
Broadband revenues in 2006 were previously included in our wireline voice revenues.
3
Wireline data net service revenues consist of the following:
a) Monthly service fees from international and domestic leased lines;
b) Other wholesale transport services;
c) Revenues from value-added services; and
d) One-time connection charges associated with the establishment of service.
Revenues from (a) to (c) are net of any interconnection or settlement payments to other carriers.
Competition
Industry, competitors and methods of competition
1. Wireless Market
The Philippine wireless market has been marked by rapid growth and intense competition in
recent years. The Philippine government began to liberalize the communications industry in 1993
after a framework was developed to promote competition within the telecommunications industry
33
and accelerate market development. Historically, PLDT has been the monopoly operator in the
Philippines. As a result of the liberalization in the 1990’s, numerous communications operators
have entered the Philippine communications market.
Seven wireless operators in the Philippines, including Globe Telecom, were initially granted
licenses to provide nationwide wireless service deploying the network technology of their choice.
The table below sets forth the technology deployed, the date of commercial launch and the
reported number of subscribers as of the most recent date available for each wireless operator:
Wireless
Operators
Year of
Commercial
Launch
Subscribers
Wireless
System
Wireless
Technology
GSM
Operating
Spectrum
Globe*
1994
24,701,820 (1)
Digital
GSM
20MHz
Smart **
1994
20,899,753 (2)
Digital
ETACS/GSM
15MHz
Piltel **
1991
14,308,493
Analog/
Digital
AMPS/CDMA
11MHz
CURE **
2007
16,358
Digital
GSM
10MHz
Bayantel
Not applicable
Not applicable
Digital
GSM
10MHz
Extelcom
1991
No data available
Analog
AMPS
10MHz
Digitel
2003
8,154,202 (3)
Digital
GSM
10MHz
* Includes TM subscribers, previously under Innove, whose contracts were transferred to Globe in 2008.
** Affiliate of PLDT. CURE subscribers under Red Mobile brand launched in 2008.
________________________________________________
Sources:
1) Globe disclosures for the year ended December 31, 2008.
2) PLDT/ Smart/ TNT disclosures as of December 31, 2008
3) Based on publicly available information and Company estimates.
Additionally, three other operators were granted licenses to offer wireless services. Next
Mobile/NEXTEL was granted a license to offer wireless trunked-radio services and currently
allows call service connectivity to wireless and wireline users. Multimedia Telephony was provided
with a license to offer broadband services under the name Broadband Philippines. On the other
hand, the fourth 3G license was awarded to Connectivity Unlimited Resources (CURE) in 2005.
Since 2000, the wireless communications industry experienced a number of consolidations. PLDT
acquired and consolidated with Smart and Piltel. On the other hand, Globe Telecom had acquired
Islacom (now named Innove Communications, Inc.). Digitel began its network in 2000 and
formally launched its wireless service under the brand name Sun Cellular in February 2003. In
2008, SMART purchased CURE and subsequently launched another wireless brand, Red Mobile,
while Liberty Telecom (Liberty) announced plans to enter the mobile and broadband businesses
after San Miguel Corporation partnered with Qatar Telecom and bought interests in Liberty.
Currently, Smart and Globe continue to lead in the wireless market in terms of subscribers and
revenues.
2. Wireline Voice Market
There are at least eight major local exchange carriers (LEC) in the Philippines with licenses to
provide local and domestic long distance services. Each LEC operator (other than PLDT and
Innove, which are authorized to provide nationwide wireline services) is assigned service areas in
which it must install the required number of wirelines and provide service. The NTC has created
15 such service areas in the Philippines and in order to promote network construction, it has been
34
the government policy to allow only one or two major operators (in addition to PLDT) in each
service area. Rates for local exchange and domestic long distance services have been
deregulated and operators are allowed to have metered as well as flat monthly fee tariff plans for
the services provided.
The Philippine wireline voice market registered weak growth in recent years with the number of
lines in service increasing from 2.9 million in 1999 to approximately 3.9 million in 2008. Traditional
fixed line market growth has been flat over the past years as a result of wireless substitution. With
an estimated 3.9 million lines in service, wireline penetration remains low at the 4% level
compared to 75% for the wireless industry.
3. Wireline Data Market
The wireline data service business is a growing segment of the wireline industry. As the Philippine
economy grows, businesses are increasingly utilizing new networking technologies and the
internet for critical business needs such as sales and marketing, intercompany communications,
database management and data storage. The potential of corporate data is becoming more visible
as it serves the promising IT Enabled Service (ITES) industry which includes call centers and
Business Process Outsourcing (BPO) companies.
4. International Long Distance Market
International long distance (ILD) traffic in the Philippines has significantly increased over the years
due to the growing overseas Filipino communities. International long distance providers in the
Philippines generate revenues from both inbound and outbound international call traffic whereby
the pricing of calls is based on agreed international settlement rates.
To date, there are eleven licensed international long distance operators, nine of which directly
compete with Globe for customers. Both Globe and Innove offer ILD services which cover
international calls between the Philippines and over 200 countries. Positive results from successful
launches of various ILD tariff promotions have brought about increased ILD revenues which
accounted for 24% and 23% of Globe’s total net service revenues for 2008 and 2007, respectively.
Dependency on a single customer or a few customers
Globe Telecom has a wide subscriber base. On the wireless front, the wireless subscribers stood
at 24.7 million by the end of 2008. There were 753,775 postpaid and approximately 23.9 million
prepaid subscribers. Globe wireline business ended the year with 422,859 subscribers,
comprised of 69% postpaid and 31% prepaid. Due to increased broadband rollout efforts, the
broadband subscribers based expanded by 84% to 234,411 from 127,672 the previous year
No single customer and contract accounted for more than 20% of the Company’s total sales in
2008.
Globe Telecom’s principal suppliers are as follows:
Globe Telecom works with both local and foreign suppliers and contractors. Equipment and
technology required to render telecommunications services are mainly sourced from foreign
countries. The principal suppliers, among others, are as follows:
For wireless – Nokia/Siemens (Finland); Ericsson Radio Systems AB (Sweden), Ericsson
(Sweden), Alcatel (France) and Microwave Networks Inc.(US).
For wireline - Fujitsu Ltd. (Japan), Lucent Technologies (USA), NEC (Japan), Alcatel (Italy),
Motorola (USA), AT&T Global (US), British Telecom (UK), and Singapore Telecom (Singapore)
and Tellabs (USA/Singapore).
Transactions with and/or dependence on related parties
As part of the normal course of its business, Globe Telecom and Innove enter into transactions
with their major stockholders, AC and STI, and certain related parties. These transactions, which
are accounted for at market prices normally charged to unaffiliated customers for similar goods
and services, include the following:
35
Globe Telecom
(a) Globe Telecom has interconnection agreements with STI. the related net traffic
settlements receivable (included in “Receivables” account in the consolidated balance
sheets) and the interconnection revenues (included in “Service revenues” account in the
consolidated statements of income) earned are as follows:
2008
Traffic settlements
receivable - net
Interconnection revenues
2007
(In Thousand Pesos)
P
= 216,348
1,817,912
P
= 63,391
1,573,686
2006
P
= 61,061
1,028,552
(b) Globe Telecom and STI have a technical assistance agreement whereby STI will provide
consultancy and advisory services, including those with respect to the construction and
operation of Globe Telecom’s networks and communication services, equipment
procurement and personnel services.
In addition, Globe Telecom has software
development, supply, license and support arrangements, lease of cable facilities,
maintenance and restoration costs and other transactions with STI.
The details of fees (included in repairs and maintenance under the “General, selling and
administrative expenses” account in the consolidated statements of income) incurred under these
agreements are as follows:
2008
Maintenance and restoration costs
and other transactions
Software development, supply,
license and support
Technical assistance fee
2007
(In Thousand Pesos)
2006
P
= 216,813
P
= 201,576
P
= 240,542
2,637
83,514
2,074
86,935
29,467
78,872
The net outstanding balances due to STI (included in the “Accounts payable and accrued
expenses” account in the consolidated balance sheets) arising from these transactions are as
follows:
2008
Maintenance and restoration costs
and other transactions
Software development, supply,
license and support
Technical assistance fee
2007
(In Thousand Pesos)
2006
P
= 115,243
P
= 54,047
P
= 24,203
28,569
23,838
14,218
25,080
31,004
25,606
(c) Globe Telecom reimburses AC for certain operating expenses. The net outstanding
liabilities to AC related to these transactions as of December 31, 2008 are not material.
(d) Globe Telecom has preferred roaming service contract with Bridge Mobile Pte. Ltd.
(BMPL). BMPL is a joint venture company formed with seven other regional
telecommunications partners as a commercial vehicle for the JV partners to build and
establish a regional mobile infrastructure and common service platform and deliver
different regional mobile services to their subscribers. Under this contract, Globe Telecom
will pay BMPL for services rendered by the latter which include, among others,
coordination and facilitation of preferred roaming arrangement among JV partners, and
procurement and maintenance of telecommunications equipment necessary for delivery of
seamless roaming experience to customers. Globe Telecom also earns or incurs
commission from BMPL for regional top-up service provided by the JV partners. As of
December 31, 2008, balances related to these transactions were not material.
36
The summary of consolidated outstanding balances resulting from transactions with related parties
follows:
2008
Traffic settlements receivable - net
(included in “Receivables” account)
Other current assets
Accounts payable and accrued
expenses
2007
(In Thousand Pesos)
2006
P
= 216,348
2,602
P
= 63,391
1,925
P
= 61,061
1,651
191,331
121,820
100,413
Patents, trademarks, copyrights, licenses, franchises, concessions, royalty agreements held;
Globe Telecom currently holds the following major licenses:
Service
Type of
Date Issued or
Expiration Date
License
Last Extended
Globe
December 24, 2030
Wireless
CPCN (1) July 22, 2002
Local Exchange CPCN (1) July 22, 2002
December 24, 2030
Carrier
International
CPCN (1) July 22, 2002
December 24, 2030
Long Distance
Interexchange
CPCN (1) February 14, 2003 December 24, 2030
Carrier
VSAT
CPCN (1) February 6, 1996
February 6, 2021
Innove
Wireless
Local Wireline
International Long
Distance
Interexchange
Carrier
Action Being
Taken
No action required
No action required
No action required
No action required
No action required
Type of
License
CPCN (1)
CPCN (1)
CPCN (1)
Date Issued or
Last Extended
July 22, 2002
July 22, 2002
July 22, 2002
Expiration
Date
April 10, 2017
April 10, 2017
April 10, 2017
Action Being
Taken
No action required
No action required
No action required
CPCN (1)
April 30, 2004
April 10, 2017
No action required
1
Certificate of Public Convenience and Necessity. The term of a CPCN is co-terminus with the franchise term.
In July 2002, the NTC issued CPCNs to Globe and Innove which allow us to operate our
respective services for a term that will be predicated upon and co-terminus with our congressional
franchise under RA 7229 (Globe) and RA 7372 (Innove). We were granted our permanent
licenses after having demonstrated our legal, financial and technical capabilities in operating and
maintaining wireless telecommunications systems, local exchange carrier services and
international gateway facilities. Additionally, Globe and Innove have exceeded the 80% minimum
roll-out compliance requirement for coverage of all provincial capitals, including all chartered cities
within a period of seven years.
Globe have also registered the following brand names with the Intellectual Property Office, the
independent regulatory agency responsible for registration of patents, trademarks and technology
transfers in the Philippines: Globe Telecom, Touch Mobile, Globelines, Globe Handyphone,
Innove Communications, Globe Link, GlobeQuest, Globe Xchange, Globelines Broadband, Globe
G-Cash, Globe AutoLoad, GlobeQuestDSL Broadband Internet, Broadband Mobility and “Hub and
Circular Device” among others for the wireless and wireline services we offer. We have also
secured certificates of registration for Globe Telecom, Globe Handyphone, Globe AutoLoad,
GlobeQuest DSL Broadband Internet, Broadband Mobility, “Hub and Other Circular Device” and
Innove Communications.
Percentage of sales or revenues and net income contributed by foreign sales
Globe operates its telecommunications services in the Philippines although it earns minimal
revenue from the roaming usage of its subscribers abroad
37
Bankruptcy, receivership or similar proceeding: None
Material reclassification, merger, consolidation, or purchase or sale of a significant amount of
assets not in the ordinary course of business.
Repurchase of Common shares and Cancellation of Treasury Shares
On February 1, 2005, the BOD approved an offer to purchase one share for every fifteen shares
(1:15) of the outstanding common stock of Globe Telecom from all stockholders of record as of
February 10, 2005 at P
= 950.00 per share. On March 15, 2005, Globe Telecom acquired 8.06
million shares at a total cost of P
= 7,675.66 million, including incidental costs.
On April 4, 2005, Globe Telecom’s stockholders approved the cancellation of the 20.06 million
treasury shares consisting of the 12.00 million shares acquired from Deutsche Telekom in 2003
and the 8.06 million shares acquired during the March 2005 share buyback, and the amendments
of the articles of incorporation of Globe Telecom to reduce accordingly the authorized capital stock
of the corporation from P
= 11,250.00 million to P
= 10,246.72 million.
The SEC approved Globe Telecom’s application for the retirement and cancellation of the existing
treasury shares on October 28, 2005. Accordingly, Globe Telecom cancelled the existing treasury
shares at cost. The difference between the par value and cost of treasury stock was charged to
the “Additional paid-in capital” and “Retained earnings” accounts amounting to P
= 5,179.35 million
and P
= 9,685.80 million, respectively.
Effect of existing or probable governmental regulations on the business
The Globe Group is regulated by the NTC under the provisions of the Public Service Act (CA 146),
Executive Order (EO) 59, EO 109, and RA 7925. Under these laws, Globe is required to do the
following:
(a) To secure a CPCN/PA (Provisional Authority) from the NTC for those services it offers which
are deemed regulated services, as well as for those rates which are still deemed regulated,
under RA 7925.
(b) To observe the regulations of the NTC on interconnection of public telecommunications
networks.
(c) To observe (and has complied with) the provisions of EO 109 and RA 7925 which impose
an obligation to rollout 700,000 fixed lines as a condition to the grant of its provisional
authorities for the cellular and international gateway services.
(d) Globe remains under the supervision of the NTC for other matters stated in CA 146 and RA
7925 and pays annual supervision fees and permit fees to the NTC.
On October 19, 2007, the NTC granted Globe a CPCN to operate and maintain an International
Cable Landing Station and submarine cable system in Nasugbu, Batangas
On May 19, 2008, Globe Telecom, Inc. announced that the NTC has approved the assignment
by its wholly-owned subsidiary Innove Communications (Innove) of its Touch Mobile (TM)
consumer prepaid subscriber contracts in favor of Globe. Globe would be managing all migrated
consumer mobile subscribers of TM, in addition to existing Globe subscribers in its integrated
cellular network.
On September 11, 2008, the NTC granted Globe a PA to establish, install, operate and maintain
an International Cable Landing Station in Ballesteros, Cagayan Province.
Research and Development Activities
Globe did not incur research and development costs from 2006 to 2008.
Compliance with environmental laws
The Globe Group complies with the Environmental Impact Statement (‘EIS’) system of the
Department of Environment and Natural Resources(‘DENR’) and pays nominal filing fees required
for the submission of applications for Environmental Clearance Certificates (‘ECC’) or Certificates
38
of Non-Coverage (‘CNC’) for its cellsites and certain other facilities, as well as miscellaneous
expenses incurred in the preparation of applications and the related environmental impact studies.
The Globe Group does not consider these amounts material.
Present Employees
The Globe Group has 5,850 active regular employees as of December 31, 2008, of which about
12% are covered by a Collective Bargaining Agreement (CBA) through the Globe Telecom
Workers Union (GTWU).
Between 2006 and 2008, there was no major dispute which warranted GTWU to file a notice of
strike against the Company.
On November 2005, the GTWU began its negotiations for another five-year agreement with Globe
Telecom. An agreement was promptly reached over the economic and non-economic provisions
of the CBA last December 2005. The CBA is valid until December 31, 2010 with a renegotiation
on the economic aspects in 2008, a process that is expected to arrive at a peaceful and swift
conclusion as in the previous CBAs. On 27 November 2008 Globe Telecom, Inc. started the renegotiation of the economic provisions of its Collective Bargaining Agreement (CBA) with the
Globe Telecom Workers Union (GTWU). The parties have come to an agreement on the terms of
the new CBA which is due for ratification and signing by GTWU.
The Company has a long-standing, cordial, and constructive relationship with the GTWU
characterized by industrial peace. It is a partnership that mutually agrees to focus on shared
goals – one that has in fact allowed the attainment of higher levels of productivity and consistent
quality of service to customers across different segments.
Breakdown of employees by main category of activity from 2006 to 2008 are as follows:
Employee Type
Rank & File, CBU
Supervisory
Managerial
Executives
2008
3,125
1,656
773
296
2007
3,132
1,450
660
269
2006
3,055
1,329
548
229
Total *
5,850
5,511
5,161
*Includes Globe, Innove, & GXI (excluding Secondees)
Globe Telecom continues to develop strategic initiatives to explore new ways to realize operating
efficiencies which will enable it to fully focus on its strategic business units. This is to ensure that
gains on employee productivity and controlled manpower growth are sustained. It also believes
that these initiatives will enhance stakeholder value and improve corporate agility which would
increase its overall competitiveness and regain its position as the service leader in the telecom
industry.
Major risk/s
(a) Foreign Exchange Risk
The Globe Group’s foreign exchange risk results primarily from movements of the Philippine Peso
(Peso) against the United States Dollar (USD) with respect to USD-denominated financial assets,
USD-denominated financial liabilities and certain USD-denominated revenues. Majority of Globe
Group’s revenues are generated in Peso, while substantially all of capital expenditures are in
USD. In addition, 16.9% of consolidated debt as of December 31, 2008 are denominated in USD
before taking into account any swap and hedges.
(b) Industry and Operational Risks
1. Competitive Industry
The Philippine telecommunications industry is mainly driven by growth in the wireless sector which
contributed 69% of total industry revenues in 2008. With SIM penetration at 75%, competition in
39
the cellular business continues to be intense as operators seek to increase market share in a
maturing market. The intense competition has seen further reductions in tariffs as operators tap
the lower-end of the market and increased incidence of multi-SIM usage as subscribers take
advantage of multiple and attractive offers in the market. These have put increasing pressure on
the average revenues earned per subscriber.
The principal players in the industry are Globe Telecom, Philippine Long Distance Telephone
Company (“PLDT”) and its wireless subsidiary Smart Communications, Inc. (“Smart”), and Digital
Telecommunications Philippines, Inc. (“Digitel”) which launched its wireless “Sun Cellular” mobile
service in 2003. Other players include Bayan Telecommunications, Inc. (“Bayantel”) and Express
Telecommunications Co., Inc. (“Extelcom”), which are both licensed to provide wireless mobile
services.
In 2008, PLDT purchased Connectivity Unlimited Resources Enterprises or CURE, one of the four
recipients of 3G licenses awarded by the NTC in 2005. CURE subsequently launched its own 3G
mobile service under the brand, Red Mobile. Additionally, during the year San Miguel Corporation
(SMC), Southeast Asia’s largest food and beverage conglomerate announced that it has partnered
with Qatar Telecom (QTel) and purchased interests in Liberty Telecom, Inc. (Liberty). SMC
reportedly plans to offer mobile and broadband services through Liberty.
Outlook for the broadband sector continues to be positive as Globe and PLDT among the principal
industry players, registered healthy increases in broadband subscribers from the previous year. At
the end of 2008, cumulative broadband subscribers were estimated to have increased by 75% to
1.4 million from the 0.8 million registered in 2007 as major players launched bundled voice and
broadband services, wireless access technologies and affordable prepaid options. The
addressable market for broadband services is expected to expand rapidly in the near term
reinforced by rising PC penetration and wide availability of wireless access devices.
2. Highly Regulated Environment
Globe is regulated by the NTC for its telecommunications business and by the SEC and the BSP
for other aspects of its business. The introduction of, changes in, or the inconsistent or
unpredictable application of, applicable laws or regulations from time to time may materially affect
the operations of Globe, and ultimately the earnings of the Company which could impair the ability
to service debt. There is no assurance that the regulatory environment will support any increase
in business and financial activity for Globe.
The government’s communications policies have been evolving since 1993 when former President
Fidel V. Ramos initiated a more liberalized Philippine Communications Industry. Changes in
regulations or government policies or differing interpretations of such regulations or policies have
affected, and will continue to affect Globe’s business, financial condition and result of operation.
(c) Philippine Political and Economic Factors
The growth and profitability of Globe may be influenced by the overall political and economic
situation of the Philippines In that any political or economic instability in the future may have a
negative impact on the Company’s financial results.
The Globe Group adopts an expanded corporate governance approach in managing its business
risks. An Enterprise Risk Management Policy was developed to systematically view the risks and
to provide a better understanding of the different risks that could threaten the achievement of the
Globe Group’s mission, vision, strategies, and goals, and to provide emphasis on how
management and employees play a vital role in achieving the Globe Group’s mission of enriching
people’s lives. The policies are not intended to eliminate risk but to manage it in such a way that
opportunities to create value for the stakeholders are achieved. Globe Group risk management
takes place in the context of the normal business processes such as strategic planning, business
planning, operational and support processes. The application of these policies is the responsibility
of the BOD through the Chief Executive Officer. The Chief Financial Officer and concurrent Chief
Risk Officer champions and oversees the entire risk management function supported by a risk
management unit. Risk owners have been identified for each risk and they are responsible for
coordinating and continuously improving risk strategies, processes and measures on an
enterprise-wide basis in accordance with established business objectives.
40
The risks are managed through the delegation of management and financial authority and
individual accountability as documented in employment contracts, consultancy contracts, letters of
authority, letters of appointment, performance planning and evaluation forms, key result areas,
terms of reference and other policies that provide guidelines for managing specific risks arising
from the Globe Group’s business operations and environment.
Corporate Governance
Globe Telecom recognizes the importance of good governance in realizing its vision, carrying out
its mission and living out its values to create and sustain increased value for its customers and
stakeholders. As strong advocates of accountability, transparency and integrity in all aspects of
the business, the Board of Directors (“Board”), management, officers, and employees of Globe
Telecom commit themselves to the principles and best practices of governance in the attainment
of its corporate goals.
The basic mechanisms for corporate governance are principally contained in the Company’s
Articles of Incorporation and By-Laws. These constitutive documents lay down, among others, the
basic structure of governance, minimum qualifications of directors, and the principal duties of the
Board and officers of the Company.
The Company’s Manual of Corporate Governance supplements and complements the Articles of
Incorporation and By-Laws by setting forth the principles of good and transparent governance.
The Company has likewise adopted a Code of Conduct, Conflict of Interest, and a Whistleblower
Policy for its employees, and has existing formal policies concerning Unethical, Corrupt and Other
Prohibited Practices covering both its employees and the members of the Board. These policies
serve as guide to matters involving work performance, dealings with employees, customers and
suppliers, handling of assets, records and information, avoidance of conflict of interest situations
and corrupt practices, as well as the reporting and handling of complaints from whistleblowers,
including reports on fraudulent reporting practices.
Moreover, the Company adopted an expanded corporate governance approach in managing
business risks. An Enterprise Risk Management Policy was developed to provide a better
understanding of the different risks that could threaten the achievement of the Company’s mission,
vision, strategies, and goals. The policy also highlights the vital role that each individual in the
organization – from the Senior Executive Group (SEG) to the staff - plays in managing those risks
and in ensuring that the Company’s business objectives are attained.
New initiatives are regularly pursued to develop and adopt corporate governance best practices,
and to build the right corporate culture across the organization.
In recognition of the Company’s efforts, the Institute of Corporate Directors, together with the SEC
and the PSE, has recently named Globe Telecom as one of the country’s Top Five Publicly Listed
Companies for Corporate Governance. The Management Association of the Philippines also
awarded the Company “Best in Corporate Governance Disclosure for a Non-Financial Institution”
and 1st Runner-up in the “Best Annual Report” category.
The Company has received awards and citations in recognition of its efforts in corporate
governance. In January 2008, the Institute of Corporate Directors, together with the SEC and the
PSE, named Globe Telecom among the country’s Top Five Publicly Listed Companies for
Corporate Governance. In Finance Asia’s 2008 poll of Asia’s best companies, Globe Telecom
ranked as one of the best in corporate governance and the second best managed company in the
country. Other leading financial publications in the region such as The Asset have likewise cited
Globe Telecom as one of the best in corporate governance in the country for 2008. In February
2009, the Management Association of the Philippines, together with the SEC, also awarded the
Company Best in Corporate Governance Disclosure for a Non-Financial Institution and 1st runnerup in the Best Annual Report category.
For further details on the Globe’s financial condition and operations, please refer to the 2008
Audited Financial Statements which is incorporated herein in the accompanying index to exhibits.
41
Manila Water Company, Inc. (MWCI) - balance sheets and income statements are shown below:
Statements of Income
(In Million Pesos)
December 31, 2008
December 31, 2007
(As Restated)
Operating Revenues
Interest and Other Income
Total Revenues
8,831
82
8,914
7,227
105
7,332
Costs and expenses
Other Expenses
Provision for income tax
4,396
261
1,469
6,125
3,864
(117)
987
4,735
Net Income
2,788
2,597
2,788
2,788
2,597
2,597
1.13
1.13
1.06
1.06
Attributable to:
Equity holders of MWCI
Minority Interest
EPS:
Basic
Diluted
As of December 31, 2008
Basic based on 2,019,834K common shares
Diluted based on 2,022,719K common shares
As of December 31, 2007
Basic based on 2,016,054K common shares
Diluted based on 2,018,636K common shares
Manila Water Company, Inc.
Balance Sheets
(In Million Pesos)
42
December 31, 2008
December 31, 2007
(As Restated)
Total Current Assets
Total Non-current Assets
8,595
27,774
4,122
23,819
Total Assets
36,368
27,942
Current Liabilities
Non-current Liabilities
Equity Holders
Minority Interest
4,231
17,680
14,450
8
4,427
11,036
12,479
-
Total Liabilities & Stockholders' Equity
36,368
27,942
Established in 1997, Manila Water Company, Inc. (the “Company”) is a Philippine company
holding exclusive rights to provide water delivery and sewerage and sanitation services under the
terms of a 25-year Concession Agreement to approximately five million people in the East Zone
(the “East Zone”), comprising a broad range of residential, commercial and industrial customers.
The year 2008 marked eleven years of the Company’s partnership with Metropolitan Waterworks
and Sewerage System (“MWSS”). During the year ended December 31, 2008, the Company had
P 8.9 billion of revenues and P2.8 billion of net income. Of the Company’s revenues during this
period, 85% or P7.5 billion were generated from water delivery services in the East Zone. The
Company’s total assets as of December 31, 2008 is P36.4 billion and shareholders’ equity of
P14.5 billion.
Under the terms of the Concession Agreement entered into on February 21, 1997 (the
“Concession Agreement”) with the MWSS, a government-owned and controlled corporation, the
Company was granted exclusive rights to service the East Zone as an agent and contractor of
MWSS. Under the Concession Agreement, MWSS granted the Company the use of MWSS’s land
and operational fixed assets and the exclusive right, as agent of MWSS, to produce and treat raw
water, distribute and market water, and collect, transport, treat, dispose and eventually re-utilize
wastewater, including reusable industrial effluent discharged by the sewerage system for the East
Zone. The Company is entitled to recover over the 25-year concession period its operating,
capital maintenance and investment expenditures, business taxes, and Concession Fee
payments, and to earn a rate of return on these expenditures for the remaining term of the
Concession. As the Company has the exclusive rights to service the East Zone, no other entity
can provide water services within this area. Hence, the Company has no competitors within its
service area.
The East Zone encompasses parts of Manila, San Juan, Taguig, Pateros, Antipolo, Taytay, JalaJala, Baras, Angono, San Mateo, Rodriquez, Marikina, Pasig, Mandaluyong, Makati and most of
Quezon City. Despite a challenging business environment, the Company sustained its volume of
water sales for 2008. The volume of water delivered to customers in 2008 totaled 387.3 million
cubic meters (“MCM”), reflecting a 3.8% growth year-on-year. The increase was brought about by
additional new service connections that reached 44,828 for 2008, coming largely from the
expansion areas in Rizal and Taguig. The Company served a total of 1,031,895 households
through 683,894 water service connections as of December 31, 2008, as compared to last year’s
level of 985,516 households and 657,919 water service connections.
From August 1, 1997, at the commencement of
the
Concession
Agreement, to
December 31, 2008, the Company has increased the number of customers it serves by more than
two million, most of whom belong to lower income communities in the East Zone. At the start of
the Concession, only 26.0% of customers enjoyed water supply 24 hours a day, compared to
99.0% who enjoyed 24-hour availability as of December 31, 2008. The Company's non-revenue
water (“NRW”) levels were significantly reduced from 63.0% at the date of commencement of
operations to an average of 19.6% for the month ended December 31, 2008.
43
Since August 1, 1997 up to December 31, 2008, the Company spent over P 26.7 billion on capital
expenditures and on projects funded by MWSS loans paid through Concession Fees (the
“Concession Fee Projects”) by the Company. These capital expenditures were used for projects
geared towards the improvement of water service, reduction of water losses, maintenance of
water quality, implementation of sustainable development programs and expansion initiatives in
Rizal and Taguig. From 2009 to 2013, the Company expects to spend P36.7 billion on capital
expenditures and Concession Fee payments The Company plans to continue to develop new
water sources, expand its water distribution network, rehabilitate its facilities to improve
operational efficiency reliability, expand sanitation and sewerage services and intensify
implementation sustainable development and environmental programs.
The Company’s principal shareholders include the Ayala Corporation (“Ayala”), United Utilities
Pacific Holdings BV (“United Utilities”), Mitsubishi Corporation, BPI Capital Corporation and the
International Finance Corporation (“IFC”).
The Concession
In 2008, Manila Water once again demonstrated effective operational performance amidst a
difficult year and notwithstanding the adoption of a more stringent financial accounting standard.
Along sustained earnings growth, the company ended the year in strong financial condition.
Manila Water invested P3.8 billion in 2008 to expand the company’s market base and improve
service quality. Additional pipelines were laid to increase its market base by about 47,000
households, thus increasing its customer base to more than five million people. Various water
system improvement projects were carried out to address system losses. With these efforts, the
company set a new nonrevenue water (NRW) record of 19.6% at the end of 2008—a significant
milestone for a company that is performing considerably better than many of its regional
counterparts. The expansion in market base enabled the company to increase its revenues by
21% driven largely by the growth in billed water volume. As a result of prudent cost management,
earnings before interest, taxes, depreciation and amortization (EBITDA) rose by 33%, improving
EBITDA margin to more than 72%. Manila Water achieved a net income of P2.8 billion, 7% better
than 2007 earnings, and a return-on-equity of 19%. Earnings per share also improved to P1.13
per share. The company managed to shore up its cash position, thus ensuring its capability to
pursue its aggressive capital investment program. Through improved collection and the proceeds
of its P4 billion bond issuance as well as the various multilateral funding acquired, the company
ended the year with more than P8.9 billion in cash reserves, mostly earmarked for its water and
wastewater projects for the following year. The company was given the highest corporate rating of
‘PRS Aaa’ from Philratings, and received the same rating for its peso bond issue. Manila Water is
built on a well-defined roadmap with the full alignment of its business goals and its advocacies in
social development and environmental protection. Along with strengthening its operational
performance, the company intensified its wastewater initiatives in response to the growing global
concern for environmental protection. In 2008, the company deployed around 90 vacuum tankers
and completed the construction of two wastewater facilities to initiate the clean-up of major
waterways in the East Zone of Metro Manila. The sewage treatment plants in Marikina and Pasig
extended the company’s sewer coverage to 16%, while the deployment of tankers for the
sanitation drives
increased households served. The company remained committed to its social development and
sustainability programs through its flagship Tubig Para sa Barangay (TPSB) program, which now
benefits 1.5 million people from various communities. The TPSB program is complemented with
the Global Partnership for Output Based Aid program, a collaborative effort of Manila Water, the
International Finance Corporation, and the World Bank. This program helped reduce the cost of
water connections, making these more affordable and accessible for the low income communities.
Manila Water attributes its operating and financial performance to its workforce, whose diverse
competencies and extensive exposure have served well in confronting challenges. This was
reflected in the awards and recognition received by the company and its executives during the
year. The Finance Executives Institute of the Philippines (FINEX) recognized Sherisa P. Nuesa as
CFO of the year. The company was also a Corporate Governance Asia Awardee, cited for its
adherence to standards as well as compliance on policies of transparency and disclosures. This
was complemented with another award from The Asset magazine, which recognized Manila Water
as the best in corporate governance in the Philippines for 2008. The company also received the
highest recognition from the Management Association of the Philippines for its 2007 annual report.
44
Lastly, Manila Water was one among Asia’s Top 10 Greenest Companies, cited for its
environmental initiatives in a survey conducted by FinanceAsia. Manila Water’s proven track
record in the East Zone has demonstrated its ability to successfully operate in an Asian setting. In
line with the company’s growth initiatives, it is now taking advantage of opportunities in both the
local and international markets. These include service contracts in Vietnam and India which were
forged to realize the vision of the company in sharing its expertise in total water and environmental
solutions management with a broader market.
Moving forward, Manila Water will sustain growth in its base business and intensify its efforts in
the environmental front. The company intends to further expand water distribution operations and
increase its customer base by another million while preserving its high service quality. The
company intends to attain the same level of excellence in its wastewater expansion through
increased investments, and contribute significantly to environmental protection. Manila Water will
build on the competence and track record it has established to explore more expansion
opportunities in the future.
Key Performance Indicators and Business Efficiency Measures
The Concession Agreement initially set service targets relating to the delivery of services by the
Company. As part of the Company and Regulatory Office’s Rate Rebasing exercise that ended
on December 31, 2002, the Company and MWSS mutually agreed to amend these targets based
on the Company’s business and capital investment plan accepted by the Regulatory Office. In
addition, the Company and MWSS adopted a new performance-based framework. This
performance-based framework, designed to mimic the characteristics of a competitive market and
help the Regulatory Office determine prudent and efficient expenditures, utilizes Key Performance
Indicators (“KPI”) and Business Efficiency Measures (“BEM”) to monitor the implementation of the
Company’s business plan and will be the basis for certain rewards and penalties on the 2008
Rate Rebasing exercise.
Fourteen KPIs, representing critical performance levels for the range of activities the Company is
responsible for, relate to water service, sewerage and sanitation service and customer service.
The BEMs are intended to enable the Regulatory Office to evaluate the efficiency of the
management and operation of the concessions and gauge progress toward the efficient fulfillment
of the Concessionaires’ business plans. There are nine BEMs relating to income, operating
expenses, capital expenditures and NRW. The BEMs are evaluated for trends and annual
forecasts. For the past years, the Company has been consistently receiving commendation from
the MWSS Board of Trustees for outperforming the target set by the Regulators in terms of KPI
and other service obligations.
Amendment to the Concession Agreement
The Concession Agreement was amended under Amendment No. 1 to the Concession Agreement
executed on October 26, 2001. Amendment No. 1 adjusted water tariffs to permit adjustment for
foreign exchange losses and reversal of such losses, which under the original Concession
Agreement were recovered only when the Concessionaire petitioned for an Extraordinary Price
Adjustment.
Organization
The Company is organized into six functional groups: (i) Project Delivery (formerly called Capital
Works); (ii) Operations; (iii) Business; (iv) Regulation and Corporate Development; (v) Human
Resources and Corporate Services; and (vi) Finance and Resource Management.
To better address customer concerns, the Company follows a decentralized approach to the
provision of water and sewerage services. Under this decentralized approach, the Operations
Group and Business Group partitioned the East Zone into Demand Monitoring Zones (“DMZs”),
each territory with approximately 3,000 water service connections, and each further subdivided
into District Metering Areas (“DMAs”), which have between 500 and 1,000 service connections
each. A Territory Team composed of a Territory Business Manager, DMA Officers, meter
consumption analysts and customer service assistants manages each DMZ. Each Territory Team
is empowered to oversee and address the overall needs of the DMZ relating to water supply and
demand, NRW monitoring and control and customer concerns. Territory Management also
45
involves revenue optimization, key account management and new development services.
Restructuring of the Company
On July 26, 2004, the Company’s Board of Directors and stockholders owning more than 80.0% of
the Company’s outstanding capital stock approved the Plan of Merger of the Company with MWC
Holdings, Inc. (“MWCH”), with the Company as the surviving entity. The merger became effective
upon approval by the Securities and Exchange Commission (“SEC”) on October 12, 2004.
MWCH was a special purpose company which was 60.0% owned by Ayala and 40.0% owned by
the Company. The merger was undertaken to rationalize the shareholding structure of the
Company and eliminate the Company’s indirect equity interest in itself. The merger involved the
exchange of 235 million common shares of the Company for all the existing 251 million shares of
MWCH. Pursuant to the merger, Ayala acquired 141 million out of the 235 million common shares
then held in treasury by the Company. The common shares that would have pertained to the
Company as a 40.0% equity holder of MWCH was no longer issued and remained in treasury.
The entire 235 million common shares held by MWCH became treasury shares of the Company,
thus increasing treasury shares to 329 million common shares.
On October 28, 2004, the Board of Directors and stockholders of the Company owning more than
80.0% of each class of share entitled to vote approved a resolution to further amend the Articles of
Incorporation of the Company to (a) change the par value of the participating preferred shares
(“PPS”) from P1.00 per share to P0.10 per share; (b) increase the number of PPS from 400 million
to 4 billion; and (c) provide that PPS shall be participating at a rate of 1/10 of dividends paid to
common shares. Upon approval by the SEC of the amendment on February 3, 2005, the
authorized capital stock of the Company became P4 billion divided into 3.1 billion common shares
with a par value of P1.00 per share, 4 billion PPS with a par value of P0.10 per share and P500
million redeemable preferred shares (“RPS”) with a par value of P1.00 per share.
On December 23, 2004, Ayala entered into an agreement to assign and transfer its 200 million
PPS in exchange for 200 million Common Shares of Philwater Holdings Company, Inc.
(“Philwater”). On the same date, United Utilities entered into an agreement to assign and transfer
133,333,333 PPS in exchange for 133,333,333 common shares in Philwater. Philwater is a
special purpose company, 60.0% owned by Ayala and 40.0% owned by United Utilities, the
principal assets of which shall be the 333,333,333 PPS.
The transfer by Ayala and United Utilities to Philwater of 333,333,333 PPS became effective upon
approval by the SEC on January 31, 2005 of the increase in capital stock of Philwater from
P50,000.00 divided into 50,000 common shares, par value of P1.00 per share, to
P333,400,000.00 divided into 333,400,000 common shares, par value of P1.00 per share,
subscription to which was paid by way of the transfer of the 333,333,333 PPS.
Water Operations
The supply of water by the Company to its customers generally involves abstraction from water
sources, subsequent treatment and distribution to customers’ premises. In 2008, the Company
supplied approximately 1340 MLD of water and billed 1060 MLD compared to 1378 MLD of water
supplied and billed 1028 MLD billed in 2007. The Company serves a total of 1,029,854
households through 702,257 water service connections as of December 31, 2008, as compared to
December 31, 2007 where a total of 986,000 households were served through 657,919 water
service connections.
Water Resources
Under the Concession Agreement, MWSS is responsible for the supply of raw water, free of
charge, to the Company’s distribution system and is required to supply a minimum quantity of
water, currently 1,600 MLD. Should MWSS fail to supply the minimum quantity, the Company is
required to distribute available water equitably.
The Company receives substantially all of its water from MWSS, which holds permits to the raw
surface waters of the Angat and Umiray Rivers. The raw surface water which MWSS supplies to
the Company comes from the Angat and Umiray Rivers, abstracted from the Angat Dam, and
conveyed to the Ipo Dam through the Ipo River. The remainder of the Company’s water supply is
ground-sourced through deep wells located in Quezon City, Mandaluyong, San Juan, Antipolo,
46
Taguig, Cainta, Makati, Marikina, Rodriguez, San Mateo, Montalban,Taytay and Baras, Rizal. As
of December 31, 2008, the Company has 12 active operational deep wells with an average
production of 16 MLD, and 38 on standby mode for use during water shortages with a capacity of
60 MLD. In addition, the Company is planning to develop additional raw water sources coming
from different rivers in Rizal and from Laguna Lake water in Angono and Taguig.
Water Treatment
Final raw water storage and treatment prior to distribution of water to the central network involves
raw water storage at La Mesa reservoir located immediately downstream of the Novaliches portal
interconnection, prior to treatment in the two Balara plants located seven km away. Aqueducts
enable either intake from three towers at La Mesa reservoir or by-pass flow direct from the portal
interconnection to Balara. The Balara treatment plants have a total design capacity of 1,600 MLD
and consist of two separate treatment systems: Balara 1 commissioned in 1935 and Balara 2
commissioned in 1958, with common use of chemical preparation and dosing facilities. The
treatment process involves coagulation, flocculation, sedimentation, filtration and chlorination.
The facilities consume higher quantities of chemicals during the rainy season when the turbidity of
water increases, which leads to increased costs of operations.
Water Distribution
After treatment, water is distributed through the Company’s network of pipelines, pumping stations
and mini-boosters. As of December 31, 2008, the Company’s network consisted of 3,763 km of
total pipeline, comprising of primary, secondary and tertiary pipelines ranging in diameter from 50
to 2,200 mm. The pipes are made of steel, cast iron, asbestos cement pipe, polyvinyl chloride and
other materials. Due to pipes’ excessive tendency to leak, the Company is replacing all of its
asbestos cement pipes (ACP), which at the start were estimated to comprise approximately 25.0%
of the total pipeline length. The Company has replaced a total of 78km of ACP as of December
31, 2008. From the start of the concession in 1997 until the end of 2008, the Company has laid
more than 3,248 km of pipeline through expansion or replacement.
Non-Revenue Water
Non-revenue water refers to the volume of water lost in the Company’s distribution system due to
leakage, pilferage from illegal connections and metering errors.
The Company’s NRW levels have been significantly reduced from an average of 63.0% at the date
of commencement of operations under the Concession Agreement to an average of 19.6% for the
year ended December 31, 2008. The significant improvement in the Company’s system losses
was accomplished through effective management of water supply coupled with massive pipe
replacement projects.
Water Quality
Since 1998, the Company’s water quality has consistently surpassed the Philippine National
Standards for Drinking Water (“PNSDW”) set by the Department of Health (“DOH”) and based on
World Health Organization water quality guidelines. The Company’s rating was based on a series
of tests conducted regularly at 973 (EO 2008) sampling points within the East Zone. The
Company’s water samples scored an average bacteriological compliance of 100%, surpassing the
threshold of 95.0% set in the PNSDW. In 1997, when the Concession began, only 88% of water
samples complied with these quality standards. The Company collects regular samples on a
monthly basis for bacteriological examination of treated surface water and ground water sources.
The Department of Health, together with the MWSS Regulatory Office, confirmed that the
Company’s water quality consistently exceeded the Philippine National Standards for Drinking
Water. This record is further affirmed by an ISO 17025:2005 accreditation obtained by the
Company’s laboratory for water/wastewater quality and testing in October 2006.
Sewerage Operations
The Company is responsible for the provision of sewerage and sanitation services through the
operation of new and existing sewerage systems and a program of emptying septic tanks in the
East Zone.
Sewerage and Sanitation System
47
Since 1997, the Company has significantly improved and expanded the limited wastewater
infrastructure originally operated and maintained by the MWSS. Sewerage services are provided
in areas where treatment facility is feasible, politically, socially, and economically. With such
limitations, sewered areas are mostly located in Quezon City and Makati, but parts of Manila,
Taguig, Cainta, Pasig and Mandaluyong are also connected to a sewer network.
Sewer coverage by the end of 2008 increased to 16% from just 3% coverage in 1997, totaling
more than 72,000 households benefited from this service. As of year-end 2008, the Company
operates 31 STPs with a total capacity of 87 MLD, compared to 40 MLD in 1997.
Customers who are not connected to the sewer network are provided septic tank emptying
services through the ‘Sanitasyon Para Sa Barangay’ (“SPSB”) program. Through cooperation with
the barangays the program aims to desludge all septic tanks in a barangay without charge over a
specified, set schedule.
Related Party Transactions
In the normal course of business, the Company has transactions with related parties. The sales
and investments made to related parties are made at normal market prices. Service agreements
are based on rates agreed upon by the parties. Outstanding balances at year-end are unsecured
and interest-free. There have been no guarantees provided or received for any related party
receivables or payable. As of December 31, 2008, the Company has not made any provision for
probable losses relating to amounts owed by related parties. This assessment is undertaken each
financial year by examining the financial position of the related party and the market in which the
related party operates.
The Company entered into a technical services agreement with United Utilities B.V., an affiliate of
United Utilities Pacific Holdings B.V., for technical services necessary for the operation of the
Company. The Company also contracted with Ayala Corporation for administrative, technical and
support services in relation to human resources, treasury, accounting, capital works, corporate
services and regulatory affairs and administrative management of the Company. The Company
further entered into a Capital Works Program Agreement with Water Capital Works Inc. (“WCWI”),
a company owned by Ayala Corporation, United Utilities Pacific Holdings B.V., and BPI Capital
Corporation, for services relating to the capital works program of the Company. The agreements
are for a period of ten years and are renewable for successive periods of five years.
Environmental Compliance
The Company’s wastewater facilities must comply with Philippine environmental standards
primarily set by the Department of Environment and Natural Resources (“DENR”) on effluent
quality. In keeping with the Company’s commitment to sustainable development, all projects are
assessed for their environmental impact, and where applicable, must obtain an Environmental
Compliance Certificate from the DENR prior to construction or expansion. Subsequent to
construction, effluents from facilities, such as sewage and septage treatment plants, are routinely
sampled and tested against DENR standards using international quality sampling and testing
procedures.
The Company has made efforts to meet and exceed all statutory and regulatory standards. The
Company employs what it believes to be appropriate treatment, disposal and monitoring
procedures and communicates the need for conservation to its customers and employees. With
technical assistance from United Utilities, the Company uses controlled work practices and
preventive measures to minimize risk to the water supply, public health and the environment. The
Company’s regular maintenance procedures involve regular disinfection of service reservoirs and
mains and replacement of corroded pipes. The Company believes that all water and wastewater
treatment processes meet the current standards of the DENR.
48
Employees
As of December 31, 2008, the Company had 1,551 employees. Approximately 47% were nonmanagement employees and 53% held management positions. Five employees were seconded
from Ayala.
The following table presents the number of employees as of the end of the periods indicated:
Year Former
MWSS
2000
2001
2002
2003
2004
2005
2006
2007
2008
1525
1476
1427
1407
1383
1351
1338
1320
1284
Direct
Hires
Seconded
from Ayala
13
56
109
109
149
219
241
243
258
6
7
5
5
4
4
3
4
5
Seconded from Consultants
Bechtel and
United Utilities
10
3
8
3
4
2
4
2
2
3
2
3
2
1
2
2
2
2
Total
1557
1550
1547
1527
1541
1579
1585
1571
1551
The following table presents the number of employees by function as of the December 31, 2008:
Group
Office of the President
Finance
Regulation and Corporate
Development
HR and Corporate Services
Business
Operations
Project Delivery
Management
3
82
NonManagement
1
18
30
37
422
154
88
3
35
455
171
43
Total
4
100
33
72
877
325
131
Before the privatization, MWSS had 8.4 employees per 1,000 service connections. The Company
has improved this ratio to 1.6 employees per 1,000 service connections as of December 31, 2007,
largely due to improvements in productivity achieved through, among other things: value
enhancement programs; improvements on work processes; employee coaching and mentoring;
transformation to knowledge workers; and various training programs.
The Company’s
organizational structure has been streamlined, reducing the number of non-management rank
levels from 16 to six, and empowering the employees through decentralized teams with
responsibility for managing territories. In addition, the Company formed multi-functional working
teams, called clusters, composed of members of management tasked with addressing corporate
issues such as quality, risk and crisis management.
As of December 31, 2007, 733 or 47% of the employees of the Company belonged to the Manila
Water Employees Union (“MWEU”). The Company and MWEU concluded negotiations on a new
Collective Bargaining Agreement covering a 2-year period from 2006 to 2008. The agreement
provides for a grant of a P69 million compensation and benefits package to more than 1,000 nonmanagement employees over three years. The Company believes that its management maintains
a strong relationship with union officials and members. The Company has not had any strikes
since its inception. Grievances are handled in management-led labor councils. The Collective
Bargaining Agreement also provides for a mechanism for the settlement of grievances.
Risk Factors
MWCI’s business, financial condition and results of operations could be materially and adversely
affected by any risks relating to MWCI and the Philippines. The Company’s financial performance
49
may be adversely affected if its requests for increases in customer tariffs are not granted. Water
tariff adjustments during the Concession Period are formula-driven, and the mechanics for seeking
these adjustments are set out in the Concession Agreement. Adjustments may be requested
based on movements in the Philippine CPI, foreign exchange currency differentials, certain
extraordinary events and during Rate Rebasing. Under the Concession Agreement, any rate
adjustment requires approval by the MWSS and the Regulatory Office.
In addition, the waterworks facilities may incur significant loss, damage or other impairments,
including the water supply systems managed by the Company as a result of:
•
•
•
•
natural disasters, such as, but not limited to, earthquakes, floods, prolonged droughts and
typhoons;
acts of terrorism;
human errors in operating the waterworks facilities, including the water supply systems;
and
industrial actions by MWCI’s employees.
Any of these events could materially harm MWCI’s business, financial condition and results of
operations.
The Company’s success also depends significantly on the continued individual and collective
contributions of each member of its management team. The departure of any of these persons
could cause its operating results to suffer.
Meanwhile, the Company’s expansion into new locations depends on its ability to obtain
necessary permits, licenses and approvals to operate in new territories in a timely and costeffective manner, as well as the timely completion of the expansion projects initiated by the
Company.
The Company’s expansion to territories outside of its current operating areas or meeting its
expected returns includes significant risks, including the following:
• regulatory risks, including government relations, local regulations and currency controls;
• risks related to operating in different territories, including reliance on local economies,
environmental or geographical problems and shortages of materials and skilled labor;
• risks related to the development of new operations, including assessing the demand for
water, engineering difficulties and the inability to begin operations as scheduled; and
• risks relating to greater competition in these new territories, including counter retaliatory
measures of the Company’s competitors to gain or retain market share by reducing prices.
• risks relating to the availability of financial, organizational and technical resources to meet
the requirements of the new business venture.
Even if its expansion plans are successful, the Company may have difficulty managing its growth.
There is no assurance that any new operation outside of its current operating areas will attain or
maintain profitability or that the results from any operation will not negatively affect its overall
profitability.
Management of Risks
The Company strives to maintain a highly transparent and professional relationship with its
regulators. The successful and transparent conduct of the past rate rebasing exercises is a
testament to the parties’ commitment to work harmoniously together, within the existing regulatory
framework. Strict compliance with regulatory targets and maintaining a high customer satisfaction
rating also serve to mitigate these regulatory risks. For the past eleven years, the Company has
consistently outperformed its regulatory obligations through a set of pre-agreed key performance
indicators and business efficiency measures.
In respect to the operating risks, the Company expects that, with the implementation of its capital
investment program, it will be able to further bring down its system losses to an even more
favorable level. Meanwhile, to mitigate social risks, the Company will continue its regular public
consultation and its sustainable development strategy, which bring the Company closer to its
customers.
50
Financing risks have been addressed by the Company through loans procured from both domestic
and international funding institutions on reasonable terms, part of which has already been spent
on various projects. The Company also obtained additional debt capital from its recent peso bond
offering.
The Company has instituted a company-wide Risk Management Program that addresses financial
and operational risks, including those brought about by natural disasters. The program aims to
evaluate and address corporate risks on a regular basis. An asset and risk management team
identifies the risks faced by Manila Water’s operating units, deliberates on the priority risks and
adopts a mitigation plan for these risks. The Company’s planning and budgeting process also
includes a risk analysis and budget action programs to address risks. Part of the risk management
system is a Business Continuity Team that conducts drills to prepare for various contingencies.
Government Regulations
MWCI has to comply with environmental laws primarily for its wastewater operations. Among
these regulations are the following:
•
DENR Administrative Order No. 35-91, Series of 1993 (Revised effluent regulations);
•
Resolution No. 25, Series of 1996 (Implementation of the Environmental User Fee System
in the Laguna de Bay Region);
•
Resolution No. 33, Series of 1996 (Approving the Rules and Regulations implementing the
Environmental User Fee System in the Laguna de Bay Region); and
•
DENR Administrative Order No. 26-92, Series of 1992 (Appointment/Designation of Pollution
Control Officers).
Other Matters
The Company has not been involved in any bankruptcy, receivership or similar proceeding as of
December 31, 2008. Further, except as discussed above, the Company has not been involved in
any material reclassification, consolidation or purchase or sale of a significant amount of assets
not in the ordinary course of business.1 The Company is not engaged in sales to foreign markets.
The Company also has no publicly-announced new product or service nor own any patents,
trademarks, copyrights, licenses, franchises, concessions and royalty agreements.
The Company is not dependent on a single customer or a few customers, the loss of any or more
of which would have a material adverse effect on the Company. Except as discussed above,
government approval is not necessary for the Company’s principal products or services. The
Company has not engaged in any research and development activities for the last three years.
Manual of Corporate Governance
Manila Water’s corporate governance is anchored on its Corporate Governance Manual, which
supplements the Articles of Incorporation and By-Laws of the Company. The Manual was first
adopted on May 3, 2004 pursuant to Securities Exchange Commission Memorandum Circular No.
2, Series of 2002. It was amended in November 2007, as endorsed by the Audit Committee and
approved by the Board.
There has been no deviation from the Manual since its adoption. In a certification submitted to the
SEC on January 6, 2009, the Company’s Compliance Officer, Atty. Glorina N. Padua-de Castro,
stated that Manila Water adopted in the Corporate Governance Manual the leading practices and
principles on good corporate governance and has fully complied with all the requirements of the
Manual for the year 2008, including the requirements in relation to the board of directors, board
committees, officers and stockholders’ rights and interests.
1
An initial public offering of shares by the Company and certain selling shareholders took place in February and
March 2005 and culminated in the listing of the Company with the Philippine Stock Exchange on 18 March 2005.
51
The revised Manual formalized the role of the Audit Committee in corporate governance, pursuant
to the Audit Charter and existing practice in the Company. The Audit Committee was given
additional functions, including the conduct of an annual evaluation of the Board and executive
officers. The revised Manual also enhanced the role of the Corporate Secretary in corporate governance.
The Corporate Secretary is tasked to ensure that the Board follows internal rules and external
regulations, to facilitate clear communication between the Board and management, and to inform
key officers of latest corporate governance developments. The revised Manual further
strengthens the Company’s policy on disclosures and related party disclosures.
In addition to enhancing its Manual, the Company likewise implemented several initiatives to
strengthen its corporate governance practices in 2008. The Company adopted a policy on
reporting of fraudulent or dishonest acts. The policy implements the provision of the Company’s
Code of Business Conduct and Ethics that requires all officers and employees to immediately
report all suspected or actual fraudulent or dishonest acts to their line manager or to the Office of
the Compliance Officer. The Company will promptly identify and investigate any suspected fraud
and pursue civil and/or criminal actions against officers and employees suspected of fraud. The
policy aims to protect employees and officers who report wrongdoings from retaliation or
discrimination. It also penalizes employees and officers who make untrue and malicious
allegations. Since the adoption of the policy in 2007, the Company has, through the Office of the
Compliance Officer, received and acted upon several reports filed pursuant to the policy.
Manila Water further issued implementing guidelines to specify certain conflict of interest
situations involving all employees and their relatives up to the fourth degree of consanguinity
and/or affinity, including common law relationships. All such existing contracts/arrangements by
employees and their relatives were required to be terminated immediately and correspondingly
reported to the line manager and the Office of the Compliance Officer, as required under the
Code. Any exception to the guidelines must be approved by the President and the Audit
Committee.
Manila Water also enhanced its website and annual reports in line with its thrust of transparency of
information and prompt and complete disclosure of all material facts relating to its business.
Manila Water continued to implement its existing corporate governance practices. Among these is
the Insider Trading Policy, which prohibits directors, officers and confidential employees from
trading in Manila Water shares within a certain period before and after the release of material
information to the public. The Company’s policy on acceptance of corporate entertainment/gifts
also continued to be in effect. This policy prohibits all officers and employees from accepting
corporate entertainment/gifts from suppliers, contractors and other business partners, which can
be viewed as influencing the manner on which an officer or employee may discharge his duties. It
also requires all officers and employees to submit a report to their line manager and the Office of
the Compliance Officer for corporate entertainment/gifts received. The report must identify the
giver, date of receipt, and type and approximate value of the corporate entertainment/gifts
received.
Manila Water likewise maintained its internal control system. This system includes a Bid and
Capital Expenditures Committee that oversees bidding systems and grants approvals for capital
expenditures. The asset and risk management team also remained active, conducting various risk
assessment and incident preparedness activities throughout the year to evaluate and address
corporate risks.
As a validation of its corporate governance initiatives, Manila Water has been named the best
company in the Philippines, in terms of Corporate Governance in The Asset Magazine’s annual
Corporate Governance Index 2008. Likewise, the Company was also chosen for 2 consecutive
years as one of the recipients of the Corporate Governance Asia Annual Recognition Award.
Corporate Governance Asia is the only journal currently specializing in corporate governance in
the region. It evaluated the performance of key companies and listed those that have contributed
significantly to the over-all development of corporate governance during the past year.
52
These citations affirm the Company’s commitment to observing the highest standards of corporate
governance and motivate the Company to further improve its current platform of governance.
For further details on the MWCI’s financial condition and operations, please refer to the 2008
Audited Financial Statements which is incorporated herein in the accompanying index to exhibits.
Other factors pertaining to the description of the business as required by Part 1, Paragraph A of
Annex C, SRC Rule 12 have not been touched on as these are either not applicable to MWCI or
require no answer.
Item 2. Description of Properties
Ayala Corporation owns 4 floors of the Tower One Building located in Ayala Triangle, Ayala
Avenue, Makati. These condominium units were purchased in 1995 and are used as corporate
headquarters of the Company. Other properties of the Company include various provincial lots
relating to its business operations totaling about 860 hectares and Metro Manila lots totaling 2.6
hectares. The Honda Cars Makati, Honda Cars Pasig, Honda cars Alabang and Isuzu Alabang
dealership buildings are located on its Metro Manila lots which are leased to these
dealerships.These properties do not have any mortgage, lien or encumbrance.
The following table provides summary information on ALI’s landbank as of December 31, 2008.
Properties are wholly-owned and free of lien unless noted.
Location
Makati 1
Taguig 2
Makati (outside CBD)
Alabang 3
Las Piñas
Quezon City 4
Manila / Pasay 5
Pasig 6
Metro Manila
Canlubang 7
Laguna (ex-Canlubang) 8
Cavite 9
Batangas/Rizal/Quezon 10
Calabarzon
Bulacan
Pampanga 11
Naga
Cabanatuan/ Baguio
Bataan 12
Other Luzon Area
Bacolod/Iloilo 13
Cebu 14
Davao
Cagayan De Oro
Visayas/Mindanao
Hectares
52
45
3
18
132
52
2
4
308
1,647
720
118
134
2,619
Primary land use
commercial/ residential
commercial/ residential
residential
commercial
residential
commercial/ residential
commercial/ residential
residential
residential/ industrial/ commercial
residential/ industrial
residential
residential
18
19
4
71
289
401
residential
residential
residential
residential
leisure/ residential
275
189
70
194
724
residential
commercial/ residential
residential
residential
53
TOTAL
4,052
1
Makati includes sites of Mandarin Hotel (1.6 has.) and Peninsula Hotel (2.0 has.) which are 50% owned through
Ayala Hotels, Inc., and remaining area at Roxas Triangle (0.5 ha.) which is 50% owned; 1.37 has. of which is
mortgaged to Bank of the Philippine Islands in compliance with Bangko Sentral ng Pilipinas ruling on
directors, officers, stockholders and related interests (DOSRI); 0.16 has. mortgaged with GSIS to secure
surety bonds in favor of Bases Conversion Development Authority.
2
Taguig includes 9.8-ha. site of Market! Market! under lease arrangement with Bases Conversion Development
Authority; 2-ha. site of Serendra which is under joint development agreement with Bases Conversion
Development Authority; 33 has. in Taguig is owned through FBDC.
For Market! Market!, the lease agreement with the BCDA covers a period of 25 years (renewable for another 25
years) and involves an upfront cash payment of P700M and annual lease payments with fixed and variable
components.
For Serendra, the joint development agreement with BCDA involves an upfront cash payment of P700M plus a
guaranteed revenue stream totaling P1.1B over an 8-year period.
3
Alabang pertains to the 17.6-ha. Alabang Town Center which is 50% owned through Alabang Commercial
Corp., 3.7 has. of which is subject of a Mortgage Trust Indenture as security for ACC’s short-term loans with
Bank of the Philippine Islands.
4
Quezon City includes 38 has. under lease arrangement with University of the Philippines and the 13-ha. site of
TriNoma which is under lease arrangement with the DOTC. TriNoma is 49% owned by ALI.
5
Manila/Pasay includes 2.1 has. (under development) which are under joint venture with Manila Jockey Club,
Inc. and 0.3-ha. site of Metro Point which is 50% owned through ALI-CII Development Corp.
6
Pasig includes 18 has. for an upcoming residential project.
7
Canlubang includes 1,216 has. which are 70% owned through Aurora Properties, Inc. and Vesta Holdings, Inc.;
also includes 304 has. which are 65% owned through Ceci Realty, Inc.
8
Laguna (excluding Canlubang) includes 100 has. which are under a 50-50% joint venture with Greenfield
Development Corp.; 19 has. in Laguna Technopark, Inc. which is 61% owned by Ayala Land; and 3-ha. site of
Pavilion Mall which is under 27-year lease arrangement with Extra Ordinary Group, with an option to renew
every 5 years thereafter (lease payment is based on a certain percentage of gross income).
9
Cavite includes 20 has. in Riego de Dios Village which is under joint venture with the Armed Forces of the
Philippines.
10
Batangas includes 17 has. in Sto. Tomas project which is under an override arrangement, while Quezon
includes a 39-ha. property.
11
Pampanga pertains to the site of Avida and CII projects, and an upcoming mall.
12
Bataan pertains to the site of Anvaya Cove which is under joint development agreement with SUDECO.
13
Bacolod includes 69 has. in Ayala Northpoint which is under override arrangement. Iloilo includes a 21-ha.
property.
14
Cebu includes about 10 has. in Cebu Business Park (including Ayala Center Cebu) which is 47% owned
through Cebu Holdings, Inc.; 0.62-ha. hotel site owned by Ayala Hotels, Inc. and Cebu Holdings, Inc.; 8 has.
in Asiatown IT Park which is owned by Cebu Property Ventures and Development Corporation which in turn is
76% owned by CHI; and 22 has. in Amara project, (66% owned by CHI) which is under joint venture with
Coastal Highpoint Ventures, Inc. A 9.46-ha. Property (within the Cebu Business Park) which houses the
Ayala Center Cebu is subject of a mortgage trust indenture securing term loan with Bank of the Philippine
Islands; 0.62 has. is subject of a mortgage trust indenture securing Cebu Insular Hotel Company Inc.’s term
loan with bank of the Philippine Islands.
IMI’s local production area (plant and equipment) of 115,712 sqm. is located in the following sites:
Binan, LIIP, Alabang, Cebu and Cavite. It also has a production area of 8,800 sqm, in Singapore
and 64, 900 sqm. in China. It also has office area of 1,584 sqm. in USA ,300 sqm. in Hongkong
and 68 sqm. in Japan.
54
Rental Properties
ALI’s properties for lease are largely shopping centers and office buildings. It also leases land,
carparks and some residential units. In the year 2008, rental revenues from these properties
accounted for P5.99 billion or 18% of Ayala Land’s consolidated revenues. Lease terms vary
depending on the type of property and tenant.
Property Acquisitions
With 4,052 hectares in its landbank as of end-2008, Ayala Land believes that it has sufficient
properties for development in next 25 years.
Nevertheless, the Company continuous to seek new areas of opportunities for additional, largescale, masterplanned developments in order to replenish the inventory and provide investors with
an entry point into attractive long-term value propositions. The focus is on acquiring key sites in
the Mega Manila area and other geographies with progressive economies that offer attractive
potentials and where projected value appreciation will be fastest.
Ayala Corporation and IMI have no property acquisition plan for 2009.
Item 3. Legal Proceedings
Except as disclosed herein, there are no material pending legal proceedings for the past five years
and the preceding years until December 31, 2008 to which Ayala or the Directors or Executive
Officers is a party or of which any of its material properties are subject in any court or
administrative agency of the Government.
Ayala Land, Inc.
As of end-2008, ALI is not involved in any litigation it considers material. However, certain
individuals and entities have claimed an interest in ALI’s properties located in Las Piñas, Metro
Manila, which are adjacent to its development in Ayala Southvale.
Prior to purchasing the aforesaid properties, ALI conducted an investigation of titles to the
properties and had no notice of any title or claim that was superior to the titles purchased by ALI.
ALI traced its titles to their original certificates of title and ALI believes that it has established its
superior ownership position over said parcels of land. ALI has assessed these adverse claims
and believes that its titles are in general superior to the purported titles or other evidence of
alleged ownership of these claimants. On this basis, beginning in October 1993, ALI filed petitions
in the RTC of Makati and Las Piñas for quieting of title to nullify the purported titles or claims of
these adverse claimants. A number of these cases are at various stages of trial and appeal.
Some of these cases have been finally decided by the Supreme Court (“SC”) in ALI’s favor.
These include decisions affirming the title of ALI to some of these properties, which have been
developed and offered for sale to the public as Sonera, Ayala Southvale. The controversy
involves the remaining area of approximately 129 hectares.
ALI does not intend to develop and sell the rest of the Las Piñas properties until the litigation is
resolved.
ALI has made no provision in respect of such actual or threatened litigations.
Avida Tex System
In December 1999, plaintiffs Edgardo Vasquez and Vazquez Building Systems Corporation filed a
patent infringement case against Avida, a wholly-owned subsidiary of ALI. Avida has raised a
number of defenses, including the following: (i) Avida is utilizing the Tex system, a British
technology patented in the Philippines of which Avida is a licensee, and not the Vasquez modular
housing patent; (ii) patent claim is overbroad; and (iii) the H-shaped column and the wall panel
installation system being claimed as the infringed component cannot be covered by the Vasquez
patent because these are not patentable as they do not qualify as a “novelty”. In a decision dated
December 18, 2007, the RTC of Quezon City ruled in favor of plaintiffs, requiring Avida to
compensate the plaintiffs in the amount of P90 million as temperate damages or reasonable
55
royalty with interest at the rate of 6% p.a. from the date of filing of the complaint as well as moral
and exemplary damages and reasonable attorney’s fees and cost of suit. Avida filed a notice of
appeal to contest this decision with the Court of Appeals.
Since then, Avida has entered into a compromise agreement with Edgardo Vasquez and Vazquez
Building Systems Corporation to resolve the patent infringement case filed by the latter against
Avida. The compromise became effective upon the approval of the Court of Appeals last March
17, 2008. Avida has recently fully settled all of its obligations under such agreement.
Glorietta Explosion
As a result of the explosion which occurred on October 19, 2007 at the basement of the Makati
Supermarket Building, the Philippine National Police (“PNP”) has filed a complaint with and
recommended to the Department of Justice (“DOJ”) the prosecution of certain officers/employees
of Makati Supermarket Corporation, the owner of the building, as well as some officers/employees
of the Company’s subsidiary, Ayala Property Management Corp. (“APMC”), among other
individuals, for criminal negligence. In a Joint Resolution dated April 23, 2008, the DOJ special
panel of prosecutors ruled that there was no probable cause to prosecute the APMC
officers/employees for criminal negligence. This was affirmed by the DOJ Secretary in a
Resolution dated November 17, 2008. A Motion for Reconsideration was filed by the DILG-IATF
to question the DOJ Secretary’s Resolution which remains unresolved to date. No civil case has
been filed by any of the victims to date.
For the significant affiliates:
Globe Telecom, Inc.
Globe is an intervenor in and Innove is a party to Civil Case No. Q-00-42221 entitled "Isla
Communications Co., Inc. et. al., versus National Telecommunications Commission (‘NTC’) et al.,"
before the Regional Trial Court (‘RTC’) of Quezon City by virtue of which Globe and Innove,
together with other cellular operators, sought and obtained a preliminary injunction against the
implementation of NTC Memorandum Circular (‘MC’) No. 13-6-2000 from the RTC of Quezon City.
NTC MC 13-6-2000 prescribed new billing requirements for cellular service providers. The NTC
appealed the issuance of the injunction to the Court of Appeals. On 25 October 2001, we received
a copy of the decision of the Court of Appeals ordering the dismissal of the case before the RTC
for lack of jurisdiction, but without prejudice to the wireless companies’ seeking relief before the
NTC, which the Court of Appeals claims had jurisdiction over the matter. On 22 February 2002, we
filed a Petition for Review with the Supreme Court (‘SC’) to annul and reverse the decision of the
Court of Appeals. The Supreme Court (‘SC’), on 2 December 2003, overturned the CA’s earlier
dismissal of the petitions filed by SMART and Globe. In its 13-page decision, the SC said that the
Quezon City trial court could hear and decide the case, contrary to NTC’s argument. The SC has
also since denied the NTC’s motion for reconsideration. The pre-trial conference before the RTC
Quezon City is still to be concluded and terminated.
On 22 May 2006, Innove received a copy of the Complaint of Subic Telecom Company
(“Subictel”), Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan
Authority and Innove from taking any actions to implement the Certificate of Public Convenience
and Necessity granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowing
Innove to offer certain telecommunications services within the Subic Bay Freeport Zone would
violate the Joint Venture Agreement (“JVA”) between PLDT and SBMA. Innove has since filed its
Opposition to the Prayer for Injunction with Motion to Dismiss, citing that SBMA is not entitled to
an injunction on the basis of the grounds it has cited in the complaint, that an injunction in this
case would be contrary to public policy, and that the complaint is forum-shopping since Subictel
had already previously objected to the grant of the CPCN in the proceedings before the regulatory
body. SBMA also filed its Opposition pointing out, among others, that Subictel is not a proper party
in this case since Subictel is not a party to the JVA. The court granted Innove’s Motion to Dismiss
and Subictel has filed a Motion for Reconsideration. The Motion for Reconsideration was
subsequently denied and Subictel has appealed to the Court of Appeals. The appeal is pending.
PLDT and its affiliate, Bonifacio Communications Corporation (BCC) and Innove and Globe are in
litigation over the right of Innove to render services and build telecommunications infrastructure in
the Bonifacio Global City. In the case filed by Innove before the NTC against BCC, PLDT and the
Fort Bonifacio Development Corporation (FBDC), the NTC has issued a Cease and Desist Order
56
preventing BCC from performing further acts to interfere with our installations in the Bonifacio
Global City.
In the case filed by PLDT against the NTC in Branch 96 of the Regional Trial Court (RTC) of
Quezon City, where PLDT sought to obtain an injunction to prevent the NTC from hearing the
case filed by Innove, the RTC denied the prayer for a preliminary injunction and the case has been
set for further hearings. PLDT has filed a Motion for Reconsideration and Globe has intervened in
this case.
In the case of filed by BCC against FBDC, Globe Telecom and Innove, Bonifacio Communications.
Corp. before the Regional Trial Court of Pasig, which case sought to enjoin Innove from making
any further installations in the BGC and claimed damages from all the parties for the breach of the
exclusivity of BCC in the area, the court did not issue a Temporary Restraining Order and has
instead scheduled several hearings on the case.
On November 11, 2008, Bonifacio Communications Corp. (BCC) filed a criminal complaint against
the officers of Innove Communications Inc., the Fort Bonifacio Development Corporation (FBDC)
and Innove contractor Avecs Corporation for malicious mischief and theft arising out of Innove’s
disconnection of BCC’S duct at the Net Square buildings. The accused officers filed their counteraffidavits and are currently pending before the Prosecutor’s Office of Pasig.
Manila Water Co., Inc.
Antonio Baltazar vs. Hon. Oscar Garcia, et al., OMB Case No. C-A-05-0205-E and OMB Case No.
C-A-05-0208-E, Ombudsman
Criminal complaints were filed with the Office of the Ombudsman against members of the Board of
Trustees of the Metropolitan Waterworks and Sewerage System (MWSS) and the MWSS
Regulatory Office and the presidents of the Company and Maynilad Water Services, Inc.
(“Maynilad”), for a violation of Republic Act No. 3019 and for ”conduct prejudicial to the best
interests of the service.” The complaint arose from the water rate increases which became
effective on January 1, 2005. The Company filed the Counter-Affidavit of its President in 2005 and
is awaiting the resolution of the cases. The Company believes that the Ombudsman will dismiss
the complaint.
Freedom from Debt Coalition, et al.vs. MWSS and the MWSS-RO, G.R. No.173044, Supreme
Court
In June 2006, the Freedom from Debt Coalition petitioned the Supreme Court to annul resolutions
of the MWSS Board of Trustees ruling that the Company and Maynilad are not public utilities but
agents and contractors of MWSS. While the Company is not impleaded as a respondent, certain
contingent, adverse, financial and regulatory consequences might result from a decision granting
the petition. The Company believes that it is not a public utility but an agent and contractor of the
MWSS, which remains as the public utility, a position supported by Section 2.1 of the Concession
Agreement, MWSS Board Resolution dated July 30, 2004, National Water Resources Board
(NWRB) Resolution dated June 17, 2005, and a Memorandum from the Office of the Government
Corporate Counsel dated June 1, 2005. On December 10, 2007, the Supreme Court dismissed
the petition on the following grounds: (a) petitioners should have appealed the MWSS resolutions
to the NWRB instead of filing a certiorari petition with the Supreme Court; (b) the petition did not
name as respondents Maynilad and the Company, the two MWSS concessionaires, who are
indispensable parties; (c) petitioners disregarded the hierarchy of courts principle by filing the
petition directly with the Supreme Court instead of a lower court; and (d) the case involves factual
issues, which the Supreme Court cannot resolve. The Company received information that the
Freedom from Debt Coalition has filed a motion for reconsideration with the Supreme Court.
Manila Water Company, Inc. and Maynilad Water Services, Inc. vs. Hon. Borbe, et al.
CBAA Case No. L-69 Central Board of Assessment Appeals
This is an appeal from the denial, by the Local Board of Assessment Appeals of Bulacan Province,
of Manila Water’s (and Maynilad’s) appeal to it from the Notice of Assessment and Notice of
57
Demand for Payment of Real Property Tax in the amount of P357,110,945 made by the Municipal
Assessor of Norzagaray, Bulacan. Manila Water is being assessed for half of the amount. In a
April 03, 2008 letter, the Municipal Treasurer of Norzagaray and the Provincial Treasurer of the
Province of Bulacan, informed both concessionaires (Manila Water Company and Maynilad Water
Services, Inc.) that their total real property tax accountabilities have now reached
P648,777,944.60 as of 31 December 2007. This amount, if paid by the concessionaires, will
ultimately be charged to the customers as part of the water tariff rate. The concessionaires (and
the MWSS, which intervened as a party in the case) are thus contesting the legality of the tax on a
number of grounds, including the fact that the properties subject of the assessment are owned by
the MWSS. MWSS is both a government-owned and controlled corporation and an
instrumentality of the National Government that is exempt from taxation under the Local
Government Code.
Herminio dela Peña, et al. vs. Manila Water Company, Inc.
NLRC NCR (South) Case No. 30-02-00723-0/NLRC CA No. 025614-2000/ CA G.R. SP No.
67134/ SC-G.R. No. 158255, Supreme Court
This case arose from a complaint for illegal dismissal filed with the National Labor Relations
Commission (NLRC) by a group of contractual collectors who belong to the Associated Collectors
Group, Inc. (ACGI). ACGI’s collection service was engaged by Manila Water starting November
1997 up to the early part of February 1999. Complainants claim that they are regular employees of
Manila Water and were illegally dismissed when Manila Water terminated its service contract with
ACGI. The labor arbiter ruled for the complainants and awarded separation pay amounting to
P222,500.00. The labor arbiter’s decision was reversed by the commission level of the NLRC. The
NLRC, in turn, was reversed by the Court of Appeals and, eventually, sustained by the Supreme
Court. The Supreme Court however deleted the award of moral and exemplary damages of
P10,000.00 per complainant.
During the execution stage of the case, the labor arbiter granted complainants’ Motion to Approve
Computation of Complainants’ Backwages and to Issue Writ of Execution. The labor arbiter
directed Manila Water to reinstate complainants and to pay them their backwages in the amount of
P19,576,500.00. Manila Water appealed the order of the labor arbiter. The Commission level of
the NLRC granted the appeal of Manila Water. The complainants elevated the case to the Court of
Appeals by Petition for Certiorari. Their petition was denied. Consequently, on August 11, 2008,
the complainants filed a Petition for Review with the Supreme Court. Manila Water filed an
Opposition to said petition. The matter is now pending resolution by the Supreme Court.
IMI and BPI are not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Except for matters taken up during the annual meeting of stockholders, there was no other matter
submitted to a vote of security holders during the period covered by this report.
58
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5. Market for Issuer’s Common Equity and Related Stockholder Matters
Market Information
The company’s common equity is traded at the Philippine Stock Exchange.
The following table shows the high and low prices (in PHP) of Ayala Corporation’s shares in the
Philippine Stock Exchange for the year 2007 and 2008:
1st qtr
2nd qtr
3rd qtr
4th qtr
2008
High
Low
454.17 322.92
352.50 257.50
320.00 250.00
295.00 174.00
2007*
High
Low
455.14
358.60
479.97
386.18
485.89
334.31
537.50
412.50
* adjusted to reflect the 20% stock dividend declared in January 2008
Source: Bloomberg
The market capitalization of the Company’s common shares as of end-2008, based on the
closing price of P209.00/share, was approximately P103.87 billion.
The price information of Ayala Common, Preferred “A” and Preferred “B” Shares as of the
close of the latest practicable trading date, April 8, 2009, is P216.00, P530.00 and P106.00,
respectively.
Holders
There are approximately 7,916 registered holders of common shares as of December 31,
2008. The following are the top 20 registered holders of the common shares of the Company:
Stockholder Name
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Mermac, Inc.
PCD Nominee Corporation (Non-Filipino)
Mitsubishi Corporation
PCD Nominee Corporation (Filipino)
Shoemart, Inc.
Henry Sy, Sr.
ESOWN Administrator 2008
ESOWN Administrator 2007
Philippine Remnants Co., Inc.
ESOWN Administrator 2006
Sysmart Corporation
ESOWN Administrator 2005
BPI TA 14105123 FAO Consuelo Zobel Alger
Foundation
Mitsubishi Logistics Corporation
Antonio O. Olbes
Aristón Estrada, Jr.
Eduardo O. Olbes
Insular Life Assurance Co. Ltd.
AC ESOP/ESOWN Account
Telengtan Brothers & Sons, Inc.
No. of Common
Shares
Percentage
(of Common
Shares)
253,074,330
126,744,640
52,564,617
31,980,363
16,282,542
1,296,636
893,860
694,289
685,872
685,044
505,760
479,582
379,657
50.92%
25.50%
10.58%
6.43%
3.28%
0.26%
0.18%
0.14%
0.14%
0.14%
0.10%
0.10%
0.08%
300,427
235,191
209,472
195,993
142,549
136,057
106,664
0.06%
0.05%
0.04%
0.04%
0.03%
0.03%
0.02%
59
As of December 31, 2008, 54.72% or 240,429,627 Common shares, 11,937,800 Preferred “A”
Shares and 57,900,950 Preferred “B” shares are owned by the public.
Dividends
Stock Dividends
PERCENT
20%
20%
Cash Dividends – 2007
CLASS
RECORD DATE
PAYMENT DATE
May 22, 2007
April 24, 2008
June 18, 2007
May 21, 2008
PAYMENT DATE
January 30, 2007
July 31, 2007
November 5, 2007
January 29, 2008
On common shares
Cash Dividends – 2008
CLASS
PAYMENT DATE
July 21, 2008
February 3, 2009
On common shares
RATE
2.00/share
4.00/share
2.00/share
2.00/share
RATE
2.00/share
2.00/share
TERM / RECORD
DATE
January 5, 2007
July 6, 2007
October 9, 2007
January 4, 2008
TERM / RECORD
DATE
July 2, 2008
January 9, 2009
Dividend policy
Dividends declared by the Company on its shares of stocks are payable in cash or in additional
shares of stock. The payment of dividends in the future will depend upon the earnings, cash flow
and financial condition of the Company and other factors.
Recent Sales of Unregistered Securities or Exempt Securities
The following shares were issued to/subscribed by the Company’s executives as a result of the
exercise of stock options (ESOP) and the subscription to the stock ownership (ESOWN) plans:
Year
2006
2007
2008
No. of Shares
ESOWN*
ESOP
662,551
761,569
131,072
619,912
43,885
893,860
* Net of cancelled subscriptions
The above shares formed part of the 8,864,000 ESOP and ESOWN shares subject of the
Commission’s resolution dated January 12, 2006 confirming the issuance of such shares as
exempt transactions pursuant to Section 10.2 of the Securities Regulation Code.
60
Item 6. Management’s Discussion and Analysis of Operations
2008
Ayala Corporation generated consolidated revenues of P79.1 billion in 2008, P341.8 million higher
compared to prior year’s consolidated revenues of P78.8 billion. While consolidated sales and
services posted healthy growth and rose by 13% to P64.0 billion, this was partly offset by lower
equity earnings from associates and jointly controlled entities as well as lower capital gains
realized during the year.
Consolidated sales and services mainly contributed 81% of Ayala’s consolidated revenues.
Revenues of the real estate, electronics, and business process outsourcing (BPO) businesses
continued to post healthy growth during the year.
Despite the global economic crisis that continue to threaten appetite for real estate products,
Ayala Land, Inc. posted good top-line growth across its major business segments, with residential
revenues up 18%, revenues from its commercial centers up 3%, and corporate business revenues
up by 10%. Its support business in construction also posted very strong growth with the
completion of several new projects. Ayala Land posted record earnings of P4.8 billion in 2008,
10% higher than the prior year.
The electronics business under Integrated Microelectronics, Inc. (IMI) posted a 5% growth in
revenues in US dollar terms with half of the revenues contributed by its operations in Singapore
and China which rose by 13% versus last year. This offset the 3% decline in Philippine and US
operations. IMI’s expansion of business with a leading Chinese telecommunications company and
the generation of ten new customer programs helped cushion the slowdown in the global
electronics sector. IMI’s operating income remained positive at US$18 million, however, a nonrecurring loss from currency hedging contracts as well as a one-time provision for manpower
expenses and inventory obsolescence expenses resulted to a US$17 million loss in 2008.
Excluding these non-recurring items, IMI’s net income would have reached US$32 million.
On a combined basis, the investee companies of LiveIt, Ayala’s BPO investment arm, recorded
revenue growth in US dollar terms of 15%, and achieved revenues of US$344.1 million and
EBITDA of US$30.2 million in 2008, LiveIt’s second full year of operations. The BPO units further
diversified their client base in 2008 with eTelecare winning 11 new clients and 31 new programs,
Integreon adding 14 new customers across the corporate, legal and financial services sectors, and
Affinity Express now serving over 140 publications of seven of the top 25 newspaper companies in
the US. However, they posted a combined net loss, of which LiveIt’s share was P874 million, due
primarily to factors such as one-time non-recurring expenses related to the eTelecare tender offer,
non-cash accounting charges, such as stock compensation expenses and the amortization of
intangibles related to the investments in investee companies, and unfavorable foreign exchange
forward contracts that eTelecare entered into. LiveIt, together with Providence Equity Partners,
completed the tender offer for eTelecare’s common shares and American Depositary Shares last
December resulting in the acquisition of 98.7% of eTelecare’s shares. Overall, the company
remains positive about the growth trajectory of the BPO sector. Ayala expects that, as in past
recessions, outsourcing will continue to grow in the short term but at a slower pace, and then will
experience accelerating growth in the medium to long term, as companies intensify their costcutting.
Lower equity earnings from associates and jointly controlled entities as well as lower capital gains
during the year altogether capped growth of consolidated revenues. Equity earnings from
associates declined by 24% to P7.4 billion from P9.8 billion due to lower net income of its telecom
and banking units as well as a net loss recorded by its international real estate operations under
AG Holdings.
61
Telecom unit under Globe Telecom posted a 15% decline in net income in 2008 to P11.3 billion.
While it continued to experience strong wireless subscriber growth as well as ramping up of
broadband subscribers, capital investments to support the broadband technology platform and a
more intensely competitive market environment impeded margin expansion. Globe Telecom’s
revenues, however, remained steady even amidst slowing domestic consumption. Consolidated
revenues reached P62.9 billion from P63.2 billion the prior year. Wireless revenues were flat
amidst a 22% growth in its subscriber base while revenues from its wireline business increased by
7%, driven by its corporate data and broadband businesses. Globe’s broadband subscriber base
grew by 84% in 2008 with the highest net adds noted in the fourth quarter. Higher operating
expenses capped EBITDA but EBITDA margin remained high at 59% as costs arising
from broadband investments lowered margins. Wireless EBITDA margin continues to be robust at
65% while wireline EBITDA margins have been under pressure given the dynamics of the start-up
broadband business. Despite lower earnings this year, Globe’s free cash flow remains strong. It
recently declared its first semi-annual cash dividend of P32 per share, which puts Globe among
the highest in dividend yields in the Philippine Stock Exchange.
Banking unit under Bank of the Philippine Islands, also posted lower net income which fell by 36%
to P6.4 billion as revenues fell due to a decline in securities trading income and a decline in the
contribution of the insurance company due largely to non-recurring investment income. BPI,
achieved good business volume growth. Loans expanded by an unprecedented 17%, driven by
strong demand from corporate and retail consumers. This was the second straight year BPI
posted double-digit loan growth. Despite the growth in loans, asset quality continued to improve
with net 30-day non-performing loans ratio down to 2.9%. BPI’s deposit base expanded by 5% to
hit P540 billion by year-end, with total customer funds and assets held in trust up by 8.9%. The
bank’s remittance business also saw strong growth, up 35%, with volume reaching US$4.4 billion,
significantly outpacing the industry’s 15%. BPI’s capital adequacy ratio of 14.1% remains well
above the 10% regulatory minimum. Last December, the bank successfully issued P5 billion in 10year subordinated debt eligible as Lower Tier 2 capital in anticipation of possible acquisition
opportunities.
International real estate arm, AG Holdings, recorded a net loss of US$7.1 million mainly due to an
extraordinary loss for provisions arising from a deemed impairment on a trading security. In
addition, last year’s earnings also included a gain from the sale of The Forum in Singapore.
Altogether, these offset the higher equity earnings from its water distribution business, Manila
Water, which posted a 7% growth in net income to P2.8 billion on the back of higher water sales
volume complemented by further improvements in the company’s operating efficiency. Manila
Water pursued an intensive capex program, spending a total of P4.2 billion in 2008 as it
accelerated the implementation of expansion projects and invested in new systems and
processes. Billed volume went up by 4% to 387 million cubic meters as Manila Water expanded its
customer base by 46,765 new household connections. In addition, the company managed to
further reduce system losses by 6 percentage points to 19.6% from over 25% last year and from a
high of 63% in 1997. This is the first time that Manila Water has brought its level of water losses to
below 20%, which is significantly better than most of the company’s regional counterparts. The
company also began construction on a number of sewerage treatment plants in 2008, with the aim
of bringing sewerage coverage to 30% by 2012 from the present level of 16% for the East Zone.
Lower capital gains realized during the period pushed Other Income on a consolidated basis 50%
lower to P5.4 billion from P10.7 billion in 2007. Significantly higher capital gains were realized in
2007 as the company took advantage of the much higher market prices prevailing at that time to
realize values from some of its investments.
Consolidated costs and expenses outpaced revenue growth and rose by 13% to P66.0 billion.
Costs of sales and services, which accounted for 76% of consolidated costs and expenses, rose
by 16% to P50.0 billion from P43.2 billion the prior year. This was broadly in step with the increase
in consolidated sales and services and also a result of higher cost of sales, particularly at the
electronics unit with higher cost of inventories.
General and administrative (G&A) expenses on a consolidated basis was flat relative to last year
at P9.5 billion. Higher G&A expenses in Ayala Land was offset by lower G&A expenses at the
parent company level and in the electronics unit.
62
Consolidated interest expense and other financing charges increased by 20% to P4.9 billion in
2008 from P4.1 billion in 2007. This was mainly due to currency-hedging related losses at IMI.
Excluding this, consolidated interest and financing charges decreased by 16% to P3.5B.
At the holding company level, however, interest and financing charges continued to decline and
has consistently declined over the past few years as the company actively reduced debt levels
and lowered financing cost. Average cost of debt at the parent level in 2008 has decreased by
over 200 basis points to 7.4% compared to 9.5% two years ago. In 2008 the company also
prepaid debt and replaced these with newly raised funds at lower cost. The parent company’s net
debt has declined substantially to P8.7 billion from a high of P36 billion in 2004, allowing it to
maintain a very comfortable net debt to equity ratio of 0.09 to 1. Likewise, on a consolidated basis,
the company is in a very comfortable financial position with consolidated net debt to equity at 0.11
to 1.
While net earnings were impacted this year by various factors both external and internal, the
company maintains a healthy financial and liquidity position across the group. Debt and debt to
equity ratios are at very comfortable levels, cash resources are sufficient to pursue the respective
growth agenda of each of the operating units, and solvency and liquidity ratios are well within
comfortable limits.
Amidst the height of the credit crisis last year, all of Ayala’s business units combined were able to
raise P23 billion in funds in the second half of last year, from August to December, effectively
securing funding requirements for 2009. This began with Ayala Land’s P4 billion five-year fixed
rate bond in August, IMI’s P1.3 billion preferred share offering to its shareholders, Manila Water’s
P4 billion five-year fixed rate bond in October, Ayala Corp.’s issuance of perpetual preferred
shares in November and BPI’s tier-2 capital raising in December. Globe also recently announced
that it will also be issuing P3 billion retail bonds in the first quarter of 2009.
No doubt 2009 will be more challenging across all fronts as the full extent of the global financial
crisis unfolds. While the company maintains a generally cautious stance given the current
environment, it is expected that each of the operating units will remain resilient, achieve steady
top-line performance and continue to contribute positive earnings in the coming year.
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
Balance Sheet items
(December 31, 2008 Vs December 31, 2007)
Cash and cash equivalents – 16% increase from P36,836mln to P42,886mln
Dividends received net of dividends paid, proceeds from sale of shares and issuance of preferred
shares partly offset by loan repayments and disbursements to fund various investments by the
parent company, issuance of bond and proceeds from sale of shares in Piedmont Property
Ventures, Inc., Stonehaven Land, Inc. and Streamwood Property, Inc. by the real estate group and
proceeds from the issuance of preferred shares by the electronics, information technology and
business process outsourcing services group. As a percentage to total assets, cash and cash
equivalents slightly increased from 19% to 20% as of December 31, 2007 and December 31,
2008, respectively.
Short-term investments – 73% decrease from P3,688mln to P1,009mln
Parent company’s money market placements were converted to cash and cash equivalents and
lower investment management account by the real estate group. As a percentage to total assets,
short-term investments are at 2% of the total assets as of December 31, 2007 and 0.5% as of
December 31, 2008.
Accounts and notes receivable-current – 38% increase from P16,823mln to P23,284mln
Increase in advances to contractors and suppliers and reclassification of a subsidiary’s
receivables from non-current receivables by the real estate group, advances to fund new
63
investments by the international group and parent company, higher receivables by the
electronics, information technology and business process outsourcing services group. As of
December 31, 2008 and December 31, 2007, accounts and note receivable is at 11% and 9% of
the total assets, respectively.
Inventories – 13% increase from P8,843mln to P10,011mln
Development costs for new and existing real estate projects by the real estate group. The
automotive group however, has a lower inventory level in 2008 due to lower demand. As a
percentage to total assets, inventories remained at 5% as of December 31, 2007 and December
31, 2008.
Other current assets – 99% increase from P3,571mln to P7,090mln
Largely due to increase in FVPL financial assets, higher prepaid expenses, inventory of supplies
and creditable withholding tax by the real estate group. This account is at 2% and 3% of the total
assets as December 31, 2007 and December 31, 2008, respectively.
Noncurrent accounts and notes receivable – 67% increase from P4,010mln to P6,694mln
Largely due to advances for investments by the parent company. Noncurrent accounts and notes
receivable slightly increased from 2% of the total assets as of December 31, 2007 to 3% as of
December 31, 2008.
Investments in associates and joint ventures – 4% decrease from P71,272,mln to P68,140mln
Investments in associates, joint ventures and others includes the Company’s and its subsidiaries’
investments in various affiliates which are being accounted for under the equity method. These
associates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation,
among others.
The decrease is attributable to the sale of shares, cash dividends received net of 2008 share in
equity by the parent company, partly offset by new investments by the international and
electronics, information technology and business process outsourcing services groups, and new
investments and 2008 equity share from associates of the real estate group. This account is at
36% of the total assets as of December 31, 2007 to 31% as of December 31, 2008.
Investment in bonds and other securities – 23% increase from P2,493mln to P3,065mln
New investments by the parent company and increase in value of investments owned by the
international group partly offset by the sale of investments and decrease in marked to market
valuation of investments by the electronics, information technology and business process
outsourcing services group. This account is 1% of the total assets as of December 31, 2007 and
December 31, 2008.
Investment in real properties – 21% increase from P17,416mln to P21,059mln
Primarily due to disbursements related to construction of buildings owned by the real estate
group. As a percentage to total assets, investment in real properties is at 9% and 10% as of
December 31, 2007 and December 31, 2008, respectively.
Property, plant and equipment – 64% increase from P8,493mln to P13,887mln
Real estate group’s disbursements for on-going projects and acquisition of an aircraft by a
subsidiary. As of December 31, 2007 and December 31, 2008, the group’s property, plant and
equipment account is at 4% and 6% of the total assets, respectively.
Deferred tax assets – 15% increase from P984mln to P1,133mln
Due to higher recognized sales by the real estate group. As of December 31, 2008 and December
31, 2007, the group’s deferred tax asset remained at 0.5% of the total assets.
Pension assets – 16% decrease from P141mln to P117mln
Decrease in pension assets of the electronics, information technology, business process
outsourcing services group. This account remained at 0.1% of the total assets as of December 31,
2007 and December 31, 2008.
64
Intangible assets – 23% increase from P3,276mln to P4,014mln
Additional intangible assets, higher peso exchange rate partly offset by amortization of intangible
assets in 2008 by the electronics, information technology and business process outsourcing
services group and goodwill arising from the acquisition of new subsidiaries by the real estate
group. As a percentage to total assets, this account remained 2% as of December 31, 2007 and
December 31, 2008.
Other noncurrent assets – 9% decrease from P2,087mln to P1,906mln
Mainly due to prepaid items charged to various projects by the real estate group. As a percentage
to total assets, this account remained at 1% as of December 31, 2007 and December 31, 2008.
Accounts payable and accrued expenses – 23% increase from P22,261mln to P27,484mln
Increase in accrual of salaries, equipment rental and cost of materials by the real estate group and
trade payables and accrual of personnel related expenses by the electronics, information
technology, business process outsourcing services group partly offset by lower inventory pull-outs
by the automotive group. As of December 31, 2007 and December 31, 2008, this account is at
27% and 30% of the total liabilities, respectively.
Short-term debt –5% increase from P2,634mln to P 2,755mln
Loans availed by the international and electronics, information technology, business process
outsourcing services groups partly offset by partial payments of loans by the real estate and
automotive groups. As of December 31, 2007 and December 31, 2008, this account remained at
3% of the total liabilities.
Income tax payable – 25% decrease from P286mln to P215mln
Higher creditable withholding tax recognized by the real estate group. As a percentage to total
liabilities, this account is at 0.35% and 0.23% as of December 31, 2007 and December 31, 2008,
respectively.
Current portion of long-term debt – 84% decrease from P9,513mln to P 1,479mln
Decrease is due to the partial payment of loans by the parent company and the real estate group.
As of December 31, 2007 and December 31, 2008, this account is at 12% and 2% of the total
liabilities, respectively.
Long-term debt – 33% increase from P37,885mln to P50,250mln
Issuance of fixed rate bonds by the real estate group and new loans availed by the parent
company net of repayments. As a percentage to total liabilities, this account is at 46% as of
December 31, 2007 and 55% as of December 31, 2008.
Deferred tax liabilities – 19% increase from P156mln to P186mln
Mainly from operations of the real estate group. As a percentage to total liabilities, this account
remained at 0.2% as of December 31, 2007 and December 31, 2008.
Pension liabilities – 8% decrease from P532mln to P491mln
Largely due to adjustment made to reflect latest actuarial valuation of the real estate group. This
account remained at 1% of the total liabilities as of December 31, 2007 and December 31, 2008.
Other noncurrent liabilities – 11% increase from P6,818mln to P7,588mln
Mainly due to increase in customer and security deposits, deferred interest income on advances
and unearned management fees of the real estate group. This account remained constant at 8%
of the total liabilities as of December 31, 2007 and December 31, 2008.
Paid-up capital – 39% increase from P26,855mln to P37,252mln
Largely due to the 20% stock dividend and issuance of preferred shares in 2008.
Share-based payments – 17% increase from P604mln to P705mln
Increase in stock options granted.
Cumulative translation adjustment – 58% decrease from (P2,297mln) to (P969mln)
Mainly due to forex rate changes.
65
Retained earnings – 2% increase from P60,173mln to P61,604mln
Attributable to 2008 net income net of cash and stock dividends declared.
Net unrealized gain on available-for-sale financial assets – 137% decrease from P1,712mln to
(P631mln)
Due to lower revaluation of investments in securities.
Parent company preferred shares held by a subsidiary – 100% increase from -0- to P100mln
Parent company preferred shares held by the real estate group
Treasury shares – 245% increase from P160mln to P551mln
Due to buy-back of shares.
Minority interest – 11% increase from P27,609mln to P30,740mln
Largely due to share of minority holders in 2008 net income.
Income Statement items
(YTD December 31, 2008 Vs YTD December 31, 2007)
Sales and services – 13% increase from P56,578mln to P64,053mln
Primarily due to higher revenues from residential, strategic landbank, construction, shopping
centers and corporate businesses of the real estate group, higher sales by the electronics,
information technology and business process outsourcing services group partly offset by lower
revenue from the automotive group.
Sales and services contributed 72% of the total revenue in 2007 and 81% in 2008.
Equity in net earnings of associates and joint ventures – 24% decrease from P9,767mln to
P7,396mln
Largely due to lower equity earnings generated from the associates of the parent company and
the international group.
This account is 12% and 9% of the total revenue in 2007 and in 2008, respectively.
Interest income – 32% increase from P1,693mln to P2,243mln
Due to higher investible funds in 2008.
This account is 2% of the total revenue in 2007 and 3% in 2008.
Other income – 50% decrease from P10,728mln to P5,417mln
Largely due to lower capital gains and forex gain in 2008 by the parent company. This account is
7% and 14% of the total revenue in 2008 and in 2007, respectively.
Cost of sales and services – 16% increase from P43,169mln to P50,014mln
Relative to higher sales.
Cost of sales and services is 76% and 74% of the total costs and expenses for the period ending
December 31, 2008 and 2007, respectively.
Interest expense and other financing charges – 20% increase from P4,120mln to P4,937mln
Charges on unwinding of hedge contracts by the electronics, information technology and business
process and outsourcing group, increase in loan level by the real estate group, partly offset by
lower interest expense due to lower loan levels and prudent debt management by the parent
company. This account is 8% and 7% of the total costs and expenses for the periods December
31, 2008 and 2007, respectively.
Provision for income tax – 23% increase from P1,972mln to P2,418mln
Due mainly to higher taxes paid by the real estate group and the parent company.
66
2007
Ayala Corporation posted record consolidated revenues and net income in 2007. Despite the
uncertainties looming in global financial markets in the latter part of the year, the domestic
operating environment remained generally positive with economic fundamentals largely remaining
intact. The main drivers of domestic consumption, particularly the robust overseas workers’
remittances, low domestic interest rate, revival of sectors like power and infrastructure as well as
greater activity across several industries continued to underpin the growth of the Ayala group’s
major businesses, particularly in property, telecom, banking, water, and automotive. However, the
peso’s continued strength has also impacted the export-oriented businesses in the portfolio,
particularly in the electronics and business process outsourcing services. But overall, the
company’s growth momentum remained solid this year as the company also realized values from
its portfolio and as operating units achieved generally higher earnings.
Consolidated revenues reached P78.8 billion, up 12% versus the prior year driven by a healthy
growth in consolidated sales and services, higher equity in net earnings, interest income, and
gains from the sale of shares particularly at the parent level.
Consolidated sales and services increased by 6% to P56.6 billion due mainly to higher unit sales
of Ayala Automotive, higher contribution from the newly acquired companies of the electronics
business as well as the new investments in business process outsourcing (BPO) under LiveIt.
Growth, however, was partly weighed by the marginal revenue growth of the real estate group.
While underlying demand across all of the company’s real estate products remained strong as
reflected in strong residential unit sales and high occupancy rates of its commercial centers and
business office portfolio, Ayala Land, Inc. (ALI) recorded only a slight revenue expansion as a
result of the standardization of revenue recognition policy, which had the effect of accelerating its
revenues in 2006. Sales and services accounted for 72% of total consolidated revenues in 2007.
Equity in net earnings of associates and joint ventures reflected an 18% increase to P9.8 billion
from P8.2 billion in 2006. The strong earnings growth of the parent company’s key affiliates,
particularly Globe Telecom, which posted a 13% growth in net income, banking unit, Bank of the
Philippine Islands (BPI), which posted an 11% increase in net income, as well as the higher
earnings of the associates of Ayala Land altogether resulted in higher equity earnings for the
group. Equity earnings accounted for 12% of the company’s total revenues in 2007.
Consolidated revenues were further boosted by capital gains which pushed the Other Income
account up by 53% to P10.7 billion. A substantial part of this was generated through value
realization initiatives at the parent level as it recognized P7.3 billion in gains from the sale of
shares in Ayala Land, BPI, and Globe as market values during the year reached attractive levels
for value realization.
On the cost side, consolidated cost and expenses increased by 8% to P58.4 billion. A substantial
part of this was due to a 6% increase of consolidated cost of sales and services to P43.2 billion,
which was very much in line with the growth of consolidated sales and services.
General and administrative expenses (GAE), on the other hand, rose by 23% to P9.5 billion
stemming from expenses related to capacity expansion initiatives and amortization expense of the
new BPO businesses, higher manpower and technology integration-related expenses of the
electronics group.
Other charges increased by 306% to P1.6 billion as a result of non-cash, non-operating charges
from the impairment loss on goodwill of the electronics, information technology and business
process outsourcing services group, particularly Affinity Express and partly Integreon.
Consolidated interest expense and other financing charges declined by 18% to P4.1 billion from
P5 billion the prior year. This was due to a substantial reduction in average funding costs. At the
holding company level in particular, the continued decline in domestic interest rates has helped
reduce financing expense significantly. Financing expense at the holding company level reached
P3 billion in 2007, 26% lower than the prior year. In 2007 the parent company pre-paid a total of
P14 billion worth of debt that had an average cost of 11.8%. Refinancing with lower cost debt has
67
brought down the average cost of parent company’s outstanding debt in 2007 to 7.4% from 9.5%
the prior year. Net debt at the parent level has also been substantially reduced and is now down to
P13.3 billion, putting parent level net debt-to-equity ratio even lower at 0.15 to 1 from 0.26 to 1 at
the beginning of the year. Even on a consolidated basis, consolidated debt by year-end 2007 was
lower at P50 billion. With cash, cash equivalents and short-term investments of P40.5 billion,
consolidated net debt declined to P9.5 billion from P29.6 billion and consolidated net debt to equity
ratio at 0.11 to 1 from 0.38 to 1. Total stockholders’ equity by year-end reached P87.2 billion, up
13% from the prior year.
Altogether, these put consolidated net income in 2007 at P16.3 billion, which was a 33% increase
from the P12.2 billion net income recorded in 2006 and the highest ever recorded by the company.
The healthy earnings growth and strong cash position of the parent company enabled it to further
increase its dividend payout in 2007 with a total of P7.3 billion paid out to shareholders, more than
double the amount the prior year. This is equivalent to 60% of prior year’s net income, inclusive of
the 20% stock dividend, and a dividend yield of 1.4% based on an average price of P558.50 per
share. This combined with the 15.5% gain in the company’ stock price during the year put total
return to shareholders at 17% in 2007.
The company’s total market capitalization by year end reached P234 billion and was ranked the
second largest among companies listed in the Philippine Stock Exchange. However, collectively,
the market capitalization of the five listed companies of the group accounted for about 27% of the
Philippine Stock Exchange’s composite index’s total market capitalization.
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
Balance Sheet items
(31 December 2007 Vs 31 December 2006)
Cash and cash equivalents – 81% increase from P20,391mln to P36,836mln
Attributable to proceeds from sale of shares of stocks, increased collections and proceeds from
the issuance of preferred shares by the real estate group. As a percentage to total assets, cash
and cash equivalents increased from 11% to 19% as of 31 December 2006 and 31 December
2007, respectively.
Short-term investments – 26% increase from P2,928mln to P3,688mln
Mainly due to money market placements of the parent company and the real estate group’s
investment management account in 2007 partly offset by the lower money market placements of
the real estate group. As a percentage to total assets, short-term investments remained at 2% of
the total assets as of 31 December 2006 and 31 December 2007.
Inventories – 6% decrease from P9,392mln to P8,843mln
Largely due to sale of units at residential building and subdivision projects by the real estate group
partly offset by higher vehicles inventory by the automotive group. As a percentage to total assets,
inventories remained at 5% as of 31 December 2006 and 31 December 2007, respectively.
Other current assets – 10% decrease from P3,961mln to P3,571mln
Sale of marketable securities partly offset by higher prepaid expenses of the real estate group. As
a percentage to total assets, other current assets remained at 2% as of 31 December 2006 and 31
December 2007, respectively.
Noncurrent assets held for sale – 100% decrease from P3, 658mln to P-0Due to sale of Oakwood by the real estate group and sale of investment in Hermill by the
international group in 2007. This account is 2% of the total assets as of 31 December 2006.
Noncurrent accounts and notes receivable – 59% increase from P2,520mln to P4,010mln
Due to availment of longer payment terms and additional sales at new and existing projects by the
real estate group. Noncurrent accounts and notes receivable slightly increased from 1% of the
total assets as of 31 December 2006 to 2% as of 31 December 2007.
68
Investments in associates and joint ventures – 4% increase from P68,221,mln to P71,272mln
Investments in associates, joint ventures and others includes the Company’s and its subsidiaries’
investments in various affiliates which are being accounted for under the equity method. These
associates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation,
among others.
The increase is largely due to the investment in a BPO company partly booked in 2006 under
Investment in bonds and other securities account by the electronics, information technology and
business process outsourcing services group and 2007 equity share in earnings of associates
partly offset by the sale of shares and dividends received by the parent company, lower forex rate
and return of investment by the international group. This account is at 37% of the total assets as
of 31 December 2006 and 31 December 2007.
Investment in bonds and other securities – 28% decrease from P3,462mln to P2,493mln
Sale of marketable securities and reclassification of investments in a BPO company to
Investments in Associates & Joint Ventures account partially offset by new investments and
marked to market investments of the electronics, information technology, business process
outsourcing services group. This account is 2% of the total assets as of 31 December 2006 and
1% as of 31 December 2007.
Property, plant and equipment – 6% decrease from P9,057mln to P8,493mln
Decrease due to lower forex rate, depreciation expense and business development costs charged
to expense by electronics, information technology, business process outsourcing services group
partly offset by the ongoing projects of the real estate group. As of 31 December 2006 and 31
December 2007, the group’s property, plant and equipment account is at 5% and 4% of the total
assets, respectively.
Deferred tax assets – 12% decrease from P1,124mln to P984mln
Due mainly to realization of unrealized financial gross profit of the real estate group. As of 31
December 2006 and 31 December 2007, the group’s deferred tax asset is at 0.6% and 0.5% of
the total assets, respectively.
Pension assets – 31% decrease from P203mln to P141mln
Decrease in pension assets of the electronics, information technology, business process
outsourcing services group. This account remained at 0.1% of the total assets as of 31 December
2006 and 31 December 2007.
Intangible assets – 26% decrease from P4,430mln to P3,276mln
Due to lower peso exchange rate, amortization in 2007 and impairment of goodwill. As a
percentage to total assets, this account remained at 2% as of 31 December 2006 and 31
December 2007.
Other noncurrent assets –17% increase from P1,785mln to P2,087mln
Cost of various facilities advanced by the electronics, information technology, business process
outsourcing services group which will be billed to its customers. As a percentage to total assets,
this account remained at 1% as of 31 December 2006 and 31 December 2007.
Accounts payable and accrued expenses – 21% increase from P18,326mln to P22,261mln
Higher trade payables by the real estate group and higher inventory pull-outs by the automotive
group. As of 31 December 2006 and 31 December 2007, this account is at 23% and 27% of the
total liabilities, respectively.
Short-term debt –5% increase from P2,504mln to P2,634mln
New loan availed by the automotive group partly offset by the payment of debt by the international
and electronics, information technology and business process outsourcing services groups. As of
31 December 2006 and 31 December 2007, this account remained at 3% of the total liabilities.
Other current liabilities – 7% increase from P1,453mln to P1,550mln
Increase in customers’ deposits by the real estate group. As a percentage to total liabilities, this
account is at 2% as of 31 December 2006 and 31 December 2007.
69
Liabilities directly associated with noncurrent assets held for sale – 100% decrease from P469mln
to P-0Due to sale of assets previously booked as held for sale. As a percentage to total liabilities, this
account is at 0.6% as of 31 December 2006.
Cumulative redeemable preferred shares – 100% decrease from P2,500mln to P-0-mln
Redemption of preferred shares by the parent company. Cumulative redeemable preferred
shares is 3% of the total liabilities as of 31 December 2006.
Deferred tax liabilities – 65% decrease from P444mln to P156mln
Primarily due to reduction in deferred tax liabilities of the real estate group. As a percentage to
total liabilities, deferred tax liabilities is at 0.6% and 0.2% as of 31 December 2006 and 31
December 2007, respectively.
Pension liabilities – 9% increase from P488mln to P532mln
Increase in pension liabilities of the real estate group. This account remained at 1% of the total
liabilities as of 31 December 2006 and 31 December 2007.
Other noncurrent liabilities – 11% increase from P6,141mln to P6,818mln
Mainly due to increase in buyers’ and tenants’ deposits of the real estate group. This account
remained constant at 8% of the total liabilities as of 31 December 2006 and 31 December 2007.
Paid-up capital – 16% increase from P23,138mln to P26,855mln
Largely due to the 20% stock dividend.
Share-based payments – 8% increase from P558mln to P604mln
Increase in stock options granted.
Cumulative translation adjustment – 671% decrease from (P298mln) to (P2,297mln)
Mainly due to forex rate changes.
Retained earnings – 17% increase from P51,311mln to P60,173mln
Attributable to 2007 net income net of cash and stock dividends declared.
Net unrealized gain on available-for-sale financial assets – 18% decrease from P2,079mln to
P1,712mln
Due to lower revaluation of investments in securities.
Treasury shares – 51,414% increase from P0.310mln to P160mln
Due to buy-back of shares.
Minority interest – 12% increase from P24,699mln to P27,609mln
Largely due to share of minority holders in 2007 net income and increased share due to reduced
shareholdings by the equity holders of the parent.
Income Statement items
(YTD 31 December 2007 Vs YTD 31 December 2006)
Sales and services – 6% increase from P53,394mln to P56,578mln
Higher unit sales by the automotive group, higher sales volume of existing businesses and
contributions from the operations of newly acquired companies by the electronics, information
technology and business process outsourcing services group partly offset by lower revenue from
the real estate group.
Sales and services contributed 72% of the total revenue in 2007 and 76% in 2006.
Equity in net earnings of associates and joint ventures – 18% increase from P8,249mln to
P9,767mln
70
Largely due to higher equity earnings generated from the associates of the real estate and
international groups and the parent company.
This account is 12% of the total revenue in 2006 and in 2007.
Interest income – 11% increase from P1,521mln to P1,693mln
Due to higher investible funds in 2007.
This account is 2% of the total revenue in 2007 and in 2006.
Other income – 53% increase from P6,998mln to P10,728mln
Largely due to capital gains from sale of shares and higher forex gains.
This account is 14% and 10% of the total revenue in 2007 and in 2006, respectively.
Cost of sales and services – 6% increase from P40,857mln to P43,169mln
Relative to higher sales.
Cost of sales and services is 74% and 76% of the total costs and expenses for the period ending
31 December 2007 and 2006, respectively.
General and administrative expenses – 23% increase from P7,708mln to P9,498mln
Largely due to the GAE of the new subsidiary, higher manpower costs, depreciation and
amortization expenses of the electronics, information technology and business process
outsourcing services group.
This account is 16% and 14% of the total costs and expenses for the period ending 31 December
2007 and 2006, respectively.
Interest expense and other financing charges – 18% decrease from P5,024mln to P4,120mln
Due to reduced average funding costs. As of 31 December 2007 this account is 7% of the total
costs and expenses vs 9% in 31 December 2006.
Other charges – 306% increase from P387mln to P1,570mln
Due to impairment loss on goodwill of the electronics, information technology and business
process outsourcing services group and extraordinary charges of the real estate group. As of 31
December 2007 this account is 3% of the total costs and expenses vs 1% in December 2006.
Provision for income tax – 5% increase from P1,877mln to P1,972mln
Due mainly to higher taxes paid by the parent company and the electronics, information
technology and business process outsourcing services group.
2006
It was another record year for Ayala Corporation as net income reached an all-time high of P12.2
billion, 49% higher than 2005 net income of P8.2 billion. This was a result of the strong earnings of
the operating units, lower interest expense, and gains from share sales. At the holding company
level, equity earnings excluding dilution gains booked in 2005 grew by 12% to P12.3 billion as all
key businesses posted significant earnings growth. Earnings were further enhanced by capital
gains of P4.7 billion from the sale of shares in Ayala Land, BPI, and Globe. This monetization
initiative is in line with the company’s strategy to realize values from existing investments and
reallocate resources into new high growth businesses as well as further reduce debt. Net debt at
the holding company level by year-end was significantly lower at US$462 million.
On a consolidated basis, sales and services rose by 54% to P53.4 billion. The substantial increase
is attributed to Ayala Land’s increased sales of land and condominium units during the year as
demand remained brisk for residential projects across all market segments. Its revenues from its
commercial center operations likewise contributed to the strong revenue growth as the year saw
higher basic rent, the full operation of Phase 1B of Market! Market!, and higher occupancy rates.
The electronics business also contributed to pushing consolidated revenues higher as IMI’s
71
revenues more than doubled during the year, reflecting the impact of the acquisition of Speedy
Tech as well as organic growth. The auto dealerships likewise contributed to revenue growth with
Ayala Auto’s sales up 24% year-on-year.
Equity in net earnings of associates and joint ventures was relatively flat in 2006 at P8.3 billion as
2005 included dilution gains from the initial public offering of Manila Water in March 2005. This
primarily reflects Ayala’s share in the net earnings of BPI, Globe, and Manila Water. All three
businesses posted record net income in 2006, with BPI’s up 8% to P9.0 billion, Globe up 14% to
P11.8 billion, and Manila Water’s by 19% to P2.4 billion.
Interest fees, rental, investment and other income grew by 11% to P8.5 billion largely due to gains
from the sale of shares of Ayala Land, BPI, and Globe. Ayala monetized some of these shares in
view of new investments it is currently making in the business process outsourcing sector as well
as an investment in a private equity real estate fund which has development projects lined up
overseas. The sale of these shares allowed us to realize values from these long-time investments
and also gave us the flexibility to pay out, for the first time in a decade, special cash dividends to
shareholders.
Consolidated cost of sales and services increased by 56% to P40.9 billion and moved much in line
with revenue growth. General and administrative expenses increased by 28% to P7.7 billion as a
result of higher payroll costs due to additional hiring to support the expansion initiatives at IMI and
Ayala Land. Consolidated interest and other charges declined by 28% to P5.4 billion. This was a
result of a combination of lower debt at the parent level as well as Ayala Land’s asset write-offs in
2005.
Consolidated cash and cash equivalents increased slightly to P23.1 billion as of year-end
2006from P24.0 billion at the beginning of the year. The increase was mainly due to higher cash
levels at the parent level given the strong cash dividend flows upstreamed by the operating units
and various fund raising initiatives. Total cash dividends received from subsidiaries reached P5.5
billion.
By year-end 2006, net debt at the parent company level declined to US$462 million from US$563
million at the beginning of the year. A portion of our debt was paid in 2006 through the issuance of
P5.8 billion in Series B preferred shares which now forms part of our stockholders’ equity. While
the preferred B shares do not have a fixed redemption period, Ayala has the option to redeem
these shares after five years. This has caused the company's debt mix to move substantially in
favor of the peso with 69% of the debt in local currency and 31% in US dollars. The current level of
net debt puts the net debt-to-equity ratio down to 0.29 to 1 from 0.49 to 1 at the beginning of the
year.
At the consolidated level, total debt also declined by 12% to P52.9 billion from P60.4 billion with
consolidated net debt to equity at 0.39 to 1. Total stockholders’ equity at year-end reached P77.1
billion up 26% from the previous year.
In the Philippine Stock Exchange, the company’s stock price closed at a year-high of P590.00 per
share, buoyed by the company’s positive fundamentals and the market’s generally robust
performance. The strong peso, steady inflation, interest rates at all-time lows, sustained economic
growth and well-contained budget deficit have all contributed to sustaining the market’s bullish
momentum. The generally upbeat mood throughout the year pushed the Philippine Composite
Index (Phisix) to close 42% higher year-on-year at 2,982.54.
Ayala’s listed operating units performed well. Ayala Land closed the year with a 54% increase in
its share price to P15.25. BPI rose 40% to P63.50 at year-end. Globe advanced 68% to P1,235.00
and Manila Water gained 52% to close at P9.40.
Ayala Corporation’s market capitalization at the end of the year reached P203.45 billion, the third
highest among locally listed issues. Collectively, the market cap of the five listed Ayala companies
accounted for 29% of the Phisix’s total market capitalization. The 87% increase in Ayala’s share
price from its year-end 2005 level and the higher full-year dividend yield of around 2% resulted in
an estimated total return to shareholders of 89% from end-2005.
72
Balance Sheet items
(2006 Vs 2005)
Accounts and notes receivable – 54% increase from P11,308mln to P17,470mln
Largely due to receivables from the sale of shares, increased sales at new and existing projects
and higher corporate withholding tax by the real estate group, advances by the international group
to finance new investments and increased sales by the electronics, information technology and
business process outsourcing services and automotive groups. As a percentage to total assets,
accounts and notes receivable increased from 7% as of December 31, 2005 to 10% as of
December 31, 2006.
Inventories – 9% increase from P8,999mln to P9,804mln
Attributable to the real estate group’s construction accomplishment at residential building projects
and continued development of residential subdivision projects. Inventories remained at 5% of the
total assets as of December 31, 2006 and December 31, 2005.
Other current assets – 81% increase from P2,190mln to P3,961mln
Due to advances on land, increase in marketable securities and higher input VAT by the real
estate group, inclusion of accounts of a new subsidiary under the electronics, information
technology and business process outsourcing services group and additional investments in
marketable securities by the international group. Other current assets increased to 2% of the total
assets as of December 31, 2006 from 1% as of December 31, 2005.
Noncurrent assets held for sale – 100% increase to P3,658mln
Represents total assets of Makati Property Ventures Inc., a member of the real estate group and
investment in Hermill Investment Pte. Ltd. of the international group classified as noncurrent
assets held for sale.
Noncurrent account and notes receivable – 55% decrease from P5,631mln to P2,520mln
Mainly due to s ale of receivables by one of the companies of the real estate group.
As a percentage to total assets, noncurrent account and notes receivable slightly decreased from
3% as of December 31, 2005 to 1% as of December 31, 2006.
Investments in associates and joint ventures – 7% increase from P63,808mln to P68,569mln
Investments in associates joint ventures and others includes the Company’s and its subsidiaries’
investments in various affiliates which are being accounted for under the equity method. These
affiliates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, among
others.
The increase is largely due to the 2006 equity in earnings from affiliates and additional equity
infusion by subsidiaries in an Asian private equity real estate fund and fund management
company. This account is 38% of the total assets as of December 31, 2005 and December 31,
2006.
Investment in bonds and other securities – 67% increase from P2,073mln to P3,462mln
Primarily due to new investments made in 2006 by the electronics, information technology and
business process outsourcing services group and revaluation of investments partly offset by the
sale of securities at the Parent Company level. As a percentage to total assets, this account is 2%
and 1% as of December 31, 2006 and December 31, 2005, respectively.
Property, plant and equipment – 9% decrease from P9,918mln to P9,057mln
Reclassification by the real estate group to Noncurrent assets held for sale partly offset by the
inclusion of assets of the newly acquired subsidiaries under the electronics, information
73
technology and business process outsourcing services group. This account is 6% and 5% of the
total assets as of December 31, 2005 and December 31, 2006, respectively.
Pension assets – 14% decrease from P236mln to P203mln
Lower pension assets of the electronics,
information technology and business process
outsourcing services group. This account remained at 0.1% of the total assets as of December
31, 2006 and December 31, 2005.
Intangible Assets– 55% increase from P2,996mln to P4,631mln
Largely due to the acquisition of a new subsidiary partly offset by the amortization of intangible
assets by the electronics, information technology and business process outsourcing services
group As a percentage to total assets, this account is 3% as of December 31, 2006 and 2% as of
December 31, 2005.
Other noncurrent assets – 8% decrease from P1,947mln to P1,785mln
Due to liquidation of advances made by the real estate group to a landowner and lower deferred
charges by the Parent Company. As a percentage to total assets, this account remained at 1% as
of December 31, 2005 and December 31, 2006.
Accounts payable and accrued expenses –6% increase from P17,311mln to P18,326mln
Primarily due to higher payables to contractors and suppliers and higher VAT and expanded
withholding tax payable by the real estate group, inclusion of payables of the newly acquired
companies of the electronics,information technology and business process outsourcing services
group and the Parent Company’s higher dividends payable partly offset by lower interest payable
due to lower loan balance. As of December 31, 2006 and December 31, 2005, this account is at
23% and 20% of the total liabilities, respectively.
Short-term debt – 59% decrease from P6,154mln to P2,504mln
Largely due to payment of short-term debt by the electronics, information technology and business
process outsourcing services group used to finance acquisition of new companies in 2005. As of
December 31, 2006 and December 31, 2005, this account is at 3% and 7% of the total liabilities,
respectively.
Income-tax payable – 8% increase from P273mln to P296mln
Due to higher income subject to income tax.
Current portion of long-term debt – 214% increase from P2,985mln to P9,360mln
Reclassification of the real estate group’s P3bln bonds which will mature in April 2007, as well as
reclassification of the Parent Company’s and the electronics, information technology and business
process outsourcing services group’s current maturing loans. As a percentage to total liabilities,
current portion of long-term debt is 12% and 4% as of December 31, 2006 and December 31,
2005, respectively.
Cumulative redeemable preferred shares (current portion ) – 100% decrease from P2,230mln
Redemption of the P2,230mln redeemable preferred shares in 2006 by the Parent Company. As a
percentage to total liabilities, the cumulative redeemable preferred shares is 3% as of December
31, 2005.
Other current liabilities – 47% increase from P986mln to P1,453mln
Largely due to higher buyer deposits from various residential projects by the real estate group and
revaluation of advances by the Parent Company. This is 2% and 1% of the total liabilities as of
December 31, 2006 and December 31, 2005, respectively.
Liabilities Directly Associated with Noncurrent Assets Held for Sale– 100% increase to P469mln
Represents total liabilities of Makati Property Ventures Inc., a member of the real estate group
classified as noncurrent assets held for sale.
Long-term debt – 17% decrease from P46,507mln to P38,518mln
74
Mainly due to payment of loans and reclassification to current portion. As a percentage to total
liabilities, long-term debt is at 48% and 55% as of December 31, 2006 and December 31, 2005,
respectively.
Deferred tax liabilities – 42% increase from P312mln to P444mln
Higher tax liability from prior years’ installment sales of the real estate group due to shift in
revenue recognition from percentage of collection to percentage of completion. As a percentage
to total liabilities this account is 0.6% as of December 31, 2006 and 0.4% as of December 31,
2005.
Pension and other benefits – 12% increase from P434mln to P488mln
Mainly due to the Parent Company’s increase in retirement fund contribution. As a percentage to
total liabilities, pension and other benefits slightly increased from 0.5% as of December 31, 2005
to 0.6% as of December 31, 2006.
Other noncurrent liabilities – 14% increase from P5,370mln to P6,141mln
Higher retention payable and deferred interest income by the real estate group. As a percentage
to total liabilities, this account is at 8% as of December 31, 2006 and 6% as of December 31,
2005.
Paid-up-Capital – 36% increase from P16,960mln to P23,138mln
Due mainly to the issuance of P5.8bln preferred shares in 2006
Share-based payments – 15% decrease from P656mln to P558mln
Mainly due to additional stock options excercised.
Cumulative translation adjustment – 151% decrease from P587mln to ( P298mln)
Mainly due to forex rate changes.
Net unrealized gain on available-for-sale investments 335% increase from P478mln to P2,079mln
Largely to increase in value of various investments of an affiliate bank and the electronics,
information technology and business process outsourcing services group.
Minority interest – 14% increase from P21,590mln to P24,699mln
Largely due to share of minority holders in the 2006 net income and increased share due to sale
of shares by the equity holders of Ayala Corporation.
Income Statement items
(YTD December 2006 Vs YTD December 2005)
Sales and services – 54% increase from P34,638mln to P53,394mln
Higher revenues from residential developments, shopping centers, office rentals and support
businesses of the real estate group, contributions from the operations of newly acquired
companies by the electronics, information technology and business process outsourcing services
group and higher sales volume by the automotive group.
Sales and services contributed 76% and 69% of the total revenue
respectively.
in 2006 and in 2005,
Equity in net earnings of associates and joint ventures – 0.6% increase from P8,202mln to
P8,253mln
Largely due to higher share in net earnings from various affiliates such as Bank of the Philippine
Islands, Globe Telecom and Ayala Land Inc.’s affiliates such as Alabang Commercial Corporation
and Cebu Holdings, Inc., partly offset by the absence of dilution gain arising from Manila Water
Corporation’s initial public offering in 2005.
In 2006, this account is 12% of the total revenue lower than the 16% in 2005.
Interest fees, rental investment and other income – 11% increase from P7,702mln to P8,519mln
75
Largely due to capital gains from sale of shares in 2006. This account is 12% of the total income in
2006, lower than the 15% in 2005.
Cost of sales and services – 56% increase from P26,170mln to P40,857mln
Relative to higher sales. This account is 76% of total costs and expenses in 2006 compared to
66% in 2005.
General and administrative expenses –28% increase from P6,011mln to P7,708mln
Due to higher payroll and benefits costs and expansion of some subsidiaries. This amount is 14%
of total costs and expenses in 2006, lower than the 15% in 2005.
Interest and other charges – 28% decrease from P7,563mln to P5,411mln
Due to provisions for decline in value of assets intended to be sold and write-off of deferred
charges of the real estate group in 2005 and lower interest payables due to lower debt levels in
2006 at the parent company level. This account is 10% of total costs and expenses in 2006 and
significantly lower than the 19% in 2005
Provision for income tax – 124% increase from P839mln to P1,877mln
Lower final tax rate in 2005 on capital gains in AIVI transaction coupled with higher corporate
income tax rate in 2006.
Key performance indicators of AC and its significant subsidiaries:
The table sets forth the comparative key performance indicators of the Company and its material
subsidiaries.
Ayala Corporation (Consolidated)
(In million pesos, except ratios)
Revenue
Net Income Attributable to Equity
Holders
Total Assets
Total Debt
Stockholders’ Equity
Current Ratio1
Debt to Equity Ratio2
Ayala Land, Inc.
(In million pesos, except ratios)
Revenue
Net Income Attributable to Equity
Holders
Total Assets
Total Debt
Stockholders’ Equity
Current Ratio1
Debt to Equity Ratio2
Integrated Micro-electronics, Inc.
(In thousand US dollars, except ratios)
Revenue
Net Income Attributable to Equity
Holders
2008
79,109
8,109
2007
78,767
16,257
2006
70,162
12,173
220,052
54,484
97,311
2.52
0.56
196,131
50,032
86,887
1.92
0.58
181,984
52,881
76,788
1.70
0.69
2008
33,749
4,812
2007
25,707
4,386
2006
25,559
3,866
100,453
16,752
49,028
1.88
0.34
82,981
10,139
45,705
1.65
0.22
78,250
12,837
40,651
1.64
0.32
2008
441,145
(16,828)
2007
422,107
35,693
2006
392,771
34,740
76
Total Assets
Total Debt
Stockholders’ Equity
Current Ratio1
Debt to Equity Ratio2
305,889
71,110
159,644
1.71
0.44
305,772
71,008
158,152
1.69
0.45
283,585
89,516
131,005
1.68
0.68
1
Current Assets/Current Liabilities
Total Debt/Stockholders’ Equity (Total Debt includes short-term debt, long-term debt, current portion of long-term debt and
cumulative preferred shares [classified as liabilities])
2
In general, the above key performance indicators were within targeted levels.
For the balance sheet items (current ratio and debt to equity ratios), the company aims to maintain
for its current ratio not to be lower than 0.5:1 and for its debt to equity ratio not to exceed 3:1. The
company and its subsidiaries’ ratios are considered better than these levels as a result of prudent
debt management policies.
There are no known trends, events or uncertainties that will result in the Company’s liquidity
increasing or decreasing in a material way.
There were no events that will trigger direct or contingent financial obligation that is material to the
Company, including any default or acceleration of an obligation.
Likewise, there were no material off-balance sheet transactions, arrangements, obligations
(including contingent obligations), and other relationships of the Company with unconsolidated
entities or other persons created during the reporting period.
At the holding company level, Ayala Corp. has allocated around P2 billion for identified capital
expenditure projects in 2009. However, the Company is prepared to increase this should it
identify other potential acquisition opportunities. The Company has sufficient internal cash, which
amounted to around P25 billion as of year-end 2008, to fund such expenditures should these
materialize.
There are no seasonal aspects that may have a material effect on the financial condition of the
Company.
Item 7. Financial Statements and Supplementary Schedules
The consolidated financial statements and schedules as listed in the accompanying Index to
Financial Statements and Supplementary Schedules are filed as part of this Form 17 A.
As regards the significant accruals for payroll, taxes other than income taxes, interest and any
other material items, details are not reasonably available because the Company’s present
consolidation process/system covers only major and/or condensed expense classifications which
are not segregated into accrued and cash portions.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
The accounting policies adopted are consistent with those of the previous financial year except for
the adoption of the following Philippine Interpretations which became effective on January 1, 2008,
and amendments to existing standards that became effective on July 1, 2008.
•
•
•
•
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions
Philippine Interpretation IFRIC 12, Service Concession Arrangements
Philippine Interpretation IFRIC 14, PAS 19 - The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction
Amendments to Philippines Accounting Standards (PAS) 39, Financial Instruments:
Recognition and Measurement and PFRS 7, Financial Instruments: Disclosures
77
The principal effects of these changes are as follows:
Philippine Interpretation IFRIC 11, PFRS 2, Group and Treasury Share Transactions
This Interpretation requires arrangements whereby an employee is granted rights to an entity’s
equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the
entity chooses or is required to buy those equity instruments (e.g., treasury shares) from
another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It
also provides guidance on how subsidiaries, in their separate financial statements, account for
such schemes when their employees receive rights to the equity instruments of the parent.
Adoption of this Interpretation did not have an impact on the consolidated financial statements.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This Interpretation covers contractual arrangements arising from public-to-private service
concession arrangements if control of the assets remains in public hands but the private sector
operator is responsible for construction activities as well as for operating and maintaining the
public sector infrastructure. This Interpretation prescribes the accounting for the rights which
the Operator receives from the Grantor using either:
Financial asset model wherein the Operator shall recognize a financial asset to the extent
that it has an unconditional contractual right to receive cash from the Grantor. The
Operator has an unconditional right to receive cash if the Grantor contractually guarantees
to pay the Operator;
Intangible asset model wherein the Operator shall recognize an intangible asset to the
extent that it receives a right to charge the users (not an unconditional right to receive
cash because the amounts are contingent on the extent that the public uses the service);
Mixed model if the Operator is paid by the users, but the Grantor guarantees a certain
minimum amount to be paid to the Operator, in which case the Financial Asset Model is
used to the extent of such amount.
Based on Manila Water Company Inc.’s (MWCI) assessment, its service concession agreement
with Metropolitan Water Works and Sewerage System would qualify under the Intangible asset
model. The effect of the adoption of this Interpretation required MWCI to recognize the fair value
of its right to charge its customers, which resulted in the following consequential effects:
a.
Increase in total assets with a corresponding increase in total liabilities. The
rehabilitation works performed by MWCI (previously recognized as property, plant and
equipment) and the present value of the total estimated concession fee payments
were recognized as intangible assets in accordance with PAS 38, Intangible Assets.
The intangible asset is amortized using the straight-line method over the life of the
concession agreement. Previously, the asset recognized under the concession
agreement was amortized based on the ratio of the nominal value of total estimated
concession fee payments to the remaining projected billable water volume over the
remaining concession period.
b.
As the related service concession obligation is now recognized, this resulted in
additional finance cost to MWCI due to the accretion of the obligation. The increase
in intangible assets, together with the change in amortization method described
above, also resulted in an increase in amortization expense.
c.
In connection with the rehabilitation works performed, MWCI also recognized revenue
and costs in accordance with PAS 11, Construction Contracts. It measures the
revenue from rehabilitation works at the fair value of the consideration received or
receivable. Given that MWCI has subcontracted the rehabilitation works to outside
contractors, the recognized revenue from rehabilitation works is equal to the related
78
cost.
d.
As the service concession obligations are denominated in foreign currencies these
were restated to their peso equivalent using the exchange rate at balance sheet date.
The related foreign currency differential adjustment under the concession agreement
provided only for a reimbursement of an amount in excess of the base rate agreed
during the rate rebasing exercise with MWSS. As the two amounts are not equal, the
difference (between the foreign currency differentials arising from the restatement of
the obligation and the reimbursable amount) affected the profit and loss. The related
revenue to recover the unreimbursed portion will be recognized only upon delivery of
service to customers.
The adoption of the Interpretation resulted in a decrease in MWCI’s retained earnings by
P
= 962.2 million and P
= 1,159.0 million as of January 1, 2008 and 2007, respectively. The impact
on the Company is a decrease in the retained earnings and investments in associates and
jointly controlled entities balances as of January 1, 2008 and 2007 by P
= 288.6 million and P
=
347.7 million, respectively.
Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction
This Interpretation provides guidance on how to assess the limit on the amount of surplus in a
defined benefit plan that can be recognized as an asset under PAS 19, Employee Benefits.
Adoption of this Interpretation did not have an impact on the consolidated financial statements.
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and PFRS 7,
Financial Instruments: Disclosures
The Amendments to PAS 39 introduce the possibility of reclassification of securities out of the
trading category in rare circumstances and reclassification to the loans and receivable
category if there is intent and ability to hold the securities for the foreseeable future or to heldto-maturity if there is intent and ability to hold the securities until maturity. The amendments to
PFRS 7 introduce the disclosures relating to these reclassifications. Adoption of these
amendments did not have any impact on the consolidated financial statements since the
Group did not avail of the reclassification allowed under these amendments.
Future Changes in Accounting Policies
The Group will adopt the following standards and interpretations enumerated below when
these become effective. Except as otherwise indicated, the Group does not expect the
adoption of these new and amended PFRS and Philippine Interpretations to have significant
impact on its financial statements.
Effective in 2009
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
The amended PFRS 1 allows an entity, in its separate financial statements, to determine the
cost of investments in subsidiaries, jointly controlled entities or associates (in its opening
PFRS financial statements) as one of the following amounts: a) cost determined in
accordance
with
PAS 27; b) at the fair value of the investment at the date of transition to PFRS, determined in
accordance with PAS 39; or c) previous carrying amount (as determined under generally
accepted accounting principles) of the investment at the date of transition to PFRS.
Amendments to PFRS 2, Share-based Payment - Vesting Condition and Cancellations
This Standard has been revised to clarify the definition of a vesting condition and prescribes
the treatment for an award that is effectively cancelled. It defines a vesting condition as a
condition that includes an explicit or implicit requirement to provide services. It further
79
requires nonvesting conditions to be treated in a similar fashion to market conditions. Failure
to satisfy a nonvesting condition that is within the control of either the entity or the counterparty
is accounted for as a cancellation. However, failure to satisfy a nonvesting condition that is
beyond the control of either party does not give rise to a cancellation.
PFRS 8, Operating Segments
PFRS 8 will replace PAS 14, Segment Reporting, and adopts a full management approach to
identifying, measuring and disclosing the results of an entity’s operating segments. The
information reported would be that which management uses internally for evaluating the
performance of operating segments and allocating resources to those segments. Such
information may be different from that reported in the consolidated balance sheet and
consolidated statement of income and the Group will provide explanations and reconciliations
of the differences. This standard is only applicable to an entity that has debt or equity
instruments that are traded in a public market or that files (or is in the process of filing) its
financial statements with a securities commission or similar party. The Group will apply PFRS
8 in 2009 and will assess the impact of this Standard on its current manner of reporting
segment information.
Amendments to PAS 1, Presentation of Financial Statements
This Amendment introduces a new statement of comprehensive income that combines all
items of income and expenses recognized in the profit or loss together with ‘other
comprehensive income’. Entities may choose to present all items in one statement, or to
present two linked statements, a separate statement of income and a statement of
comprehensive income. This Amendment also requires additional requirements in the
presentation of the balance sheet and owner’s equity as well as additional disclosures to be
included in the financial statements. Adoption of this Amendment will not have significant
impact on the Group except for the presentation of a statement of comprehensive income and
additional disclosures to be included in the consolidated financial statements.
Amendments to PAS 23, Borrowing Costs
The Standard has been revised to require capitalization of borrowing costs when such costs
relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.
Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
Amendments to PAS 27 will be effective on January 1, 2009 which has changes in respect of
the holding companies’ separate financial statements including (a) the deletion of ‘cost
method’, making the distinction between pre- and post-acquisition profits no longer required;
and (b) in cases of reorganizations where a new parent is inserted above an existing parent of
the group (subject to meeting specific requirements), the cost of the subsidiary is the previous
carrying amount of its share of equity items in the subsidiary rather than its fair value. All
dividends will be recognized in profit or loss. However, the payment of such dividends
requires the entity to consider whether there is any indicator of impairment.
Amendment to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation
These amendments specify, among others, that puttable financial instruments will be
classified as equity if they have all of the following specified features: (a) Instrument entitles
the holder to require the entity to repurchase or redeem the instrument (either on an ongoing
basis or on liquidation) for a pro rata share of the entity’s net assets, (b) Instrument is in the
most subordinate class of instruments, with no priority over other claims to the assets of the
entity on liquidation, (c) Instruments in the subordinate class have identical features; (d) The
instrument does not include any contractual obligation to pay cash or financial assets other
than the holder’s right to a pro rata share of the entity’s net assets; and (e) Total expected
cash flows attributable to the instrument over its life are based substantially on the profit or
loss, a change in recognized net assets, or a change in the fair value of the recognized and
unrecognized net assets of the entity over the life of the instrument.
80
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
This Interpretation requires customer loyalty award credits to be accounted for as a separate
component of the sales transaction in which they are granted and therefore part of the fair
value of the consideration received is allocated to the award credits and realized in income
over the period that the award credits are redeemed or expire.
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
This Interpretation provides guidance on identifying foreign currency risks that qualify for
hedge accounting in the hedge of net investment; where within the group the hedging
instrument can be held in the hedge of a net investment; and how an entity should determine
the amount of foreign currency gains or losses, relating to both the net investment and the
hedging instrument, to be recycled on disposal of the net investment.
Improvements to PFRS
In May 2008, the International Accounting Standards Board issued its first omnibus of
amendments to certain standards, primarily with a view to removing inconsistencies and
clarifying wording. These are the separate transitional provisions for each standard:
• PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
When a subsidiary is held for sale, all of its assets and liabilities will be classified as
held for sale under PFRS 5, even when the entity retains a noncontrolling interest in
the subsidiary after the sale.
•
PAS 1, Presentation of Financial Statements
Assets and liabilities classified as held for trading are not automatically classified as
current in the consolidated balance sheet.
•
PAS 16, Property, Plant and Equipment
This amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’,
to be consistent with PFRS 5, Noncurrent Assets Held for Sale and Discontinued
Operations and PAS 36, Impairment of Assets.
Items of property, plant and equipment held for rental that are routinely sold in the
ordinary course of business after rental, are transferred to inventory when rental
ceases and they are held for sale. Proceeds of such sales are subsequently shown as
revenue. Cash payments on initial recognition of such items, the cash receipts from
rents and subsequent sales are all shown as cash flows from operating activities.
•
PAS 19, Employee Benefits
Revises the definition of ‘past service costs’ to include reduction in benefits related to
past services (‘negative past service costs’) and to exclude reduction in benefits
related to future services that arise from plan amendments. Amendments to plans that
result in a reduction in benefits related to future services are accounted for as a
curtailment.
It revises the definition of ‘return on plan assets’ to exclude plan administration costs if
they have already been included in the actuarial assumptions used to measure the
defined benefit obligation.
•
Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus
on the point in time at which the liability is due to be settled and it deletes the
reference to the recognition of contingent liabilities to ensure consistency with PAS
37, Provisions, Contingent Liabilities and Contingent Assets.
PAS 23, Borrowing Costs
Revises the definition of borrowing costs to consolidate the types of items that are
considered components of ‘borrowing costs’, i.e., components of the interest expense
calculated using the effective interest rate method.
81
•
PAS 28, Investments in Associates
If an associate is accounted for at fair value in accordance with PAS 39, only the
requirement of PAS 28 to disclose the nature and extent of any significant restrictions
on the ability of the associate to transfer funds to the entity in the form of cash or
repayment of loans applies.
An investment in an associate is a single asset for the purpose of conducting the
impairment test. Therefore, any impairment test is not separately allocated to the
goodwill included in the investment balance.
•
PAS 29, Financial Reporting in Hyperinflationary Economies
Revises the reference to the exception that assets and liabilities should be measured
at historical cost, such that it notes property, plant and equipment as being an
example, rather than implying that it is a definitive list.
•
PAS 31, Interests in Joint Ventures
If a joint venture is accounted for at fair value, in accordance with PAS 39, only the
requirements of PAS 31 to disclose the commitments of the venturer and the joint
venture, as well as summary financial information about the assets, liabilities, income
and expense will apply.
•
PAS 36, Impairment of Assets
When discounted cash flows are used to estimate ‘fair value less costs to sell’,
additional disclosure is required about the discount rate, consistent with disclosures
required when the discounted cash flows are used to estimate ‘value in use’.
•
PAS 38, Intangible Assets
Expenditure on advertising and promotional activities is recognized as an expense
when the Group either has the right to access the goods or has received the services.
Advertising and promotional activities now specifically include mail order catalogues.
It deletes references to there being rarely, if ever, persuasive evidence to support an
amortization method for finite life intangible assets that results in a lower amount of
accumulated amortization than under the straight-line method, thereby effectively
allowing the use of the unit-of-production method.
•
PAS 39, Financial Instruments: Recognition and Measurement
Changes in circumstances relating to derivatives, specifically derivatives designated
or
de-designated as hedging instruments after initial recognition are not reclassifications.
When financial assets are reclassified as a result of an insurance company changing
its accounting policy in accordance with paragraph 45 of PFRS 4, Insurance
Contracts, this is a change in circumstance, not a reclassification.
It removes the reference to a ‘segment’ when determining whether an instrument
qualifies as a hedge.
It requires use of the revised effective interest rate (rather than the original effective
interest rate) when re-measuring a debt instrument on the cessation of fair value
hedge accounting.
•
PAS 40, Investment Properties
82
It revises the scope (and the scope of PAS 16) to include property that is being
constructed or developed for future use as an investment property. Where an entity is
unable to determine the fair value of an investment property under construction, but
expects to be able to determine its fair value on completion, the investment under
construction will be measured at cost until such time as fair value can be determined
or construction is complete.
•
PAS 41, Agriculture
It removes the reference to the use of a pre-tax discount rate to determine fair value,
thereby allowing use of either a pre-tax or post-tax discount rate depending on the
valuation methodology used.
It removes the prohibition to take into account cash flows resulting from any additional
transformations when estimating fair value. Instead, cash flows that are expected to
be generated in the ‘most relevant market’ are taken into account.
Effective in 2010
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial
Statements
Revised PFRS 3 introduces a number of changes in the accounting for business combinations
that will impact the amount of goodwill recognized, the reported results in the period that an
acquisition occurs, and future reported results. Revised PAS 27 requires, among others, that
(a) change in ownership interests of a subsidiary (that do not result in loss of control) will be
accounted for as an equity transaction and will have no impact on goodwill nor will it give rise
to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling
and noncontrolling interests (previously referred to as ‘minority interests’); even if the losses
exceed the noncontrolling equity investment in the subsidiary; and (c) on loss of control of a
subsidiary, any retained interest will be remeasured to fair value and this will impact the gain
or loss recognized on disposal. The changes introduced by revised PFRS 3 and PAS 27 must
be applied prospectively and will affect future acquisitions and transactions with noncontrolling
interests.
Amendment to PAS 39, Financial Instruments: Recognition and Measurement –Eligible
hedged items
Amendment to PAS 39 will be effective on July 1, 2009, which addresses only the designation
of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or
portion in particular situations. This amendment clarifies that an entity is permitted to
designate a portion of the fair value changes or cash flow variability of a financial instrument
as a hedged item.
Effective in 2012
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This Interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. This Interpretation
requires that revenue on construction of real estate be recognized only upon completion,
except when such contract qualifies as a construction contract to be accounted for under PAS
11, Construction Contracts, or involves rendering of services, in which case revenue is
recognized based on stage of completion. Contracts involving provision of services with the
construction materials and where the risks and reward of ownership are transferred to the
buyer on a continuous basis will also be accounted for based on stage of completion. The
adoption of this Interpretation will be accounted for retrospectively, and will result to
restatement of prior period financial statements. The adoption of this Interpretation may
significantly affect the determination of revenue for real estate sales and the corresponding
cost, and the related trade receivables, deferred tax liabilities and retained earnings accounts.
The Group is in the process of quantifying the impact of adoption of this Interpretation when it
becomes effective in 2012.
83
Information on Independent Public Accountant
a.
The principal accountants and external auditors of the Company is the accounting firm of
SyCip, Gorres, Velayo & Company (SGV & Co.). The same accounting firm was
approved for re-election at the annual stockholders’ meeting.
b.
Pursuant to the General Requirements of SRC Rule 68, Par. 3 (Qualifications and Reports
of Independent Auditors), the Company has engaged SGV & Co. as external auditor of the
Company, and Ms. Lucy L. Chan has been the Partner In-charge effective audit year
2007.
c.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company has engaged the services of SGV & Co. during the two most recent fiscal
years. There are no disagreements with SGV & Co. on accounting and financial
disclosure.
External Audit Fees and Services
Ayala Corporation paid or accrued the following fees, including VAT, to its external auditors in the
past two years:
2008
2007
Audit & Audit-related Fees
P 3.13 M
2.91 M
Tax Fees
-
Other Fees
P 5.29 M
0.39 M
No tax consultancy services were secured from SGV & Co.
In 2008, SGV & Co. billed the Company for an aggregate fee of P5.29 M for the following services:
(i) Review of the Company’s consolidated financial statements for the period ended June
30, 2008 and issuance of a comfort letter in connection with the Company’s issuance
of preferred shares.
(ii) Conduct of an Enterprise-Wide Risk Management study.
(iii) Conduct of a seminar on new accounting standards.
In 2007, SGV & Co. rendered the PFRS Seminars to the Company for an aggregate fee of
P0.39M.
The Company’s Audit Committee (composed of Meneleo J. Carlos, Jr., Xavier P. Loinaz and
Toshifumi Inami) recommended to the Board of Directors the appointment of SGV & Co. as its
external auditor and the fixing of the audit fees. Likewise, the other services rendered by SGV &
Co. were approved by the Board of Directors upon the recommendation of the Audit Committee.
The stockholders further ratified the resolution of the Board of Directors.
The Audit Committee has an existing policy which prohibits the Company from engaging the
independent auditors to provide services that may adversely impact their independence, including
those expressly prohibited by SEC regulations. In addition, the Audit Committee pre-approves all
audit and permitted non-audit services provided by the external auditors. It is expected that the
external auditors will continue to provide certain non-audit services including tax-related services
to the Company and its subsidiaries.
At the AC Annual Stockholders’ Meeting held last 3 April 2009, SGV & Co., were reappointed as
the Company’s external auditors for the year 2009.
84
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9. Directors and Executive Officers of the Registrant
The write-ups below include positions currently held by the directors and executive officers, as
well as positions held during the past five years.
Board of Directors
Jaime Augusto Zobel de Ayala
Fernando Zobel de Ayala
Meneleo J. Carlos, Jr.
Toshifumi Inami
Delfin L. Lazaro
Xavier P. Loinaz
Mercedita S. Nolledo
Chairman and Chief Executive Officer
President and Chief Operating Officer
Independent Director
Director
Director
Director
Director
Jaime Augusto Zobel de Ayala, Filipino, 49, has served as Director of Ayala Corporation since
1987. He also holds the following positions: Chairman and CEO and Chairman of the Nomination
Committee of Ayala Corporation; Chairman of the Board of Directors of Globe Telecom, Inc., Bank
of the Philippine Islands and Integrated Micro-electronics, Inc.; Vice Chairman of Manila Water
Co., Inc.; Co-Vice Chairman of Ayala Foundation, Inc.; and Director of Ayala Land, Inc. He is a
member of various international and local business and socio-civic organizations including the JP
Morgan International Council, Mitsubishi Corporation International Advisory Committee, Toshiba
International Advisory Group, Harvard University Asia Center Advisory Committee, Board of
Trustees of the Asian Institute of Management and a national council member of the World Wildlife
Fund (US). He was a TOYM (Ten Outstanding Young Men) Awardee in 1999 and was named
Management Man of the Year in 2006 by the Management Association of the Philippines for his
important role in the transformation of Ayala Corporation into a highly diversified forward-looking
conglomorate.
He was also awarded the prestigious Harvard Business School Alumni
Achievement Award in 2007. He graduated with B.A. in Economics (Cum Laude) at Harvard
College in 1981 and took his MBA at the Harvard Graduate School of Business Administration in
1987.
Fernando Zobel de Ayala, Filipino, 48, has served as Director of Ayala Corporation since 1994.
He also holds the following positions: President and Chief Operating Officer of Ayala Corporation;
Chairman of Ayala Land, Inc., Manila Water Company, Inc., AC International Finance Ltd., AG
Holdings Limited, Ayala Automotive Holdings Corp., Ayala Hotels, Inc., Alabang Commercial
Corp., and Anvaya Cove Beach and Nature Club, Inc.; Co-Vice Chairman and Trustee of Ayala
Foundation, Inc.; Director of the Bank of the Philippine Islands, Globe Telecom, Inc., Integrated
Micro-electronics Inc., AI North America and Habitat for Humanity International. He graduated
with B.A. Liberal Arts at Harvard College in 1982.
85
Meneleo J. Carlos, Jr., Filipino, 79, serves as the Independent Director of Ayala Corporation
since September 2002. He is the Chairman of Ayala Corporation’s Audit and Compensation
Committees and a member of the Nomination Committee. He is the Chairman and President of RI
Chemical Corporation, MC Shipping, Pigmentex, Inc., Chem Insurance Brokers, Inc. and
Riverbanks Development Corp.; President of Resins, Inc. and Stella Technik Asia, Inc.; Chairman
of Maja Development Corporation, AVC Chemical Corporation, Philippine Iron Construction &
Marine Works, Inc. (PICMW) and Vacphil Rubber Corporation; and Director of Philippine Aerosol
Container Corp. (PACC), Philippine Technology Development Ventures, Inc. and Polymer
Product, Inc. (Philippines). He graduated with a B.S. Chemical Engineering degree and a
Certificate of Advanced Studies at Cornell University in 1952.
Toshifumi Inami, Japanese, 57, has served as Director of Ayala Corporation since June 2006.
He is currently the General Manager of Mitsubishi Corporation-Manila Branch and Senior Vice
President of Mitsubishi Corporation-Tokyo, Japan. He is the Chairman of International Elevator &
Equipment, Inc.; Chairman and President of MCPL (Philippines), Inc.; Director in the following
companies: The Japanese Association Manila, Inc., Isuzu Philippines Corp., MD Distripark Manila,
Inc., MD Laguna Corporation, Imasen Philippines Manufacturing Corp., Kansai Paint Philippines,
Trans World Agro-Products Corporation, Kepco Ilijan Corporation, Mirant Diamond Holdings and
UniCharm Philippines, Inc.; and President of Japanese Chamber of Commerce & Industry of the
Philippines (JCCIPI). Prior to his assignment at Mitsubishi Corporation-Manila Branch, he was the
General Manager at the Ship Department of Mitsubishi Corporation-Tokyo, Japan. He had a
degree in BS Mechanical Engineering from Keio University in Japan.
Delfin L. Lazaro, Filipino, 62, has served as Director of Ayala Corporation since January 2007.
He has served as a member of the Management Committee of Ayala Corporation (Ayala Group)
since 1996. He also holds the following positions: Chairman of LiveIt Solutions, Inc., Philwater
Holdings Co., Inc. and MPM Noodles Corp.; Chairman and President of AYC Holdings Ltd. and
A.C.S. T. Business Holdings, Inc.; Vice Chairman and President of Asiacom Philippines, Inc.;
Director of Ayala Land, Inc., Globe Telecom, Inc., Integrated Micro-electronics, Inc., Manila Water
Co., Inc., AI North America, Inc., AC International Finance Ltd., Ayala DBS Holdings, Inc. and
Ayala Automotive Holdings Corp. Formerly, Mr. Lazaro was the President and CEO of Benguet
Corporation and Secretary of the Department of Energy of the Philippine government. He was
named Management Man of the Year 1999 by the Management Association of the Philippines for
his contribution to the conceptualization and implementation of the Philippine Energy Development
Plan and to the passage of the law creating the Department of Energy. He was also cited for
stabilizing the power situation that helped the country achieve successively high growth levels up
to the Asian crisis in 1997. He graduated with BS Metallurgical Engineering at the University of
the Philippines in 1967 and took his MBA (with Distinction) at Harvard Graduate School of
Business in 1971.
Mercedita S. Nolledo, Filipino, 67, has served as Director of Ayala Corporation since 2004 and is
also a Senior Managing Director and Corporate Secretary of Ayala Corporation, and Senior
Counsel of the Ayala Group of Companies. Her other significant positions include: Director and
Corporate Secretary of Ayala Land, Inc.; Director of Honda Cars Cebu, Inc., Honda Cars Makati,
Inc., Isuzu Automotive Dealership, Inc., Isuzu Cebu, Inc., Ayala Automotive Holdings Corp., Bank
of the Philippine Islands, BPI Family Bank, BPI Capital Corp., Ayalafil, Inc., Mandaue Primeland,
Inc. and Anvaya Cove Beach and Nature Club, Inc.; Corporate Secretary and Member of the
Board of Trustees of Ayala Foundation, Inc.; Director and Treasurer of Phil. Tuberculosis Society,
Inc. She had her education at the University of the Philippines and graduated Magna Cum Laude
and Class Valedictorian in Bachelor of Science in Business Administration and Cum Laude and
Class Valedictorian in Bachelor of Laws.
Management Committee Members / Key Executive Officers
*
*
*
*
**
Jaime Augusto Zobel de Ayala
Fernando Zobel de Ayala
Delfin L. Lazaro
Mercedita S. Nolledo
Gerardo C. Ablaza, Jr.
Chairman & Chief Executive Officer
President & Chief Operating Officer
Senior Managing Director
Senior Managing Director, Senior Counsel & Corporate Secretary
Senior Managing Director
86
**
**
**
**
Antonino T. Aquino
Jaime I. Ayala
Charles H. Cosgrove
Rufino Luis T. Manotok
**
**
**
***
**
***
Arthur R. Tan
Alfredo I. Ayala
Ernest Lawrence L. Cu
John Eric T. Francia
Victoria P. Garchitorena
Solomon M. Hermosura
**
****
Aurelio R. Montinola III
Renato O. Marzan
**
Ramon G. Opulencia
John Philip S. Orbeta
Senior Managing Director
Senior Managing Director
Senior Managing Director
Senior Managing Director, Corporate Information Officer
& Chief Finance Officer
Senior Managing Director
Managing Director
Managing Director
Managing Director
Managing Director, General Counsel, Assistant Corporate Secretary &
Compliance Officer
Managing Director, General Counsel, Assistant Corporate Secretary &
Compliance Officer
Managing Director & Treasurer
Managing Director
* Members of the Board of Directors
** Management Committee members
*** Management Committee member effective January 1, 2009
**** Retired effective December 31, 2008
Gerardo C. Ablaza, Jr., Filipino, 55, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 1998. He also holds the following positions: Senior
Managing Director of Ayala Corporation and President and CEO of Globe Telecom, Inc.;
Chairman of Innove Communications, Inc.; Director of Bank of the Philippine Islands, BPI Family
Savings Bank, Inc., BPI Card Finance Corporation, Azalea Technology Investment, Inc. and
Asiacom Philippines, Inc. He was previously Vice President and Country Business Manager for
the Philippines and Guam of Citibank, N.A. for its Global Consumer Banking business. Prior to
this position, he was Vice President of Citibank, N.A. Singapore for Consumer Banking. Attendant
to his last position in Citibank, N.A., he was the bank’s representative to the Board of Directors of
CityTrust Banking Corporation and its various subsidiaries. He graduated Summa Cum Laude at
De La Salle University in 1974 with a degree in AB Major in Mathematics (Honors Program).
Antonino T. Aquino, Filipino, 61, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since August 1998. He also holds the following positions: Senior
Managing Director of Ayala Corporation and President of Manila Water Company, Inc. He also
served as President of Ayala Property Management Corporation, Senior Vice President of Ayala
Land, Inc., and a Business Unit Manager in IBM Philippines, Inc. He also serves as a member of
the board of various corporate social responsibility foundations such as Ayala Foundation, Manila
Water Foundation, Habitat for Humanities Philippines, La Mesa Watershed Foundation and Makati
Environment Foundation. He graduated with Bachelor of Science Major in Management at the
Ateneo de Manila University in 1968 and has completed academic units for the Masteral Degree in
Business Management at the Ateneo Graduate School of Business in 1975.
Jaime I. Ayala, Filipino, 46, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 2004. He also holds the following positions: Senior Managing
Director of Ayala Corporation and President and CEO of Ayala Land, Inc. His other significant
positions include: Chairman and President of Makati Property Ventures, Inc.; Chairman of Ayala
Property Management Corp., Cebu Holdings, Inc., Cebu Insular Hotel Co., Inc., Cebu Property
Ventures & Dev't. Corp., Alveo Land Corp., Avida Land Corp., Laguna Technopark, Inc., Makati
Development Corp., and Station Square East Commercial Corp; Director and President of Aurora
Properties, Inc, Ayala Hotels, Inc., Enjay Hotels, Inc., Roxas Land Corp. and Vesta Property
Holdings, Inc.; Director of Alabang Commercial Corp., Ayala Greenfield Development Corp., Ayala
Infrastructure Ventures, Inc., Ayala Land Sales, Inc., Berkshire Holdings, Inc., Bonifacio Arts
Foundation, Inc., Bonifacio Land Corp., Emerging City Holdings, Inc., Fort Bonifacio Development
Corp., myAyala.com, Inc., Ayala Center Association and Makati Parking Authority. Prior to joining
ALI, he spent 19 years with McKinsey & Company in the US, Mexico, Tokyo and Hong Kong. At
McKinsey, he was a Director (senior partner) and played a number of global and regional
leadership roles, including that of President of McKinsey's Manila office. He earned his M.B.A.
87
from Harvard School, graduating with honors in 1988. He completed his undergraduate work in
1984 at Princeton University, where he graduated Magna Cum Laude in Economics, with a minor
in Engineering.
Charles H. Cosgrove, American, 53, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 1998. He is also a Senior Managing Director of Ayala
Corporation and CEO of AG Holdings Ltd. Prior to joining Ayala Corporation, he was a Managing
Director of Singapore Telecom International Pte. Ltd. He graduated from Stanford University with
an AB in 1977. He obtained a JD from Georgetown University School of Law in 1980.
Rufino Luis T. Manotok, Filipino, 58, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 1999. He also holds the following positions: Senior
Managing Director, Corporate Information Officer and Chief Finance Officer of Ayala Corporation;
President and Chairman of Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., Isuzu
Iloilo Corp., Prime Initiatives, Inc. and Water Capital Works, Inc.; Chairman of Honda Cars Cebu,
Inc., Isuzu Cebu, Inc., Ayala Aviation Corp. and AYC Finance Ltd.; Vice Chairman of Michigan
Power, Inc.; President and Director of Ayala Automotive Holdings Corp. and Philwater Holdings
Company; and Director of AC International Finance Ltd., AG Holdings Limited, AI North America,
Inc., Asiacom Philippines, Inc., AYC Holdings Ltd., Azalea International Venture Partners Ltd.,
Ayala Systems Technology, Inc., BPI Family Savings Bank, Inc., Bestfull Holdings Limited, Fine
State Group Limited, IMA Landholdings, Inc. and Michigan Holdings, Inc. He graduated with
Bachelor of Arts in Economics at the Ateneo de Manila University in 1971 and had his Masters
Degree in Business Management at the Asian Institute of Management in 1973. He also took the
Advance Management Program at Harvard Business School in 1994.
Arthur R. Tan, Filipino, 49, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) for more than 5 years. He holds the position of Senior Managing
Director of Ayala Corporation. He is also the President and CEO of Integrated Micro-electronics,
Inc. and Speedy-Tech Electronics, Ltd.; Chairman of Speedy-Tech Philippines, Inc. and Advanced
Research and Competency Development Institute (ARCDI); and Vice Chairman of Semiconductor
and Electronics Industries in the Philippines, Inc. (SEIPI). He is also the President of IMI USA,
Inc. and IMI International Singapore Pte. Ltd. Prior to joining Ayala Corporation, he was a
Managing Director of American Microsystems, Inc. (Asia Pacific Region/Japan). He graduated
with a degree of BS in Electronics and Communication Engineering at the Mapua Institute of
Technology in 1982. He has taken post graduate classes in MSEE from the University of Idaho
and business courses from Harvard University.
Alfredo I. Ayala, Filipino, 48, is a Managing Director of Ayala Corporation since June 2006. He is
the Chief Executive Officer of LiveIt Solutions, Inc., the holding company of Ayala Corporation for
its investments in the BPO sector. He is the Chairman of the Business Processing Association of
the Philippines (BPA/P) and e-Telecare Global Solutions, Inc. He is a Director of NewBridge
International Investment Limited, LiveIt Investments Limited, Affinity Express Holdings Limited and
HRMall Holdings Limited. Previously, he was a Chairman of SPi, one of the leading non-voice
BPO companies in Asia; Partner at Crimson Investment, an international private equity firm and
Managing Director and co-Founder of MBO Partners. He graduated with Honors from Brown
University with a double major in BA in Development Studies and Economics. He took his Masters
in Business Administration at Harvard Graduate School of Business Administration.
Ernest Lawrence L. Cu, Filipino, 48, is a member of the Management Committee of Ayala
Corporation (Ayala Group) since January 2009. He is currently the Deputy Chief Executive Officer
of Globe Telecom, Inc. and joined Globe on October 1, 2008. He brings with him over two
decades of general management and business development experience spanning multi-country
operations. He is also a Director of Systems Technology Institute, Inc., Rockwell Residential
Condominium, ATR KimEng Capital Partners, Inc., ATR KimEng Financial Corporation, Game
Services Group, Encash and a Trustee for De La Salle College of St. Benilde. Prior to joining
Globe, he was the President and CEO of SPI Technologies, Inc. He also served as Director of
Digital Media Exchange, Inc. and a Trustee of the International School Manila. He has a Bachelor
of Science in Industrial Management Engineering from De La Salle University in Manila and an
M.B.A. from the J.L. Kellogg Graduate School of Management, Northwestern University
88
John Eric T. Francia, Filipino, 37, is a Managing Director and a member of the Management
Committee of Ayala Corporation (Ayala Group) since January 2009. Prior to joining the Company,
he was the Head of the Global Business Planning and Operations of the Monitor Group, a strategy
consulting firm based in Cambridge, MA. In this role, he had primary responsibility for the firm’s
global business planning processes and business analytics for strategic investments. He received
his undergraduate degree in Humanities and Political Economy from the University of Asia & the
Pacific, graduating Magna Cum Laude. He then completed his Masters Degree in Management
Studies at the University of Cambridge in the UK, graduating with First Class Honors.
Victoria P. Garchitorena, Filipino, 65, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 2006. She is currently the Managing Director of Ayala
Corporation (since 1996), President and Board member of Ayala Foundation, Inc. and Ayala
Foundation USA. Her other significant positions include: Trustee of the International Center on
Innovation, Transformation and Excellence in Governance and Pinoy Me Foundation; Governor of
Management Association of the Philippines; member of the Asia Pacific Advisory Council Against
Corruption-World Bank, League of Corporate Foundations and Makati Business Club; and
member of the National Committee of Bishops-Businessmen’s Council for Human Development.
Previously, she was a Senior Consultant on Poverty Alleviation and Good Governance and the
Head of the Presidential Management Staff and Secretary to the Cabinet under the Office of the
President of the Republic of the Philippines; a Director of Philippine Charity Sweepstakes Office;
Executive Assistant to the Chairman and President of the Meralco Foundation, Inc.; a Trustee of
the Ramon Magsaysay Awards Foundation; and Co-Chairperson of EDSA People Power
Commission. She graduated with a B.S. Physics degree (Summa Cum Laude) at the College of
the Holy Spirit in 1964 and was an SGV scholar at the Asian Institute of Management.
Solomon M. Hermosura, Filipino, 46, has served as Managing Director of Ayala Corporation
since January 1999 and a member of the Management Committee of Ayala Corporation (Holding
Company) since January 2009. He also holds the following positions: Compliance Officer,
General Counsel and Assistant Corporate Secretary of Ayala Corporation effective January 1,
2009; Director of Pameka Holdings, Inc., Water Capital Works, Inc. and West Zone Water Service,
Inc.; Director and Corporate Secretary of Integreon Managed Solutions (Philippines), Inc.,
Philwater Holdings Company, Inc., Northern Riverworks and Rivers of Cebu Inc.; Corporate
Secretary of Ayala Foundation, Inc. effective January 8, 2009; Company Secretary of Integreon,
Inc.; Assistant Corporate Secretary of Ayala DBS Holdings, Inc. and Michigan Holdings, Inc.;
Assistant Company Secretary of AC International Finance Ltd. and AYC Finance Ltd.; and
President of Manila Water Total Solutions, Inc. He earned his Bachelor of Laws degree from San
Beda College in 1986 and placed 3rd in the 1986 Bar Examination.
Aurelio R. Montinola III, Filipino, 56, has served as member of the Management Committee of
Ayala Corporation (Ayala Group) since 2005. He also holds the following positions: President and
CEO of the Bank of the Philippine Islands; Vice Chairman of the Board of Directors of Republic
Cement Corporation; Vice Chairman of the Board of Trustees of Far Eastern University; Chairman
of East Asia Educational Foundation, Inc.; Chairman of the Board of Directors of Amon Trading
Corporation, East Asia Educational Foundation, Inc., Shenton Realty Corporation, City Trust
Realty Corporation and Syrel Investment and Realty Corporation; Regional Vice Chairman of
MasterCard Incorporated; Director of Ayala Land, Inc., Manila Water Company, Inc., BPI Family
Savings Bank, BPI Direct Savings Bank, BPI/MS Insurance Corporation, Ayala Life Assurance,
Inc. and Universal Malayan Reinsurance Corporation; President of BPI Foundation, Inc.; Director
of Makati Business Club; and Member of Management Association of the Philippines. He
graduated with a degree in BS Management Engineering at the Ateneo de Manila University in
1973 and received his MBA at Harvard Business School in 1977.
Renato O. Marzan, Filipino, 60, has served as a member of the Management Committee of Ayala
Corporation (Holding Company) since May 2007 to December 2008. He also held the following
positions: General Counsel, Managing Director, Compliance Officer and Assistant Corporate
Secretary of Ayala Corporation; Director and Corporate Secretary of Integrated Micro-electronics,
Inc., Honda Cars Makati, Inc., and Isuzu Automotive Dealership, Inc.; Corporate Secretary of
Globe Telecom, Inc., AC International Finance Ltd., Cebu Holdings, Inc., Cebu Property Ventures
and Development Corp., Avida Land, Corp., Ayala Hotels, Inc., Alabang Commercial Corp., Alveo
89
Land Corp., and Ayala Automotive Holdings Corporation; Director of NewBridge International
Investment Limited, LiveIt Investments Limited, Integreon Holdings Limited and AYC Finance
Limited; and Assistant Corporate Secretary of Ayala Land, Inc. and Ayala Foundation, Inc. He had
his education at the San Beda College with a degree in Bachelor of Arts in Philosophy (Magna
Cum Laude) in 1969 and Bachelor of Laws (Cum Laude) in 1973.
Ramon G. Opulencia, Filipino, 52, has served as Treasurer of Ayala Corporation since
September 2005 and has previously served as the Senior Assistant Treasurer from November
1992 to September 2005. He is also a Managing Director of Ayala Corporation. He is currently a
member of the Board of Directors and the Audit Committee of BPI Family Savings Bank, Inc. He
is also a director of AYC Holdings Limited and AYC Finance Limited. Prior to joining Ayala
Corporation, he was a Senior Manager of the Bank of the Philippine Islands’ Treasury Group. He
graduated with a BS in Mechanical Engineering degree at the De La Salle University in 1978 and
took his Masteral in Business Management at the Asian Institute of Management graduating with
Distinction in 1983. He completed the Advanced Management Program at the Harvard Business
School in May 2005.
John Philip S. Orbeta, Filipino, 47, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 2005. He is currently the Managing Director and Group
Head for Corporate Resources, which includes Strategic Human Resources, Corporate
Communications and Information & Communications Technology at Ayala Corporation. He is
concurrently the Chairman of the Ayala Group Human Resources Council which brings together
the Human Resources professionals from all the Ayala Group of Companies. Prior to joining
Ayala Corporation, he spent 19 years at Watson Wyatt Worldwide (NYSE:WW), the global
management consulting firm where he was the Vice President and Global Practice Director for the
firm's Human Capital Consulting Group, overseeing the firm's practices in executive
compensation, strategic rewards, data services and organization effectiveness around the world.
He was also a member of Watson Wyatt's Board of Directors. He received his undergraduate
degree in Economics from the Ateneo de Manila University where he also attended graduate
studies in Industrial Psychology. He completed a Leadership Development Program at the
Harvard Business School.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Pursuant to the Company’s By-Laws, each Director has a term of office of one year from date of
election or until his successor shall have been named, qualified and elected. Each Executive
Officer are covered by Letters of Appointment with the Company stating therein their respective
job functionalities, among others, the terms and conditions of which are in accordance with
existing laws.
The Executive Officers are entitled to receive retirement benefits in accordance with the terms and
conditions of the Company’s BIR-registered employees’ retirement plan. There is no plan or
arrangement by which the Executive Officers will receive from the Company any form of
compensation in case of a change-in-control of the Company or a change in the Officers’
responsibilities following such change-in-control.
Significant Employees
The Corporation considers its entire work force as significant employees. Everyone is expected to
work together as a team to achieve the Corporation’s goals and objectives.
Family Relationship
Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, Chairman/Chief Executive Officer
and President/Chief Operating Officer of the Company respectively, are brothers.
There are no known family relationships between the current members of the Board of Directors
and key officers other than the above.
Relationships and Related Transactions
90
The Ayala Group of Companies, in the regular conduct of business, has entered into transactions
with associates, jointly controlled entities and other related parties principally consisting of
advances and reimbursement of expenses, purchase and sale of real estate properties, various
guarantees, construction contracts, and development, management, underwriting, marketing and
administrative service agreements. Sales and purchases of goods and services to and from
related parties are made at normal market prices.
No other transaction was undertaken by the Company in which any Director or Executive Officer
was involved or had a direct or indirect material interest.To date, there are no complaints received
by the Company regarding related-party transactions.
Parent Company
Mermac, Inc. holds or owns 50.92% of the total issued and outstanding common stock of the
Company as of 31 December 2008. As of December 31, 2008, the company has no outstanding
receivable/payable from/to Mermac, Inc.
No single Director or Executive Officer, nominee for election as Director, or any member of their
immediate family owns or holds more than 10% of the Company’s voting shares.
Please refer to Note 27 (“Related Party transactions”) of the Notes to Consolidated Financial
Statements of the 2008 Audited Financial Statements which is incorporated herein in the
accompanying Index to Exhibits.
Involvement in Certain Legal Proceedings
Except as disclosed herein, there are no material pending legal proceedings for the past five years
and the preceding years until 31 January 2008 to which Ayala or the Directors or Executive
Officers is a party or of which any of its material properties are subject in any court or
administrative agency of the Government.
Resignation of Directors/Management Committee members/Key Officers
To date, no director has resigned from, or declined to stand for re-election to the Board of
Directors since the date of the 2008 annual meeting of stockholders due to any disagreement with
the Company relative to the Company’s operations, policies and practices.
Item 10. Executive Compensation
Name and Principal Position
Jaime Augusto Zobel de Ayala
Chairman and CEO
Fernando Zobel de Ayala
President and COO
Delfin L. Lazaro
Senior Managing Director
Rufino Luis T. Manotok
Senior Managing Director,
Corporate Information Officer &
Chief Finance Officer
Mercedita S. Nolledo
Senior Managing Director, Senior
Counsel & Corporate Secretary
Renato O. Marzan
Managing Director, General
Counsel, Assistant Corporate
Secretary & Compliance Officer
Ramon G. Opulencia
Managing Director & Treasurer
Alfredo I. Ayala
Managing Director
Victoria P. Garchitorena
Year
Salary
Other Income
91
Managing Director
Solomon M. Hermosura
Managing Director
Ricardo N. Jacinto
Managing Director
Rufino F. Melo III
Managing Director
John Philip S. Orbeta
Managing Director
Luis Juan B. Oreta
Managing Director
CEO & 13 Most Highly
Compensated Executive Officers
All other officers** as a group
unnamed
Actual 2007
Actual 2008
Projected 2009
P165.51 M
P179.10 M
P197.01 M
P110.72 M
P64.44 M
P45.70 M *
Actual 2007
Actual 2008
Projected 2009
P233.85 M
P240.72 M
P264.79 M
P153.61 M
P89.65 M
P61.49 M *
* Composed of guaranteed and performance bonus provision
** Managers and up (including all above-named Officers)
The total annual compensation includes basic pay and other taxable income (guaranteed bonus,
performance-based incentive and exercise of Stock Option).
The Company has no other arrangement with regard to the remuneration of its existing directors
and officers aside from the compensation received as herein stated.
Options Outstanding
The Company offered the Executive Stock Option Plan (ESOP) to the Company’s officers since
1995. The following are the outstanding options held by the above named officers:
Name
Options
Granted
Outstanding
Options
Grant Date
Exercise
Price
All abovenamed
officers
363,985
374,809
618,494
591,148
45,403
2,264
144,932
470,537
562,419
45,403
May 8, 2001
June 18, 2002
June 6, 2003
June 10, 2004
May 1, 2005
171.88
140.97
107.29
152.78
204.86
Market Price
on Date of
Grant*
190.98
156.63
119.21
169.76
227.62
* Grossed up exercise price for the 10% discount
The options expire ten years from grant date. Of the above named officers, no officers exercised
their options for the year 2008.
The Company has adjusted the exercise price and market price of the options awarded to the
above named officers due to the stock dividend declared by the Company in May 2004, June 2007
and May 2008 and to the reverse stock split in May 2005.
Compensation of Directors
The members of the Board of Directors of the Corporation who are neither officers nor consultants
of the Corporation shall be entitled to a director’s fee in an amount to be fixed by the stockholders
at a regular or special meeting duly called for the purpose.
During the 2003 Annual Stockholders’ Meeting, the stockholders ratified the resolution fixing the
remuneration of non-executive directors at P1,000,000.00 consisting of the following components:
Retainer Fee:
P500,000.00
92
Per diem per Board meeting attended:
P100,000.00
In addition, a non-executive director is entitled to a per diem of P20,000.00 per board committee
meeting actually attended. The executives who are members of the Board of Directors do not
receive per diem. Their compensation, as executives of the company is included in the
compensation table indicated in the previous page.
None of the directors, in their personal capacity, has been contracted and compensated by the
Company for services other than those provided as a director.
The Company has no other arrangement with regard to the remuneration of its existing directors
and officers aside from the compensation received as herein stated.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Record and Beneficial Owners and Management
1) Security Ownership of Certain Record and Beneficial Owners (of more than 5%) as of
31 January 2009.
Title of
Class
Name, address of Record Owner
and Relationship with Issuer
Common
Mermac, Inc.2
35/F Tower One, Ayala Triangle,
Ayala Ave., Makati City
PCD Nominee Corporation
(Non-Filipino)4
G/F MSE Bldg.
Ayala Ave., Makati City
Common
Common
Common
2
Mitsubishi Corporation6
52/F PBCom Tower, 6794 Ayala
Ave. cor. VA Rufino St., Makati City
PCD Nominee Corporation
No. of
Shares
Held
Percent
Name of Beneficial
Owner and
Relationship with
Record Owner
Mermac, Inc.3
Citizenship
Filipino
253,074,330
50.92%
Hongkong and
Shanghai Banking
Corporation (HSBC)
and Standard
Chartered Bank
(SCB)5
Mitsubishi
Corporation7
Various
120,449,909
24.24%
Japanese
52,564,617
10.58%
Hongkong and
Filipino
38,295,569
7.70%
(of the
Outstanding
Common
Shares)
The Co-Vice Chairmen of Mermac, Inc. (“Mermac”), Jaime Augusto Zobel de Ayala and Fernando Zobel
de Ayala, are the Chairman/CEO and President/COO of the Company, respectively.
3
The Board of Directors of Mermac has the power to decide how Mermac shares in Ayala are to be voted.
4
The PCD is not related to the Company.
5
HSBC and SCB are participants of PCD. The 61,712,592 and 38,081,140 shares beneficially owned by
HSBC and SCB, respectively, form part of the 158,745,478 shares registered in the name of PCD NonFilipino and Filipino. The clients of HSBC and SCB have the power to decide how their shares are to be
voted. There no holders of more than 5% of the Company’s shares under HSBC and SCB.
6
Mitsubishi Corporation (“Mitsubishi”) is not related to the Company.
7
The Board of Directors of Mitsubishi has the power to decide how Mitsubishi shares in Ayala are to be
voted.
93
(Filipino)
G/F MSE Bldg.
Ayala Ave., Makati City
2)
Title of Class
Shanghai Banking
Corporation (HSBC)
and Standard
Chartered Bank
(SCB)
Security Ownership of Directors and Management as of 31 January 2009.
Name of Beneficial Owner
Citizenshi
p
Percent of
All Class
(direct & indirect)
(direct & indirect)
(direct)
(direct)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
Filipino
Filipino
Filipino
Japanese
Filipino
Filipino
0.082462%
0.084909%
0.000000%
0.000000%
0.049051%
0.018574%
0.027674%
0.003527%
(direct & indirect)
(direct & indirect)
(direct & indirect)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
(direct)
(direct & indirect)
(direct & indirect)
(direct & indirect)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
(direct & indirect)
(direct & indirect)
Filipino
Filipino
Filipino
Amount and Nature of Beneficial
Ownership
Directors
Common
Jaime Augusto Zobel de Ayala
467,549
Common
Fernando Zobel de Ayala
481,420
Common
Meneleo J. Carlos, Jr.
1
Common
Toshifumi Inami
1
Common
Delfin L. Lazaro
278,110
Common
Xavier P. Loinaz
105,313
Common
156,907
Mercedita S. Nolledo
Preferred “A”
20,000
CEO and Most Highly Compensated Officers
Common
Jaime Augusto Zobel de Ayala
467,549
Common
Fernando Zobel de Ayala
481,420
Common
Delfin L. Lazaro
278,110
Common
162,401
Rufino Luis T. Manotok
Preferred “B”
25,000
Common
156,907
Mercedita S. Nolledo
Preferred “A”
20,000
Common
116,894
Renato O. Marzan
Preferred “A”
2,000
Common
143,676
Preferred “A” Ramon G. Opulencia
16,000
Preferred “B”
15,000
Common
Alfredo I. Ayala
91,300
Common
Victoria P. Garchitorena
90,290
Common
Solomon M. Hermosura
100,590
Common
28,629
Ricardo N. Jacinto
Preferred “B”
59,050
Common
54,009
Rufino F. Melo III
Preferred “A”
12,000
Common
John Philip S. Orbeta
146,809
Common
Luis Juan B. Oreta
68,130
Other Executive Officers (Group ManCom Members)
Common
116,658
Gerardo C. Ablaza, Jr.
Preferred “A”
4,000
Common
76,435
Antonino T. Aquino
Preferred “A”
24,200
Common
Jaime I. Ayala
28,244
Common
Charles H. Cosgrove
0
Common
John Eric T. Francia
0
Common
Arthur R. Tan
217,802
All Directors and Officers as a group
3,108,418
(direct & indirect)
(direct)
(direct)
(direct)
(direct & indirect)
(direct & indirect)
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
American
Filipino
Filipino
0.082462%
0.084909%
0.049051%
0.028643%
0.004409%
0.027674%
0.003527%
0.020617%
0.000353%
0.025340%
0.002822%
0.002646%
0.016103%
0.015925%
0.017741%
0.005049%
0.010415%
0.009526%
0.002116%
0.025893%
0.012016%
0.020575%
0.000705%
0.013481%
0.004268%
0.004981%
N/A
N/A
0.038414%
0.548238%
None of the members of the Company’s directors and management owns 2.0% or more of the
outstanding capital stock of the Company.
The Corporation knows of no person holding more than 5% of common shares under a voting trust
94
or similar agreement.
No change of control in the Corporation has occurred since the beginning of its last fiscal year.
Item 12. Certain Relationships and Related Transactions
The Ayala Group of Companies, in their regular conduct of business, have entered into
transactions with associates, joint ventures and other related parties principally consisting of
advances and reimbursement of expenses, purchase and sale of real estate properties, various
guarantees, construction contracts, and development, management, underwriting, marketing and
administrative service agreements. Sales and purchases of goods and services to and from
related parties are made at normal market prices.
No other transaction was undertaken by the Company in which any Director or Executive Officer
was involved or had a direct or indirect material interest.
To date, there are no complaints received by the Company regarding related-party transactions.
Transactions with Promoters
There are no transactions with promoters within the past five (5) years.
PART IV – CORPORATE GOVERNANCE
Item 13. Corporate Governance
Good corporate governance is the cornerstone of Ayala’s sustained success over the past 174
years. Ayala is committed to the highest level of good governance throughout the organization as
well as to fostering a culture of integrity and empowering leadership.
Ayala’s governance is anchored on the belief that there is a strong link between high quality
governance and the creation of shareholder value and long-term growth.
BOARD STRUCTURE AND PROCESS
Key Role and Responsibilities
Ayala Corporation is led by its Board of Directors consisting of seven directors. The Board
represents the Company and the shareholders and is accountable to them for creating and
delivering value through effective and good governance. The Board establishes the vision,
strategic objectives, key policies, and procedures for the management of the Company, as well as
the mechanism for monitoring and evaluating Management’s performance. The Board also
ensures the adequacy of internal control mechanisms for good governance.
Composition
The directors are elected annually by the stockholders. The Board represents a mix of business,
finance and legal competencies, with each director capable of adding value and exercising
independent judgment. Decision-making at the board level adheres to a process that fosters the
independence and integrity of judgment of each director. All the directors have participated in
training on corporate governance. The name and profile of each director are found in the Board of
Directors section of this Annual Report. None of the members of the Board and management
owns 2.0% or more of the outstanding capital stock of the Company. The board structure provides
a clear division of responsibilities between the Board and management.
Independent Directors
In carrying out their fiduciary duties, the directors must act judiciously and exercise independent
judgment. Ayala Corporation also conforms to the requirement to have independent directors, as
defined by law, constituting at least twenty percent (20%) of the Board. Of the seven directors, Mr.
Meneleo J. Carlos, Jr., sits as the independent director. Moreover, Messrs. Toshifumi Inami and
Xavier P. Loinaz are non-executive directors.
95
The Company complies with the rules of the Securities & Exchange Commission (SEC) on the
qualifications, nomination and election of independent directors. For this purpose, the Company
defines an independent director as one having no interest or relationship with the Company that
may hinder his independence from the Company or Management or interfere with his exercise of
independent judgment in carrying out his responsibilities as a director.
Chairman and Chief Executive Officer
The Chairman of the Board and Chief Executive Officer (CEO) is Jaime Augusto Zobel de Ayala
who assumed the position in 2006. Fernando Zobel de Ayala holds the position of President and
Chief Operating Officer (COO). The respective roles of the Chairman/CEO and the President/
COO are complimentary and ensure an appropriate balance of power and increased
accountability and further provide a greater capacity of the Board for independent decision
making. The Chairman/CEO and the President/COO attend the annual meetings of the
shareholders.
Board Performance
Board meetings are held at least once a quarter or as often as necessary. The Board has
separate and independent access to the Corporate Secretary who oversees the adequate flow of
information to the Board prior to meetings and serves as an adviser to the directors on their
responsibilities and obligations.
Discussions during board meetings are open and independent views are given due consideration.
There was more than 80% average attendance in the five board meetings held in 2008. Of the
seven directors, six directors, namely, Messrs. Jaime Augusto Zobel de Ayala, Fernando Zobel de
Ayala, Meneleo J. Carlos, Jr. Xavier P. Loinaz and Toshifumi Inami and Mercedita S. Nolledo had
perfect or 100% attendance. Mr. Delfin L. Lazaro attended four or 80% of the five meetings. The
directors had greater than 80% average attendance in board meetings.
Board Committees
The Board has established committees to assist in exercising its authority including monitoring the
performance of the business. Four committees support the Board in the performance of specific
functions and to aid in good governance. The committees are the Executive Committee, the
Compensation Committee, the Nomination Committee and the Audit and Risk Committee.
Executive Committee (ExCom). The ExCom, during the periods between board meetings,
exercises the Board’s powers and attributes except with respect to any action for which
shareholders’ approval is required, distribution of cash dividends, filling of vacancies in the Board
or in the ExCom, amendment or repeal of By-Laws or the adoption of new By-Laws, amendment
or repeal of any resolution of the Board which by its express terms is not so amendable or
repealable, and the exercise of powers delegated by the
Compensation Committee. The Compensation Committee establishes a formal and transparent
procedure for developing a policy on executive remuneration and for fixing the remuneration of
officers and directors. It provides oversight over remuneration of senior management and other
key personnel.
At three meetings in 2008, the Commitee approved:
1) the performance bonus for year 2007;
2) the salary adjustments for managers and officers for 2008;
3) the 2008 Executive Stock Ownership Plan (ESOWN) allocation; and
4) the changes to the Employee Welfare and Retirement Plan of Ayala Corporation.
Nomination Committee. The Nomination Committee’s main function is to maintain a process to
ensure that all nominees to the Board have all the qualifications and none of the disqualifications
for directors stated in the By-Laws, the Manual of Corporate Governance of the Company and the
pertinent rules of the SEC. Also, the Committee reviews the qualifications of all persons nominated
to positions requiring appointment by the Board.
At two meetings in 2008, the Nomination Committee approved:
1) the final list of nominees for directors for the year 2008-2009; and
96
2) the appointment of Mr. John Eric T. Francia as Managing Director, effective 02 January 2009.
Audit and Risk Committee. The Audit and Risk Committee oversees Ayala Corporation’s internal
control, financial reporting and risk management processes on behalf of the Board of Directors.
The Committee held five meetings in 2008. During these meetings, the Committee reviewed and
approved the 2007 Consolidated Audited Financial Statements of the Company as audited by the
external auditors Sycip Gorres Velayo & Co. (SGV & Co.), as well as the unaudited financial
statements of the Company for the 1st to the 3rd quarters of 2008. The Committee likewise
approved the revised Audit and Risk Committee Charter, revised Enterprise Risk Management
Policy and 2008 Internal Audit Plan. In addition, the Committee recommended the appointment of
SGV & Co. as the Company’s external auditors for 2008 and the proposed remuneration.
The activities of the Audit and Risk Committee are further discussed in the section on
Accountability and Audit.
Director and Senior Executive Compensation
Non-executive directors are members of the Board of Directors who are not officers or consultants
of the Company, and who receive remuneration consisting of a retainer fee of P500,000.00 and
per diem of P100,000.00 for each board meeting attended and P20,000.00 per board committee
meeting attended. The remuneration of nonexecutive directors was ratified during the 2003 annual
stockholders’ meeting.
None of the directors has been contracted and compensated by the Company for services other
than services provided as a director.
The Company adopts a performance-based compensation scheme for its senior executives as
incentive. As additional incentive to top management, the Board approved stock option plans for
key officers covering 3% of the Company’s authorized capital stock. The grantee is selected
based on certain criteria like outstanding performance over a three year period.
The total compensation paid to non-executive directors and officers is disclosed annually in the
Definitive Information Statement sent to shareholders 15 business days prior to the annual
stockholders’ meeting. The total annual compensation includes the basic salary and other variable
pay (i.e. guaranteed bonus, performance-based incentive and exercise of Stock Option Plan).
MANAGEMENT
Management is accountable to the Board of Directors for the operations of the Company. It puts
the Company’s targets in concrete terms and formulates the basic strategies for achieving the
targets. Governance is not just a matter for the Board. A culture of good governance must be
fostered throughout the organization. Management is equally responsible for ensuring that the
mechanisms and structure are in place.
Enterprise Risk Management
In line with its corporate governance infrastructure, the Company has adopted a group-wide
enterprise risk management framework in 2002. An Enterprise Risk Management Policy was
approved by the Audit Committee in 2003, and was subsequently revised and approved on
February 14, 2008. The policy was designed to enhance the risk management process and
institutionalize a focused and disciplined approach to managing the Company’s business risks.
The risk management framework encompasses the following:
1) identification and assessment of business risks,
2) development of risk management strategies,
3) assessment/design/implementation of risk management capabilities,
4) monitoring and evaluating the effectiveness of risk mitigation strategies and management
performance, and
5) identification of areas and opportunities for improvement in the risk management process.
A Chief Risk Officer (CRO) is the champion of enterprise risk management at Ayala and
oversees the entire risk management function. On the other hand, the Risk Management Unit
provides support to the CRO and is responsible for overall continuity. Beginning 2008, under an
97
expanded charter, the Audit and Risk Committee will provide a more focused oversight of the risk
management function. A quarterly report on the risk portfolio of the Ayala group of companies and
the related risk mitigation efforts and initiatives are provided to the Committee. The Company’s
internal auditors monitor the compliance with risk management policies to ensure that an effective
control environment exists within the entire Ayala Group.
For 2008, the Company engaged the services of an outside consultant to assist the Company in
the rollout of a more focused enterprise risk management framework. The rollout included a formal
risk awareness session and self-assessment workshops with all the functional units of the
Company. The Audit and Risk Committee has initiated the institutionalization of an enterprise risk
management function across all the subsidiaries and affiliates.
ACCOUNTABILITY AND AUDIT
The Audit and Risk Committee exercises oversight of the performance of external and internal
auditors. The role and responsibilities of the Committee are defined in the expanded Audit and
Risk Committee Charter. The internal audit function is governed by a separate Internal Audit
Charter.
Audit Charter.
Independent Public Accountants
The external auditors of the Company is the accounting firm of Sycip, Gorres, Velayo & Company
(SGV & Co.). Ms. Lucy L. Chan is the Partner in-charge beginning 2007. The Audit and Risk
Committee independently reviews the integrity of the Company’s financial reporting and ensures
the independence of the external auditors. The Audit and Risk Committee checks all financial
reports for compliance with the internal financial management handbook and pertinent accounting
standards, including regulatory requirements. It also recommends to the Board and stockholders
the appointment of the external auditors and the setting of appropriate audit fees.
Internal Audit
The Internal Audit Unit conducts independent reviews of the Company’s organizational and
operational controls and risk management policies and compliance with those controls and
policies to ensure that they are effective, appropriate, and complied with. The Audit Team, which is
composed of Certified Public Accountants and a Certified Internal Auditor reports to the Audit and
Risk Committee of the Board of Directors. Regular audits of business and support units are
conducted according to an annual audit program approved by the Audit and Risk Committee.
Special audits are also undertaken when and as necessary.
In 2008, the Audit and Risk Committee received, reviewed, noted and/or approved updates and/or
presentations from Internal Audit and from Management on audit activities in accordance with the
approved internal audit plan. The Internal Audit function was rated “Generally Conforms” after a
thorough external quality assessment review (QAR) conducted by the Institute of Internal Auditors,
Inc. (USA) in May 2007. The rating, considered the highest possible score in connection with the
QAR, confirms that internal audit’s activities are conducted in conformance with the International
Standards for the Professional Practice of Internal Auditing. We continue to improve the Internal
Audit function by utilizing a risk-based audit approach and by benchmarking against best practices
in Internal Auditing.
Compliance Officer
The Compliance Officer ensures adherence to soundcorporate governance principles and best
practices. Until his retirement on December 31, 2008, Renato O. Marzan, who held the position of
Managing Director, was the Compliance Officer. Effective January 1, 2009, Solomon M.
Hermosura, a Managing Director, was appointed Compliance Officer. The Compliance Officer
identifies, monitors, and controls compliance risks; operationalizes and monitors compliance with
the Manual of Corporate Governance; and issues yearly a certification on the extent of Ayala
Corporation’s compliance with the Manual.
In 2008, the Compliance Officer initiated a performance assessment for each member of the
Board to assess the level of the Board’s compliance with leading practices and principles of good
corporate governance. This is a formal self-rating system that takes into account factors such as
98
independence, experience, judgment, knowledge, time commitment and team work, and identifies
clear areas for improvement.
DISCLOSURE AND TRANSPARENCY
Ayala Corporation is committed to high standards of disclosure and transparency to enable the
investment community to understand the true financial condition of the Company and the quality of
its corporate governance.
Ownership Structure
The Company has a transparent ownership structure. It annually discloses the top 20 holders of
the common equity securities of the Company. In addition, disclosure of thesecurity ownership of
record and beneficial owners of more than 5% as well as of directors and management is made
annually. This information is contained in the Definitive Information Statement sent to
shareholders. It also provides the PSE a monthly foreign ownership report.
As of December 31, 2008, Mermac, Inc. held 253.1 million common shares representing 50.92%
of the Company’s total outstanding common shares. PCD Nominee Corporation held 158.7 million
common shares or 31.94% and Mitsubishi Corporation held 52.6 million common shares or
10.58%. Out of the total 497 million outstanding common shares, 180.92 million common shares
or 36.40% are beneficially owned by non-Filipinos. There are a total of 12 million outstanding listed
Preferred A shares, all of which are owned by various owners registered under the PCD Nominee
Corporation, while 0.21% of the outstanding Preferred A shares are beneficially owned by
foreigners. Out of the 58 million outstanding listed Preferred B shares, 23.5 million shares or
40.45% are owned by various owners registered under the PCD Nominee Corporation and about
1.8 million shares or 3.0% are owned by foreigners. Of the 567 million total issued and
outstanding common and preferred shares of the Company, a total of 182.7 million common and
preferred shares or 32.22% are owned by foreigners.
There are no cross or pyramid shareholding.
Content and Timing of Disclosures
Ayala Corporation updates the investing public with strategic, operating and financial information
through adequate and timely disclosures filed with the SEC and PSE. In addition to compliance
with periodic reportorial requirements, the Company punctually discloses major and marketsensitive information such as dividend declarations, joint ventures and acquisitions, sale and
disposition of significant assets, as well as other material information that may affect the decision
of the investing public.
In 2008, unstructured disclosures were filed involving matters such as the amendment of the
Amended Articles of Incorporation on the reclassification of the Preferred Shares, result of
Integrated Micro-electronics, Inc.’s currency hedging contracts, joint venture with the Mahindra
Group of India, memorandum of agreement with BPI and Globe Telecom to form the country’s first
mobile microfinance bank, share buyback program, public offering of Preferred A shares, and new
investments made in the BPO sector.
Consolidated audited financial statements for the latest financial year are submitted to the SEC by
April 15, as required. The audited annual report is submitted at least 15 working days before the
annual stockholders’ meeting. In 2008, the audited Annual Report as contained in the Definitive
Information Statement was submitted to the SEC on February 28, 2008 and the PSE on February
28, 2008, more than three weeks before the April 04, 2008 annual stockholders’ meeting. Interim
(i.e., quarterly financial statements) are released between 30 to 45 days from the end of the
financial period. The results are disclosed to the SEC and PSE within 24 hours from the time the
Board meets to accept the results.The results are also sent to financial and stock market analysts
via a live analysts’ briefing where members of senior management present the results personally.
These are also made available via the Internet immediately upon confirmation by the SEC of its
receipt of disclosure, and made available on the Company’s Web site.
Financial Reporting
The consolidated financial statements of Ayala Corporation have been prepared in compliance
with Philippine Financial Reporting Standards. The annual consolidated financial statements
99
provide a breakdown of total assets, total liabilities and equity, revenues, costs and expenses,
income before income tax, net income attributable to equity holders of Ayala Corporation and
minority interests and earnings per share. A more extensive, transparent disclosure of segment
results such as assets, liabilities and revenues is provided to enable shareholders to appreciate
various businesses and their impact on overall value enhancement.
The following are disclosed in the note on Business Segments:
a. total revenue
b. operating profit
c. net income
d. segment assets
e. investments in associates and jointly controlled entities
f. segment liabilities
g. depreciation and amortization
A section on Geographical Segments is likewise included which breaks down the following:
a. Revenue
b. Segment Assets
c. Investment Properties
Transactions entered into with associates and other related parties are on an arm’s length basis.
Sales and purchases of goods and services to and from related parties are made at normal
market prices. Related party transactions are discussed and quantified in the Notes to the
Consolidated Financial Statements.
Information on the Company’s financial instruments is accompanied by a presentation of the
Company’s risk management objectives and policies to allow for a better assessment of financial
performance and cash flows. Significant accounting judgments and estimates are also disclosed.
DEALINGS IN SECURITIES
Ayala Corporation has adopted a uniform policy on securities transactions to reinforce and
formalize existing government regulations against insider trading.
Reporting of Transactions
Ayala Corporation is compliant with the requirement for directors and principal officers to report to
the SEC and the PSE, within five trading days from the disclosed action, any acquisition, disposal
or change in their shareholdings in the Company. The Company has expanded coverage of this
reporting requirement to include members of the Management Committee and all the Managing
Directors. All other officers are required to submit a quarterly report on their trades of Company’s
shares to the Compliance Officer.
Trading Blackouts
The Company has adopted a policy on insider trading. Under this policy, directors, officers and
employees who are considered to have knowledge of material facts or changes in the affairs of
Ayala Corporation which have not been disclosed to the public, including any information likely to
affect the market price of Ayala Corporation’s securities, are prohibited from buying or selling the
Company’s securities during trading blackout periods. The policy covers the Company’s shares of
stock, options to purchase stocks, bonds, and other evidence of indebtedness. Covered persons
include all members of the Board, all key officers, consultants and advisers and all other
employees who are made aware of undisclosed material information, including members of the
immediate families of key officers and covered persons.
During the year, notices of trading blackouts for structured disclosures were issued for a period
covering ten (10) trading days before and three (3) trading days after the disclosure of quarterly
and annual financial results. Compliance with these trading blackout periods is strictly enforced.
There have been no cases of violation of the Company’s Policy on Insider Trading.
STAKEHOLDER RELATIONS
Ayala Corporation adheres to a high level of moral conduct and fair dealings with all its
shareholders, customers, employees and business partners. The company believes this is the
basis and foundation for building long-term, mutually-beneficial relationships.
100
Shareholder Meeting & Voting Procedures
Stockholders are informed at least fifteen (15) business days in advance of the scheduled date of
their meetings. Notice of regular or special meetings contains a statement of the matters to be
transacted at the meeting. The notice to stockholders also set the date, time and place of the
validation of proxies which is prescribed to be no less than five business days prior to the annual
stockholders’ meeting. Each outstanding common share of stock entitles the registered holder to
one vote.
Shareholder and Investor Relations
The Company believes that open and transparent communications are requisite for sustained
growth and building investor confidence. Our investor communications program promotes greater
understanding of the Company’s long-term value creation proposition. The Company, through its
Investor Relations Unit reporting directly to the Head of Strategic Planning, addresses the various
information requirements of the investing public and communicates with minority shareholders
through timely and full disclosures to the PSE, regular quarterly briefings, annual shareholders’
meetings, one-on-one meetings, conference calls, road shows and investor conferences, Web site
and emails or telephone calls.
The Company holds regular briefings and meetings with buy-side and sell-side analysts as well as
financial analysts from the banking community. In 2008, four of such briefings were held,
coinciding with the announcement of the 2007 year-end results, 2008 1st quarter, 1st Semester
and 3rd quarter results. Access to senior management is also provided to analysts. During the
year, the company also participated in three Investor Conferences where senior management was
present to meet institutional investors.
The Company has updated the Investor Relations section of its Web site to include the
organization structure, performance, ownership and governance of the Company. The section is
updated promptly when and as disclosures to the regulatory agencies are made. Proceedings of
analysts’ briefings by way of presentations are immediately made available on the web.
Employee Relations
Ayala Corporation is committed to promoting the safety and welfare of its employees. It believes in
inspiring its employees, developing their talents, and recognizing their needs as business
partners. Strong and open lines of communication are maintained to relay the Company’s concern
for their welfare and safety, and deepen their understanding of the Company’s value-creating
proposition.
CODE OF ETHICAL BEHAVIOR
Ayala Corporation strongly believes in, and adopts as part of its basic operating principles, the
primacy of the person, shared values and the empowerment of people. The Company and its
employees commit to live out the following values: Integrity, Long-term Vision, Empowering
Leadership, and Commitment to National Development. These values are captured in the new
Code of Ethical Behavior launched in April 2006. The Code outlines the general expectations of
and sets standards for employee behavior and ethical conduct. It is intended to be read in
conjunction with the Company’s Human Resources Manual of Personnel Policies which includes
the Code of Conduct governing acceptable conduct for the orderly operation of the Company as
well as for the protection of the rights, safety, and benefit of the total employee force. Company
employees are required to annually disclose any business- and family-related transactions to
ensure that potential conflicts of interest are brought to the attention of Management.
Recognitions
Ayala Corporation and other companies in the Ayala group were recognized by various
international institutions for its corporate governance performance in 2008. In Asiamoney’s 2008
corporate governance poll, Ayala Corporation ranked 1st in the category for Best for
Responsibilities for Management and The Board of Directors in the Philippines. The Company was
also awarded the People Program of the Year award by the Personnel Management Association
of the Philippines. Ayala Corporation, Globe Telecom and Manila Water figured prominently in the
Corporate Governance Asia Recognition Awards given in June 2008. Ayala Corporation was cited
No. 3 among seven companies. Lastly, in the 2008 Corporate Governance Scorecard of Publicly
101
Listed Philippine Companies, Ayala Corporation, Ayala Land, Bank of the Philippine Islands and
Globe Telecom were recognized in the Top 5 companies which have excelled in corporate
governance. Manila Water landed in the Top 20. The award, which was conferred by the Institute
of Corporate Directors in cooperation with the PSE and the SEC, covers the criteria and attributes
that include the right of shareholders, equitable treatment of shareholders, role of stakeholders in
corporate governance, disclosure and transparency, and board responsibility.
OTHERS
Anti-Money Laundering. Ayala Corporation, not being an operating company, does not face issues
of anti-money laundering. However, the Company strictly observes and is committed to complying
with the provisions of the Anti-Money Laundering law.
WEB SITE
Additional information on the Company’s corporate governance initiatives may be viewed at
www.ayala.com.ph.
102
PART V - EXHIBITS AND SCHEDULES
Item 14. Exhibits and Reports on SEC Form 17-C
(a)
Exhibits - See accompanying Index to Exhibits
(b)
Reports on SEC Form 17-C
Reports on SEC Form 17-C were filed during the last six month period covered by this report and
are listed below:
Date
7-11-2008
8-11-2008
8-12-2008
8-21-2008
9-12-2008
9-18-2008
9-22-2007
10-30-2008
11-10-2008
11-12-2008
12-11-2008
Particulars
The Securities and Exchange Commission (SEC) approved the Company’s
application for an amendment of the Amended Articles of Incorporation to
reclassify the redeemed 1.2 Billion Preferred “A” and “AA” shares with a par
value of P1.00 per share into 12 Million new Preferred “A” shares with a par
value of P100.00 per share.
Ayala Corporation’s net income in the first half of 2008 reached P3.7 billion
Ayala Corporation has budgeted $200 million for investment in the BPO sector
and has spent $120 million to date.
Ayala Corporation and Ayala Land, Inc. listed their respective peso Bond
issues with the Phil. Dealing and Exchange Corp. (PDex)
The Board of Directors of Ayala Corporation ratified the resolution of the
Executive Committee authorizing the issuance and offering of Preferred “A”
shares of the Corporation in the amount of P6 billion.
The Board of Directors of Ayala Corporation approved the declaration and
payment from the unappropriated retained earnings of the Corporation as of
31 December 2007, of the quarterly cash dividends of 9.4578% per annum, to
all shareholders of the Corporation’s outstanding Preferred class “B” with
record date of 07 October 2008 and payable 21 October 2008.
Ayala Corporation through its 100% indirect subsidiary, Newbridge
International Investments Ltd. and Providence Equity Partners commenced a
tender offer in the Philippines and the United States to acquire up to all of the
outstanding shares of eTelecare common shares, and up to all of the
outstanding eTelecare American Depositary shares, for US$9.00 per share in
cash. Newbridge and Providence equity Partners have each committed to
contribute up to US$ 150 million in cash to the BidCo.
Ayala Corporation, the Bank of the Philippine Islands, and Globe Telecom
signed a memorandum to form the country’s first mobile microfinance bank.
Ayala Corporation announced to the public its primary offer of 8 Million Class
“A” preferred shares with a 4 Million oversubscription option.
Ayala Corporation’s consolidated net income in the first nine months of 2008
reached 7.8 billion.
Set the holding of the Regular Annual Stockholders’ Meeting on 03 April 2009.
103
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
2008 Audited Consolidated Financial Statements – Ayala Corporation and Subsidiaries
Statement of Management’s Responsibility for Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Income for the Years Ended December 31, 2008 and 2007
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended
December 31, 2008 and 2007
Consolidated Statements of Cash Flow for the Years Ended December 31, 2008 and 2007
Notes to Consolidated Financial Statements
Form and Content Schedules
Report of Independent Public Accountants on Supplementary Schedules
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Marketable Securities (Current Marketable Equity Securities and Other
Short-term Cash Investments)
Amounts Receivable from Directors, Officers, Employees, Related
Parties and Principal Stockholders (Other than Affiliates)
Non-current Marketable Equity Securities, Other Long-term
Investments in Stocks and Other Investments
Indebtedness of Unconsolidated Subsidiaries and Related Parties
Intangible Assets
Long-term Debt
Indebtedness to Affiliates and Related Parties (Long-term Loans
From Related Companies)
Guarantees of Securities of Other Issuers
Capital Stock
Retained Earnings Available for Dividend Distribution
2008 Audited Financial Statements
Bank of the Philippine Islands
Globe Telecom, Inc. and Subsidiaries
Manila Water Company, Inc.
104
COVER SHEET
3 4 2 1 8
SEC Registration Number
A Y A L A
C O R P O R A T I O N
A N D
S U B S I D I A R I E
S
(Company’s Full Name)
T o w e r
O n e ,
A v e n u e ,
A y a l a
M a k a t i
T r i a n g l e ,
A y a l a
C i t y
(Business Address: No. Street City/Town/Province)
Rufino Luis T. Manotok
848-5441
(Contact Person)
(Company Telephone Number)
1 2
3 1
Month
Day
A A F S
Month
(Form Type)
(Fiscal Year)
Day
(Annual Meeting)
(Secondary License Type, If Applicable)
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
Foreign
To be accomplished by SEC Personnel concerned
File Number
LCU
Document ID
Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
*SGVMC112179*
SyCip Gorres Velayo & C o.
6760 Ayala Av enue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Ayala Corporation
Tower One, Ayala Triangle
Ayala Avenue, Makati City
We have audited the accompanying consolidated financial statements of Ayala Corporation and
Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2008 and 2007, and
the consolidated statements of income, consolidated statements of changes in equity and consolidated
statements of cash flows for each of the three years in the period ended December 31, 2008, and a
summary of significant accounting policies and other explanatory notes. The financial statements of
the Bank of the Philippine Islands and Subsidiaries, in which the Company has a 33.5% interest in
2008 and 2007, were audited by other auditors whose report has been furnished to us, and our opinion
on the consolidated financial statements, insofar as it relates to the amounts included for the Bank of
the Philippine Islands and Subsidiaries, is based solely on the report of the other auditors. In the
consolidated financial statements, the Company’s investment in the Bank of the Philippine Islands and
Subsidiaries is stated at P
=28,533 million and P
=30,852 million as of December 31, 2008 and 2007,
respectively, and the Company’s equity in the net income of the Bank of the Philippine Islands and
Subsidiaries is stated at P
=2,145 million in 2008, P
=3,291 million in 2007 and P
=3,300 million in 2006.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Philippine Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error; selecting and applying appropriate accounting policies; and making accounting
estimates that are reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.
*SGVMC112179*
A member firm of Ernst & Young Global Limited
-2An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained and the report of other auditors are sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, based on our audits and the report of the other auditors, the consolidated financial
statements present fairly, in all material respects, the financial position of Ayala Corporation and
Subsidiaries as of December 31, 2008 and 2007, and its financial performance and its cash flows for
each of the three years in the period ended December 31, 2008 in accordance with Philippine
Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Lucy L. Chan
Partner
CPA Certificate No. 88118
SEC Accreditation No. 0114-AR-1
Tax Identification No. 152-884-511
PTR No. 1566465, January 5, 2009, Makati City
February 23, 2009
*SGVMC112179*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
December 31
2007
(As Restated Note 2
2008
ASSETS
Current Assets
Cash and cash equivalents (Notes 4 and 28)
Short-term investments (Notes 5 and 28)
Accounts and notes receivable - net (Notes 6, 27 and 28)
Inventories (Note 7)
Other current assets (Notes 8 and 28)
Total Current Assets
Noncurrent Assets
Noncurrent accounts and notes receivable (Notes 6 and 28)
Land and improvements
Investments in associates and jointly controlled entities - net
(Note 9)
Investments in bonds and other securities (Notes 10 and 28)
Investment properties - net (Note 11)
Property, plant and equipment - net (Note 12)
Deferred tax assets - net (Note 21)
Pension assets (Note 23)
Intangible assets - net (Note 13)
Other noncurrent assets (Note 16)
Total Noncurrent Assets
Total Assets
P
=42,885,792
1,008,924
23,284,010
10,011,355
7,090,394
84,280,475
=36,835,549
P
3,687,606
16,822,874
8,842,535
3,570,672
69,759,236
6,694,021
15,756,894
4,010,373
16,200,601
68,140,394
3,064,502
21,058,577
13,886,560
1,132,847
117,388
4,014,136
1,906,172
135,771,491
P
=220,051,966
71,271,632
2,492,913
17,416,173
8,492,845
983,565
140,576
3,275,697
2,087,249
126,371,624
=196,130,860
P
P
=27,483,536
2,755,447
214,697
1,478,871
1,553,530
33,486,081
=22,261,167
P
2,634,148
286,050
9,512,760
1,550,482
36,244,607
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses (Notes 15, 27 and 28)
Short-term debt (Notes 16 and 28)
Income tax payable
Current portion of long-term debt (Notes 16 and 28)
Other current liabilities
Total Current Liabilities
(Forward)
*SGVMC112179*
-2December 31
2007
(As Restated Note 2
2008
Noncurrent Liabilities
Long-term debt - net of current portion (Notes 16 and 28)
Deferred tax liabilities - net (Note 21)
Pension liabilities (Note 23)
Other noncurrent liabilities (Note 17)
Total Noncurrent Liabilities
Total Liabilities
Equity
Equity attributable to equity holders of Ayala Corporation
Paid-up capital (Note 18)
Share-based payments (Note 24)
Cumulative translation adjustments
Retained earnings (Note 18)
Net unrealized gain (loss) on available-for-sale financial
assets (Note 10)
Parent Company preferred shares held by a
subsidiary (Note 18)
Treasury stock (Note 18)
Minority interests
Total Equity
Total Liabilities and Equity
P
=50,250,151
185,536
490,744
7,588,080
58,514,511
92,000,592
37,251,714
705,457
(968,778)
61,604,466
(631,127)
(100,000)
(550,540)
97,311,192
30,740,182
128,051,374
P
=220,051,966
=37,884,705
P
155,756
531,552
6,817,643
45,389,656
81,634,263
26,855,394
603,949
(2,297,077)
60,172,621
1,712,016
–
(159,693)
86,887,210
27,609,387
114,496,597
=196,130,860
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112179*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Earnings Per Share Figures)
Years Ended December 31
2007
2006
(As Restated (As Restated Note 2)
Note 2)
2008
REVENUE
Sales and services (Notes 11 and 27)
Equity in net income of associates and jointly controlled
entities
Interest income
Other income (Note 19)
COSTS AND EXPENSES
Costs of sales and services (Notes 7, 11, 19 and 27)
General and administrative (Notes 19, 23 and 27)
Interest expense and other financing charges
(Notes 16 and 19)
Other charges (Note 19)
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 21)
Current
Deferred
INCOME BEFORE INCOME ASSOCIATED WITH
NONCURRENT ASSETS HELD FOR SALE
INCOME ASSOCIATED WITH NONCURRENT
ASSETS HELD FOR SALE - net of tax (Note 14)
NET INCOME
Net Income Attributable to:
Equity holders of Ayala Corporation
Minority interests
EARNINGS PER SHARE (Note 22)
Basic
Income before income associated with noncurrent
assets held for sale attributable to equity holders
of Ayala Corporation
Net income attributable to equity holders of
Ayala Corporation
Diluted
Income before income associated with noncurrent
assets held for sale attributable to equity holders
of Ayala Corporation
Net income attributable to equity holders of
Ayala Corporation
P
=64,052,828
=56,578,214
P
=53,394,230
P
7,396,180
2,242,895
5,416,750
79,108,653
9,767,222
1,693,045
10,728,375
78,766,856
8,249,240
1,520,858
6,998,009
70,162,337
50,014,366
9,485,514
43,169,110
9,498,306
40,857,337
7,708,161
4,937,108
1,595,422
66,032,410
13,076,243
4,120,160
1,569,944
58,357,520
20,409,336
5,024,052
386,919
53,976,469
16,185,868
2,442,789
(25,234)
2,417,555
1,979,820
(7,825)
1,971,995
1,764,984
112,175
1,877,159
10,658,688
18,437,341
14,308,709
–
P
=10,658,688
624,788
=19,062,129
P
155,258
=14,463,967
P
P
=8,108,597
2,550,091
P
=10,658,688
=16,256,601
P
2,805,528
=19,062,129
P
=12,173,113
P
2,290,854
=14,463,967
P
P
=15.22
=30.64
P
=23.91
P
15.22
31.62
24.01
P
=15.17
=30.50
P
=23.80
P
15.17
31.47
23.89
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112179*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands)
Paid-up Capital
(Note 18)
At January 1, 2008, as previously
reported
Effect of adoption of Philippine
Interpretation IFRIC 12 (Note 2)
At January 1, 2008, as restated
Adjustments to foreign currency
translation
Net changes on available-for-sale
financial assets
Income (loss) recognized directly in
equity
Net income for the year
Total income for the year
Issuance/subscription of shares
Additions to subscriptions receivable
Cost of share-based payments
of Ayala Corporation
Cost of share-based payments
of investees
Parent Company preferred shares held
by a subsidiary
Acquisition of treasury stock
Cash dividends
Stock dividends
Increase in minority interests
Dividends paid to minority interests
At December 31, 2008
Share-based
Payments
(Note 24)
Net Unrealized
Gain (Loss) on Parent Company
Available-for- Preferred Shares
Retained Sale Financial
Cumulative
Held by a
Assets
Earnings
Translation
Subsidiary Treasury Stock
(Note 10)
(Note 18)
(Note 18)
(Note 18)
Adjustments
For the year ended December 31, 2008
=26,855,394
P
=603,949
P
(P
=2,297,077)
–
26,855,394
–
603,949
–
(2,297,077)
–
–
1,328,299
–
–
–
–
–
1,328,299
–
1,328,299
–
–
–
8,108,597
8,108,597
–
–
–
–
–
6,322,349
(64,745)
–
–
–
(20,801)
–
=60,461,247
P
(288,626)
60,172,621
Minority
Interests
Total
Equity
=
P114,785,223
=1,712,016
P
=–
P
(P
=159,693)
=27,609,387
P
–
1,712,016
–
–
–
(159,693)
–
27,609,387
–
–
–
91,757
1,420,056
(2,343,143)
–
–
92,936
(2,250,207)
(2,343,143)
–
(2,343,143)
–
–
–
–
–
–
–
–
–
–
–
–
184,693
2,550,091
2,734,784
–
–
(830,151)
10,658,688
9,828,537
6,301,548
(64,745)
(288,626)
114,496,597
–
4,018
–
–
–
–
–
–
4,018
–
118,291
–
–
–
–
–
27,446
145,737
–
–
–
4,138,716
–
–
P
=37,251,714
–
–
–
–
–
–
P
=705,457
–
–
–
–
–
–
(P
=968,778)
–
–
(2,538,036)
(4,138,716)
–
–
P
=61,604,466
–
–
–
–
–
–
(P
=631,127)
(100,000)
–
–
–
–
–
(P
=100,000)
–
(390,847)
–
–
–
–
(P
=550,540)
–
(100,000)
–
(390,847)
–
(2,538,036)
–
–
921,157
921,157
(552,592)
(552,592)
P
=30,740,182 P
=128,051,374
*SGVMC112179*
-2-
Paid-up Capital
(Note 18)
At January 1, 2007, as previously
reported
Effect of adoption of Pre-need Rule 31,
Pre-need Uniform Chart of
Accounts by an associate (Note 9)
Effect of adoption of Philippine
Interpretation IFRIC 12 (Note 2)
At January 1, 2007, as restated
Adjustments to foreign currency
translation
Net changes on available-for-sale
financial assets
Income (loss) recognized directly in
equity
Net income for the year
Total income for the year
Issuance/subscription of shares
Additions to subscriptions receivable
Cost of share-based payments
of Ayala Corporation
Cost of share-based payments
of investees
Acquisition of treasury stock
Cash dividends
Stock dividends
Increase in minority interests
Dividends paid to minority interests
At December 31, 2007
Share-based
Payments
(Note 24)
Retained
Cumulative
Earnings
Translation
(Note 18)
Adjustments
For the year ended December 31, 2007
=23,137,948
P
=558,416
P
–
–
–
23,137,948
–
558,416
–
(298,310)
–
–
(1,998,767)
–
–
–
–
–
364,129
(96,267)
–
–
–
–
–
–
10,718
–
–
–
3,449,584
–
–
=26,855,394
P
34,815
–
–
–
–
–
=603,949
P
(P
=298,310)
–
–
(1,998,767)
–
(1,998,767)
–
–
–
–
–
–
–
–
–
(P
=2,297,077)
=51,659,261
P
Net Unrealized
Gain (Loss) on
Available-forSale Financial
Assets
(Note 10)
=2,078,522
P
(85,010)
–
(347,669)
51,226,582
–
2,078,522
–
–
Treasury Stock
(Note 18)
(P
=310)
–
–
(310)
–
16,256,601
16,256,601
–
–
(366,506)
–
(366,506)
–
–
–
–
–
–
–
–
–
–
–
–
–
=1,712,016
P
=101,834,262
P
–
(85,010)
–
24,698,735
(347,669)
101,401,583
34,900
–
–
–
(3,860,978)
(3,449,584)
–
–
=60,172,621
P
=24,698,735
P
(358,643)
(366,506)
–
Total
Equity
–
–
–
Minority
Interests
–
–
(159,383)
–
–
–
–
(P
=159,693)
(323,743)
2,805,528
2,481,785
–
–
–
201
–
–
–
962,291
(533,625)
=27,609,387
P
(2,357,410)
(331,606)
(2,689,016)
19,062,129
16,373,113
364,129
(96,267)
10,718
35,016
(159,383)
(3,860,978)
–
962,291
(533,625)
=114,496,597
P
*SGVMC112179*
-3-
Paid-up Capital
(Note 18)
At January 1, 2006, as previously
reported
Effect of adoption of Philippine
Interpretation IFRIC 12 (Note 2)
January 1, 2006, as restated
Adjustments to foreign currency
translation
Net changes on available-for-sale
financial assets
Income (loss) recognized directly in
equity
Net income for the year
Total income for the year
Issuance/subscription of shares
Collections of subscriptions receivable
Cost of share-based payments
of investees
Cash dividends
Increase in minority interests
Dividends paid to minority interests
At December 31, 2006
Share-based
Payments
(Note 24)
Retained
Cumulative
Earnings
Translation
(Note 18)
Adjustments
For the year ended December 31, 2006
=16,959,696
P
=655,754
P
=587,350
P
–
16,959,696
–
655,754
–
587,350
–
–
–
–
(885,660)
–
=42,513,384
P
(344,011)
42,169,373
Net Unrealized
Gain on
Available-forSale Financial
Assets
(Note 10)
Treasury Stock
(Note 18)
Minority
Interests
Total
Equity
=82,783,386
P
=477,839
P
(P
=310)
=21,589,673
P
–
477,839
–
(310)
–
21,589,673
(344,011)
82,439,375
–
–
–
(146,104)
(1,031,764)
–
1,600,683
–
(24,199)
1,576,484
–
–
–
–
–
(170,303)
2,290,854
2,120,551
–
–
544,720
14,463,967
15,008,687
5,995,117
93,461
–
–
–
6,084,791
93,461
–
–
–
(89,674)
–
(885,660)
–
(885,660)
–
–
–
12,173,113
12,173,113
–
–
1,600,683
–
1,600,683
–
–
–
–
–
–
=23,137,948
P
(7,664)
–
–
–
=558,416
P
–
–
–
–
(P
=298,310)
–
(3,030,894)
–
–
=51,311,592
P
–
–
–
–
=2,078,522
P
–
–
–
–
(P
=310)
–
–
1,879,066
(890,555)
=24,698,735
P
(7,664)
(3,030,894)
1,879,066
(890,555)
=101,486,593
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112179*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Years Ended December 31
2007
2006
(As Restated (As Restated Note 2)
Note 2)
2008
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest and other financing charges - net of amount
capitalized (Note 19)
Depreciation and amortization (Note 19)
Cost of share-based payments (Note 24)
Provision for impairment loss (Note 19)
Equity in net income of associates and jointly
controlled entities
Gain on sale of investments (Note 19)
Interest income
Other investment income
Impairment loss on goodwill (Note 19)
Operating income before changes in working capital
Decrease (increase) in:
Accounts and notes receivable
Inventories
Other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Other current liabilities
Net pension liabilities
Cash generated from operations
Interest received
Interest paid
Income taxes paid
Net cash provided by (used in) operating activities
before cash items associated with noncurrent assets
held for sale
Net cash provided by operating activities associated
with noncurrent assets held for sale
Total cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of investments
Disposals of property and equipment
Maturities of (additions to) short-term investments
Additions to:
Investments
Property, plant and equipment (Note 12)
Dividends received from associates and jointly controlled
entities
P
=13,076,243
=20,409,336
P
=16,185,868
P
3,481,156
2,940,216
342,919
1,259,085
4,120,160
2,988,879
288,050
–
5,024,052
2,590,358
285,431
–
(7,396,180)
(3,554,679)
(2,242,895)
(264,495)
–
7,641,370
(9,767,222)
(8,844,822)
(1,693,045)
(73,500)
662,591
8,090,427
(8,249,240)
(5,796,711)
(1,520,858)
(285,227)
–
8,233,673
(8,896,301)
(1,248,050)
(1,197,782)
(2,254,055)
1,981,833
863,696
(3,171,691)
(251,543)
(1,777,903)
4,169,567
(38,164)
(17,620)
413,020
2,183,379
(3,655,908)
(2,514,143)
4,239,429
97,469
105,848
13,124,647
1,469,236
(3,837,504)
(1,989,616)
1,704,662
403,413
89,130
5,229,741
1,510,885
(5,386,829)
(1,742,356)
(3,573,652)
8,766,763
(388,559)
–
(3,573,652)
–
8,766,763
291,672
(96,887)
9,915,369
132,196
2,678,683
15,152,209
1,006,583
(759,678)
9,300,943
313,755
(2,399,978)
(9,257,780)
(5,965,432)
(6,258,142)
(4,368,019)
(5,950,008)
(3,450,654)
8,326,390
8,050,049
4,248,500
(Forward)
*SGVMC112179*
-2Years Ended December 31
2006
2007
(As Restated (As Restated Note 2)
Note 2)
2008
Acquisitions through business combinations by subsidiaries
- net of cash acquired (Note 20)
Decrease (increase) in other noncurrent assets
Cash balance of deconsolidated subsidiaries
Net cash provided by investing activities before cash items
associated with noncurrent assets held for sale
Net cash provided by (used in) investing activities
associated with noncurrent assets held for sale, including
cash balance
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Short-term and long-term debt
Issuance of preferred shares
Issuance of common shares
Collections of (additions to) subscriptions receivable
Payments of short-term and long-term debt
Dividends paid
Acquisition of treasury shares (Note 18)
Redemption of preferred shares
Increase in:
Other noncurrent liabilities
Minority interests in consolidated subsidiaries
Net cash provided by (used in) financing activities
before cash items associated with noncurrent
assets held for sale
Net cash used in financing activities associated with
noncurrent assets held for sale
Net cash provided by (used in) financing activities
(P
=891,935)
292,557
–
(P
=326,030)
(631,428)
–
(P
=1,641,092)
(10,076)
(81)
5,230,048
11,865,544
411,309
–
5,230,048
624,788
12,490,332
(361,691)
49,618
13,045,651
5,958,307
–
(64,745)
(12,025,905)
(2,925,409)
(390,848)
–
21,742,528
–
209,687
(96,267)
(21,392,701)
(4,255,580)
(159,383)
(2,500,000)
396,915
399,881
676,578
962,291
11,532,591
5,800,000
57,690
93,461
(16,798,083)
(3,781,584)
–
(2,230,000)
589,672
1,879,066
4,393,847
(4,812,847)
(2,857,187)
–
4,393,847
–
(4,812,847)
(187,120)
(3,044,307)
6,050,243
16,444,248
(3,091,576)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
36,835,549
20,391,301
23,482,877
CASH AND CASH EQUIVALENTS AT
END OF YEAR (Note 4)
P
=42,885,792
=36,835,549
P
=20,391,301
P
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112179*
AYALA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Ayala Corporation (the Company) is incorporated in the Republic of the Philippines. The
Company’s registered office address and principal place of business is Tower One, Ayala
Triangle, Ayala Avenue, Makati City. The Company is a publicly listed company which is
50.92% owned by Mermac, Inc., 10.58% owned by Mitsubishi Corporation and the rest by the
public.
The Company is the holding company of the Ayala Group of Companies, with principal business
interests in real estate and hotels, financial services and bancassurance, telecommunications,
electronics, information technology and business process outsourcing services, utilities,
automotives, international and others.
The consolidated financial statements of Ayala Corporation and Subsidiaries (the Group) as of
December 31, 2008 and 2007 and for each of the three years in the period ended December 31,
2008 were endorsed for approval by the Audit Committee on February 13, 2009 and authorized
for issue by the Executive Committee of the Board of Directors (BOD) on February 23, 2009.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements of the Group have been prepared on a
historical cost basis, except for financial assets at fair value through profit or loss (FVPL),
available-for-sale (AFS) financial assets and derivative financial instruments that have been
measured at fair value. The consolidated financial statements are presented in Philippine Peso (P
=)
and all values are rounded to the nearest thousand pesos (P
=000) unless otherwise indicated.
Statement of Compliance
The consolidated financial statements of the Group have been prepared in compliance with
Philippine Financial Reporting Standards (PFRS).
Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Group as of
December 31, 2008 and 2007 and for each of the three years in the period ended December 31,
2008. The financial statements of the subsidiaries are prepared for the same reporting year as the
Company.
The consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances. All significant intercompany transactions
and balances, including intercompany profits and unrealized profits and losses, are eliminated in
consolidation.
*SGVMC112179*
-2Subsidiaries are consolidated from the date of acquisition, being the date on which the Group
obtains control, and continue to be consolidated until the date that such control ceases.
The consolidated financial statements comprise the financial statements of the Company and the
following wholly and majority-owned domestic and foreign subsidiaries:
Effective Percentages
of Ownership
2007
2008
Real Estate and Hotels:
Ayala Land, Inc. (ALI) and subsidiaries
(ALI Group)
Ayala Hotels, Inc. (AHI) and subsidiaries
Electronics, Information Technology and Business
Process Outsourcing Services:
Azalea Technology Investments, Inc. and
subsidiaries (Azalea Technology)
Azalea International Venture Partners, Limited
(AIVPL) (British Virgin Islands Company)
and subsidiaries
LiveIt Solutions, Inc. (LSI) and subsidiaries
Technopark Land, Inc.
Integrated Microelectronics, Inc. (IMI) and
subsidiaries**
Automotive:
Ayala Automotive Holdings Corporation
(AAHC) and subsidiaries
International and Others:
Bestfull Holdings Limited (incorporated in
Hong Kong) and subsidiaries (BHL Group)
AC International Finance Limited (ACIFL)
(Cayman Island Company) and subsidiary
AYC Finance Ltd. (Cayman Island Company)
Michigan Holdings, Inc. (MHI) and subsidiary
Ayala Aviation Corporation
Darong Agricultural and Development
Corporation
PFC Properties, Inc. (PPI) and subsidiary
53.5*
76.8
53.2*
76.6
100.0
100.0
100.0
100.0
78.8
100.0
100.0
78.8
67.8
67.9
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
–
100.0
99.9
*The Company owns 75.46% of the total common and preferred shares of ALI.
** A subsidiary of ACIFL through AYC Holdings, Ltd.
On December 19, 2007, the Company entered into a Subscription Agreement with Deed of
Conversion of deposits for future subscriptions with AIVPL whereby the Company converted its
deposits into equity by way of subscription to common shares of stock of AIVPL at an agreed
Philippine Peso equivalent amounting to P
=407.8 million. This resulted in the Company having a
direct ownership of 68.71% in AIVPL with Azalea Technology’s ownership interest in AIVPL
reduced to 31.29 % as of December 31, 2007.
*SGVMC112179*
-3On various dates in 2008, the Company converted US$171.88 million of its deposits on future
subscriptions in AIVPL into equity, increasing the Company’s ownership from 68.71% to
97.78%. Consequently, Azalea Technology’s ownership in AIVPL was diluted from 31.29% to
2.22%.
On May 1, 2008, AIVPL converted its US$124 million deposits on future subscription in LiveIt
Investments Ltd. (LIL) giving it 99.99% ownership interest in LIL. LSI, which previously held
100% of LIL, now holds 0.01% stake in LIL. LIL carries the Group’s investments in Integreon
Managed Solutions Inc. (Integreon), Affinity Express Inc. and Newbridge International
Investments.
On March 1, 2008, the Company entered into a Deed of Assignment with AIVPL to transfer the
Company’s shares of Bayantrade in exchange for AIVPL’s shares of stocks.
In February 2008, PPI, which is 99.85% owned by the Company and 0.15% owned by other
shareholders, was merged into the Company. This was executed via a share swap. The PPI
shares held by the other shareholders, which were valued at P
=2.62 per share, were exchanged for
the appropriate number of newly issued Company shares valued at P
=560.00 per share.
On November 29, 2007, the Company entered into a Deed of Assignment with AIVPL where the
Company assigned its 250,000 shares in HRMall, Inc. (with original acquisition cost of
=25.0 million representing 100% of HRMall’s total outstanding stock) in exchange for
P
583,458 shares of AIVPL (with par value of US$1.00 per share).
On June 20, 2007, Ayala International Pte. Ltd. (AIPL) and its subsidiaries (AIPL Group) have
undergone restructuring wherein intermediate Hong Kong holding companies, including AG
Holdings, were formed such that BHL became the Company’s holding company for the BHL
Group which now includes the AIPL Group. BHL is a private limited company incorporated
under Hong Kong laws.
Minority interests represent the portion of profit or loss and net assets in subsidiaries not wholly
owned and are presented separately in the consolidated statement of income and changes in equity
and within the equity section in the consolidated balance sheet, separately from the Company’s
equity. Acquisitions of minority interest are accounted for using the parent entity extension
method, whereby, the difference between the consideration and the book value of the share of the
nets assets acquired is recognized as goodwill.
Changes in Accounting Policies and Disclosures
The accounting policies adopted are consistent with those of the previous financial year except for
the adoption of the following Philippine Interpretations which became effective on January 1,
2008, and amendments to existing standards that became effective on July 1, 2008.
·
·
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions
Philippine Interpretation IFRIC 12, Service Concession Arrangements
*SGVMC112179*
-4·
·
Philippine Interpretation IFRIC 14, PAS 19 - The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction
Amendments to Philippines Accounting Standards (PAS) 39, Financial Instruments:
Recognition and Measurement and PFRS 7, Financial Instruments: Disclosures
The principal effects of these changes are as follows:
Philippine Interpretation IFRIC 11, PFRS 2, Group and Treasury Share Transactions
This Interpretation requires arrangements whereby an employee is granted rights to an entity’s
equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the
entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another
party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also
provides guidance on how subsidiaries, in their separate financial statements, account for such
schemes when their employees receive rights to the equity instruments of the parent. Adoption of
this Interpretation did not have an impact on the consolidated financial statements.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This Interpretation covers contractual arrangements arising from public-to-private service
concession arrangements if control of the assets remains in public hands but the private sector
operator is responsible for construction activities as well as for operating and maintaining the
public sector infrastructure. This Interpretation prescribes the accounting for the rights which the
Operator receives from the Grantor using either:
Financial asset model wherein the Operator shall recognize a financial asset to the extent that
it has an unconditional contractual right to receive cash from the Grantor. The Operator has
an unconditional right to receive cash if the Grantor contractually guarantees to pay the
Operator;
Intangible asset model wherein the Operator shall recognize an intangible asset to the extent
that it receives a right to charge the users (not an unconditional right to receive cash because
the amounts are contingent on the extent that the public uses the service);
Mixed model if the Operator is paid by the users, but the Grantor guarantees a certain
minimum amount to be paid to the Operator, in which case the Financial Asset Model is used
to the extent of such amount.
Based on Manila Water Company Inc.’s (MWCI) assessment, its service concession agreement
with Metropolitan Water Works and Sewerage System would qualify under the Intangible asset
model. The effect of the adoption of this Interpretation required MWCI to recognize the fair
value of its right to charge its customers, which resulted in the following consequential effects:
a.
Increase in total assets with a corresponding increase in total liabilities. The
rehabilitation works performed by MWCI (previously recognized as property, plant and
equipment) and the present value of the total estimated concession fee payments were
recognized as intangible assets in accordance with PAS 38, Intangible Assets. The
*SGVMC112179*
-5intangible asset is amortized using the straight-line method over the life of the concession
agreement. Previously, the asset recognized under the concession agreement was
amortized based on the ratio of the nominal value of total estimated concession fee
payments to the remaining projected billable water volume over the remaining concession
period.
b.
As the related service concession obligation is now recognized, this resulted in additional
finance cost to MWCI due to the accretion of the obligation. The increase in intangible
assets, together with the change in amortization method described above, also resulted in
an increase in amortization expense.
c.
In connection with the rehabilitation works performed, MWCI also recognized revenue
and costs in accordance with PAS 11, Construction Contracts. It measures the revenue
from rehabilitation works at the fair value of the consideration received or receivable.
Given that MWCI has subcontracted the rehabilitation works to outside contractors, the
recognized revenue from rehabilitation works is equal to the related cost.
d.
As the service concession obligations are denominated in foreign currencies these were
restated to their peso equivalent using the exchange rate at balance sheet date. The
related foreign currency differential adjustment under the concession agreement provided
only for a reimbursement of an amount in excess of the base rate agreed during the rate
rebasing exercise with MWSS. As the two amounts are not equal, the difference
(between the foreign currency differentials arising from the restatement of the obligation
and the reimbursable amount) affected the profit and loss. The related revenue to recover
the unreimbursed portion will be recognized only upon delivery of service to customers.
The adoption of the Interpretation resulted in a decrease in MWCI’s retained earnings by
=962.2 million and P
P
=1,159.0 million as of January 1, 2008 and 2007, respectively. The impact on
the Company is a decrease in the retained earnings and investments in associates and jointly
controlled entities balances as of January 1, 2008 and 2007 by P
=288.6 million and P
=347.7 million,
respectively.
Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction
This Interpretation provides guidance on how to assess the limit on the amount of surplus in a
defined benefit plan that can be recognized as an asset under PAS 19, Employee Benefits.
Adoption of this Interpretation did not have an impact on the consolidated financial statements.
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and PFRS 7,
Financial Instruments: Disclosures
The Amendments to PAS 39 introduce the possibility of reclassification of securities out of the
trading category in rare circumstances and reclassification to the loans and receivable category if
there is intent and ability to hold the securities for the foreseeable future or to held-to-maturity if
there is intent and ability to hold the securities until maturity. The amendments to PFRS 7
introduce the disclosures relating to these reclassifications. Adoption of these amendments did
not have any impact on the consolidated financial statements since the Group did not avail of the
reclassification allowed under these amendments.
*SGVMC112179*
-6Future Changes in Accounting Policies
The Group will adopt the following standards and interpretations enumerated below when these
become effective. Except as otherwise indicated, the Group does not expect the adoption of these
new and amended PFRS and Philippine Interpretations to have significant impact on its financial
statements.
Effective in 2009
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Cost of an Investment
in a Subsidiary, Jointly Controlled Entity or Associate
The amended PFRS 1 allows an entity, in its separate financial statements, to determine the cost
of investments in subsidiaries, jointly controlled entities or associates (in its opening PFRS
financial statements) as one of the following amounts: a) cost determined in accordance with
PAS 27; b) at the fair value of the investment at the date of transition to PFRS, determined in
accordance with PAS 39; or c) previous carrying amount (as determined under generally accepted
accounting principles) of the investment at the date of transition to PFRS.
Amendments to PFRS 2, Share-based Payment - Vesting Condition and Cancellations
This Standard has been revised to clarify the definition of a vesting condition and prescribes the
treatment for an award that is effectively cancelled. It defines a vesting condition as a condition
that includes an explicit or implicit requirement to provide services. It further requires nonvesting
conditions to be treated in a similar fashion to market conditions. Failure to satisfy a nonvesting
condition that is within the control of either the entity or the counterparty is accounted for as a
cancellation. However, failure to satisfy a nonvesting condition that is beyond the control of
either party does not give rise to a cancellation.
PFRS 8, Operating Segments
PFRS 8 will replace PAS 14, Segment Reporting, and adopts a full management approach to
identifying, measuring and disclosing the results of an entity’s operating segments. The
information reported would be that which management uses internally for evaluating the
performance of operating segments and allocating resources to those segments. Such information
may be different from that reported in the consolidated balance sheet and consolidated statement
of income and the Group will provide explanations and reconciliations of the differences. This
standard is only applicable to an entity that has debt or equity instruments that are traded in a
public market or that files (or is in the process of filing) its financial statements with a securities
commission or similar party. The Group will apply PFRS 8 in 2009 and will assess the impact of
this Standard on its current manner of reporting segment information.
Amendments to PAS 1, Presentation of Financial Statements
This Amendment introduces a new statement of comprehensive income that combines all items of
income and expenses recognized in the profit or loss together with ‘other comprehensive income’.
Entities may choose to present all items in one statement, or to present two linked statements, a
separate statement of income and a statement of comprehensive income. This Amendment also
*SGVMC112179*
-7requires additional requirements in the presentation of the balance sheet and owner’s equity as
well as additional disclosures to be included in the financial statements. Adoption of this
Amendment will not have significant impact on the Group except for the presentation of a
statement of comprehensive income and additional disclosures to be included in the consolidated
financial statements.
Amendments to PAS 23, Borrowing Costs
The Standard has been revised to require capitalization of borrowing costs when such costs relate
to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.
Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
Amendments to PAS 27 will be effective on January 1, 2009 which has changes in respect of the
holding companies’ separate financial statements including (a) the deletion of ‘cost method’,
making the distinction between pre- and post-acquisition profits no longer required; and (b) in
cases of reorganizations where a new parent is inserted above an existing parent of the group
(subject to meeting specific requirements), the cost of the subsidiary is the previous carrying
amount of its share of equity items in the subsidiary rather than its fair value. All dividends will
be recognized in profit or loss. However, the payment of such dividends requires the entity to
consider whether there is any indicator of impairment.
Amendment to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation
These amendments specify, among others, that puttable financial instruments will be classified as
equity if they have all of the following specified features: (a) Instrument entitles the holder to
require the entity to repurchase or redeem the instrument (either on an ongoing basis or on
liquidation) for a pro rata share of the entity’s net assets, (b) Instrument is in the most subordinate
class of instruments, with no priority over other claims to the assets of the entity on liquidation,
(c) Instruments in the subordinate class have identical features; (d) The instrument does not
include any contractual obligation to pay cash or financial assets other than the holder’s right to a
pro rata share of the entity’s net assets; and (e) Total expected cash flows attributable to the
instrument over its life are based substantially on the profit or loss, a change in recognized net
assets, or a change in the fair value of the recognized and unrecognized net assets of the entity
over the life of the instrument.
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
This Interpretation requires customer loyalty award credits to be accounted for as a separate
component of the sales transaction in which they are granted and therefore part of the fair value of
the consideration received is allocated to the award credits and realized in income over the period
that the award credits are redeemed or expire.
*SGVMC112179*
-8Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
This Interpretation provides guidance on identifying foreign currency risks that qualify for hedge
accounting in the hedge of net investment; where within the group the hedging instrument can be
held in the hedge of a net investment; and how an entity should determine the amount of foreign
currency gains or losses, relating to both the net investment and the hedging instrument, to be
recycled on disposal of the net investment.
Improvements to PFRS
In May 2008, the International Accounting Standards Board issued its first omnibus of
amendments to certain standards, primarily with a view to removing inconsistencies and
clarifying wording. These are the separate transitional provisions for each standard:
·
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
When a subsidiary is held for sale, all of its assets and liabilities will be classified as held
for sale under PFRS 5, even when the entity retains a noncontrolling interest in the
subsidiary after the sale.
·
PAS 1, Presentation of Financial Statements
Assets and liabilities classified as held for trading are not automatically classified as
current in the consolidated balance sheet.
·
PAS 16, Property, Plant and Equipment
This amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’, to
be consistent with PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
and PAS 36, Impairment of Assets.
Items of property, plant and equipment held for rental that are routinely sold in the
ordinary course of business after rental, are transferred to inventory when rental ceases
and they are held for sale. Proceeds of such sales are subsequently shown as revenue.
Cash payments on initial recognition of such items, the cash receipts from rents and
subsequent sales are all shown as cash flows from operating activities.
·
PAS 19, Employee Benefits
Revises the definition of ‘past service costs’ to include reduction in benefits related to
past services (‘negative past service costs’) and to exclude reduction in benefits related to
future services that arise from plan amendments. Amendments to plans that result in a
reduction in benefits related to future services are accounted for as a curtailment.
It revises the definition of ‘return on plan assets’ to exclude plan administration costs if
they have already been included in the actuarial assumptions used to measure the defined
benefit obligation.
Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus on
the point in time at which the liability is due to be settled and it deletes the reference to
the recognition of contingent liabilities to ensure consistency with PAS 37, Provisions,
Contingent Liabilities and Contingent Assets.
*SGVMC112179*
-9·
PAS 23, Borrowing Costs
Revises the definition of borrowing costs to consolidate the types of items that are
considered components of ‘borrowing costs’, i.e., components of the interest expense
calculated using the effective interest rate method.
·
PAS 28, Investments in Associates
If an associate is accounted for at fair value in accordance with PAS 39, only the
requirement of PAS 28 to disclose the nature and extent of any significant restrictions on
the ability of the associate to transfer funds to the entity in the form of cash or repayment
of loans applies.
An investment in an associate is a single asset for the purpose of conducting the
impairment test. Therefore, any impairment test is not separately allocated to the goodwill
included in the investment balance.
·
PAS 29, Financial Reporting in Hyperinflationary Economies
Revises the reference to the exception that assets and liabilities should be measured at
historical cost, such that it notes property, plant and equipment as being an example,
rather than implying that it is a definitive list.
·
PAS 31, Interests in Joint Ventures
If a joint venture is accounted for at fair value, in accordance with PAS 39, only the
requirements of PAS 31 to disclose the commitments of the venturer and the joint
venture, as well as summary financial information about the assets, liabilities, income and
expense will apply.
·
PAS 36, Impairment of Assets
When discounted cash flows are used to estimate ‘fair value less costs to sell’, additional
disclosure is required about the discount rate, consistent with disclosures required when
the discounted cash flows are used to estimate ‘value in use’.
·
PAS 38, Intangible Assets
Expenditure on advertising and promotional activities is recognized as an expense when
the Group either has the right to access the goods or has received the services.
Advertising and promotional activities now specifically include mail order catalogues.
It deletes references to there being rarely, if ever, persuasive evidence to support an
amortization method for finite life intangible assets that results in a lower amount of
accumulated amortization than under the straight-line method, thereby effectively
allowing the use of the unit-of-production method.
·
PAS 39, Financial Instruments: Recognition and Measurement
Changes in circumstances relating to derivatives, specifically derivatives designated or
de-designated as hedging instruments after initial recognition are not reclassifications.
*SGVMC112179*
- 10 When financial assets are reclassified as a result of an insurance company changing its
accounting policy in accordance with paragraph 45 of PFRS 4, Insurance Contracts, this
is a change in circumstance, not a reclassification.
It removes the reference to a ‘segment’ when determining whether an instrument qualifies
as a hedge.
It requires use of the revised effective interest rate (rather than the original effective
interest rate) when re-measuring a debt instrument on the cessation of fair value hedge
accounting.
·
PAS 40, Investment Properties
It revises the scope (and the scope of PAS 16) to include property that is being
constructed or developed for future use as an investment property. Where an entity is
unable to determine the fair value of an investment property under construction, but
expects to be able to determine its fair value on completion, the investment under
construction will be measured at cost until such time as fair value can be determined or
construction is complete.
·
PAS 41, Agriculture
It removes the reference to the use of a pre-tax discount rate to determine fair value,
thereby allowing use of either a pre-tax or post-tax discount rate depending on the
valuation methodology used.
It removes the prohibition to take into account cash flows resulting from any additional
transformations when estimating fair value. Instead, cash flows that are expected to be
generated in the ‘most relevant market’ are taken into account.
Effective in 2010
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial
Statements
Revised PFRS 3 introduces a number of changes in the accounting for business combinations that
will impact the amount of goodwill recognized, the reported results in the period that an
acquisition occurs, and future reported results. Revised PAS 27 requires, among others, that
(a) change in ownership interests of a subsidiary (that do not result in loss of control) will be
accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to
a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling and
noncontrolling interests (previously referred to as ‘minority interests’); even if the losses exceed
the noncontrolling equity investment in the subsidiary; and (c) on loss of control of a subsidiary,
any retained interest will be remeasured to fair value and this will impact the gain or loss
recognized on disposal. The changes introduced by revised PFRS 3 and PAS 27 must be applied
prospectively and will affect future acquisitions and transactions with noncontrolling interests.
*SGVMC112179*
- 11 Amendment to PAS 39, Financial Instruments: Recognition and Measurement -Eligible
hedged items
Amendment to PAS 39 will be effective on July 1, 2009, which addresses only the designation of
a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in
particular situations. This amendment clarifies that an entity is permitted to designate a portion of
the fair value changes or cash flow variability of a financial instrument as a hedged item.
Effective in 2012
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This Interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. This Interpretation
requires that revenue on construction of real estate be recognized only upon completion, except
when such contract qualifies as a construction contract to be accounted for under PAS 11,
Construction Contracts, or involves rendering of services, in which case revenue is recognized
based on stage of completion. Contracts involving provision of services with the construction
materials and where the risks and reward of ownership are transferred to the buyer on a
continuous basis will also be accounted for based on stage of completion. The adoption of this
Interpretation will be accounted for retrospectively, and will result to restatement of prior period
financial statements. The adoption of this Interpretation may significantly affect the
determination of revenue for real estate sales and the corresponding cost, and the related trade
receivables, deferred tax liabilities and retained earnings accounts. The Group is in the process of
quantifying the impact of adoption of this Interpretation when it becomes effective in 2012.
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 dates of acquisition and which are subject to an insignificant risk of
change in value.
Financial Instruments
Date of recognition
The Group recognizes a financial asset or a financial liability in the consolidated balance sheet
when it becomes a party to the contractual provisions of the instrument. Purchases or sales of
financial assets that require delivery of assets within the time frame established by regulation or
convention in the marketplace are recognized on the settlement date.
Initial recognition of financial instruments
All financial assets and financial liabilities are recognized initially at fair value. Except for
securities at FVPL, the initial measurement of financial assets includes transaction costs. The
Group classifies its financial assets in the following categories: financial assets at FVPL, loans
and receivables, held-to-maturity (HTM) investments, and AFS financial assets. The Group also
classifies its financial liabilities into financial liabilities at FVPL and other financial liabilities.
The classification depends on the purpose for which the investments were acquired and whether
they are quoted in an active market.
*SGVMC112179*
- 12 The Group determines the classification of its financial assets and financial liabilities at initial
recognition and, where allowed and appropriate, re-evaluates such designation at every reporting
date.
Financial instruments are classified as liability or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to stockholders’ equity
net of any related income tax benefits.
Determination of fair value
The fair value for financial instruments traded in active markets at the balance sheet date is based
on their quoted market price or dealer price quotations (bid price for long positions and ask price
for short positions), without any deduction for transaction costs. When current bid and asking
prices are not available, the price of the most recent transaction provides evidence of the current
fair value as long as there has not been a significant change in economic circumstances since the
time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation methodologies. Valuation methodologies include net present value
techniques, comparison to similar instruments for which market observable prices exist, option
pricing models, and other relevant valuation models.
Day 1 profit
Where the transaction price in a non-active market is different from the fair value from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Group recognizes the difference
between the transaction price and fair value (a Day 1 profit) in the consolidated statement of
income under “Interest income” or “Interest expense and other financing charges” unless it
qualifies for recognition as some other type of asset. In cases where use is made of data which is
not observable, the difference between the transaction price and model value is only recognized in
the consolidated statement of income when the inputs become observable or when the instrument
is derecognized. For each transaction, the Group determines the appropriate method of
recognizing the ‘Day 1’ profit amount.
Financial assets at FVPL
Financial assets at FVPL include financial assets held for trading and financial assets designated
upon initial recognition as at FVPL.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in
the near term. Derivatives, including separated embedded derivatives, are also classified as held
for trading unless they are designated as effective hedging instruments or a financial guarantee
contract. Fair value gains or losses on investments held for trading, net of interest income
accrued on these assets, are recognized in the consolidated statement of income under “Other
income” or “Other charges”. Interest earned or incurred is recorded in “Interest income” or
“Interest expense and other financing charges” while dividend income is recorded when the right
of payments has been established.
*SGVMC112179*
- 13 Where a contract contains one or more embedded derivatives, the hybrid contract may be
designated as financial asset at FVPL, except where the embedded derivative does not
significantly modify the cash flows or it is clear that separation of the embedded derivative is
prohibited.
Financial assets may be designated at initial recognition as at FVPL if any of the following
criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment
that would otherwise arise from measuring the assets or recognizing gains or losses on them on a
different basis; or (ii) the assets are part of a group of financial assets which are managed and
their performance evaluated on a fair value basis, in accordance with a documented risk
management or investment strategy; or (iii) the financial instrument contains an embedded
derivative that would need to be separately recorded.
The Group’s financial assets at FVPL pertain to government securities and other investment
securities and derivatives not designated as hedges.
Derivative Financial Instruments
Derivative instruments (including bifurcated embedded derivatives) are initially recognized at fair
value on the date in which a derivative transaction is entered into or bifurcated, and are
subsequently remeasured at fair value. Any gains or losses arising from changes in fair value on
derivatives that do not qualify for hedge accounting are taken directly to the consolidated
statement of income. Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative.
As of December 31, 2007, the Group’s derivative assets pertain to a nondeliverable currency
forward contract and structured currency options included under “Other current assets” account in
the consolidated balance sheet.
Derivative financial instruments also include bifurcated embedded derivatives. An embedded
derivative is separated from the host contract and accounted for as a derivative if all of the
following conditions are met: a) the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks of the host contract;
b) a separate instrument with the same terms as the embedded derivative would meet the
definition of a derivative; and c) the hybrid or combined instrument is not recognized at FVPL.
The Group assesses whether embedded derivatives are required to be separated from the host
contracts when the Group first becomes a party to the contract. Reassessment of embedded
derivatives is only done when there are changes in the contract that significantly modifies the
contractual cash flows.
For bifurcated embedded derivatives in financial contracts that are not designated or do not
qualify as hedges, changes in the fair values of such transactions are recognized in the
consolidated statement of income.
*SGVMC112179*
- 14 As of December 31, 2008, the Company’s bifurcated embedded derivative pertains to prepayment
option on its loan which is included under the “Other noncurrent assets” account in the
consolidated balance sheet.
Contracts that are entered into and continue to be held for the purpose of the receipt of the raw
materials in accordance with the Group’s expected usage requirements are considered normal
purchase agreements.
HTM investments
HTM investments are quoted nonderivative financial assets with fixed or determinable payments
and fixed maturities that the Group has the positive intention and ability to hold to maturity.
Where the Group sell other than an insignificant amount of HTM investments, the entire category
would be tainted and reclassified as AFS investments. After initial measurement, these
investments are measured at amortized cost using the effective interest rate method, less
impairment in value. Amortized cost is calculated by taking into account any discount or
premium on acquisition and fees that are an integral part of the effective interest rate. The
amortization is included in “Interest income” in the consolidated statement of income. Gains and
losses are recognized in the consolidated statement of income when the HTM investments are
derecognized or impaired, as well as through the amortization process. The losses arising from
impairment of such investments shall be recognized in the consolidated statement of income
under “Other charges” account. HTM investments are included in current assets if expected to be
realized within 12 months from balance sheet date. HTM investments that are not due in the next
12 months are presented under “Investments in bonds and other securities” account in the
consolidated balance sheet.
The Group’s HTM investments pertain to bonds included under “Other current assets” account in
2008 and “Investments in bonds and other securities” in 2007.
Loans and receivables
Loans and receivables are nonderivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are not entered into with the intention of immediate or
short-term resale and are not designated as AFS or financial asset at FVPL. This accounting
policy relates both to the balance sheet captions “Short-term investments” which arise primarily
from unquoted debt securities, and “Accounts and notes receivable” (except for Advances to
contractors).
After initial measurement, loans and receivables are subsequently measured at amortized cost
using the effective interest rate method, less any allowance for impairment losses. Amortized cost
is calculated by taking into account any discount or premium on acquisition and fees that are an
integral part of the effective interest rate. The amortization is included in the “Interest income”
account in the consolidated statement of income. The losses arising from impairment of such
loans and receivables are recognized under “Provision for doubtful accounts” in the consolidated
statement of income.
*SGVMC112179*
- 15 Loans and receivables are included in current assets if maturity is within 12 months from the
balance sheet date.
AFS financial assets
AFS investments are those which are designated as such or do not qualify to be classified as
designated at FVPL, HTM, or loans and receivables.
Financial assets may be designated at initial recognition as AFS if they are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions.
After initial measurement, AFS financial assets are measured at fair value. The unrealized gains
or losses arising from the fair valuation of AFS financial assets are excluded from reported
earnings and are reported as “Net unrealized gain (loss) on available-for-sale financial assets” (net
of tax where applicable) in equity. The Group’s share in its associates’ net unrealized gain (loss)
on AFS is likewise included in this account.
When the security is disposed of, the cumulative gain or loss previously recognized in equity is
recognized in the consolidated statement of income under “Other income” or “Other charges”.
Where the Group holds more than one investment in the same security, the cost is determined
using the weighted average method. Interest earned on AFS financial assets is reported as interest
income using the effective interest rate. Dividends earned are recognized under “Other income”
in the consolidated statement of income when the right to receive payment is established. The
losses arising from impairment of such investments are recognized under “Other charges” in the
consolidated statement of income.
When the fair value of AFS financial assets cannot be measured reliably because of lack of
reliable estimates of future cash flows and discount rates necessary to calculate the fair value of
unquoted equity instruments, these investments are carried at cost, less any allowance for
impairment losses.
The Group’s AFS financial assets pertain to investments in quoted and unquoted equity securities
included under “Investments in bonds and other securities” in the consolidated balance sheet.
AFS financial assets are included in current assets if expected to be realized within
12 months from balance sheet date.
Other financial liabilities
Issued financial instruments or their components, which are not designated at FVPL are classified
as other financial liabilities where the substance of the contractual arrangement results in the
Group having an obligation either to deliver cash or another financial asset to the holder, or to
satisfy the obligation other than by the exchange of a fixed amount of cash or another financial
asset for a fixed number of its own equity shares. The components of issued financial instruments
that contain both liability and equity elements are accounted for separately, with the equity
component being assigned the residual amount, after deducting from the instrument as a whole the
*SGVMC112179*
- 16 amount separately determined as the fair value of the liability component on the date of issue.
After initial measurement, other financial liabilities are subsequently measured at amortized cost
using the effective interest rate method. Amortized cost is calculated by taking into account any
discount or premium on the issue and fees that are an integral part of the effective interest rate.
Any effects of restatement of foreign currency-denominated liabilities are recognized in the
consolidated statement of income.
This accounting policy applies primarily to the Group’s short-term and long-term debt, accounts
payable and accrued expenses, and other obligations that meet the above definition (other than
liabilities covered by other accounting standards, such as income tax payable).
Deposits and Retentions Payable
Deposits and retentions payable are initially measured at fair value. After initial recognition,
deposits and retentions payable are subsequently measured at amortized cost using effective
interest rate method.
For deposits, the difference between the cash received and its fair value is deferred (included in
the “Deferred credits” account in the consolidated balance sheet) and amortized using the straightline method under the “Sales and services” account in the consolidated statement of income.
Derecognition of Financial Assets and Liabilities
Financial asset
A financial asset (or, where applicable, a part of a financial asset or part of a group of financial
assets) is derecognized where:
· the rights to receive cash flows from the assets have expired;
· the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third-party under a “pass-through”
arrangement; or
· the Group has transferred its right to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred
nor retained the risks and rewards of the asset but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset or has entered into
a pass-through arrangement, and has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the
Group’s continuing involvement in the asset. Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at the lower of the original carrying amount of
the asset and the maximum amount of consideration that the Group could be required to repay.
Financial liability
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired. Where an existing financial liability is replaced by another from the
same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability
and the recognition of a new liability, and the difference in the respective carrying amounts is
recognized in the consolidated statement of income.
*SGVMC112179*
- 17 Impairment of Financial Assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial
asset or group of financial assets is impaired. A financial asset or a group of financial assets is
deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one
or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’)
and that loss event (or events) has an impact on the estimated future cash flows of the financial
asset or the group of financial assets that can be reliably estimated. Evidence of impairment may
include indications that the borrower or a group of borrowers is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will
enter bankruptcy or other financial reorganization and where observable data indicate that there is
measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Loans and receivables and HTM investments
For loans and receivables and HTM investments carried at amortized cost, the Group first
assesses whether objective evidence of impairment exists individually for financial assets that are
individually significant, or collectively for financial assets that are not individually significant. If
the Group determines that no objective evidence of impairment exists for an individually assessed
financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses for impairment. Those characteristics
are relevant to the estimation of future cash flows for groups of such assets by being indicative of
the debtors’ ability to pay all amounts due according to the contractual terms of the assets being
evaluated. Assets that are individually assessed for impairment and for which an impairment loss
is, or continues to be, recognized are not included in a collective assessment for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated
future cash flows (excluding future credit losses that have not been incurred) discounted at the
financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). The carrying amount of the asset is reduced through use of an allowance account
and the amount of the loss is charged to the consolidated statement of income under “Provision
for doubtful accounts”. Interest income continues to be recognized based on the original effective
interest rate of the asset. Loans, together with the associated allowance accounts, are written off
when there is no realistic prospect of future recovery and all collateral has been realized. If, in a
subsequent period, the amount of the estimated impairment loss decreases because of an event
occurring after the impairment was recognized, the previously recognized impairment loss is
reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the
extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics such as customer type, payment history, past-due status and
term.
*SGVMC112179*
- 18 Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for assets with credit risk characteristics
similar to those in the group. Historical loss experience is adjusted on the basis of current
observable data to reflect the effects of current conditions that did not affect the period on which
the historical loss experience is based and to remove the effects of conditions in the historical
period that do not exist currently. The methodology and assumptions used for estimating future
cash flows are reviewed regularly by the Group to reduce any differences between loss estimates
and actual loss experience.
Assets carried at cost
If there is an objective evidence that an impairment loss has been incurred on an unquoted equity
instrument that is not carried at fair value because its fair value cannot be reliably measured, or on
derivative asset that is linked to and must be settled by delivery of such an unquoted equity
instrument, the amount of the loss is measured as the difference between the carrying amount and
the present value of estimated future cash flows discounted at the current market rate of return for
a similar financial asset.
AFS financial assets
In case of equity investments classified as AFS financial assets, impairment would include a
significant or prolonged decline in the fair value of the investments below its cost. Where there is
evidence of impairment loss, the cumulative loss - measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on that financial asset
previously recognized in the consolidated statement of income - is removed from equity and
recognized in the consolidated statement of income under “Other charges”. Impairment losses on
equity investments are not reversed through the consolidated statement of income. Increases in
fair value after impairment are recognized directly in the consolidated statement of changes in
equity.
In the case of debt instruments classified as AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Future interest income is based on the
reduced carrying amount and is accrued using the rate of interest used to discount future cash
flows for the purpose of measuring impairment loss and is recorded as part of “Interest income”
account in the consolidated statement of income. If, in a subsequent year, the fair value of a debt
instrument increased and the increase can be objectively related to an event occurring after the
impairment loss was recognized in the consolidated statement of income, the impairment loss is
reversed through the consolidated statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated
balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize the asset and settle the
liability simultaneously. This is not generally the case with master netting agreements, and the
related assets and liabilities are presented gross in the consolidated balance sheet.
*SGVMC112179*
- 19 Inventories
Inventories are carried at the lower of cost and net realizable value (NRV). Costs incurred in
bringing each product to its present location and condition are generally accounted for as follows:
Real estate inventories - cost includes those costs incurred for the development and
improvement of properties, including capitalized borrowing costs.
Vehicles - purchase cost on specific identification basis.
Finished goods and work-in-process - determined on a moving average basis; cost includes
direct materials and labor and a proportion of manufacturing overhead costs based on normal
operating capacity.
Parts and accessories, materials, supplies and others - purchase cost on a moving average
basis.
NRV for real estate inventories, vehicles, finished goods and work-in-process and parts and
accessories is the estimated selling price in the ordinary course of business, less estimated costs of
completion and estimated costs necessary to make the sale, while NRV for materials, supplies and
others represents the related replacement costs.
Noncurrent Assets Held for Sale
Noncurrent assets held for sale are carried at the lower of its carrying amount and fair value less
costs to sell. At balance sheet date, the Group classifies assets as held for sale (disposal group)
when their carrying amount will be recovered principally through a sale transaction rather than
through continuing use. For this to be the case, the asset must be available for immediate sale in
its present condition subject only to terms that are usual and customary for sales of such assets
and its sale must be highly probable. For the sale to be highly probable, the appropriate level of
management must be committed to a plan to sell the asset and an active program to locate a buyer
and complete the plan must have been initiated. Further, the asset must be actively marketed for
sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the date of
classification.
The related results of operations and cash flows of the disposal group that qualified as
discontinued operation are separated from the results of those that would be recovered principally
through continuing use, and prior years’ consolidated statement of income and cash flows are represented. Results of operations and cash flows of the disposal group that qualified as
discontinued operation are presented in the consolidated statement of income and consolidated
statement of cash flows as items associated with noncurrent assets held for sale.
Land and Improvements
Land and improvements consist of properties for future development and are carried at the lower
of cost or NRV. NRV is the estimated selling price in the ordinary course of business, less
estimated cost of completion and estimated costs necessary to make the sale. Cost includes cost
of purchase and those costs incurred for improvement of the properties.
*SGVMC112179*
- 20 Investments in Associates and Jointly Controlled Entities
Investments in associates and jointly controlled entities (investee companies) are accounted for
under the equity method. An associate is an entity in which the Group has significant influence
and which is neither a subsidiary nor a joint venture. A joint venture is a contractual arrangement
whereby two or more parties undertake an economic activity that is subject to joint control, and a
jointly controlled entity is a joint venture that involves the establishment of a separate entity in
which each venturer has an interest.
An investment is accounted for using the equity method from the day it becomes an associate. On
acquisition of investment, the excess of the cost of investment over the investor’s share in the net
fair value of the investee’s identifiable assets, liabilities and contingent liabilities is accounted for
as goodwill and included in the carrying amount of the investment and not amortized. Any excess
of the investor’s share of the net fair value of the associate’s identifiable assets, liabilities and
contingent liabilities over the cost of the investment is excluded from the carrying amount of the
investment, and is instead included as income in the determination of the share in the earnings of
the investees.
Under the equity method, investments in associates and jointly controlled entities are carried in
the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share in the
net assets of the investees, less any impairment in value. The Group’s share in the investee’s
post-acquisition profits or losses is recognized in the consolidated statement of income, and its
share of post-acquisition movements in the investee’s equity reserves is recognized directly in
equity. Profits and losses resulting from transactions between the Group and the investee
companies are eliminated to the extent of the interest in the investee companies and to the extent
that for unrealized losses, there is no evidence of impairment of the asset transferred. Dividends
received are treated as a reduction of the carrying value of the investment.
The Group discontinues applying the equity method when its investment in an investee company
is reduced to zero. Accordingly, additional losses are not recognized unless the Group has
guaranteed certain obligations of the investee company. When the investee company
subsequently reports profits, the Group resumes recognizing its share of the profits only after its
share of the profits equals the share of net losses not recognized during the period the equity
method was suspended.
The reporting dates of the investee companies and the Group are identical and the investee
companies’ accounting policies conform to those used by the Group for like transactions and
events in similar circumstances.
Interest in a Joint Venture
Makati Development Corporation (MDC), an ALI subsidiary, has an interest in a joint venture,
whereby the venturers have a contractual arrangement that establishes joint control. MDC
recognizes its interest in the joint venture using proportionate consolidation. MDC combines its
share of each of the assets, liabilities, income and expenses of the joint venture with similar items,
line by line, in its financial statements. The financial statements of the joint venture are prepared
for the same reporting period as the Group. Adjustments are made where necessary to bring the
accounting policies into line with those of MDC.
*SGVMC112179*
- 21 Adjustments are made in the MDC’s financial statements to eliminate MDC’s share of unrealized
gains and losses on transactions between MDC and the joint venture. Losses on transactions are
recognized immediately if the loss provides evidence of a reduction in the NRV of current assets
or an impairment loss. The joint venture is proportionately consolidated until the date on which
the Group ceases to have joint control over the joint venture.
Investment Properties
Investment properties consist of properties that are held to earn rentals, and are not occupied by
the companies in the Group. Investment properties, except for land, are carried at cost less
accumulated depreciation and amortization and any impairment in value. Land is carried at cost
less any impairment in value.
Depreciation and amortization are computed using the straight-line method over the estimated
useful lives of the assets, regardless of utilization. The estimated useful lives of investment
properties follow:
Land improvements
Buildings
5 years
20-40 years
Investment properties are derecognized when either they have been disposed of or when the
investment property is permanently withdrawn from use and no future economic benefit is
expected from its disposal. Any gain or loss on the retirement or disposal of an investment
property is recognized in the consolidated statement of income in the year of retirement or
disposal.
Transfers are made to investment property when there is a change in use, evidenced by ending of
owner-occupation, commencement of an operating lease to another party or ending of
construction or development. Transfers are made from investment property when, and only when,
there is a change in use, evidenced by commencement of owner-occupation or commencement of
development with a view to sale. Transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and they
do not change the cost of the property for measurement or for disclosure purposes.
Property, Plant and Equipment
Property, plant and equipment, except for land, are carried at cost less accumulated depreciation
and amortization and any impairment in value. Land is carried at cost less any impairment in
value. The initial cost of property, plant and equipment consists of its construction cost or
purchase price and any directly attributable costs of bringing the property, plant and equipment to
its working condition and location for its intended use.
Construction-in-progress is stated at cost. This includes cost of construction and other direct
costs. Construction-in-progress is not depreciated until such time that the relevant assets are
completed and put into operational use.
*SGVMC112179*
- 22 Major repairs are capitalized as part of property, plant and equipment only when it is probable
that future economic benefits associated with the item will flow to the Group and the cost of the
items can be measured reliably. All other repairs and maintenance are charged against current
operations as incurred.
Depreciation and amortization of property, plant and equipment commences once the property,
plant and equipment are available for use and computed on a straight-line basis over the estimated
useful lives of the property, plant and equipment as follows:
Buildings and improvements
Machinery and equipment
Furniture, fixtures and equipment
Transportation equipment
3-40 years
3-10 years
2-10 years
3-5 years
Hotel property and equipment includes the following types of assets and their corresponding
estimated useful lives:
Hotel buildings and improvements
Land improvements
Leasehold improvements
Furniture, furnishing and equipment
Machinery and equipment
Transportation equipment
30-50 years
30 years
5-20 years
5 years
5 years
5 years
The assets residual values, useful lives and depreciation and amortization method are reviewed
periodically to ensure that the amounts, periods and method of depreciation and amortization are
consistent with the expected pattern of economic benefits from items of property, plant and
equipment.
When property, plant and equipment are retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization and accumulated provision for impairment losses, if
any, are removed from the accounts and any resulting gain or loss is credited or charged against
current operations.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is the fair value as at the date of acquisition.
Subsequently, intangible assets are measured at cost less accumulated amortization and provision
for impairment loss, if any. The useful lives of intangible assets with finite lives are assessed at
the individual asset level. Intangible assets with finite lives are amortized over their useful lives
on a straight line basis. Periods and method of amortization for intangible assets with finite
useful lives are reviewed annually or earlier when an indicator of impairment exists.
*SGVMC112179*
- 23 The estimated useful lives of intangible assets follow:
Customer relationships
Order backlog
Unpatented technology
Developed software
Licenses
2-5 years
6 months
5 years
2 years
3 years
A gain or loss arising from derecognition of an intangible asset is measured as the difference
between the net disposal proceeds and the carrying amount of the intangible assets and is
recognized in the consolidated statement of income when the intangible asset is derecognized.
Business Combinations and Goodwill
Business combinations are accounted for using the purchase method. The cost of an acquisition is
measured as the fair value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable
assets (including previously unrecognized intangible assets) acquired and liabilities and
contingent liabilities assumed in a business combination are measured initially at their fair values
at the date of acquisition, irrespective of the extent of any minority interest.
Goodwill is initially measured at cost being the excess of the cost of the business combination
over the Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and
contingent liabilities. If the cost of the acquisition is less than the fair value of the net assets of
the subsidiary acquired, the difference is recognized directly in the consolidated statement of
income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For
the purpose of the impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the Group’s cash-generating units (CGU) that are expected to
benefit from the synergies of the combination, irrespective of whether other assets or liabilities of
the acquiree are assigned to those units. Each unit or group of units to which the goodwill is
allocated should:
·
·
represent the lowest level within the Group at which the goodwill is monitored for internal
management purposes; and
not be larger than an operating segment based on either the Group’s primary or secondary
reporting format determined in accordance with PAS 14, Segment Reporting.
Goodwill allocated to a CGU is included in the carrying amount of the CGU being disposed when
determining the gain or loss on disposal. For partial disposal of operation within the CGU, the
goodwill associated with the disposed operation is included in the carrying amount of the
operation when determining gain or loss on disposal and measured on the basis of the relative
values of the operation disposed of and the portion of the CGU retained, unless another method
better reflects the goodwill associated with the operation disposed of.
*SGVMC112179*
- 24 Impairment of Nonfinancial Assets
The Group assesses at each reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is
required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is calculated as the higher of the asset’s or cash-generating unit’s fair value less costs to
sell and its value in use and is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from other assets or groups of assets.
Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered
impaired and is written down to its recoverable amount. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessment of the time value of money and the risks specific to the asset.
Impairment losses of continuing operations are recognized in the consolidated statement of
income in those expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is
any indication that previously recognized impairment losses may no longer exist or may have
decreased. If such indication exists, the recoverable amount is estimated. A previously
recognized impairment loss is reversed only if there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was recognized. If that is
the case, the carrying amount of the asset is increased to its recoverable amount. That increased
amount cannot exceed the carrying amount that would have been determined, net of depreciation
and amortization, had no impairment loss been recognized for the asset in prior years. Such
reversal is recognized in the consolidated statement of income unless the asset is carried at
revalued amount, in which case the reversal is treated as revaluation increase. After such a
reversal, the depreciation and amortization charge is adjusted in future periods to allocate the
asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining
useful life.
Investments in associates and jointly controlled entities
After application of the equity method, the Group determines whether it is necessary to recognize
any additional impairment loss with respect to the Group’s net investment in the investee
company. The Group determines at each balance sheet date whether there is any objective
evidence that the investment in the investee company is impaired. If this is the case, the Group
calculates the amount of impairment as being the difference between the recoverable amount of
the investee company and the carrying cost and recognizes the amount in the consolidated
statement of income.
Impairment of goodwill
For assessing impairment of goodwill, a test for impairment is performed annually and when
circumstances indicate that the carrying value may be impaired. Impairment is determined for
goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the
goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an
impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in
future periods.
*SGVMC112179*
- 25 Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligations and a reliable estimate can be made of the amount of the
obligation. Where the Group expects a provision to be reimbursed, the reimbursement is
recognized as a separate asset but only when the reimbursement is virtually certain. 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 interest expense. Provisions
are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
Treasury Stock
Own equity instruments which are reacquired and held by the Company or by other companies of
the consolidated group are carried at cost and are deducted from equity. No gain or loss is
recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity
instruments. When the shares are retired, the capital stock account is reduced by its par value and
the excess of cost over par value upon retirement is debited to additional paid-in capital to the
extent of the specific or average additional paid-in capital when the shares were issued and to
retained earnings for the remaining balance.
Revenue and Cost Recognition
Revenue and cost from sales of completed projects by real estate subsidiaries are accounted for
using the full accrual method. The percentage of completion method is used to recognize income
from sales of projects where the subsidiaries have material obligations under the sales contracts to
complete the project after the property is sold. Under this method, gain is recognized as the
related obligations are fulfilled, measured principally on the basis of the estimated completion of
a physical proportion of the contract work. Any excess of collections over the recognized
receivables are included under “Other current liabilities” in the liabilities section of the
consolidated balance sheet.
Revenue from construction contracts are recognized using the percentage of completion method,
measured principally on the basis of the estimated physical completion of the contract work.
Contract costs include all direct materials and labor costs and those indirect costs related to
contract performance. Expected losses on contracts are recognized immediately when it is
probable that the total contract costs will exceed total contract revenue. Changes in contract
performance, contract conditions and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements which may result in revisions to estimated costs
and gross margins are recognized in the year in which the changes are determined.
Rental income under noncancellable and cancellable leases on Investment properties is
recognized in the consolidated statement of income on a straight-line basis over the lease term and
the terms of the lease, respectively, or based on a certain percentage of the gross revenue of the
tenants, as provided under the terms of the lease contract.
*SGVMC112179*
- 26 Marketing fees, management fees from administrative and property management are recognized
when services are rendered.
Revenue from hotel operations are recognized when services are rendered. Revenue from
banquets and other special events are recognized when the events take place.
Revenue from sales of electronic products and vehicles are recognized when the significant risks
and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be
measured reliably.
Revenue from business process outsourcing services are recognized when services are rendered.
Revenue from internet operations are recognized when services are rendered and goods are
delivered.
Interest income is recognized as it accrues using the effective interest method.
Dividend income is recognized when the Group’s right to receive payment is established.
Gain or loss is recognized in the consolidated statement of income if the Company disposes some
of its investment in a subsidiary or associate. Gain or loss is computed as the difference between
the proceeds of the disposal and its carrying amount, including the carrying amount of goodwill, if
any.
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement is dependent on
the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after inception of the lease only if one of the following applies: (a) there is a
change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal
option is exercised or extension granted, unless the term of the renewal or extension was initially
included in the lease term; (c) there is a change in the determination of whether fulfillment is
dependent on a specified asset; or (d) there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date
of renewal or extension period for scenario (b).
Group as Lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the
consolidated asset are classified as operating leases. Fixed lease payments are recognized as an
expense in the statement of income on a straight-line basis while the variable rent is recognized as
an expense based on terms of the lease contract.
*SGVMC112179*
- 27 Finance leases, which transfer 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 lives of the
assets or the respective lease terms.
Group as Lessor
Leases where the Group does not transfer substantially all the risk and benefits of ownership of
the assets are classified as operating leases. Lease payments received are recognized as income in
the consolidated statement of income on a straight-line basis over the lease term. Initial direct
costs incurred in negotiating operating leases are added to the carrying amount of the leased asset
and recognized over the lease term on the same basis as the rental income. Contingent rent is
recognized as revenue in the period in which it is earned.
Commission Expense
Commissions paid to sales or marketing agents on the sale of pre-completed real estate units are
deferred when recovery is reasonably expected and are charged to expense in the period in which
the related revenue is recognized as earned. Accordingly, when the percentage of completion
method is used, commissions are likewise charged to expense in the period the related revenue is
recognized. Commission expense is included under “Cost of sales and services” in the
consolidated statement of income.
Borrowing Costs
Borrowing costs are generally expensed as incurred. Interest and other financing costs incurred
during the construction period on borrowings used to finance property development are
capitalized as part of development cost (included in real estate inventories, investment properties
and property, plant and equipment). Capitalization of borrowing costs commences when the
activities to prepare the asset are in progress and expenditures and borrowing costs are being
incurred. The capitalization of these borrowing costs ceases when substantially all the activities
necessary to prepare the asset for its intended use or sale are complete. If the carrying amount of
the asset exceeds its recoverable amount, an impairment loss is recorded. Capitalized borrowing
cost is based on the applicable weighted average borrowing rate from general borrowings and the
actual borrowing costs eligible for capitalization for funds borrowed specifically.
Pension Cost
Pension cost is actuarially determined using the projected unit credit method. This method
reflects services rendered by employees up to the date of valuation and incorporates assumptions
concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient
regularity, with option to accelerate when significant changes to underlying assumptions occur.
Pension cost includes current service cost, interest cost, expected return on any plan assets,
actuarial gains and losses and the effect of any curtailments or settlements.
*SGVMC112179*
- 28 The net pension liability recognized in the consolidated balance sheet in respect of the defined
benefit pension plans is the present value of the defined benefit obligation at the balance sheet
date less the fair value of the plan assets. The defined benefit obligation is calculated annually by
independent actuaries using the projected unit credit method. The present value of the defined
benefit obligation is determined by using risk-free interest rates of government bonds that have
terms to maturity approximating the terms of the related pension liabilities or applying a single
weighted average discount rate that reflects the estimated timing and amount of benefit payments.
The net pension asset is the lower of the fair value of the plan assets less the present value of the
defined benefit obligation at the balance sheet date, together with adjustments for unrecognized
actuarial gains or losses and past service costs that shall be recognized in future periods, or the
total of any cumulative unrecognized net actuarial losses and past service cost and the present
value of any economic benefits available in the form of refunds from the plan or reductions in the
future contributions to the plan.
Actuarial gains and losses are recognized as income or expense if the cumulative unrecognized
actuarial gains and losses at the end of the previous reporting period exceeded the greater of 10%
of the present value of defined benefit obligation or 10% of the fair value of plan assets. These
gains or losses are recognized over the expected average remaining working lives of the
employees participating in the plans.
Income Tax
Current tax
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantially enacted by the balance sheet
date.
Deferred tax
Deferred income tax is provided, using the balance sheet liability method, on all temporary
differences, with certain exceptions, at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, with certain
exceptions. Deferred tax assets are recognized for all deductible temporary differences,
carryforward benefit of unused tax credits from excess of minimum corporate income tax (MCIT)
over the regular corporate income tax and unused net operating loss carryover (NOLCO), to the
extent that it is probable that taxable income will be available against which the deductible
temporary differences and carryforward benefits of MCIT and NOLCO can be utilized.
Deferred tax liabilities are not provided on nontaxable temporary differences associated with
investments in domestic subsidiaries, associates and interests in jointly controlled entities. With
respect to investments in foreign subsidiaries, associates and interests in jointly controlled
entities, deferred tax liabilities are recognized except where the timing of the reversal of the
temporary difference can be controlled and it is probable that the temporary difference will not
reverse in the foreseeable future.
*SGVMC112179*
- 29 The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable income will be available to allow all
as part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at
each balance sheet date and are recognized to the extent that it has become probable that future
taxable income will allow all as part of the deferred tax assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rate that is expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates and tax laws that
have been enacted or substantively enacted at the balance sheet date. Movements in the deferred
income tax assets and liabilities arising from changes in tax rates are charged or credited to
income for the period.
Income tax relating to items recognized directly in equity is recognized in equity.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set
off current tax assets against current tax liabilities and the deferred taxes relate to the same
taxable entity and the same taxation authority.
Foreign Currency Transactions
The functional and presentation currency of Ayala Corporation and its Philippine subsidiaries
(except for BHL, AIVPL and IMI), is the Philippine Peso (P
=). Each entity in the Group
determines its own functional currency and items included in the financial statements of each
entity are measured using that functional currency. Transactions in foreign currencies are initially
recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the functional currency rate of
exchange ruling at the balance sheet date. All differences are taken to the consolidated statement
of income with the exception of differences on foreign currency borrowings that provide a hedge
against a net investment in a foreign entity. These are taken directly to equity until the disposal of
the net investment, at which time they are recognized in the consolidated statement of income.
Tax charges and credits attributable to exchange differences on those borrowings are also dealt
with in equity. Nonmonetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rate as at the date of initial transaction. Nonmonetary
items measured at fair value in a foreign currency are translated using the exchange rate at the
date when the fair value was determined.
The functional currency of BHL, AIVPL and IMI is the US Dollar ($). As at the reporting date,
the assets and liabilities of these subsidiaries are translated into the presentation currency of the
Group at the rate of exchange ruling at the balance sheet date and their statement of income
accounts are translated at the weighted average exchange rates for the year. The exchange
differences arising on the translation are taken directly to a separate component of equity. On
disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to that
particular foreign operation shall be recognized in the consolidated statement of income.
The Group’s share in the associates’ translation adjustments are likewise included under the
Cumulative Translation Adjustments account in equity.
*SGVMC112179*
- 30 Share-based Payments
The Company and its subsidiaries have equity-settled, share-based compensation plans with its
employees.
PFRS 2 Options
For options granted after November 7, 2002 that have not vested on or before January 1, 2005, the
cost of equity-settled transactions with employees is measured by reference to the fair value at the
date on which they are granted. In valuing equity-settled transactions, vesting conditions,
including performance conditions, other than market conditions (conditions linked to share
prices), shall not be taken into account when estimating the fair value of the shares or share
options at the measurement date. Instead, vesting conditions are taken into account in estimating
the number of equity instruments that will ultimately vest. Fair value is determined by using the
Black-Scholes model, further details of which are provided in Note 24 to the consolidated
financial statements.
The cost of equity-settled transactions is recognized, together with a corresponding increase in
equity, over the period in which the performance conditions are fulfilled, ending on the date on
which the relevant employees become fully entitled to the awards (‘vesting date’). The
cumulative expense recognized for equity-settled transactions at each reporting date until the
vesting date reflects the extent to which the vesting period has expired and the Group’s best
estimate of the number of equity instruments that will ultimately vest. The income or expense for
a period represents the movement in cumulative expense recognized as at the beginning and end
of that period.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vesting irrespective of whether or not
the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized
as if the terms had not been modified. In addition, an expense is recognized for any increase in
the value of the transaction as a result of the modification, as measured at the date of
modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of
cancellation, and any expense not yet recognized for the award is recognized immediately.
However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if they were a
modification of the original award, as described in the previous paragraph.
Pre-PFRS 2 Options
For options granted before November 7, 2002 that have vested before January 1, 2005, the
intrinsic value of stock options determined as of grant date is recognized as expense over the
vesting period.
*SGVMC112179*
- 31 The dilutive effect of outstanding options is reflected as additional share dilution in the
computation of diluted earnings per share (see Note 22).
Employee share purchase plans
The Company and some of its subsidiaries have employee share purchase plans (ESOWN) which
allow the grantees to purchase the Company’s and its respective subsidiaries’ shares at a
discounted price. The Group recognizes the difference between the market price at the time of
subscription and the subscription price as stock compensation expense over the holding period.
Where the subscription receivable is payable over more than one year, the subscription price is
adjusted for the time value and treated as additional stock compensation expense. For the
unsubscribed shares where the employees still have the option to subscribe in the future, these are
accounted for as options.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income attributable to common equity
holders by the weighted average number of common shares issued and outstanding during the
year and adjusted to give retroactive effect to any stock dividends declared during the period.
Diluted EPS is computed by dividing net income attributable to common equity holders by the
weighted average number of common shares issued and outstanding during the year plus the
weighted average number of common shares that would be issued on conversion of all the dilutive
potential common shares. The calculation of diluted earnings per share does not assume
conversion, exercise or other issue of potential common shares that would have an antidilutive
effect on earnings per share.
Segment Reporting
The Group’s operating businesses are organized and managed separately according to the nature
of the products and services provided, with each segment representing a strategic business unit
that offers different products and serves different markets. Financial information on business
segments is presented in Note 25 to the consolidated financial statements.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. Contingent assets are not recognized in the consolidated financial statements but
disclosed when an inflow of economic benefits is probable.
Subsequent Events
Post year-end events that provide additional information about the Group’s position at the balance
sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end
events that are not adjusting events are disclosed in the consolidated financial statements when
material.
*SGVMC112179*
- 32 -
3. Significant Accounting Judgments and Estimates
The preparation of the accompanying consolidated financial statements in conformity with PFRS
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The estimates and assumptions used
in the accompanying consolidated financial statements are based upon management’s evaluation
of relevant facts and circumstances as of the date of the consolidated financial statements. Actual
results could differ from such estimates.
Judgments
In the process of applying the Group’s accounting policies, management has made the following
judgments, apart from those involving estimations, which have the most significant effect on the
amounts recognized in the consolidated financial statements:
Operating lease commitments - Group as lessor
The Group has entered into commercial property leases on its investment property portfolio. The
Group has determined that it retains all significant risks and rewards of ownership of these
properties as the Group considered among others the length of the lease term is compared with the
estimated useful life of the assets.
A number of the Group’s operating lease contracts are accounted for as noncancellable operating
leases and the rest are cancellable. In determining whether a lease contract is cancellable or not,
the Company considers among others, the significance of the penalty, including the economic
consequence to the lessee.
Operating lease commitments - Group as lessee
The Group has entered into a contract with Bases Conversion Development Authority (BCDA) to
develop, under a lease agreement, a mall on a 9.8-hectare lot inside Fort Bonifacio. The Group
has determined that all significant risks and rewards of ownership of these properties are retained
by the lessor.
Distinction between investment properties and owner-occupied properties
The Group determines whether a property qualifies as investment property. In making its
judgment, the Group considers whether the property generates cash flows largely independent of
the other assets held by an entity. Owner-occupied properties generate cash flows that are
attributable not only to property but also to the other assets used in the production or supply
process.
Some properties comprise a portion that is held to earn rentals or for capital appreciations and
another portion that is held for use in the production or supply of goods or services or for
administrative purposes. If these portions cannot be sold separately as of balance sheet date, the
property is accounted for as investment property only if an insignificant portion is held for use in
the production or supply of goods or services or for administrative purposes. Judgment is applied
in determining whether ancillary services are so significant that a property does not qualify as
investment property. The Group considers each property separately in making its judgment.
*SGVMC112179*
- 33 Distinction between real estate inventories and land and improvements
The Group determines whether a property will be classified as real estate inventories or land and
improvements. In making this judgment, the Group considers whether the property will be sold in
the normal operating cycle (Real estate inventories) or whether it will be retained as part of the
Group’s strategic landbanking activities for development or sale in the medium or long-term
(Land and improvements).
HTM investments
The classification of HTM investments requires significant judgment. In making this judgment,
the Group evaluates its intention and ability to hold such investments to maturity. If the Group
fails to keep these investments to maturity other than in certain specific circumstances, it will be
required to reclassify the entire portfolio as AFS investments. The investments would therefore
be measured at fair value and not at amortized cost.
Impairment of AFS equity investments
The Group treats AFS equity investments as impaired when there has been a significant or
prolonged decline in the fair value below its cost or where other objective evidence of impairment
exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group
treats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than 6 months for quoted
equity securities. In addition, the Group evaluates other factors, including normal volatility in
share price for quoted equities and the future cash flows and the discount factors for unquoted
equities.
Financial assets not quoted in an active market
The Group classifies financial assets by evaluating, among others, whether the asset is quoted or
not in an active market. Included in the evaluation on whether a financial asset is quoted in an
active market is the determination on whether quoted prices are readily and regularly available,
and whether those prices represent actual and regularly occurring market transactions on an arm’s
length basis.
Contingencies
The Group is currently involved in various legal proceedings. The estimate of the probable costs
for the resolution of these claims has been developed in consultation with outside counsel
handling the defense in these matters and is based upon an analysis of potential results. The
Group currently does not believe that these proceedings will have a material effect on the Group’s
financial position. It is possible, however, that future results of operations could be materially
affected by changes in the estimates or in the effectiveness of the strategies relating to these
proceedings (see Note 32).
Management’s Use of Estimates
The key assumptions concerning the future and other sources of estimation and uncertainty at the
balance sheet date that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.
*SGVMC112179*
- 34 Revenue and cost recognition
ALI Group’s revenue recognition policies require management to make use of estimates and
assumptions that may affect the reported amounts of revenue and costs. ALI Group’s revenue
from real estate and construction contracts are recognized based on the percentage of completion
measured principally on the basis of the estimated completion of a physical proportion of the
contract work, and by reference to the actual costs incurred to date over the estimated total costs
of the project.
Estimating allowance for impairment losses
The Group maintains allowance for doubtful accounts based on the result of the individual and
collective assessment under PAS 39. Under the individual assessment, the Group is required to
obtain the present value of estimated cash flows using the receivable’s original effective interest
rate. Impairment loss is determined as the difference between the receivable’s carrying balance
and the computed present value. Factors considered in individual assessment are payment history,
past due status and term. The collective assessment would require the Group to group its
receivables based on the credit risk characteristics (customer type, payment history, past-due
status and term) of the customers. Impairment loss is then determined based on historical loss
experience of the receivables grouped per credit risk profile. Historical loss experience is
adjusted on the basis of current observable data to reflect the effects of current conditions that did
not affect the period on which the historical loss experience is based and to remove the effects of
conditions in the historical period that do not exist currently. The methodology and assumptions
used for the individual and collective assessments are based on management's judgment and
estimate. Therefore, the amount and timing of recorded expense for any period would differ
depending on the judgments and estimates made for the year.
As of December 31, 2008 and 2007, allowance for impairment losses amounted to P
=460.9 million
and P
=442.4 million, respectively. Accounts and notes receivable, net of allowance for doubtful
accounts, amounted to P
=30.0 billion and P
=20.8 billion as of December 31, 2008 and 2007,
respectively (see Note 6).
Evaluation of net realizable value of inventories
Inventories are valued at the lower of cost or NRV. This requires the Group to make an estimate
of the inventories’ estimated selling price in the ordinary course of business, cost of completion
and costs necessary to make a sale to determine the NRV. For real estate inventories, the Group
adjusts the cost of its real estate inventories to net realizable value based on its assessment of the
recoverability of the inventories. In determining the recoverability of the inventories,
management considers whether those inventories are damaged or if their selling prices have
declined. Likewise, management also considers whether the estimated costs of completion or the
estimated costs to be incurred to make the sale have increased. In the event that NRV is lower
than the cost, the decline is recognized as an expense. The amount and timing of recorded
expenses for any period would differ if different judgments were made or different estimates were
utilized. Inventories carried at cost amounted to P
=8.0 billion and P
=7.1 billion as of
December 31, 2008 and 2007, respectively. Inventories carried at NRV amounted to P
=2.0 billion
and P
=1.8 billion as of December 31, 2008 and 2007, respectively (see Note 7).
*SGVMC112179*
- 35 Evaluation of asset impairment
The Group reviews investments in associates and jointly controlled entities, investment
properties, property, plant and equipment and intangible assets for impairment of value.
Impairment for goodwill is assessed at least annually. This includes considering certain
indications of impairment such as significant changes in asset usage, significant decline in assets’
market value, obsolescence or physical damage of an asset, plans in the real estate projects,
significant underperformance relative to expected historical or projected future operating results
and significant negative industry or economic trends.
The Group estimates the recoverable amount as the higher of the net selling price and value in
use. In determining the present value of estimated future cash flows expected to be generated
from the continued use of the assets, the Group is required to make estimates and assumptions
that may affect investments in associates and jointly controlled entities, investment properties,
property, plant and equipment and intangible assets.
For goodwill, this requires an estimation of the recoverable amount which is the net selling price
or value in use of the cash-generating units to which the goodwill is allocated. Estimating a value
in use amount requires management to make an estimate of the expected future cash flows for the
cash generating unit and also to choose a suitable discount rate in order to calculate the present
value of cash flows.
For 2008, the Group’s impairment test for goodwill is based on value in use calculations that use
a discounted cash flow model. The cash flows are derived from the budget for the next five years
and assumes a steady growth rate. The recoverable amount is most sensitive to discount rate used
for the discounted cash flow model as well as the expected future cash inflows and the growth
rate used for extrapolation purposes.
In determining the amount of impaired goodwill in 2007, the Group determined the recoverable
amount of the investment in a subsidiary based on the estimated net selling price of the cash
generating unit to which the goodwill is allocated. The excess of the carrying amount of the
investment over the estimated net selling price is allocated first to the goodwill, resulting in an
impairment loss of P
=662.6 million (see Note 13).
Investments in associates and jointly controlled entities, investment properties, property, plant and
equipment and intangible assets amounted to P
=107.1 billion and P
=100.4 billion as of
December 31, 2008 and 2007, respectively (see Notes 9, 11, 12 and 13).
Estimating useful lives of investment properties, property, plant and equipment, and intangible
assets
The Group estimated the useful lives of its investment properties, property, plant and equipment
and intangible assets based on the period over which the assets are expected to be available for
use. The estimated useful lives of investment properties, property, plant and equipment and
intangible assets are reviewed at least annually and are updated if expectations differ from
previous estimates due to physical wear and tear and technical or commercial obsolescence on the
use of these assets. It is possible that future results of operations could be materially affected by
changes in these estimates brought about by changes in factors mentioned above. A reduction in
the estimated useful lives would increase depreciation expense and decrease noncurrent assets.
*SGVMC112179*
- 36 Investment properties, property, plant and equipment and intangible assets amounted to
=39.0 billion and P
P
=29.2 billion as of December 31, 2008 and 2007, respectively (see Notes 11, 12
and 13).
Deferred tax assets
The Group reviews the carrying amounts of deferred income taxes at each balance sheet date and
reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable income
will be available to allow all or part of the deferred tax assets to be utilized. However, there is no
assurance that the Group will generate sufficient taxable income to allow all or part of deferred
tax assets to be utilized. The Group looks at its projected performance in assessing the
sufficiency of future taxable income.
As of December 31, 2008 and 2007, the Group has net deferred tax assets amounting to
=1,132.8 million and P
P
=983.6 million, respectively and net deferred tax liabilities amounting to
=185.5 million and P
P
=155.8 million, respectively (see Note 21).
Share-based payments
The expected life of the options is based on the expected exercise behavior of the stock option
holders and is not necessarily indicative of the exercise patterns that may occur. The volatility is
based on the average historical price volatility which may be different from the expected volatility
of the shares of stock of the Group.
Total expense arising from share-based payments recognized by the Group amounted to
=342.9 million in 2008, P
P
=288.0 million in 2007 and P
=285.4 million in 2006.
Estimating pension obligation and other retirement benefits
The determination of the Group’s obligation and cost of pension and other retirement benefits is
dependent on the selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in Note 23 to the consolidated financial statements and include
among others, discount rates, expected returns on plan assets and rates of salary increase. While
the Group believes that the assumptions are reasonable and appropriate, significant differences in
the actual experience or significant changes in the assumptions materially affect retirement
obligations. See Note 23 to the consolidated financial statements for the related balances.
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the consolidated
balance sheet or disclosed in the notes to the consolidated financial statements cannot be derived
from active markets, they are determined using internal valuation techniques using generally
accepted market valuation models. The inputs to these models are taken from observable markets
where possible, but where this is not feasible, estimates are used in establishing fair values.
These estimates may include considerations of liquidity, volatility, and correlation. Certain
financial assets and liabilities were initially recorded at fair values by using the discounted cash
flow method.
*SGVMC112179*
- 37 -
4. Cash and Cash Equivalents
This account consists of the following:
2007
(In Thousands)
=4,041,960
P
P
=3,772,560
32,793,589
39,113,232
=36,835,549
P
P
=42,885,792
2008
Cash on hand and in banks
Cash equivalents
Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents are short-term,
highly liquid investments that are made for varying periods of up to three months depending on
the immediate cash requirements of the Group, and earn interest at the prevailing short-term rates.
5. Short-term Investments
This account consists of the following:
2007
(In Thousands)
=2,287,606
P
P
=1,008,924
1,400,000
–
=3,687,606
P
P
=1,008,924
2008
Money market placements
Investment Management Account (IMA)
Money market placements are short-term investments made for varying periods of more than three
months and up to six months and earn interest at the respective short-term investment rates.
The IMA is a six-month investment made through a Directional IMA with a local bank where
funds are invested in special depository accounts with the Bangko Sentral ng Pilipinas (BSP).
6. Accounts and Notes Receivable
This account consists of the following:
2007
2008
(In Thousands)
Trade:
Real estate
Electronics manufacturing
Automotive
Information technology and business process
outsourcing (BPO)
International and others
P
=10,565,254
3,152,168
665,670
=9,412,522
P
2,972,599
779,768
352,084
64,074
362,238
66,943
(Forward)
*SGVMC112179*
- 38 -
Related parties (Note 27)
Advances to other companies
Advances to contractors and suppliers
Others
Less allowance for doubtful accounts
Less noncurrent portion
2007
2008
(In Thousands)
=2,395,624
P
P
=8,441,996
2,231,057
2,735,712
1,394,106
2,496,665
1,660,794
1,965,297
21,275,651
30,438,920
442,404
460,889
20,833,247
29,978,031
4,010,373
6,694,021
=16,822,874
P
P
=23,284,010
The classes of trade receivables of the Group follow:
Real estate
Real estate receivables are receivables relating to residential development which pertain to
receivables from the sale of high-end, upper middle-income and affordable residential lots and
units and leisure community developments, construction contracts which pertain to receivables
from third party construction projects, shopping centers which pertain to lease receivables of
retail space, corporate business which pertain to lease receivables of office and factory buildings
and receivables from the sale of office buildings and industrial lots, and management fees which
pertain to facility management fees receivable.
The sales contracts receivable, included in real estate receivables, are collectible in monthly
installments over a period of one to ten years and bear annual interest rates ranging from 2.5% to
18.0% computed on the diminishing balance of the principal. Titles to real estate properties are
not transferred to the buyers until full payment has been made.
Electronics manufacturing
Electronics manufacturing receivables pertain to receivables arising from manufacturing and other
related services for electronic products and components and collectible within 30 to 60 days from
invoice date.
Automotive
Automotive receivables are receivables relating to manufacture and sale of passenger cars and
commercial vehicles and are collectible within 30 to 90 days from date of sale.
Information technology and business process outsourcing
Information technology and business process outsourcing receivables arose from venture capital
for technology businesses; provision of value-added content for wireless services, online
business-to-business and business-to-consumer services; electronic commerce; and technology
infrastructure sales and technology services; and onshore- and offshore-business process
outsourcing services.
*SGVMC112179*
- 39 International and others
International and other receivables arose from investments in overseas property companies and
projects, charter services, agri-business and others.
Receivables from related parties and advances to other companies
Receivable from related parties includes notes receivable issued to related parties which are
interest bearing and payable based on the terms of the notes. Advances to other companies are
due and demandable.
Advances to contractors and suppliers
Advances to contractors are recouped every progress billing payment depending on the percentage
of accomplishment.
Others
Other receivables include accrued interest receivable, receivable from employees and other
nontrade receivables.
*SGVMC112179*
- 40 Movements in the allowance for doubtful accounts follow (in thousands):
At January 1
Provisions during the year
(Note 19)
Write-offs
Reversals
At December 31
Individually impaired
Collectively impaired
Total
Gross amount of loans and
receivables individually
determined to be impaired,
before deducting any
individually assessed
impairment allowance
At January 1
Provisions during the year
(Note 19)
Write-offs
Reversals
At December 31
Individually impaired
Collectively impaired
Total
Gross amount of loans and
receivables individually
determined to be impaired,
before deducting any
individually assessed
impairment allowance
Real Estate
P
=119,508
Electronics
Manufacturing
P
=31,180
61,526
(44,305)
–
P
=136,729
P
=82,628
54,101
P
=136,729
7,256
–
(2,159)
P
=36,277
P
=36,277
–
P
=36,277
P
=83,124
P
=36,277
Real Estate
=106,976
P
Electronics
Manufacturing
=20,449
P
36,065
(22,818)
(715)
=119,508
P
=32,119
P
87,389
=119,508
P
31,003
(13,308)
(6,964)
=31,180
P
=31,180
P
–
=31,180
P
=32,119
P
=31,180
P
Automotive
P
=26,107
217
–
–
P
=26,324
P
=217
26,107
P
=26,324
2008
Information
Technology
and BPO
P
=18,261
International
and Others
P
=61,160
Others
P
=186,188
Total
P
=442,404
5,866
–
(5,007)
P
=19,120
P
=19,120
–
P
=19,120
–
–
–
P
=61,160
P
=60,134
1,026
P
=61,160
14,006
–
(18,915)
P
=181,279
P
=178,218
3,061
P
=181,279
88,871
(44,305)
(26,081)
P
=460,889
P
=376,594
84,295
P
=460,889
P
=217
P
=19,120
P
=60,134
P
=225,012
P
=423,884
Automotive
=32,925
P
2007
Information
Technology
and BPO
=14,045
P
International
and Others
=61,142
P
Others
=206,100
P
Total
=441,637
P
4,216
–
–
=18,261
P
=18,261
P
–
=18,261
P
18
–
–
=61,160
P
=60,134
P
1,026
=61,160
P
56,399
(75,954)
(357)
=186,188
P
=185,462
P
726
=186,188
P
127,701
(118,898)
(8,036)
=442,404
P
=327,156
P
115,248
=442,404
P
=18,261
P
=60,134
P
=232,256
P
=373,950
P
–
(6,818)
–
=26,107
P
=–
P
26,107
=26,107
P
=–
P
*SGVMC112179*
- 41 As of December 31, 2008 and 2007, certain real estate receivables with a nominal amount of
=9,485.5 million and P
P
=5,865.7 million, respectively, were recorded initially at fair value. The fair
value of the receivables was obtained by discounting future cash flows using the applicable rates
of similar types of instruments. The unamortized discount amounted to P
=830.4 million and
=768.7 million as of December 31, 2008 and 2007, respectively.
P
In November 2008, ALI Group entered into agreements with certain financial institutions for the
sale of real estate receivables without recourse amounting to P
=1,537.0 million at an average
discount rate of 6.4%. The discount on these receivables amounting to P
=103.8 million has been
included under “Other charges” in the consolidated statement of income.
7. Inventories
This account consists of the following:
2007
2008
(In Thousands)
Real estate inventories:
Subdivision land for sale
At cost
At NRV
Condominium, residential and commercial
units for sale - at cost
Club Shares - at cost
Materials, supplies and others - at NRV (cost of
=1,650,194 in 2008 and P
P
=1,301,195 in 2007)
Work-in-process - at cost
Vehicles - at cost
Finished goods - at cost
Parts and accessories - at NRV (cost of P
=135,296 in
2008 and P
=146,468 in 2007)
P
=3,156,622
608,955
=3,429,872
P
455,100
3,681,273
281,022
2,341,030
57,978
1,296,231
344,240
265,478
268,958
1,196,332
294,558
719,766
228,151
108,576
P
=10,011,355
119,748
=8,842,535
P
Inventories recognized as cost of sales amounted to P
=40.3 billion and P
=34.4 billion in 2008 and
2007, respectively, and were included under costs of sales and services in the consolidated
statement of income.
In 2008, the Group recorded provision for impairment losses on inventories amounting to
=136.6 million (see Note 19).
P
*SGVMC112179*
- 42 -
8. Other Current Assets
This account consists of the following:
2007
(In Thousands)
=622,097
P
P
=2,233,201
1,116,792
1,845,997
494,628
1,209,148
621,653
1,102,560
–
65,405
143,322
–
572,180
634,083
=3,570,672
P
P
=7,090,394
2008
Financial assets at FVPL
Prepaid expenses
Creditable withholding tax
Value-added input tax
HTM investments
Derivative assets
Others
Financial assets at FVPL consist of:
Held for trading:
Government securities
Designated as at FVPL:
Investment securities
2008
2007
(In Thousands)
P
=1,778,720
=318,018
P
454,481
P
=2,233,201
304,079
=622,097
P
Government securities pertain to treasury bonds and treasury bills that have yields to maturity of
5.5% to 6.4% in 2008 and 5.7% in 2007, respectively. The Group recognized unrealized loss on
these government securities amounting to P
=3.9 million in 2008, unrealized gain of P
=18.0 million
in 2007 and unrealized gain of P
=43.8 million in 2006 (see Note 19). The Group recognized
realized gain on disposals amounting to P
=1.1 million and P
=52.6 million in 2008 and 2007,
respectively (see Note 19).
Investment securities pertain mostly to the Group’s investment in The Rohatyn Group (TRG)
Allocation LLC, which has a fair value of US$9.4 million (P
=448.2 million) and US$6.6 million
(P
=271.5 million), as of December 31, 2008 and 2007, respectively. Unrealized gains on this
investment amounted to US$2.9 million (P
=119.5 million) and US$0.5 million (P
=22.1 million) in
2008 and 2007, respectively (see Note 19).
Prepaid expenses mainly include prepayments for commissions, marketing fees, advertising and
promotion, taxes and licenses, rentals and insurance.
Creditable withholding tax amounting to P
=473.1 million as of December 31, 2007 was reclassified
from “Accounts and notes receivable - net” to “Other current assets”.
The value-added input tax is applied against value-added output tax. The remaining balance is
recoverable in future periods.
*SGVMC112179*
- 43 As of December 31, 2008, HTM investments pertain to fixed rate treasury notes that bear
effective interest rate of 11.4% and will mature on February 25, 2009. In prior years, HTM
investment is presented as part of “Investments in bonds and others securities” in the consolidated
balance sheet (see Note 10).
As of December 31, 2007, derivative assets pertain to those of ALI and IMI. ALI has an
outstanding nondeliverable forward contract with a notional amount of US$25.0 million and a
forward rate of P
=44.48 with maturity date of October 30, 2008. This forward contract was
preterminated in April 2008. Fair value gains amounting to P
=7.0 million was recognized in 2008
and marked-to-market gain amounting to P
=59.0 million was recognized in 2007. IMI has an
outstanding structured currency option with a notional amount of US$11.1 million. Fair value
gain amounting to P
=168.8 million was recognized in 2007, inclusive of P
=84.3 million mark-tomarket gain.
In 2008, IMI entered into additional structured currency options for economic hedges which it
unwound in the 2nd quarter of 2008 (see Note 19). The remaining outstanding structured
currency options after the unwinding program have maturity dates of up to November 2008. As
of December 31, 2008, IMI has no outstanding derivative assets.
Fair Value Changes on Derivatives
The net movements in fair values of the Group’s freestanding derivative instruments as of
December 31, 2008 and 2007 follow:
2007
(In Thousands)
=–
P
P
=143,322
2008
Balance at beginning of year
Net changes in fair value of derivatives
not designated as accounting hedges
Fair value of settled instruments
Balance at end of year
(1,448,978)
(1,305,656)
(1,305,656)
P
=–
227,841
227,841
84,519
=143,322
P
The net changes in fair value of derivatives not designated as accounting hedges pertaining to free
standing derivative instruments include hedging losses amounting P
=1,456 million in 2008
included under “Interest expense and other financing charges” and fair value gain amounting to
=7.0 million in 2008 and P
P
=227.8 million in 2007 included as part of “Net marked-to-market gain”
under “Other income” account in the consolidated statement of income (see Note 19).
Embedded Derivatives (see Note 16)
Balance at inception
Net changes in fair value of derivatives
not designated as accounting hedges
Fair value of settled instruments
Balance at end of year
2008
=84,907
P
(4,387)
80,520
–
=80,520
P
*SGVMC112179*
- 44 The net changes in fair value of derivatives not designated as accounting hedges during the year
pertaining to embedded derivatives were included as part of “Net marked-to-market gain” under
“Other income” in the consolidated statement of income (see Note 19). As of December 31,
2008, these embedded derivatives were classified under ”Other Noncurrent Assets” account.
9. Investments in Associates and Jointly Controlled Entities
This account consists of the following:
2007
(As Restated Note 2)
2008
(In Thousands)
=52,185,116
P
P
=51,383,363
17,746,625
16,532,190
Acquisition cost
Accumulated equity in earnings
Cumulative translation adjustments and equity
reserves
224,841
P
=68,140,394
1,339,891
=71,271,632
P
The Group’s equity in the net assets of its associates and jointly controlled entities and the related
percentages of ownership are shown below.
Percentage of Ownership
2008
Domestic:
Bank of the Philippine Islands and subsidiaries (BPI)
Globe Telecom, Inc. and subsidiaries (Globe)*
EGS Corporation*
MWCI and subsidiaries*
Emerging City Holdings, Inc. (ECHI)*
Cebu Holdings, Inc. and subsidiaries (CHI)
North Triangle Depot Commercial Corporation
(NTDCC)
Berkshires Holdings, Inc. (BHI)*
Philwater Holdings Company, Inc. (Philwater)*
Bonifacio Land Corporation (BLC)
Asiacom Philippines, Inc. (Asiacom)*
Alabang Commercial Corporation (ACC)*
eTelecare Global Solutions, Inc. (eTelecare)
ALI Property Partners Holdings Corporation
(APPHC) (see Note 20)
Foreign:
Arch Asian Partners L.P.
Others
2007
33.5**
30.5
50.0
29.9**
50.0
47.2
33.5**
33.3
–
30.0**
50.0
47.2
49.0
50.0
60.0
5.0
60.0
50.0
–
49.0
50.0
60.0
5.0
60.0
50.0
22.2**
–
60.0*
19.2**
Various
19.4**
Various
Carrying Amounts
2007
(As Restated Note 2)
2008
(In Millions)
=30,852
P
P
=28,533
21,461
18,000
–
3,346
2,712
3,188
2,485
2,823
1,810
1,940
1,555
1,210
1,193
1,118
843
595
–
1,541
1,065
1,030
934
794
573
2,753
–
238
959
2,837
P
=68,140
894
2,130
=71,272
P
* Jointly controlled entities.
** Effective ownership interest of the Company.
*SGVMC112179*
- 45 The fair value of investments in listed associates and jointly controlled entities for which there
are published price quotations amounted to P
=79,767.2 million and P
=140,115.2 million as of
December 31, 2008 and 2007, respectively.
Financial information on significant associate and jointly controlled entities (amounts in millions,
except earnings per share figures) follows:
BPI
Total resources
Total liabilities
Minority interest
Net interest income
Other income
Other expenses
Net income attributable to:
Equity holders of the bank
Minority interests
Earnings per share
Basic
Diluted
2008
P
=666,612
602,740
938
19,463
10,321
18,312
2007
=637,285
P
566,154
1,120
18,950
13,604
18,311
6,423
134
10,012
214
1.98
1.98
3.09
3.09
Globe
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Net operating revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
2008
P
=17,541
102,202
119,743
33,728
35,923
69,651
65,964
48,118
11,276
2007
=18,740
P
97,881
116,621
27,600
33,604
61,204
68,042
47,991
13,277
84.75
84.61
100.07
99.58
MWCI
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
2008
P
=8,595
27,774
36,369
4,231
17,680
21,911
2007
(As restated)
=4,122
P
23,819
27,941
4,427
11,036
15,463
(Forward)
*SGVMC112179*
- 46 -
MWCI
Revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
2008
P
=8,914
4,396
2,788
2007
(As restated)
=7,332
P
3,864
2,597
1.13
1.13
1.06
1.06
The following significant transactions affected the Group’s investments in its associates and
jointly controlled entities:
Investment in BPI
In 2007, BPI adopted the provisions of Pre-need Rule 31, As Amended, Accounting Standards for
Pre-need Plans and Pre-need Uniform Chart of Accounts, as required by the SEC. As provided
under SEC Interpretative Bulletin No. 1, Series of 2008, the impact of the adoption did not result
in a restatement of BPI’s prior year financial statements. The adjustment resulting from the
transition to the Amended Pre-need Rule 31 amounting to P
=253.5 million was reflected in the
opening balance of retained earnings as of January 1, 2007 of BPI. The Company’s share in the
said adjustment amounting to P
=85.0 million is reflected as a reduction in the January 1, 2007
retained earnings.
Investment in Globe
In June 2008, the Company sold 3.8 million shares to Singapore Telecom, Inc. (SingTel)
decreasing its ownership interest in Globe’s common shares from 33.3% to 30.5%. The
Company’s gain arising from the sale of investments in Globe shares amounted to P
=2.7 billion
(see Note 19). The Company also holds 60% of Asiacom Philippines, Inc., which owns
158.5 million Globe preferred shares. The Company does not exercise control over Asiacom
since it is a joint venture with SingTel.
Investment in EGS Corporation and eTelecare
In 2007, LiveIt acquired additional 3.9 million eTelecare common shares at a cost of P
=1.9 billion
increasing its ownership interest in eTelecare from 11.2% to 22.2% as of December 31, 2007.
LiveIt accounted for its investment in eTelecare using the equity method from the date that
eTelecare became an associate.
On September 19, 2008, NewBridge International Investments, Ltd. (NewBridge), a subsidiary of
the Company through LIL, together with Providence Equity Partners (Providence), entered into a
Definitive Agreement to acquire up to all of the outstanding shares of eTelecare common shares
and American Depository Shares (ADS) for US$9.00 per share. New Bridge and Providence
formed a 50-50 joint venture company, EGS Corporation to own 100% of EGS Acquisition Corp.
On December 12, 2008, EGS Acquisition Corp. acquired through a tender offer, 98.7% of the
outstanding eTelecare common shares and ADS for a total consideration of US$285.3 million
plus US$9.4 million in transactions costs. The 22.2% eTelecare shares owned by Newbridge
were tendered and included in the purchase.
*SGVMC112179*
- 47 Investment in MWCI
Beginning January 1, 2008, MWCI adopted Philippine Interpretation IFRIC 12, Service
Concession Arrangements (see Note 2). The impact on the Company is a decrease in the retained
earnings and investments in associates and jointly controlled entities balance as of January 1,
2008 and 2007 by P
=288.6 million and P
=347.7 million, respectively.
Investment in NTDCC
In 2007, a series of capital calls were made by NTDCC amounting to P
=484.8 million, increasing
ALI’s overall invested capital to P
=1,450.0 million or a 49.29% stake.
NTDCC was assigned development rights over certain areas of the MRT Depot in Quezon City by
MRT Development Co. to construct and operate a commercial center under certain terms and
conditions until the end of a 50-year development period renewable for another 25 years.
NTDCC was primarily organized to own and operate the commercial center atop the MRT Depot.
NTDCC officially started the construction of the shopping center, now known as TriNoma, in
2005 and became operational on May 16, 2007.
Investment in ECHI, BHI and BLC
ALI and Regent’s (an ALI subsidiary) investments in BLC are accounted for using the equity
method because the ALI Group has significant influence over BLC. ECHI and BHI are joint
venture companies established by ALI to indirectly hold its equity interest in BLC.
On July 31, 2008, the ALI Group acquired additional 4,360,178 shares of BLC from Fort
Bonifacio Development Corporation amounting to P
=689.0 million, equivalent to 7.66% ownership
in BLC. This resulted in an increase in ALI Group’s effective interest in BLC from 37.23% to
41.10%.
Investment in Philwater
The Company does not exercise control over Philwater since it is a joint venture with United
Utilities Pacific Holdings BV.
Investment in ARCH Fund
In 2006, the Company and ALI entered into a Shareholders’ Agreement with ARCH Capital and
Great ARCH Co. Limited, wherein the Company and ALI committed to invest a total of
US$75.0 million in a private equity fund that will explore property markets in Asia, excluding
Japan and Philippines. On the same year, an Amendment and Adherence Agreement was entered
into by the same parties, together with Fine State Group Limited (Fine State) and Green Horizons
Holdings Limited (Green Horizons), transferring the interests of the Company and ALI in ARCH
Capital into Fine State and Green Horizons, respectively. Fine State and Green Horizons are
effectively 100% owned Hong Kong based subsidiaries of the Company and ALI, respectively.
The Company (through Fine State) and ALI (through Green Horizons) both have interests in the
fund management company, ARCH Capital, which is tasked to raise third party capital and pursue
investments for the Fund. As of December 31, 2008 and 2007, the Company (through Fine State)
and ALI (through Green Horizon) owned a combined interest in ARCH Capital of 50%.
*SGVMC112179*
- 48 In 2007, the private equity fund, called ARCH Asian Partners, L.P. (Fund) was established. As of
December 31, 2007, the Fund achieved its final closing, resulting in a total investor commitment
of US$330.0 million. As a result, a portion of the funds disbursed by the Company and ALI
which were invested into the Fund has been returned in 2007, reducing the Company and ALI’s
overall invested capital to P
=580.3 million as of December 31, 2007. In 2008, the Fund issued a
capital call where the Company and ALI’s share amounted to US$3.9 million.
The Company and ALI exercise significant influence over the Fund by virtue of their interest in
the general partner and in ARCH Capital. Accordingly, the Company and ALI account for their
investments in the Fund using the equity method of accounting.
The excess of cost of investments over the Group’s equity in the net assets of its associates and
jointly controlled entities accounted for under the equity method amounted to P
=10.6 billion and
=10.8 billion as of December 31, 2008 and 2007, respectively.
P
10. Investments in Bonds and Other Securities
This account consists of investments in:
2007
2008
(In Thousands)
AFS equity investments
Quoted
Unquoted
HTM investments (see Note 8)
Bonds
P
=1,449,982
1,614,520
3,064,502
P628,112
=
1,796,854
2,424,966
–
P
=3,064,502
67,947
=2,492,913
P
The unquoted equity investments include investments in TRG Global Opportunity Fund (GOF)
and TRG Special Opportunity Fund (SOF). The GOF is a multi-strategy hedge fund which
invests primarily in emerging markets securities. The SOF focuses on less liquid assets in
emerging markets (Latin America, Asia, Emerging Europe, Middle East and Africa) such as
distressed debt, NPLs, corporate high yield, mid and small cap stocks, real estate (debt and
equity) and private equity. It also includes the Group’s investments in Red River Holding in
2008. The Red River Holding is a fund that seeks to achieve a balanced and diversified portfolio
of Vietnamese companies.
Unquoted investments in shares of stock also includes unlisted preferred shares in a public utility
company which the Group will continue to carry as part of the infrastructure that it provides for
its real estate development projects. These are carried at cost less impairment, if any.
*SGVMC112179*
- 49 As of December 31, 2008 and 2007, the Net Unrealized Gain (Loss) on AFS financial assets as
reflected in the equity section is broken down as follows:
2008
(In Thousands)
Net unrealized gain on AFS financial assets of
the Company and its consolidated subsidiaries
Share in the net unrealized gain (loss) on AFS of
associates
P
=78,320
(709,447)
(P
=631,127)
2007
=834,589
P
877,427
=1,712,016
P
The rollforward of unrealized gain (loss) on AFS financial assets of the Company and its
consolidated subsidiaries is as follows:
Balance at beginning of year
Changes in fair value recognized in equity
Loss (gain) removed from equity and recognized in
profit and loss
Balance at end of year
2007
2008
(In Thousands)
=1,739,515
P
P
=834,589
(882,257)
(1,862,720)
1,106,451
P
=78,320
(22,669)
=834,589
P
11. Investment Properties
The movements of investment properties follow:
2007
2008
(In Thousands)
Cost
At January 1
Additions
Addition through business combination (Note 20)
Disposals
Transfers
At December 31
Accumulated depreciation and amortization
and impairment losses
At January 1
Depreciation and amortization (Note 19)
Addition through business combination (Note 20)
Disposals
Reversal of impairment loss
At December 31
Net book value
P
=22,696,439
773,716
3,731,452
(308,271)
–
26,893,336
=21,523,096
P
929,835
–
(906,248)
1,149,756
22,696,439
5,280,266
730,845
73,828
(250,180)
–
5,834,759
P
=21,058,577
4,728,434
881,546
–
(208,997)
(120,717)
5,280,266
=17,416,173
P
*SGVMC112179*
- 50 Certain parcels of land are leased to several individuals and corporations. Some of the lease
contracts provide, among others, that within a certain period from the expiration of the contracts,
the lessee will have to demolish and remove all improvements (such as buildings) introduced or
built within the leased properties. Otherwise, the lessor will cause the demolition and removal
thereof and charge the cost to the lessee unless the lessor occupies and appropriates the same for
its own use and benefit.
The aggregate fair value of the Group’s investment properties amounted to P
=131.91 billion in
2008 and P
=123.8 billion in 2007. The fair values of the investment properties were determined
based on valuations performed by independent professional qualified appraisers.
Consolidated rental income from investment properties amounted to P
=5.9 billion in 2008,
=5.5 billion in 2007 and P
P
=5.2 billion in 2006. Consolidated direct operating expenses arising
from the investment properties amounted to P
=3.1 billion in 2008, P
=2.4 billion in 2007 and
=2.1 billion in 2006.
P
In 2007, investment properties which were damaged during the Glorietta 2 explosion and other
investment properties connected to the Ayala Center redevelopment with net book values of
=72.0 million and P
P
=141.9 million, respectively, were written off by ALI (see Note 19).
12. Property, Plant and Equipment
The movements in property, plant and equipment follow:
2008
Land,
Buildings and
Improvements
(see Note 16)
Cost
At January 1
Additions
Addition through business
combination (see Note 20)
Disposals
Transfers and others
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year (Note 19)
Impairment loss for the year
(Note 19)
Additions through business
combination (Note 20)
Disposals
Transfers and others
At December 31
Net book value
P
= 3,407,607
376,720
Machinery
and
Equipment
(see Note 26)
P
= 6,675,439
1,269,742
Hotel
Property and
Equipment
(see Note 16)
P
= 2,693,069
236,064
Furniture,
Fixtures and Transportation
Equipment
Equipment
(In Thousands)
P
= 1,985,808
276,505
P
= 1,040,022
477,798
Constructionin-Progress
Total
P
= 1,354,449
3,328,603
P
= 17,156,394
5,965,432
227
(317,916)
351,257
3,817,895
70,046
(235,628)
(138,384)
7,641,215
–
(2,001)
–
2,927,132
23,698
(59,994)
(226,327)
1,999,690
1,640
(118,428)
8,666
1,409,698
1,760,130
3,372,359
1,399,430
1,515,742
615,888
–
8,663,549
325,341
938,985
102,523
260,529
205,204
–
1,832,582
36,003
–
–
37,400
–
–
73,403
27
(283,376)
142,426
1,980,551
P
= 1,837,344
65,557
(187,297)
(123,609)
4,065,995
P
= 3,575,220
–
(2,001)
1,499,952
P
= 1,427,180
8,632
(44,063)
(183,429)
1,594,811
P
= 404,879
1,439
(89,250)
2,069
735,350
P
= 674,348
1,288,753
(4,216)
–
5,967,589
–
–
–
P
= 5,967,589
1,384,364
(738,183)
(4,788)
23,763,219
75,655
(605,987)
(162,543)
9,876,659
P
= 13,886,560
*SGVMC112179*
- 51 2007
Land,
Buildings and
Improvements
(see Note 16)
Machinery
and
Equipment
(see Note 26)
Hotel
Property and
Equipment
(see Note 16)
=3,435,033
P
141,277
(190,745)
22,042
3,407,607
=6,327,518
P
885,535
(156,141)
(381,473)
6,675,439
=2,702,209
P
29,511
(38,651)
–
2,693,069
=2,068,901
P
156,172
(119,797)
(119,468)
1,985,808
=937,686
P
184,712
(81,788)
(588)
1,040,022
1,429,479
2,783,886
1,326,151
1,280,517
546,616
357,986
(27,335)
1,760,130
=1,647,477
P
893,756
(305,283)
3,372,359
=3,303,080
P
111,231
(37,952)
1,399,430
=1,293,639
P
318,620
(83,395)
1,515,742
=470,066
P
137,584
(68,312)
615,888
=424,134
P
Cost
At January 1
Additions
Disposals
Transfers and others
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year (Note 19)
Disposals
At December 31
Net book value
Furniture,
Fixtures and
Equipment
(In Thousands)
Transportation
Equipment
Constructionin-Progress
=952,377
P
1,904,972
(23,802)
(1,479,098)
1,354,449
Total
=16,423,724
P
3,302,179
(610,924)
(1,958,585)
17,156,394
–
–
–
–
=1,354,449
P
7,366,649
1,819,177
(522,277)
8,663,549
=8,492,845
P
Consolidated depreciation and amortization expense on property, plant and equipment amounted
to P
=1,832.6 million in 2008, P
=1,819.2 million in 2007 and P
=1,681.4 million in 2006 (see Note 19).
In 2008, IMI recognized an impairment loss amounting to P
=73.4 million representing the carrying
amount of the production assets dedicated to EPSON Imaging Devices, Panasonic
Communication of the Philippines and Panac Co. Ltd., net of reimbursements received, following
the pre-termination of the existing manufacturing agreements with said companies (see Note 19).
As of December 31, 2008 the Group has commitments of P
=8,897.6 million relating to the
completion of the construction-in-progress projects.
13. Intangible Assets
The movements in intangible assets follow:
Cost
At January 1
Addition through business
combination (Note 20)
Exchange differences
At December 31
Accumulated amortization and
impairment loss
At January 1
Amortization (see Note 19)
Exchange differences
At December 31
Net book value
Goodwill
Customer
Relationships
Order
Backlog
2008
Unpatented
Technology
(In Thousands)
Developed
Software
Licenses
Total
P
=3,264,238
P
=936,354
P
=4,128
P
=4,128
P
=20,312
P
=140,946
P
=4,370,106
492,483
374,275
4,130,996
153,680
136,435
1,226,469
–
–
4,128
–
624
4,752
–
–
20,312
–
20,635
161,581
646,163
531,969
5,548,238
662,591
–
–
662,591
P
=3,468,405
414,487
318,766
62,655
795,908
P
=430,561
4,128
–
–
4,128
P
=–
1,652
826
249
2,727
P
=2,025
11,551
8,761
–
20,312
P
=–
–
48,436
–
48,436
P
=113,145
1,094,409
376,789
62,904
1,534,102
P
=4,014,136
*SGVMC112179*
- 52 -
Cost
At January 1
Addition through business
combination (Note 20)
Additions during the year
Exchange differences
At December 31
Accumulated amortization and
impairment loss
At January 1
Amortization (Note 19)
Impairment loss (Note 19)
Exchange differences
At December 31
Net book value
Goodwill
Customer
Relationships
Order
Backlog
2007
Unpatented
Technology
(In Thousands)
Developed
Software
Licenses
Total
=3,493,437
P
=1,035,092
P
=4,928
P
=4,928
P
=24,526
P
=–
P
=4,562,911
P
317,100
278
(546,577)
3,264,238
–
–
662,591
–
662,591
=2,601,647
P
–
12,000
(110,738)
936,354
–
–
(800)
4,128
–
–
(800)
4,128
–
–
(4,214)
20,312
–
140,946
–
140,946
317,100
153,224
(663,129)
4,370,106
127,142
320,923
–
(33,578)
414,487
=521,867
P
4,928
–
–
(800)
4,128
=–
P
986
926
–
(260)
1,652
=2,476
P
–
11,551
–
–
11,551
=8,761
P
–
–
–
–
–
=140,946
P
133,056
333,400
662,591
(34,638)
1,094,409
=3,275,697
P
Goodwill is mainly comprised of the excess of the acquisition cost over the fair value of the
identifiable assets and liabilities of companies acquired by IMI and Integreon, Inc.
Impairment testing of goodwill for IMI
Goodwill acquired through business combinations have been allocated to three individual CGUs
of IMI for impairment testing as follows:
2008
In US$
Speedy Tech Electronics, Ltd.
Saturn
M. Hansson Consulting, Inc.
US$45,128
657
441
US46,226
2007
In US$
In Php**
In Php*
(In Thousands)
US$45,128
P1,862,884
=
P
=2,144,483
657
27,121
31,221
441
18,204
20,956
US$46,226
=1,908,209
P
P
=2,196,660
*Translated using the closing exchange rate at the balance sheet date (US$1:P
=47.52)
**Translated using the closing exchange rate at the balance sheet date (US$1:P
=41.28)
The recoverable amounts of the CGUs have been determined based on value-in-use calculations
using cash flow projections from financial budgets approved by management covering a five-year
period. The pre-tax discount rate applied to cash flow projections is 10% and 11% in 2008 and
2007, respectively, and cash flows beyond the five-year period are extrapolated using a very
conservative steady growth rate of 1% which does not exceed the compound annual growth rate
for the global EMS industry.
Key assumptions used in value-in-use calculations
The calculations of value-in-use for the CGUs are most sensitive to assumptions on budgeted
gross margins, growth rates and pre-tax discount rates.
*SGVMC112179*
- 53 Gross margins are based on the mix of business model arrangements with the customers whether
semi or full turnkey. The forecasted growth rate is based on a very conservative steady growth
rate which does not exceed the compound annual growth rate for global EMS industry. Discount
rates reflect management’s estimate of the risks specific to each CGU. This is the benchmark
used by management to assess operating performance and to evaluate future investment proposals.
Based on the value-in-use calculations, the carrying values of the CGUs did not exceed their
recoverable amounts. Therefore, IMI did not recognize any impairment loss in 2008.
With regard to the assessment of value-in-use of the three CGUs, IMI management believes that a
reasonably possible change in any of the above key assumptions will not cause the carrying value
of the CGU to materially exceed its recoverable amount.
Impairment testing of goodwill for Integreon, Inc.
The Goodwill of Integreon, Inc. (Integreon) arose from the acquisition of the following
companies:
2008
In US$
CBF Group, Inc.
Integreon Managed
Solutions, Inc.
Datum Legal, Inc.
Contentscape
US$10,153
8,770
3,678
370
US$22,971
2007
In US$
In Php*
(In Thousands)
US$6,556
P
=482,471
416,750
174,779
17,582
P
=1,091,582
8,770
–
370
US$15,696
In Php**
=270,632
P
362,026
–
15,274
=647,932
P
*Translated using the closing exchange rate at the balance sheet date (US$1:P
=47.52)
**Translated using the closing exchange rate at the balance sheet date (US$1:P
=41.28)
Goodwill has been allocated to the Integreon CGU for purposes of impairment testing. The
recoverable amount of the CGU has been determined based on value-in-use calculation using cash
flow projections from financial budgets approved by management covering a five-year period.
The pre-tax discount rate applied to cash flow projections is 22% and cash flows beyond the
five-year period are extrapolated using a steady growth rate of 5%.
Key assumptions used in value-in-use calculation
The calculations of value-in-use for the CGU are most sensitive to the following assumptions:
revenue growth for the five-year projection period, growth rate beyond the five-year period and
the pre-tax discount rate. The assumptions are based on management’s estimate after considering
industry outlook.
Based on the value-in-use calculation, the carrying value of the CGU did not exceed its
recoverable amount. Therefore, Integreon did not recognize any impairment loss in 2008.
With regard to the assessment of value-in-use of the CGU, Integreon management believes that a
reasonably possible change in any of the above key assumptions will not cause the carrying value
of the CGU to materially exceed its recoverable amount.
*SGVMC112179*
- 54 -
14. Noncurrent Assets Held for Sale
In 2006, the Group had negotiations to sell its equity interests in Makati Property Ventures, Inc.
(MVPI) and Hermill Investments Pte. Ltd. (Hermill).
AHI, together with Ocmador Philippines B. V., agreed to sell MPVI to DBS Trustee Ltd. (Trustee
of Ascott Residence Trust) on March 22, 2007.
AIPL, through its 100%-owned Ayala International Holdings Limited (AIHL), entered into a Sale
and Purchase Agreement (SPA) with Hotel Properties Limited (HPL) on January 17, 2007 for the
sale of its 23.3% interest in Hermill, the holding company for The Forum Shopping Mall, a
17-storey retail-cum-office development along Orchard Road in Singapore. The consideration for
AIHL’s 23.3% stake is Singapore Dollars (SGD) 47 million. The SPA further provides that if,
within 3 years from the Completion Date of March 2007, Hermill is able to obtain approval from
the Singapore government for the demolition and re-development of The Forum Shopping Mall,
HPL shall pay AIHL SGD 3.5 million.
In 2007, the Group recognized a gain amounting to P
=598.7 million as a result of the
consummation of the sale of MPVI and P
=26.0 million as a result of the Hermill sale (included in
“Income associated with noncurrent assets held for sale” in the consolidated statements on
income).
The result of MPVI for 2006 is presented below (amounts in thousands):
Sales and services
Interest, fees, investment and other income
Cost of sales and services
Depreciation
General administrative expenses
Interest and other financing charges
Provision for income tax
Income associated with noncurrent assets held for sale
=733,261
P
12,871
746,132
339,457
102,446
23,475
39,527
85,969
590,874
=155,258
P
The carrying amounts of the major classes of assets and liabilities of MPVI and Hermill classified
as held for sale as of December 31, 2006 are as follows (amounts in thousands):
ASSETS
Cash
Accounts and notes receivable- net
Inventories
Other current assets
=324,362
P
44,382
4,407
5,446
(Forward)
*SGVMC112179*
- 55 ASSETS
Investment in joint venture
Property and equipment
Deferred tax assets
Other noncurrent assets
Noncurrent assets held for sale
LIABILITIES
Accounts payable and accrued expenses
Income tax payable
Current portion of long-term debt
Long-term debt
Liabilities directly associated with
noncurrent assets held for sale
=1,574,167
P
1,679,153
22,672
3,895
=3,658,484
P
=145,269
P
45,167
139,821
138,843
=469,100
P
Long-term debt comprises a fixed rate US$5.7 million bank loan having an effective rate of
8.55% repayable in full on September 15, 2008.
EPS on income associated with noncurrent assets held for sale attributable to equity holders of the
Company follows:
Income associated with noncurrent assets held for sale
Less: Income associated with noncurrent assets held for
sale attributable to minority interests
Weighted average number of common shares for basic
EPS
Dilutive shares arising from stock options
Adjusted weighted average number of common shares
for diluted EPS
Basic EPS
Diluted EPS
2007
2006
(In Thousands, except EPS figures)
=624,788
P
=155,258
P
139,982
484,806
108,681
46,577
496,787
2,374
495,654
2,435
499,161
=0.98
P
=0.97
P
498,089
=0.09
P
=0.09
P
15. Accounts Payable and Accrued Expenses
This account consists of the following:
Accounts payable
Accrued expenses
Accrued project costs
Dividends payable
2007
2008
(In Thousands)
=13,289,481
P
P
=15,671,340
6,044,523
6,998,095
540,618
2,022,903
1,213,727
1,333,740
(Forward)
*SGVMC112179*
- 56 -
2007
(In Thousands)
=223,887
P
P
=505,772
579,886
398,207
32,577
317,945
297,786
192,372
38,682
43,162
=22,261,167
P
P
=27,483,536
2008
Accrued personnel costs
Interest payable
Retentions payable
Related parties (Note 27)
Taxes payable
Accounts payable and accrued expenses are noninterest-bearing and are normally settled on 15- to
60-day terms. Other payables are noninterest-bearing and are normally settled within one year.
Accrued expenses consist mainly of light and power, marketing costs, film share, professional
fees, postal and communication, supplies, repairs and maintenance, transportation and travel,
security, insurance, and representation.
16. Short-term and Long-term Debt
Short-term debt consists of:
Philippine peso debt - with interest rates ranging
from 7.0% to 9.6% per annum in 2008 and 5.5%
to 7.9% per annum in 2007
Foreign currency debt - with interest rates ranging
from 2.5% to 6.4% per annum in 2008 and 2.7%
to 6.4% per annum in 2007
2008
2007
(In Thousands)
P
=1,501,000
=2,243,900
P
1,254,447
P
=2,755,447
390,248
=2,634,148
P
The Philippine peso debt consists mainly of ALI and its subsidiaries’ bank loans of
=1,279.5 million and P
P
=1,613.0 million as of December 31, 2008 and 2007, respectively. These
are unsecured peso-denominated short-term borrowings with interest rates ranging from 7.0% to
8.5% per annum in 2008 and 5.5% to 7.9% per annum in 2007.
The foreign currency debt consists mainly of IMI’s loans from various banks with interest rates
ranging from 2.5% to 3.6% per annum in 2008 and 2.7% to 4.1% per annum in 2007.
*SGVMC112179*
- 57 Long-term debt consists of:
2007
2008
(In Thousands)
The Company:
Bank loans - with interest rates ranging from
6.3% to 6.6% per annum in 2008 and 4.5% to
5.3% per annum in 2007 and varying maturity
dates up to 2013
Fixed Rate Corporate Notes (FXCNs) with
interest rates ranging from 6.7% to 10.4% per
annum and varying maturity dates up to 2014
Bonds due 2012
Syndicated term loan
Subsidiaries:
Loans from banks and other institutions:
Foreign currency - with interest rates ranging
from 2.7% to 15.0% per annum in 2008
and 6.0% to 15.0% per annum in 2007
Philippine peso - with interest rates ranging
from 9.5% to 20.0% per annum in 2008
and 5.0% to 20.0% per annum in 2007
Bonds:
Due 2008
Due 2009
Due 2013
FXCNs
8.125% Guaranteed Notes
Less current portion
P
=6,990,000
=7,129,091
P
10,662,500
6,000,000
1,584,907
25,237,407
10,680,000
6,000,000
–
23,809,091
10,985,557
9,639,934
7,819,128
2,866,532
–
106,930
4,000,000
3,580,000
–
26,491,615
51,729,022
1,478,871
P
=50,250,151
2,000,000
80,470
–
3,580,000
5,421,438
23,588,374
47,397,465
9,512,760
=37,884,705
P
The Company
Generally, the Company’s long-term loans are unsecured. Due to certain regulatory constraints in
the local banking system regarding loans to directors, officers, stockholders and related interest,
some of the Company’s credit facilities with a local bank are secured by shares of stock of a
consolidated subsidiary with carrying value of P
=2,844.0 million as of December 31, 2008 and
=1,809.9 million as of December 31, 2007 in accordance with BSP regulations.
P
All credit facilities of the Company outside of this local bank are unsecured, and their respective
credit agreements provide for this exception. The Company positions its deals across various
currencies, maturities and product types to provide utmost flexibility in its financing transactions.
*SGVMC112179*
- 58 In 2007, the Company issued P
=3.5 billion FXCNs consisting of 5- and 7-year notes to a local bank
with fixed interest rates of 6.725% and 6.7% per annum, respectively.
In 2005, the Company issued P
=7.2 billion FXCNs consisting of 5- and 7- year notes to various
institutions with fixed interest rates of 10.0% and 10.375% per annum, respectively.
In 2007, the Company issued 6.825% Fixed Rate Bonds with an aggregate principal amount of
=6.0 billion to mature in 2012. Prior to maturity, the Company may redeem in whole the
P
outstanding bonds on the twelfth and sixteenth coupon payment date. The bonds have been rated
“PRS Aaa” by the Philippine Ratings Services Corporation (PhilRatings).
In the first quarter of 2008, the Company availed of a syndicated term loan amounting to
=1.5 billion which bears fixed interest rate of 6.7% per annum and will mature in 2018. The
P
embedded derivative of the loan pertaining to its prepayment option amounting P
=80.5 million was
bifurcated and included as part of “Other noncurrent assets” account in the consolidated balance
sheets. Fair value loss on the bifurcated embedded derivative option amounted to P
=4.4 million in
2008.
Subsidiaries
Foreign Currency Debt
In August 2008, the Company, through a wholly owned subsidiary, entered into a 5-year
syndicated term loan with a foreign bank, with the Company as guarantor, for US$50.0 million at
a rate of 52 points over the 1-, 3- or 6 month LIBOR at the Company’s option. As of
December 31, 2008, the outstanding balance of this loan amounted to US$25.0 million and
undrawn borrowing facilities amounting to US$25.0 million.
In 2007, the Company, through a wholly owned subsidiary, entered into a 5-year syndicated loan
for US$150.0 million at a rate of 71.4 basis points over the 1 month, 3 month or 6 month LIBOR
at the Company’s option.
In 2006, IMI obtained a US$40.0 million 5-year term clean loan from a local bank payable in a
single balloon payment at the end of the loan term. IMI may, at its option, prepay the loan in part
or in full, together with the accrued interest without penalty. The interest is repriced quarterly at
the rate of 3-months LIBOR plus margin of 0.80% and is payable quarterly. In 2007, IMI prepaid
a portion of the loan amounting to US$10.0 million.
In 2006, IMI Singapore, a wholly owned subsidiary of IMI, obtained a US$40.0 million variable
rate 5-year loan, repayable in 10 equal semi-annual installments of US$4.0 million commencing
on May 29, 2007 and maturing on November 29, 2011. The interest is repriced semi-annually at
the LIBOR rate plus 0.75% quoted by the bank and is payable semi-annually. As of
December 31, 2008, outstanding balance amounted to US$24.0 million.
*SGVMC112179*
- 59 Philippine Peso Debt
The Philippine Peso loans pertain to ALI subsidiaries’ loans that will mature on various dates up
to 2015 with floating interest rates at 100 basis points to 150 basis points spread over benchmark
91-day PDST-R1/R2 and fixed interest rates of 6.97% to 9.72% per annum. The term loan
facility of a subsidiary is secured by a Mortgage Trust Indenture over land and building with a
total carrying value of P
=811.8 million and P
=612.2 million as of December 31, 2008 and 2007,
respectively.
5-Year Bonds due 2008
In 2003, ALI issued P
=2.0 billion bonds due in 2008 with fixed and floating rate tranches. The
fixed-rate bonds carry a coupon of 10.8% per annum and have a nominal principal amount of
=1.0 billion. The floating rate bonds, also worth P
P
=1.0 billion, bear a margin of 125 basis points
over benchmark 91-day PDST-F and are repriced quarterly. The bonds were fully paid when it
matured in November 2008.
Home Starter Bonds due 2009
ALI launched in March 2006 its Homestarter Bonds of up to P
=169.2 million with fixed interest
rate of 5% per annum. The Homestarter Bonds are being issued monthly in a series for a period
of thirty six (36) months with final maturity in March 2009. On maturity date, the principal
amount of the bond is redeemable with the accrued interest. Should the bondholder decide to
purchase an Ayala Land property, he is entitled to an additional 10% of the aggregate face value
of the bond as bonus credit which together with the principal and accrued interest can be applied
as downpayment towards the purchase of an Ayala Land Premier, Alveo or Avida property. As of
end of 2008 and 2007, outstanding Homestarter Bonds amounted to P
=106.9 million and
=80.5 million, respectively.
P
5-Year Bonds due 2013
In 2008, ALI issued P
=4.0 billion bonds due 2013 with fixed rate equivalent to 8.75% p.a. The
PhilRatings assigned a PRS Aaa rating on the bonds indicating that it has the smallest degree of
investment risk. Interest payments are protected by a large or by an exceptionally stable margin
and principal is assured. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
PRS Aaa is the highest credit rating possible on PhilRatings’ rating scales for long-term
issuances.
5-,7-and 10-year FXCNs due in 2011, 2013 and 2016
In 2006, ALI issued P
=3.0 billion FXCNs consisting of 5-, 7- and 10-year notes issued to various
financial institutions and will mature on various dates up to 2016. The FXCNs bear fixed interest
rates ranging from 7.3% to 7.8% per annum depending on the term of the notes.
10-year FXCNs due 2012
ALI also has an outstanding P
=580.0 million 10-year FXCNs with fixed interest rate of 14.9% per
annum issued in 2002 and due 2012. In February 2009, ALI prepaid in full such FXCNs.
Guaranteed Notes
In 2003, the Company, through a wholly owned subsidiary, issued 8.1% Guaranteed Notes, due
2008, amounting to US$200 million at 99.5% of its face value. These were fully paid in 2008.
*SGVMC112179*
- 60 The loan agreements on long-term debt of the Company and certain subsidiaries provide for
certain restrictions and requirements with respect to, among others, payment of dividends,
incurrence of additional liabilities, investments and guaranties, mergers or consolidations or other
material changes in their ownership, corporate set-up or management, acquisition of treasury
stock, disposition and mortgage of assets and maintenance of financial ratios at certain levels.
These restrictions and requirements were complied with by the Group as of December 31, 2008
and 2007.
Total interest paid amounted to P
=3.7 billion in 2008, P
=3.8 billion in 2007 and P
=5.4 billion in 2006.
Interest capitalized by subsidiaries amounted to P
=151.0 million in 2008 and P
=3.4 million in 2007.
The average capitalization rate is 4.90% and 0.14% in 2008 and 2007, respectively.
17. Other Noncurrent Liabilities
This account consists of the following:
Deposits and deferred credits
Retentions payable
Other liabilities
2007
2008
(In Thousands)
=4,070,262
P
P
=4,880,443
1,117,079
1,766,831
1,630,302
940,806
=6,817,643
P
P
=7,588,080
Deposits are initially recorded at fair value, which was obtained by discounting future cash flows
using the applicable rates of similar types of instruments. The difference between the cash
received and its fair value is recorded as deferred credits.
18. Equity
The details of the Company’s common and equity preferred shares follow:
Authorized shares
Par value per share
Issued and subscribed shares
Treasury shares
Common shares
Preferred A shares
Preferred B shares
2007
2006
2007
2007
2008
2008
2008
(In Thousands, except par value figures)
600,000
380,000
–
58,000
600,000
12,000
58,000
=50
P
=50
P
–
=100
P
P
=50
P
=100
P
=100
414,687
344,854
–
58,000
498,362
12,000
58,000
324
4
–
–
1,378
–
–
*SGVMC112179*
- 61 Preferred shares
In February 2006, the BOD approved the reclassification of the unissued preferred shares and
redeemed preferred shares of the Company into 58 million new class of Preferred B shares with a
par value of P
=100 per share or an aggregate par value of P
=5,800 million. The Preferred B shares
have the following features: (a) optional redemption by the Company; (b) issue value, dividend
rate and declaration thereof to be determined by the BOD; (c) cumulative in payment of current
dividends as well as any unpaid back dividends and non-participating in any other further
dividends; (d) nonconvertible into common shares; (e) preference over holders of common stock
in the distribution of corporate assets in the event of dissolution and liquidation of the Company
and in the payment of the dividend at the rate specified at the time of issuance; (f) nonvoting
except in those cases specifically provided by law; (g) no pre-emptive rights to any issue of
shares, common or preferred; and; (h) reissuable when fully redeemed.
In July 2006, the Company filed a primary offer in the Philippines of its Preferred B shares at an
offer price of P
=100 per share to be listed and traded on the Philippine Stock Exchange (PSE). The
Preferred B shares are cumulative, nonvoting and redeemable at the option of the Company under
such terms that the BOD may approve at the time of the issuance of shares and with a dividend
rate of 9.4578% per annum. The Preferred B shares may be redeemed at the option of the
Company starting in the fifth year.
On January 31, 2008, the BOD approved the re-issuance and reclassification of 1.2 billion
redeemed Preferred A and AA shares with a par value of P
=1.00 per share into 12.0 million new
Preferred A shares with a par value of P
=100 per share with the same features as the existing
Preferred B shares, except on the issue price and dividend rate and the amendment of the
Company’s amended Articles of Incorporation to reflect the reclassification of the redeemed
Preferred shares into new Preferred A shares. On April 4, 2008, the Company’s stockholders
ratified the reissuance and reclassification.
On July 9, 2008, the Securities Exchange Commission (SEC) approved the amendments to the
Company’s Articles of Incorporation embodying the reclassification of redeemed Preferred
shares.
In November 2008, the Company filed a primary offer in the Philippines of its Preferred A shares
at an offer price of P
=500 per share to be listed and traded on the PSE. The Preferred A shares are
cumulative, nonvoting and redeemable at the option of the Company under such terms that the
BOD may approve at the time of the issuance of shares and with a dividend rate of 8.88% per
annum. The Preferred A shares may be redeemed at the option of the Company starting in the
fifth year.
Common shares
On December 7, 2006, the BOD approved the increase of the authorized common capital stock
from P
=19.0 billion divided into 380,000,000 shares to P
=30.0 billion divided into 600,000,000
shares with a par value of P
=50 per share. The BOD likewise approved the declaration of a 20%
stock dividend to all common stockholders to be issued from the increased authorized capital
stock.
*SGVMC112179*
- 62 On April 30, 2007, the Company’s application for increase in authorized common stock and stock
dividends were approved by the SEC.
The common shares may be owned or subscribed by or transferred to any person, partnership,
association or corporation regardless of nationality, provided that at anytime at least 60% of the
outstanding capital stock shall be owned by citizens of the Philippines or by partnerships,
associations or corporations 60% of the voting stock or voting power of which is owned and
controlled by citizens of the Philippines.
The details of the Company’s paid-up capital follow:
2008
Additional
Common
Paid-in
Stock Subscribed
Capital
(In Thousands)
P
=– P
=5,800,000 P
=20,633,667
P
=100,685
P
=657,422
Preferred
Stock - A
As of January 1, 2008
Exercise of
ESOP/ESOWN
Issuance of shares
Stock dividends
As of December 31, 2008
Preferred
Stock - B
–
–
–
1,200,000
–
110
–
–
4,138,716
P
=1,200,000 P
=5,800,000 P
=24,772,493
Total
Paid-up
Capital
Subscriptions
Receivable
44,913
319,151
–
4,758,175
–
–
P
=145,598 P
=5,734,748
(P
=336,380) P
=26,855,394
299,319
(64,745)
–
5,958,285
–
4,138,716
=37,251,714
(P
=401,125) P
2007
As of January 1, 2007
Exercise of ESOP/ESOWN
Stock dividend
As of December 31, 2007
Preferred
Stock - B
Common
Stock
=5,800,000
P
–
–
=5,800,000
P
P
=17,166,964
17,119
3,449,584
P
=20,633,667
Preferred
Stock – B
Common
Stock
=–
P
–
5,800,000
=5,800,000
P
=17,137,083
P
29,881
–
P
=17,166,964
Additional
Total
Paid-in Subscriptions
Paid-up
Subscribed
Capital
Receivable
Capital
(In Thousands)
=75,754
P
=335,343
P
(P
=240,113) =
P23,137,948
24,931
322,079
(96,267)
267,862
–
–
–
3,449,584
=26,855,394
=100,685
P
=657,422
P
(P
=336,380) P
2006
As of January 1, 2006
Exercise of ESOP/ESOWN
Issuance of shares
As of December 31, 2006
Additional
Total
Paid-in Subscriptions
Paid-up
Subscribed
Capital
Receivable
Capital
(In Thousands)
=37,544
P
=118,643
P
(P
=333,574) =
P16,959,696
38,210
216,700
93,461
378,252
–
–
–
5,800,000
=75,754
P
=335,343
P
(P
=240,113) P
=23,137,948
The movements in the Company’s outstanding number of common shares follow:
2008
At January 1
Stock dividends
Exercise of options ESOP/ESOWN
Issuance of shares
Treasury stock
414,363
82,774
898
3
(1,054)
496,984
2007
(In Thousands)
344,850
68,991
841
–
(319)
414,363
2006
343,488
–
1,362
–
–
344,850
*SGVMC112179*
- 63 On September 10, 2007, the BOD approved the creation of a share buyback program involving
=2.5 billion worth of common capital stock. In 2008 and 2007, the Company acquired 1,054,422
P
and 319,243 common shares, respectively, at a total cost of P
=390.8 million and P
=159.4 million,
respectively. As of December 31, 2008 and 2007, treasury stock amounted to P
=550.5 million and
=159.7 million, respectively.
P
In addition, P
=100.0 million Preferred A shares of the Company have been acquired by ALI. This
has been accounted for as “Parent Company Preferred shares held by a subsidiary” and presented
as a reduction in equity.
Retained Earnings
Retained earnings include the accumulated equity in undistributed net earnings of consolidated
subsidiaries, associates and jointly controlled entities accounted for under the equity method
amounting to P
=30,308.0 million, P
=29,824.0 million and P
=24,858.9 million as of December 31,
2008, 2007 and 2006, respectively.
Retained earnings are further restricted for the payment of dividends to the extent of the cost of
the common shares held in treasury.
In accordance with SEC Memorandum Circular No. 11 issued in December 2008, the Company’s
retained earnings available for dividend declaration as of December 31, 2008 amounted
=30,746.0 million.
P
Dividends consist of the following:
2007
2006
2008
(In Thousands, except dividends per share)
Dividends to common shares
Cash dividends declared during the year
Cash dividends per share
Stock dividends
Dividends to equity preferred shares
declared during the year
P
=1,989,484
P
=4.00
P
=4,138,716
=3,312,426
P
=8.00
P
=3,449,584
P
=2,756,618
P
=8.00
P
–
P
=548,552
=548,552
P
=274,276
P
On January 31, 2008, the BOD approved the declaration of a 20% stock dividend to all common
share holders of the Company as of a record date to be approved at the annual stockholders’
meeting. On April 4, 2008, the Company’s stockholders ratified the declaration of the 20% stock
dividends to all stockholders.
Capital Management
The primary objective of the Company’s capital management policy is to ensure that it maintains
a strong credit rating and healthy capital ratios in order to support its business and maximize
shareholder value.
The Company manages its capital structure and makes adjustments to it, in light of changes in
economic conditions. To maintain or adjust the capital structure, the Company may adjust the
dividend payment to shareholders or issue new shares. No changes were made in the objectives,
policies or processes for the years ended December 31, 2008 and 2007.
*SGVMC112179*
- 64 The Company is not subject to externally imposed capital requirements.
The Company monitors capital using a gearing ratio of debt to equity and net debt to equity. Debt
consists of short-term and long-term debt. Net debt includes short-term and long-term debt less
cash and cash equivalents and short-term investments. The Company considers as capital the
equity attributable to equity holders of the Company.
2007
(As Restated)
2008
(In Thousands)
=2,634,148
P
P
=2,755,447
47,397,465
51,729,022
50,031,613
54,484,469
Short-term debt
Long-term debt
Total debt
Less:
Cash and cash equivalents
Short-term investments
Net debt
Equity attributable to equity holders of the
Company
Debt to equity
Net debt to equity
42,885,792
1,008,924
P
=10,589,753
36,835,549
3,687,606
=9,508,458
P
P
=97,311,191
56%
11%
=86,887,210
P
58%
11%
19. Other Income and Costs and Expenses
Other income consists of:
2008
Gain on sale of investments
Management and marketing fees
Foreign exchange gain
Dividend income
Marked-to-market gain (Note 8)
Others
P
=3,554,679
626,350
181,858
148,914
119,229
785,720
P
=5,416,750
2007
2006
(In Thousands)
=8,844,822
P
P5,542,090
=
485,802
590,066
626,766
72,424
73,500
180,250
320,610
43,841
376,875
569,338
=10,728,375
P
=6,998,009
P
Gain on sale of investments consists mostly of gain arising from the sale of the Company’s
investments in listed subsidiary, associate and jointly controlled entities.
In March 2008, ALI sold its shares of stock in Streamwood Property, Inc., Piedmont Property
Ventures, Inc. and Stonehaven Land, Inc. Total consideration received from the sale amounted to
=902.0 million. Gain on sale amounted to P
P
=762.0 million included under “Gain on sale of
investments”.
*SGVMC112179*
- 65 In December 2007, ALI entered into a joint venture with Kingdom Hotel Investments, Inc. to
develop a 7,377-square meter property along Makati Avenue corner Arnaiz Avenue (formerly
Pasay Road) into a luxury hotel complex comprising a 300-room Fairmont Hotel, a 30-suite
Raffles Hotel and 189 Raffles branded private residences. The total project cost is approximately
US$153.0 million.
The 7,377-square meter property to be developed was conveyed by ALI to KHI-ALI Manila, Inc.
(KAMI) in exchange for 37,250 common shares, 38,250 redeemable preferred shares A and
16,758 preferred shares of KAMI. On December 13, 2007, ALI sold 16,758 of its preferred
shares in KAMI to Kingdom Manila B.V., which resulted in a gain of P
=1,004.0 million, reported
under “Gain on sale of investments”.
Other income includes income derived from ancillary services of consolidated subsidiaries.
Depreciation and amortization expense included in the consolidated statements of income follow:
2008
Included in:
Cost of sales and services
General and administrative expenses
P
=1,821,069
1,119,147
P
=2,940,216
2007
(In Thousands)
=1,971,932
P
1,016,947
=2,988,879
P
2006
=1,960,042
P
630,316
=2,590,358
P
Personnel costs included in the consolidated statements of income follow:
2008
Included in:
Cost of sales and services
General and administrative expenses
P
=4,869,732
4,753,473
P
=9,623,205
2007
(In Thousands)
=4,495,767
P
4,168,554
=8,664,321
P
2006
=3,432,411
P
3,959,265
=7,391,676
P
General and administrative expenses included in the consolidated statement of income are as
follows:
2008
Personnel costs (Notes 23, 24 and 27)
Depreciation and amortization
Professional fees
Taxes and licenses
Advertising and promotions
Transportation and travel
Rental and utilities
Postal and communication
Supplies
P
=4,753,473
1,119,147
616,969
454,387
420,620
338,855
298,472
157,226
137,599
2007
2006
(In Thousands)
=4,168,554
P
P3,959,265
=
1,016,947
630,316
796,979
574,881
530,583
349,229
234,330
158,455
376,087
347,977
357,666
253,519
153,649
126,733
161,459
111,509
(Forward)
*SGVMC112179*
- 66 2008
Entertainment, amusement and recreation
Donations and contributions
Repairs and maintenance
Provision for doubtful accounts (Note 6)
Insurance
Dues and fees
Research and development
Contract labor
Others
P
=129,273
123,312
116,317
88,871
73,342
66,365
48,685
39,677
502,924
P
=9,485,514
2007
2006
(In Thousands)
=141,782
P
=188,911
P
126,541
106,969
132,257
81,239
127,701
79,783
59,703
45,088
61,033
65,381
189,693
48,561
36,952
23,051
826,390
557,294
=9,498,306
P
P7,708,161
=
Interest expense and other financing charges consist of:
2008
Interest expense on:
Short-term debt
Long-term debt
Hedging losses (Note 8)
Dividends on preferred shares
Others
P
=244,466
3,216,017
1,455,952
–
20,673
P
=4,937,108
2007
(In Thousands)
=321,891
P
3,544,488
–
154,335
99,446
=4,120,160
P
2006
=512,997
P
4,219,374
–
291,681
–
=5,024,052
P
During the first half of 2008, IMI entered into additional structured currency options for economic
hedges. The economic turn-around during the second quarter of 2008 led to a weaker peso which
resulted in an unfavorable position on IMI’s derivative transactions. In May 2008, the BOD of
IMI approved the unwinding of four major derivative contracts and IMI incurred unwinding cost
amounting to $33.36 million or P
=1.46 billion. The net changes in fair value of settled derivative
instruments not designated as accounting hedges are included as part of “Interest expense and
other financing charges”. The fair value of settled instruments includes the unwinding cost of
US$33.36 million for the year ended December 31, 2008.
Other charges consist of:
2008
Provision for impairment losses (Notes 7, 10
and 12)
Impairment loss on goodwill (Note 13)
Write-offs and other charges
Others
P
=1,259,085
–
–
336,337
P
=1,595,422
2007
(In Thousands)
=–
P
662,591
669,949
237,404
=1,569,944
P
2006
=217,580
P
–
–
169,339
=386,919
P
In 2007, write-offs and other charges include the write-down of investment properties damaged by
the Glorietta 2 explosion and related expenses incurred, and demolition and relocation costs as
part of the ALI’s Ayala Center redevelopment program amounting to a total of P
=213.7 million in
2007 (See Note 11).
*SGVMC112179*
- 67 -
20. Business Combinations
PFRS 3 provides that if the initial accounting for a business combination can be determined only
provisionally by the end of the period in which the combination is effected because either the fair
values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the
cost of the combination can be determined only provisionally, the acquirer shall account for the
combination using those provisional values. The acquirer shall recognize any adjustments to
those provisional values as a result of completing the initial accounting within twelve months of
the acquisition date as follows: (i) the carrying amount of the identifiable asset, liability or
contingent liability that is recognized or adjusted as a result of completing the initial accounting
shall be calculated as if its fair value at the acquisition date had been recognized from that date;
(ii) goodwill or any gain recognized shall be adjusted by an amount equal to the adjustment to the
fair value at the acquisition date of the identifiable asset, liability or contingent liability being
recognized or adjusted; and (iii) comparative information presented for the periods before the
initial accounting for the combination is complete shall be presented as if the initial accounting
has been completed from the acquisition date.
2008 Acquisitions
Datum Legal, Inc.
On May 30, 2008, Integreon Managed Solutions, Inc., a wholly owned subsidiary of Integreon
Inc. which in turn is a subsidiary of LIL, acquired 100% of Datum Legal, Inc. (Datum).
The purchase price allocation has been prepared on a preliminary basis and reasonable changes
are expected as additional information becomes available. The following is a summary of the
provisional fair values of the assets acquired and liabilities assumed as of the date of the
acquisition:
Cash and cash equivalents
Trade and other receivables
Other current assets
Property and equipment - net
Other noncurrent assets
Fair Value
Recognized on Acquisition
In US$
In Php*
(In Thousands)
US$530
=23,261
P
2,156
94,667
68
2,998
364
15,986
12
507
3,130
137,419
(Forward)
*SGVMC112179*
- 68 -
Accounts payable and accrued expenses
Other current liabilities
Other noncurrent liabilities
Net assets
Intangible assets arising on acquisition
Goodwill arising on acquisition
Total consideration
Fair Value
Recognized on Acquisition
In US$
In Php*
(In Thousands)
=1,324
P
=58,149
P
450
19,780
128
5,575
1,902
83,504
1,228
53,915
3,500
153,680
3,678
161,511
US$8,406
=369,106
P
*Translated using the exchange rate at the transaction date (US$1:P
=43.91)
Cost of the acquisition follows:
Cash paid
Shares issued
Transaction costs
In US$
In Php*
(In Thousands)
US$7,289
=320,066
P
631
27,701
486
21,339
US$8,406
=369,106
P
*Translated using the exchange rate at the transaction date (US$1:P
=43.91)
Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
In US$
In Php*
(In Thousands)
US$530
=23,261
P
7,775
341,405
US$7,245
=318,144
P
*Translated using the exchange rate at the transaction date (US$1:P
=43.91)
From the date of acquisition, Datum had contributed P
=38.9 million to the net income of the
Group. If the contribution had taken place at the beginning of the year, the net income for the
Group would have increased by P
=111.2 million and revenue would have increased by
=417.2 million in 2008.
P
ALI Property Partners Holdings Company (APPH)
In 2006, ALI signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments
Ltd. (FIL) to jointly develop a business process outsourcing office building in Dela Rosa Street
and to purchase the existing PeopleSupport Building.
*SGVMC112179*
- 69 As of December 31, 2007, APPHC, the joint-venture company, is 60% owned by ALI. APPHC
owns 60% interest in its subsidiary, ALI Property Partners Corporation (APPCo.). The remaining
40% interest in both APPHC and APPCo. are split evenly between MIL and FIL. APPHC and
APPCo. are jointly controlled by ALI, MIL, and FIL.
On December 8, 2008, ALI acquired from FIL its 20% ownership in APPHC and APPCo. This
resulted in an increase in ALI’s effective ownership interest in APPHC from 60% to 80% and
APPCo. from 36% to 68%, thereby providing ALI with the ability to control the operations of
APPHC and APPCo. following the acquisition. Accordingly, APPHC and APPCo.’s financial
statements are consolidated on a line-by-line basis with that of the Group as of
December 31, 2008.
The purchase price allocation has been prepared on a preliminary basis, and reasonable changes
are expected as additional information becomes available. Following is a summary of the
provisional fair values of the identifiable assets acquired and liabilities assumed of APPHC and
APPCo. as of the date of acquisition, as the Group still has to finalize the fair values (amounts in
thousands):
Assets:
Cash and cash equivalents
Accounts and notes receivables - net
Other current assets
Investment property - net
Property and equipment - net
Other assets
Liabilities:
Accounts and accrued expenses
Deposits and other current liabilities
Loans payable
Deposits and other noncurrent liabilities
Net assets
Minority interest in APPHC
Net assets of APPHC acquired
Minority interest in APPCo. acquired
Total net assets acquired
Provisional goodwill
Acquisition cost
Cash and cash equivalents acquired with the subsidiary
Acquisition cost, net of cash acquired
=227,266
P
189,105
645,582
3,657,624
1,292,723
30,959
6,043,259
718,625
41,212
3,348,200
373,523
4,481,560
1,561,699
632,444
929,255
185,851
316,222
502,073
150,530
652,603
227,266
=425,337
P
From the date of acquisition, APPHC and APPCo’s additional contribution to the Group’s net
income is immaterial. Had the combination taken place at the beginning of the year, the net
income of the Group would have increased by P
=7.5 million and revenue from continuing
operations would have increased by P
=323.0 million.
*SGVMC112179*
- 70 Total cost directly attributable to the business combination amounted to P
=15.6 million.
2007 Acquisitions
On February 17, 2007, Integreon Managed Solutions, Inc. (IMSI), a wholly owned subsidiary of
Integreon, which in turn is a subsidiary of LIL, entered into a Stock Purchase Agreement with
CBF Group, Inc. (CBF) and the sole shareholder of CBF for the purchase of all 100,000 issued
and outstanding common shares of stock of CBF.
The purchase price allocation has been prepared on a preliminary basis and reasonable changes
are expected as additional information becomes available. The following is a summary of the
provisional fair values of the assets acquired and liabilities assumed as of the date of the
acquisition:
Cash and cash equivalents
Trade and other receivables
Other current assets
Property and equipment - net
Accounts payable and accrued expenses
Other current liabilities
Net assets
Goodwill arising on acquisition
Total cash consideration
Fair Value
Recognized on Acquisition
In US$
In Php*
(In Thousands)
US$20
=939
P
350
16,935
71
3,455
581
28,122
1,022
49,451
69
3,347
749
36,235
818
39,582
204
9,869
6,556
317,100
US$6,760
=326,969
P
*Translated using the exchange rate at the transaction date (US$1:P
=48.37)
Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
In US$
In Php*
(In Thousands)
US$20
=939
P
6,760
326,969
US$6,740
=326,030
P
*Translated using the exchange rate at the transaction date (US$:P
=48.37)
From the date of acquisition, CBF’s additional contribution to the Group’s net income is
immaterial. If the contribution had taken place at the beginning of the year, the net income
for the Group would have decreased by P
=8.3 million and revenue would have increased by
=268.3 million in 2007.
P
*SGVMC112179*
- 71 In 2008, IMSI paid an additional US$3.6 million representing earn-out paid to CBF’s former
shareholders. This was reflected as additional goodwill. In 2008, IMSI finalized its
purchased price allocation and there were no significant changes to the fair values of the
assets acquired and liabilities assumed of CBF.
21. Income Taxes
The components of the Group’s deferred taxes as of December 31, 2008 and 2007 are as follows:
Net Deferred Tax Assets
2007
2008
(In Thousands)
Deferred tax assets on:
Allowance for probable losses
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
Retirement benefits
Share-based payments
NOLCO
MCIT
Others
Deferred tax liabilities on:
Capitalized interest and other expenses
Others
Net deferred tax assets
P
=796,299
=686,007
P
446,236
144,850
62,265
28,854
5,214
233,895
1,717,613
391,709
188,718
47,541
19,007
7,670
386,976
1,727,628
(553,912)
(30,854)
(584,766)
P
=1,132,847
(723,404)
(20,659)
(744,063)
=983,565
P
Net Deferred Tax Liabilities
2007
2008
(In Thousands)
Deferred tax assets on:
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
NOLCO
Others
P
=63,593
36,984
13,347
113,924
=59,756
P
49,026
9,232
118,014
(Forward)
*SGVMC112179*
- 72 2007
2008
(In Thousands)
Deferred tax liabilities on:
Excess of financial realized gross profit over
taxable realized gross profit
Capitalized interest and other
expenses
Others
Net deferred tax liabilities
(P
=137,854)
(P
=123,808)
(117,271)
(44,335)
(299,460)
(P
=185,536)
(122,673)
(27,289)
(273,770)
(P
=155,756)
The Group has NOLCO amounting to P
=7.2 billion and P
=8.0 billion in 2008 and 2007,
respectively, which were not recognized. Further, deferred tax assets from the excess MCIT over
regular corporate income tax amounting to P
=41.2 million in 2008 and P
=37.1 million in 2007 and
from unrealized gain on real estate sales amounting to P
=4.8 million as of December 31, 2007,
respectively, was also not recognized. Deferred tax assets are recognized only to the extent that
taxable income will be available against which the deferred tax assets can be used. The Group
will recognize a previously unrecognized deferred tax asset to the extent that it becomes probable
that future taxable income will allow the deferred tax asset to be recovered.
As of December 31, 2008, NOLCO and MCIT that can be claimed as deduction from future
taxable income or used as deductions against income tax liabilities are as follows:
Year incurred
Expiry Date
2006
2007
2008
2009
2010
2011
NOLCO
MCIT
(In Thousands)
=3,004,989
P
=15,449
P
2,095,519
20,248
2,282,936
17,482
=7,383,444
P
=53,179
P
At December 31, 2008 and 2007, deferred tax liabilities have not been recognized on the
undistributed earnings and cumulative translation adjustment of foreign subsidiaries, associates
and jointly controlled entities since the timing of the reversal of the temporary difference can be
controlled by the Group and management does not expect the reversal of such temporary
difference in the foreseeable future. Such undistributed earnings and cumulative translation
adjustment amounted to P
=2,051.0 million and P
=2,075.0 million as of December 31, 2008 and
2007, respectively.
*SGVMC112179*
- 73 The reconciliation between the statutory and the effective income tax rates follows:
Statutory income tax rate
Tax effects of:
Gain on sale of shares and capital
gains tax
Nontaxable equity in net earnings of
associates and jointly controlled
entities
Interest income subjected to final tax
at lower rates
Income under income tax holiday
Effect of change in tax rate
Others
Effective income tax rate
2008
35%
2007
(As Restated)
35.00%
2006
(As Restated)
35.00%
(7.43)
(17.56)
(13.98)
(19.80)
(16.70)
(17.84)
(2.45)
(0.22)
0.90
12.49
18.49%
(1.82)
(0.04)
–
10.81
9.69%
(1.15)
0.16
–
9.40
11.59%
As of December 31, 2008, the deferred tax assets and liabilities are set-up based on the 30%
corporate tax rate which became effective beginning January 1, 2009 as provided under Republic
Act No. 9337.
22. Earnings Per Share
The following table presents information necessary to calculate EPS on net income attributable to
equity holders of the Company:
Net income
Less dividends on preferred stock (Note 18)
Weighted average number of common shares
Dilutive shares arising from stock options
Adjusted weighted average number of
common shares for diluted EPS
Basic EPS
Diluted EPS
2007
2006
(As Restated)
(As Restated)
2008
(In Thousands, except EPS figures)
=16,256,601
P
=12,173,113
P
P
=8,108,597
548,552
274,276
548,552
=15,708,049
P
=11,898,837
P
P
=7,560,045
496,787
495,654
496,756
2,374
2,435
1,719
498,475
P
=15.22
P
=15.17
499,161
=31.62
P
=31.47
P
498,089
=24.01
P
=23.89
P
*SGVMC112179*
- 74 EPS on income before income associated with noncurrent assets held for sale attributable to
equity holders of the Company follows:
2007
2006
(As Restated)
(As Restated)
2008
(In Thousands, except EPS figures)
Income before income associated with
noncurrent assets held for sale
Less: Income before income associated with
noncurrent assets held for sale associated
to minority interests
Less: Dividends on preferred stock (Note 18)
Weighted average number of common shares
for basic EPS
Dilutive shares arising from stock options
Adjusted weighted average number of
common shares for diluted EPS
Basic EPS
Diluted EPS
P
=10,658,688
=18,437,341
P
=14,308,709
P
2,550,091
548,552
P
=7,560,045
2,665,546
548,552
=15,223,243
P
2,182,173
274,276
=11,852,260
P
496,756
1,719
496,787
2,374
495,654
2,435
498,475
P
=15.22
P
=15.17
499,161
=30.64
P
=30.50
P
498,089
=23.91
P
=23.80
P
23. Retirement Plan
The Company and certain subsidiaries have their respective funded, noncontributory tax-qualified
defined benefit type of retirement plans covering substantially all of their employees. The
benefits are based on defined formula with minimum lump-sum guarantee of 1.5 months effective
salary per year of service. The consolidated retirement costs charged to operations amounted to
=195.6 million in 2008, P
P
=331.5 million in 2007 and P
=319.5 million in 2006.
The principal actuarial assumptions used to determine the pension benefits with respect to the
discount rate, salary increases and return on plan assets were based on historical and projected
normal rates. The Company’s and certain subsidiaries’ annual contributions to their respective
plans consist of payments covering the current service cost for the year and the required funding
relative to the guaranteed minimum benefits as applicable.
The components of retirement expense in the consolidated statement of income are as follows:
2008
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Curtailment gain
Net actuarial loss (gain)
Past service cost
Effect of ceiling limit
Total retirement expense
Actual return on plan assets
P
=263,055
215,771
(247,462)
(11,447)
(29,573)
2,796
2,504
P
=195,644
(P
=410,372)
2007
(In Thousands)
=260,685
P
158,528
(167,940)
–
(18,715)
98,539
357
=331,454
P
=244,109
P
2006
=239,923
P
240,125
(163,718)
–
4,362
1,466
(2,642)
=319,516
P
=295,694
P
*SGVMC112179*
- 75 The funded status and amounts recognized in the consolidated balance sheet for the pension plan
assets of subsidiaries in a net pension asset position as of December 31, 2008 and 2007 are as
follows:
Benefit obligation
Plan assets
Unrecognized net actuarial losses (gains)
Unrecognized past service cost
Assets recognized in the consolidated balance sheets
2007
2008
(In Thousands)
(P
=683,176)
(P
=306,808)
817,507
730,490
134,331
423,682
6,657
(306,294)
(412)
–
=140,576
P
P
=117,388
The funded status and amounts recognized in the consolidated balance sheet for the pension plan
liabilities of the Company and subsidiaries in a net pension liability position as of December 31,
2008 and 2007 are as follows:
Benefit obligation
Plan assets
Unrecognized net actuarial losses (gains)
Unrecognized past service cost
Liabilities recognized in the consolidated
balance sheet
2007
2008
(In Thousands)
(P
=3,025,722)
(P
=3,136,033)
2,916,832
2,283,634
(108,890)
(852,399)
(460,983)
331,431
38,321
30,224
(P
=490,744)
(P
=531,552)
Changes in the present value of the combined defined benefit obligation are as follows:
Balance at January 1
Interest cost on benefit obligation
Current service cost
Benefits paid
Curtailments
Settlements
Actuarial gains on obligations
Past service cost
Balance at December 31
2007
2008
(In Thousands)
=4,012,650
P
P
=3,708,898
158,528
215,771
260,685
263,055
(291,372)
(342,328)
–
(34,104)
–
(153,679)
(569,821)
(214,791)
138,228
19
=3,708,898
P
P
=3,442,841
*SGVMC112179*
- 76 Changes in the fair value of the combined plan assets are as follows:
2007
2008
(In Thousands)
=3,508,563
P
P
=3,734,339
167,940
247,462
273,039
186,164
(291,372)
(342,328)
–
(153,679)
76,169
(657,834)
=3,734,339
P
P
=3,014,124
Balance at January 1
Expected return
Contributions by employer
Benefits paid
Settlements
Actuarial gains (losses) on plan assets
Balance at December 31
The assumptions used to determine pension benefits for the Group are as follows:
2008
7.0 to 13.4%
4.5 to 8.0%
3.0 to 8.0%
Discount rates
Salary increase rates
Expected rates of return on plan assets
2007
7.0 to 12.0%
5.0 to 10.0%
3.3 to 10.0%
The allocation of the fair value of plan assets of the Group follows:
2008
51.4%
25.0%
23.6%
Investments in debt securities
Investments in equity securities
Others
2007
63.6%
29.0%
7.4%
Amounts for the current and previous annual periods are as follows:
2006
2005
(In Thousands)
=3,708,898) (P
=4,012,650) (P
=3,026,065)
(P
=3,442,841) (P
3,734,339
3,508,563
2,910,036
3,014,124
=25,441
P
(P
=504,087) (P
=116,029)
(P
=428,717)
2008
Defined benefit obligation
Plan assets
Excess (deficit)
2007
2004
(P
=2,458,164)
1,775,607
(P
=682,557)
Experience adjustments on plan liabilities amounted to P
=566.1 million loss in 2008,
=136.6 million gain in 2007 and P
P
=41.8 million loss in 2006. Experience adjustment on plan assets
amounted to P
=658.5 million loss in 2008, P
=76.2 million gain in 2007 and P
=132.0 million gain
in 2006.
The Company expects to contribute P
=165.2 million to its defined benefit pension plan in 2009.
As of December 31, 2008 and 2007, the plan assets include shares of stock of the Company with
total fair value of P
=357.8 million and P
=614.0 million, respectively.
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date.
*SGVMC112179*
- 77 -
24. Stock Option Purchase Plans
The Company has stock option plans for key officers (Executive Stock Option Plan - ESOP) and
employees (Employee Stock Ownership Plan - ESOWN) covering 3.0% of the Company’s
authorized capital stock. The grantees are selected based on certain criteria like outstanding
performance over a defined period of time.
The ESOP grantees may exercise in whole or in part the vested allocation in accordance with the
vesting percentage and vesting schedule stated in the ESOP. Also, the grantee must be an
employee of the Company or any of its subsidiaries during the 10-year option period. In case the
grantee retires, he is given 3 years to exercise his vested and unvested options. In case the grantee
resigns, he is given 90 days to exercise his vested options.
ESOP
A summary of the Company’s stock option activity and related information for the years ended
December 31, 2008, 2007 and 2006 follows:
2007
2008
Outstanding, at beginning of year
Exercised
Adjustment due to 20% stock
dividends (see Note 18)
Outstanding, at end of year
2006
Number
of Shares
2,837,102
(52,499)
Weighted
Average
Exercise Price
P
= 170.30
(150.99)
Number
of Shares
2,533,908
(169,656)
Weighted
Average
Exercise Price
=205.13
P
(203.37)
567,415
3,352,018
–
P
= 141.18
472,850
2,837,102
–
=170.30
P
Weighted
Number
Average
of Shares Exercise Price
3,785,816
=202.56
P
(1,251,908)
(197.35)
–
2,533,908
–
=205.13
P
The options have a contractual term of 10 years. As of December 31, 2008 and 2007, the
weighted average remaining contractual life of options outstanding is 4.3 years and 5.2 years,
respectively, and the range of exercise prices amounted from P
=107.29 to P
=187.19.
The fair value of each option is estimated on the date of grant using the Black-Scholes optionpricing model. The fair values of stock options granted under ESOP at each grant date and the
assumptions used to determine the fair value of the stock options are as follows:
Weighted average share price
Exercise price
Expected volatility
Option life
Expected dividends
Risk-free interest rate
June 30, 2005
=327.50
P
=295.00
P
46.78%
10 years
1.27%
12.03%
June 10, 2004
=244.00
P
=220.00
P
46.71%
10 years
1.43%
12.75%
The expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also necessarily be the actual outcome.
*SGVMC112179*
- 78 ESOWN
The Company also has ESOWN granted to qualified officers and employees wherein grantees
may subscribe in whole or in part to the shares awarded to them based on the 10% discounted
market price as offer price set at grant date. To subscribe, the grantee must be an employee of the
Company or any of its subsidiaries during the 10-year payment period. In case the grantee
resigns, unsubscribed shares are cancelled, while the subscription may be paid up to the percent of
holding period completed and payments may be converted into the equivalent number of shares.
In case the grantee is separated, not for cause, but through retrenchment and redundancy,
subscribed shares may be paid in full, unsubscribed shares may be subscribed, or payments may
be converted into the equivalent number of shares. In case the grantee retires, the grantee may
subscribe to the unsubscribed shares anytime within the 10-year period. The plan does not allow
sale or assignment of the shares. All shares acquired through the plan are subject to the
Company’s Right to Repurchase.
Shares granted and subscribed under the ESOWN follows:
2007
623,335
619,912
=400.00
P
2008
1,015,200
898,260
P
=284.96
Granted
Subscribed
Exercise price
Subscriptions receivable from the stock option plans covering the Company’s shares are presented
under equity.
For the unsubscribed shares, the employee still has the option to subscribe from the start of the
fifth year but not later than on the start of the seventh year from date of grant. Movements in the
number of options outstanding under ESOWN as of December 31, 2008 follow:
2007
2008
At January 1
Granted
Adjustment due to 20% stock
dividends (see Note 18)
At December 31
Number of
options
61,546
116,940
Weighted
average
exercise
price
P
=237.88
284.96
Number of
options
48,436
3,423
Weighted
average
exercise
price
=274.00
P
400.00
12,309
190,795
–
P
=251.39
9,687
61,546
–
=237.88
P
*SGVMC112179*
- 79 The fair value of stock options granted is estimated on the date of grant using the Black-Scholes
Merton Formula, taking into account the terms and conditions upon which the options were
granted. The expected volatility was determined based on an independent valuation. The fair
value of stock options granted under ESOWN at grant date and the assumptions used to determine
the fair value of the stock options follow:
Number of unsubscribed shares
Fair value of each option
Weighted average share price
Exercise price
Expected volatility
Dividend yield
Interest rate
May 15, 2008
116,940
=137.45
P
=316.50
P
=284.96
P
30.63%
1.56%
8.23%
Total expense arising from share-based payments recognized by the Group in the consolidated
statement of income amounted to P
=342.9 million in 2008, and P
=288.0 million in 2007,
=285.4 million in 2006.
P
25. Segment Information
Business segment information is reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources among operating segments.
Accordingly, the primary segment reporting format is by business segment. Secondary
information is reported geographically.
The industry segments where the Group operates are as follows:
·
Real estate and hotels - planning and development of large-scale fully integrated residential
and commercial communities; development and sale of residential, leisure and commercial
lots and the development and leasing of retail and office space and land in these communities;
construction and sale of residential condominiums and office buildings; development of
industrial and business parks; development and sale of upper middle-income and affordable
housing; strategic land bank management; hotel, cinema and theater operations; and
construction and property management.
·
Financial services and bancassurance - universal banking operations, including savings and
time deposits in local and foreign currencies; commercial, consumer, mortgage and
agribusiness loans; leasing; payment services, including card products, fund transfers,
international trade settlement and remittances from overseas workers; trust and investment
services including portfolio management, unit funds, trust administration and estate planning;
fully integrated bancassurance operations, including life, non-life, pre-need and reinsurance
services; internet banking; on-line stock trading; corporate finance and consulting services;
foreign exchange and securities dealing; and safety deposit facilities.
*SGVMC112179*
- 80 ·
Telecommunications - provider of digital wireless communications services, wireline voice
communication services, consumer broadband services, other wireline communication
services, domestic and international long distance communication or carrier services and
mobile commerce services.
·
Electronics, information technology and business process outsourcing services - electronics
manufacturing services provider for original equipment manufacturers in the computing,
communications, consumer, automotive, industrial and medical electronics markets; venture
capital for technology businesses and emerging markets; provision of value-added content for
wireless services, on-line business-to-business and business-to-consumer services; electronic
commerce; technology infrastructure hardware and software sales and technology services;
and onshore- and offshore-business process outsourcing services.
·
Water utilities - contractor to manage, operate, repair, decommission, and refurbish all fixed
and movable assets (except certain retained assets) required to provide water delivery services
and sewerage services in the East Zone Service Area.
·
Automotive - manufacture and sale of passenger cars and commercial vehicles.
·
International - investments in overseas property companies and projects.
·
Others - air-charter services, agri-business and others.
The Group generally accounts for inter-segment sales and transfers as if the sales or transfers
were to third parties at current market prices.
The following tables regarding business segments present assets and liabilities as of
December 31, 2008 and 2007 and revenue and profit information for each of the three years in the
period ended December 31, 2008 (in millions).
2008
Revenue
Sales to external customers
Equity in net earnings of
associates and jointly
controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other
financing charges
Other charges
Provision for income tax
Parent Company
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
P
=–
P
= 30,679
P
= 22,917
6,702
1,234
3,436
11,372
1,424
9,948
885
855
1,331
33,750
24,613
9,137
(122)
60
265
23,120
22,779
341
(144)
93
178
127
271
(144)
(2,236)
(999)
(197)
(1,051)
(375)
(2,076)
(1,618)
(95)
(115)
(8)
(117)
2
International
Automotive
and Others
Consolidated
P
=–
P
= 10,457
P
= 64,053
75
1
207
10,740
10,413
327
7,396
2,243
5,417
79,109
59,500
19,609
(24)
(9)
(32)
(4,937)
(1,595)
(2,418)
(Forward)
*SGVMC112179*
- 81 -
Income before income
associated with
noncurrent assets held
for sale
Income associated with
noncurrent assets held
for sale, net of tax
Net income
Net income attributable to:
Equity holders of Ayala
Corporation
Minority interests
Other Information
Segment assets
Investment in associates and
jointly controlled entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
Segment additions to
property, plant and
equipment and
investment properties
Depreciation and
amortization
Non-cash expenses other
than depreciation and
amortization
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
Parent Company
Real Estate
and Hotels
P
= 6,516
P
= 5,635
(P
= 1,487)
–
P
= 6,516
–
P
= 5,635
–
(1,487)
P
= 6,516
–
P
= 6,516
P
= 2,879
2,756
P
= 5,635
(P
= 1,285)
(202)
(1,487)
P
= 34,625
P
= 91,376
P
= 19,016
50,857
–
P
= 85,482
9,916
1,042
P
= 102,334
37,606
–
P
= 37,606
International
Automotive
and Others
Consolidated
(P
= 267)
P
= 262
P
= 10,659
–
(267)
–
P
= 262
–
P
= 10,659
(P
= 261)
(6)
(267)
P
= 259
3
P
= 262
P
= 8,108
2,551
P
= 10,659
P
= 3,574
P
= 2,188
P
= 150,779
3,906
55
P
= 22,977
2,952
–
P
= 6,526
509
36
P
= 2,733
68,140
1,133
P
= 220,052
45,022
162
P
= 45,184
7,747
12
P
= 7,759
537
6
P
= 543
903
6
P
= 909
91,815
186
P
= 92,001
P
= 84
P
= 4,918
P
= 1,377
P
=5
P
= 355
P
= 6,739
92
1,259
1,494
4
91
2,940
P
= 1,024
P
= 462
P
= 175
P
= 221
P
=–
P
= 1,882
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P2,145 million, =
P3,667 million and =
P923 million, respectively.
2007
Revenue
Sales to external customers
Equity in net earnings of
associates and jointly
controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other
financing charges
Other charges
Provision for income tax
Income before income
associated with
noncurrent assets held
for sale
Income associated with
noncurrent assets held
for sale, net of tax
Net income
Parent Company
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
=–
P
=22,962
P
=21,655
P
8,697
903
8,670
18,270
1,819
16,451
804
597
1,464
25,827
17,970
7,857
(2,993)
(2)
(140)
(868)
(874)
(1,579)
13,316
4,536
–
=13,316
P
599
=5,135
P
(28)
77
186
21,890
20,798
1,092
(234)
(685)
(166)
International
Automotive
and Others
Consolidated
(As Restated)
=–
P
=11,961
P
=56,578
P
226
114
143
483
242
241
68
2
265
12,296
11,838
458
9,767
1,693
10,728
78,766
52,667
26,099
(9)
–
(23)
(16)
(9)
(64)
(4,120)
(1570)
(1,972)
7
209
369
18,437
–
=7
P
26
=235
P
–
=369
P
625
=19,062
P
(Forward)
*SGVMC112179*
- 82 -
Parent Company
Net income attributable to:
Equity holders of Ayala
Corporation
Minority interests
Other Information
Segment assets
Investment in associates and
jointly controlled entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
Segment additions to
property, plant and
equipment and
investment properties
Depreciation and
amortization
Non-cash expenses other
than depreciation and
amortization
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
(P
=473)
480
=7
P
International
Automotive
and Others
Consolidated
(As Restated)
=230
P
5
=235
P
=367
P
2
=369
P
=16,256
P
2,806
=19,062
P
=13,318
P
(2)
=13,316
P
=2,814
P
2,321
=5,135
P
=26,418
P
=75,361
P
=16,359
P
=3,127
P
=2,610
P
=123,875
P
55,855
–
=82,273
P
9,034
929
=85,324
P
3,142
31
=19,532
P
2,806
–
=5,933
P
435
24
=3,069
P
71,272
984
=196,131
P
=41,522
P
–
=41,522
P
=31,899
P
114
=32,013
P
=6,572
P
26
=6,598
P
=151
P
9
=160
P
=1,334
P
7
=1,341
P
=81,478
P
156
=81,634
P
=172
P
=2,924
P
=1,044
P
=–
P
=92
P
=4,232
P
89
1,558
1,251
4
80
2,982
=291
P
=267
P
=688
P
=–
P
=–
P
=1,246
P
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P3,291 million, =
P4,546 million and =
P800 million, respectively.
2006
Revenue
Sales to external customers
Equity in net earnings of
associates and jointly
controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other
financing charges
Other charges
Provision for income tax
Income before income
associated with
noncurrent assets held
for sale
Income associated with
noncurrent assets held
for sale, net of tax
Net income
Net income attributable to:
Equity holders of Ayala
Corporation
Minority interests
Parent Company
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
=–
P
=23,805
P
=20,557
P
7,926
771
5,040
13,737
1,700
12,037
291
659
1,054
25,809
18,952
6,857
(3,895)
(49)
(54)
(813)
(281)
(1,633)
8,039
4,130
–
=8,039
P
=8,040
P
(1)
=8,039
P
(25)
55
337
20,924
18,806
2,118
(286)
(49)
(116)
International
Automotive
and Others
Consolidated
(As Restated)
=–
P
=9,032
P
=53,394
P
48
31
390
469
174
295
9
5
177
9,223
8,933
290
8,249
1,521
6,998
70,162
48,565
21,597
(21)
–
(23)
(9)
(8)
(51)
(5,024)
(387)
(1,877)
1,667
251
222
14,309
155
=4,285
P
–
=1,667
P
–
=251
P
–
=222
P
155
=14,464
P
=2,466
P
1,819
=4,285
P
=1,195
P
472
=1,667
P
=250
P
1
=251
P
=222
P
–
=222
P
=12,173
P
2,291
=14,464
P
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P3,300 million, =
P4,109 million and =
P585 million, respectively.
*SGVMC112179*
- 83 Geographical Segments
Revenue
Philippines
Japan
USA
Europe
Others (Mostly Asia)
Investment Properties and
Property and
Equipment Additions
Segment Assets
2008
2007
(As Restated)
P
=56,425,628
7,735,083
6,736,608
4,471,487
3,739,847
P
=79,108,653
=56,931,668
P
9,400,556
6,081,976
3,525,576
2,827,080
=78,766,856
P
2007
(As Restated)
2008
(In Thousands)
=179,435,176
P
P
=205,680,829
5,470
13,020
6,477,017
6,048,504
–
–
10,213,197
8,309,613
=196,130,860
P
P
=220,051,966
2008
2007
P
=5,340,657
199
919,310
–
478,982
P
=6,739,148
=4,156,480
P
1,946
329
–
856,628
=5,015,383
P
Summarized financial information of BPI, Globe and MWCI are presented in Note 9 to the
consolidated financial statements.
26. Leases
Finance leases - as lessee
Foreign subsidiaries conduct a portion of their operations from leased facilities, which include
office equipment. These leases are classified as finance leases and expire over the next 5 years.
The average discount rate implicit in the lease is 8.5% per annum in 2008 and 2007. Future
minimum lease payments under the finance leases together with the present value of the net
minimum lease payments follow:
Within one year
After one year but not more than five years
Total minimum lease payments
Less amounts representing finance charges
Present value of minimum lease payments
2007
2008
Minimum Present values
Minimum Present values
payments
of payments
payments
of payments
(In Thousands)
=2,541
P
=2,359
P
P
=1,036
P
=980
483
470
14
13
3,024
2,829
1,050
993
195
–
57
–
=2,829
P
=2,829
P
P
=993
P
=993
Operating lease commitments - as lessee
The Group entered into lease agreements with third parties covering real estate properties. These
leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or a certain
percentage of gross revenue, whichever is higher.
*SGVMC112179*
- 84 Future minimum rentals payable under non-cancellable operating leases of lessee subsidiaries are
as follows:
Within one year
After one year but not more than five years
More than five years
2007
2008
(In Thousands)
=146,620
P
P
=154,923
483,373
513,202
1,577,925
1,478,113
=2,207,918
P
P
=2,146,238
Operating leases - as lessor
Certain subsidiaries have lease agreements with third parties covering its investment property
portfolio. These leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or
a certain percentage of gross revenue, whichever is higher.
Future minimum rentals receivable under non-cancellable operating leases of the Group are as
follows:
Within one year
After one year but not more than five years
More than five years
2007
2008
(In Thousands)
=653,150
P
P
=1,361,126
1,485,316
3,783,681
245,132
1,405,812
=2,383,598
P
P
=6,550,619
27. Related Party Transactions
The Group, in its regular conduct of business, has entered into transactions with associates, jointly
controlled entities and other related parties principally consisting of advances and reimbursement
of expenses, purchase and sale of real estate properties, various guarantees, construction
contracts, and development, management, underwriting, marketing and administrative service
agreements. Sales and purchases of goods and services to and from related parties are made at
normal market prices.
The effects of the foregoing are shown under the appropriate accounts in the consolidated
financial statements as follows:
Income
Associates and joint ventures
Key management personnel
Other related parties
P
=1,380,412
–
4,464
P
=1,384,876
2008
Costs and Amounts Owed by Amounts Owed to
Expenses
Related Parties Related Parties
(In Thousands)
P
=510,563
P
=7,679,618
P
=185,956
761,060
220,876
–
57,699
541,502
6,416
P
=1,329,322
P
=8,441,996
P
=192,372
*SGVMC112179*
- 85 -
Income
Associates and joint ventures
Key management personnel
Other related parties
=1,287,340
P
–
83,871
=1,371,211
P
Income
Associates and joint ventures
Key management personnel
Other related parties
=619,858
P
–
12,567
=632,425
P
2007
Costs and Amounts Owed by Amounts Owed to
Expenses
Related Parties
Related Parties
(In Thousands)
=2,202,909
P
=1,307,627
P
=286,000
P
668,885
285,514
–
113,793
802,483
11,786
=2,985,587
P
=2,395,624
P
=297,786
P
2006
Costs and Amounts Owed by Amounts Owed to
Expenses
Related Parties
Related Parties
(In Thousands)
=6,374,376
P
=1,391,917
P
P47,187
=
767,588
254,288
–
61,956
1,551,445
85,017
=7,203,920
P
=3,197,650
P
=132,204
P
Amounts owed by related parties include the following:
a. Promissory notes issued by Bonifacio Land Corporation (BLC), which were assigned by
Metro Pacific Corporation (MPC) to ALI and Evergreen Holdings Inc. (EHI) and the
advances subsequently made by ALI to Fort Bonifacio Development Corporation (FBDC) to
fund the completion of the Bonifacio Ridge project and to BLC to finance the costs to be
incurred in relation to its restructuring program. These notes and advances are due and
demandable and bear interest at the rate of 12% to 14% per annum.
b. Promissory notes and advances issued by AYC Holdings, Inc. to EGS Corp. and EGS
Acquisition Corp. to fund the acquisition of eTelecare amounting to P
=4,982.0 million. The
advances amounting to P
=665.3 million is payable in one year and bear interest at the rate of
12% per annum. The promissory notes amounting to P
=4,316.7 million is payable over a
period of five years and bear interest at the rate of 12% to 18% per annum.
Allowance for doubtful accounts to related parties amounted to P
=111.0 million and P
=105.5 million
as of December 31, 2008 and 2007, respectively. Provision for doubtful accounts amounted to
=6.0 million in 2008, P
P
=1.7 million in 2007 and P
=6.5 million in 2006.
Compensation of key management personnel by benefit type follows:
2008
Short-term employee benefits
Share-based payments (Note 24)
Post-employment benefits (Note 23)
P
=532,332
184,308
44,420
P
=761,060
2007
(In Thousands)
=449,419
P
144,511
74,955
=668,885
P
2006
=500,413
P
182,877
84,298
=767,588
P
*SGVMC112179*
- 86 28. Financial Instruments
Fair Value of Financial Instruments
The table below presents a comparison by category of carrying amounts and estimated fair values
of all of the Group’s financial instruments (in thousands):
2007
2008
FVPL FINANCIAL ASSETS
Financial assets at FVPL
Derivative assets*
Total FVPL financial assets
LOANS AND RECEIVABLES
Cash and cash equivalents
Short-term investments
Accounts and notes receivables
Trade receivables
Real estate
Electronics manufacturing
Automotive
Information technology and
business process outsourcing
International and others
Total trade receivables
Nontrade receivables
Advances to other companies
Receivable from related parties
Other receivables
Total nontrade receivables
Total loans and receivables
AFS FINANCIAL ASSETS
Quoted shares of stocks
Unquoted shares of stocks
Total AFS financial assets
HTM INVESTMENTS
Quoted debt investments
Total financial assets
OTHER FINANCIAL LIABILITIES
Current Other Financial Liabilities
Accounts payable and accrued
expenses
Accounts payable
Accrued expenses
Accrued project cost
Dividends payable
Accrued personnel costs
Interest payable
Retentions payable
Related parties
Short-term debt
Current portion of long-term debt
Noncurrent Other Financial Liabilities
Other noncurrent liabilities
Long-term debt
Total other financial liabilities
Carrying Value
Fair Value
Carrying Value
Fair Value
P
=2,233,201
80,520
2,313,721
P
=2,233,201
80,520
2,313,721
=622,097
P
143,322
765,419
=622,097
P
143,322
765,419
42,885,792
1,008,924
42,885,792
1,008,924
36,835,549
3,687,606
36,835,549
3,687,606
10,428,525
3,115,891
639,346
11,118,638
3,115,891
639,346
9,293,014
2,941,419
753,661
9,532,729
2,941,419
753,661
332,964
2,914
14,519,640
332,964
2,914
15,209,753
343,977
5,783
13,337,854
343,977
5,783
13,577,569
2,735,712
8,330,920
1,895,094
12,961,726
71,376,082
2,735,712
8,638,552
1,874,915
13,249,179
72,353,648
2,231,057
2,290,117
1,580,113
6,101,287
59,962,296
2,216,427
2,290,117
1,560,288
6,066,832
60,167,556
1,499,982
1,614,520
3,114,502
1,499,982
1,614,520
3,114,502
628,112
1,796,854
2,424,966
628,112
1,796,854
2,424,966
65,405
P
=76,869,710
68,695
P
=77,850,566
67,947
=63,220,628
P
72,685
=63,430,626
P
P
=15,671,340
6,998,095
2,022,903
1,333,740
505,772
398,207
317,945
192,372
2,755,447
1,478,871
P
=15,671,340
6,998,095
2,022,903
1,333,740
505,772
398,207
317,945
192,372
2,755,447
1,477,966
=13,289,481
P
6,044,523
540,618
1,213,727
223,887
579,886
32,577
297,786
2,634,148
9,512,760
=13,289,481
P
6,044,523
540,618
1,213,727
223,887
579,886
32,577
297,786
2,634,148
9,512,760
7,016,372
50,250,151
P
=88,941,215
7,022,465
51,849,121
P
=90,545,373
6,817,643
37,884,705
=79,071,741
P
6,823,734
42,089,076
=83,282,203
P
*The derivative assets as of December 31, 2008 pertains to the bifurcated prepayment option on the Company’s loan which is
included under the “Other Noncurrent Assets” account in the consolidated balance sheet (see Note 16)
*SGVMC112179*
- 87 The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate such value:
Cash and cash equivalents, short-term investments and current receivables - Carrying amounts
approximate fair values due to the relative short-term maturities of these investments.
Financial assets at FVPL - Fair values of investments in government securities are based on
quoted prices as of balance sheet date.
Noncurrent trade and nontrade receivables - The fair values are based on the discounted value of
future cash flows using the applicable rates for similar types of instruments. The discount rates
used ranged from 6.40% to 7.70% in 2008 and 4.19% to 6.04% in 2007.
AFS quoted equity shares - Fair values are based on quoted prices published in markets.
AFS unquoted shares - Fair value of equity funds are based on net asset value per share. For other
unquoted equity shares where the fair value is not reasonably determinable due the unpredictable
nature of future cash flows and the lack of suitable method of arriving at a reliable fair value,
these are carried at cost.
HTM investments - The fair value of bonds is based on quoted market prices.
Liabilities - The fair values of accounts payable and accrued expenses and short-term debt
approximate the carrying amounts due to the short-term nature of these transactions.
The fair value of noncurrent other financial liabilities (fixed rate and variable rate loans repriced
on a semi-annual/annual basis and deposits) are estimated using the discounted cash flow
methodology using the current incremental borrowing rates for similar borrowings with maturities
consistent with those remaining for the liability being valued. The discount rates used ranged
from 6.60% to 7.70% in 2008 and 4.19% to 6.04% in 2007.
For variable rate loans that reprice every three months, the carrying value approximates the fair
value because of recent and regular repricing based on current market rates.
The fair value of forward currency contracts is based on counterparty valuation except for
forward transactions with a nonbank counterparty where valuation was calculated by reference to
currency forward exchange rates for contracts with similar maturity profiles. The fair value of the
outstanding structured currency options was derived from the mark-to-market valuations provided
by counterparty banks.
The fair value of prepayment option was determined using binomial pricing model. Valuation
inputs were based on market observable rates as of value date while interest rate volatility was
computed using historical rates or data.
*SGVMC112179*
- 88 Risk Management and Financial Instruments
General
In line with the corporate governance infrastructure of the Company, the Company have adopted a
group-wide enterprise risk management framework in 2002. An Enterprise Risk Management
Policy was approved by the Audit Committee in 2003, and was subsequently revised and
approved on February 14, 2008. The policy was designed primarily to enhance the risk
management process and institutionalize a focused and disciplined approach to managing the
Company’s business risks. By understanding and managing risk, the Company provides greater
certainty and confidence to the stockholders, employees, and the public in general.
The risk management framework encompasses the identification and assessment of business risks,
development of risk management strategies, assessment/design/implementation of risk
management capabilities, monitoring and evaluating the effectiveness of risks mitigation
strategies and management performance, and identification of areas and opportunities for
improvement in the risk management process.
A Chief Risk Officer (CRO) is the ultimate champion of enterprise risk management at Ayala and
oversees the entire risk management function. On the other hand, the Risk Management Unit
provides support to the CRO and is responsible for overall continuity. Beginning 2008, under an
expanded charter, the Audit and Risk Committee will provide a more focused oversight role over
the risk management function. A quarterly report on the risk portfolio of the Ayala Group of
Companies and the related risk mitigation efforts and initiatives are provided to the Audit and
Risk Committee. The Company’s internal auditors monitor the compliance with Ayala’s risk
management policies to ensure that an effective control environment exists within the entire
Ayala Group.
For 2008, the Company engaged the services of an outside consultant to assist the Company in the
roll-out of a more focused enterprise risk management framework which included a formal risk
awareness session and self-assessment workshops with all the functional units of the Company.
The Audit and Risk Committee has initiated the institutionalization of an enterprise risk
management function across all the subsidiaries and affiliates.
Financial Risk Management Objectives and Policies
The Group’s principal financial instruments comprise of financial assets at FVPL, AFS financial
assets, HTM investments, bank loans, corporate notes and bonds. The financial debt instruments
were issued primarily to raise financing for the Group’s operations. The Group has various
financial assets such as cash and cash equivalents, accounts and notes receivables and accounts
payable and accrued expenses which arise directly from its operations.
The main purpose of the Group’s financial instruments is to fund its operational and capital
expenditures. The main risks arising from the use of financial instruments are interest rate risk,
foreign exchange risk, liquidity risk and credit risk. The Group also enters into derivative
transactions, the purpose of which is to manage the currency and interest rate risk arising from its
financial instruments.
*SGVMC112179*
- 89 The Group’s risk management policies are summarized below:
Interest Rate Risk
The Group’s exposure to market risk for changes in interest rates relates primarily to the
Company’s and its subsidiaries’ long-term debt obligations. The Group’s policy is to manage its
interest cost using a mix of fixed and variable rate debt.
The following table demonstrates the sensitivity of the Group’s profit before tax and equity to a
reasonably possible change in interest rates as of December 31, 2008 and 2007, with all variables
held constant, (through the impact on floating rate borrowings and changes in fair value of
financial assets through FVPL).
December 31, 2008
FVPL financial assets
Parent Company - floating rate borrowings
Subsidiaries - floating rate borrowings
Effect on profit before tax
Change in basis points
+100 basis points
-100 basis points
(In Thousands)
(P
=10,295)
P
=10,475
(52,425)
52,425
(130,990)
130,990
(P
=193,710)
P
=193,890
December 31, 2007
FVPL financial assets
Parent Company - floating rate borrowings
Subsidiaries - floating rate borrowings
Effect on profit before tax
Change in basis points
+100 basis points
-100 basis points
(In Thousands)
(P
=9,975)
=10,348
P
(57,817)
57,817
(133,316)
133,316
(P
=201,108)
=201,481
P
There is no other impact on the Group’s equity other than those already affecting the net income.
*SGVMC112179*
- 90 The terms and maturity profile of the interest-bearing financial assets and liabilities, together with its corresponding nominal amounts and
carrying values (in thousands), are shown in the following table:
2008
Interest terms (p.a.)
Group
Cash and cash
Fixed at the date of investment
equivalents
Short-term investments Fixed at the date of investment or
revaluation cut-off
FVPL financial assets Fixed at the date of investment or
revaluation cut-off
Fixed at the date of sale
Accounts and notes
receivable
HTM
Fixed at 16.50%
Company
Long-term debt
Fixed
Fixed at 6.70%
Fixed at 6.75%
Fixed at 6.825%
Fixed at 10.00%
Fixed at 10.375%
Fixed at 6.725%
Floating
Variable at 0.50% to 0.67% over 91-day
T-bills PDST-R1 (formerly Mart1)
Subsidiaries
Short-term debt
Variable ranging from 7.0% to 9.64%
Variable ranging from 2.5% to 6.4%
Long-term debt
Fixed
Fixed at 9.5%
Fixed at 5.0% to 14.88%
Rate Fixing
Period
Nominal
Amount
< 1 year
1 to 5 years
> 5 years
Carrying Value
Various
=42,885,792
P
=42,885,792
P
=–
P
=–
P
=42,885,792
P
Balance date
1,008,924
1,008,924
–
–
1,008,924
Balance date
1,778,720
1,334,081
434,639
–
1,778,720
Date of sale
14,720,214
8,017,173
5,651,461
208,166
13,876,800
6 months
65,000
65,405
–
–
65,405
7 years
10 years
5 years
5 years
7 years
5 years
1,492,500
1,500,000
6,000,000
3,000,000
4,170,000
2,000,000
7,500
1,667
–
–
10,000
–
30,000
6,667
6,000,000
3,000,000
4,160,000
2,000,000
1,455,000
1,491,666
–
–
–
–
1,492,500
1,500,000
6,000,000
3,000,000
4,170,000
2,000,000
3 months
6,990,000
5,000
6,985,000
–
6,990,000
Monthly
Monthly
1,501,000
1,254,447
1,501,000
1,254,447
–
–
–
–
1,501,000
1,254,447
1 and 2 years
3,5,7 and 10
years
33,500
13,855,658
33,500
204,892
–
9,884,047
–
3,762,625
33,500
13,851,564
3 months
1,625,000
39,250
435,350
1,146,394
1,620,994
3 months
10,985,557
1,177,062
9,799,115
9,380
10,985,557
Floating
Variable at 1.00% to 1.5% over 91-day
PDST-F or PDST-R1
Variable from 4.0% to 15.0%
*SGVMC112179*
- 91 2007
Interest terms (p.a.)
Group
Cash and cash
Fixed at the date of investment
equivalents
Short-term investments Fixed at the date of investment or
revaluation cut-off
FVPL financial assets Fixed at the date of investment or
revaluation cut-off
Fixed at the date of sale
Accounts and notes
receivable
HTM investments
Fixed at 16.50%
Company
Long-term debt
Fixed
Fixed at 6.70%
Fixed at 6.725% to 10.00%
Fixed at 10.375%
Floating
Variable at 0.50% to 1.50% over 91-day
T-bills PDST-F (formerly Mart1)
Subsidiaries
Short-term debt
Variable ranging from 3.10% to 6.40%
Variable ranging from 3.40% to 9.00%
Long-term debt
Fixed
Fixed at 8.125%
Fixed at 5.0% to 14.88%
Rate Fixing
Period
Nominal
Amount
< 1 year
1 to 5 years
> 5 years
Carrying Value
Various
=36,835,549
P
=36,835,549
P
=–
P
=–
P
=36,835,549
P
Balance date
3,687,606
3,687,606
–
–
3,687,606
Balance date
622,097
622,097
–
–
622,097
Date of sale
9,204,200
4,887,108
3,331,790
203,569
8,422,467
6 months
65,000
–
67,947
–
67,947
7 years
3 to 5 years
5 years
1,500,000
11,000,000
4,180,000
7,500
–
8,250
30,000
11,000,000
4,171,750
1,462,500
–
–
1,500,000
11,000,000
4,180,000
3 months
7,129,091
1,305,758
973,485
4,849,848
7,129,091
Monthly
Monthly
390,248
2,243,900
390,248
2,243,900
–
–
–
–
390,248
2,243,900
5 years
5, 7 and 10
years
5,421,438
6,246,759
5,421,438
1,167,460
–
3,899,624
–
1,175,295
5,421,438
6,242,379
3 months
3 months
9,639,934
2,288,840
393,214
1,209,140
9,246,720
879,412
–
196,071
9,639,934
2,284,623
Floating
Variable at 6.00% to 15.00%
Variable at 1.00% to 1.50% over
91-day PDST-F or PDST-R1
*SGVMC112179*
- 92 Foreign Exchange Risk
The Group’s foreign exchange risk results primarily from movements of the Philippine Peso
(PHP) against the United States Dollar (USD). The Company may enter into foreign currency
forwards and foreign currency swap contracts in order to hedge its USD obligations.
The table below summarizes the Group’s exposure to foreign exchange risk as of
December 31, 2008 and 2007. Included in the table are the Group’s monetary assets and
liabilities at carrying amounts, categorized by currency.
2008
USD Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents
Short term investment
Accounts and notes receivables
Other current assets
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Long-term debt
Other noncurrent liabilities
Total liabilities
Net foreign currency denominated
assets (liabilities)
US$88,107
6,120
107,245
–
–
201,472
P
=4,186,845
290,822
5,096,282
–
–
9,573,949
2,119
–
175,000
–
177,119
100,695
–
8,316,000
–
8,416,695
US$24,353
P
=1,157,254
US$267,120
–
8,040
1,521
9,942
286,623
13,802
2,429
302,839
159
319,229
(US$32,606)
2008
SGD Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Total assets
Liabilities
Accounts payable and accrued
expenses
Short-term debt
Total liabilities
Net foreign currency denominated
assets (liabilities)
2007
USD Php Equivalent
=11,026,714
P
–
331,891
62,787
410,406
11,831,798
569,747
100,269
12,501,194
6,564
13,177,774
(P
=1,345,976)
2007
SGD Php Equivalent
SGD8,093
60
8,153
P
=264,874
1,976
266,850
SGD13,811
13
13,824
=394,473
P
375
394,848
972
6,955
7,927
31,822
227,626
259,448
12,764
12,009
24,773
364,567
343,008
707,575
SGD226
P
=7,402
(SGD10,949)
(P
=312,727)
*SGVMC112179*
- 93 2008
HKD Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Total assets
Liabilities
Accounts payable and accrued
expenses
Net foreign currency denominated
assets
HKD441
106,549
106,990
P
=2,699
652,859
655,558
HKD–
14,360
14,360
=–
P
76,219
76,219
12,060
73,897
–
–
HKD94,930
P
=581,661
HKD14,360
=76,219
P
2008
RMB Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Total assets
Liabilities
Accounts payable and accrued
expenses
Net foreign currency denominated
assets
2007
HKD Php Equivalent
2007
RMB Php Equivalent
RMB16,508
132,881
149,389
P
=114,457
921,346
1,035,803
RMB3,612
109,559
110,171
P20,434
=
619,865
640,299
103,097
714,830
64,756
366,375
RMB46,292
P
=320,973
RMB45,415
=273,924
P
The following table demonstrates the sensitivity to a reasonably possible change in the exchange
rate, with all variables held constant, of the Group’s profit before tax (due to changes in the fair
value of monetary assets and liabilities) and the Group’s equity (in thousands).
2008
Currency
US$
SGD
HKD
RMB
Increase (decrease) in
Peso per foreign currency
depreciation (appreciation)
=1.00
P
(P
=1.00)
=1.00
P
(P
=1.00)
=1.00
P
(P
=1.00)
=1.00
P
(P
=1.00)
Effect
on profit
before tax
(P
=24,353)
24,353
(226)
226
(94,930)
94,930
(46,292)
46,292
*SGVMC112179*
- 94 2007
Currency
US$
SGD
HKD
RMB
Increase (decrease) in
Peso per foreign currency
depreciation (appreciation)
=1.00
P
(P
=1.00)
=1.00
P
(P
=1.00)
=1.00
P
(P
=1.00)
=1.00
P
(P
=1.00)
Effect
on profit
before tax
=32,606
P
(32,606)
10,949
(10,949)
(14,360)
14,360
(45,415)
45,415
There is no other impact on the Group’s equity other than those already affecting the net income.
Price risk
AFS financial assets are acquired at a certain price in the market. Such investment securities are
subject to price risk due to changes in market values of instruments arising either from factors
specific to individual instruments or their issuers or factors affecting all instruments traded in the
market. Depending on the several factors such as interest rate movements, country’s economic
performance, political stability, domestic inflation rates, these prices change, reflecting how
market participants view the developments.
The analysis below demonstrates the sensitivity to a reasonably possible change of market index
with all other variables held constant, of the Group’s equity (in thousands).
2008
Market Index
PSEi
Change in Variables
+5%
-5%
Effect on Equity
=38,096
P
(38,096)
Change in Variables
+5%
-5%
Effect on Equity
=6,712
P
(6,712)
2007
Market Index
PSEi
Liquidity Risk
The Group seeks to manage its liquidity profile to be able to service its maturing debts and to
finance capital requirements. The Group maintains a level of cash and cash equivalents deemed
sufficient to finance operations. As part of its liquidity risk management, the Company regularly
evaluates its projected and actual cash flows. It also continuously assesses conditions in the
financial markets for opportunities to pursue fund-raising activities. Fund-raising activities may
include bank loans and capital market issues both on-shore and off-shore.
*SGVMC112179*
- 95 The table summarizes the maturity profile of the Group’s financial liabilities as of
December 31, 2008 and 2007 based on contractual undiscounted payments.
Accounts payable and
accrued expenses
Accounts payable
Accrued expenses
Accrued project costs
Dividends payable
Accrued personnel
costs
Interest payable
Retentions payable
Related parties
Short-term debt
Long-term debt
Other noncurrent
liabilities
Interest payable
Accounts payable and
accrued expenses
Accounts payable
Accrued expenses
Accrued project costs
Dividends payable
Accrued personnel
costs
Interest payable
Retentions payable
Related parties
Short-term debt
Long-term debt
Other noncurrent
liabilities
Interest payable
< 1 year
1 to < 2 years
2008
2 to < 3 years
(In Thousands)
> 3 years
Total
P
= 15,671,340
6,998,095
2,022,903
1,333,740
P
=–
–
–
–
P
=–
–
–
–
P
=–
–
–
–
P
=15,671,340
6,998,095
2,022,903
1,333,740
505,772
398,207
317,945
192,372
2,755,447
1,478,871
–
–
–
–
–
5,669,616
–
–
–
–
–
8,801,387
–
–
–
–
35,694,241
505,772
398,207
317,945
192,372
2,755,447
51,644,115
–
P
= 31,674,692
2,260,063
P
=7,929,679
745,981
P
=9,547,368
4,010,328
P
=39,704,569
7,016,372
P
=88,856,308
< 1 year
P
= 3,625,656
1 to < 2 years
P
=3,360,187
2 to < 3 years
P
=3,212,604
> 3 years
P
=4,162,923
Total
P
=14,361,370
< 1 year
1 to < 2 years
2007
2 to < 3 years
(In Thousands)
> 3 years
Total
=13,289,481
P
6,044,523
540,618
1,213,727
=–
P
–
–
–
=–
P
–
–
–
=–
P
–
–
–
=13,289,481
P
6,044,523
540,618
1,213,727
223,887
579,886
32,577
297,786
2,634,148
9,512,760
–
–
–
–
–
2,286,464
–
–
–
–
–
4,600,754
–
–
–
–
–
30,997,487
223,887
579,886
32,577
297,786
2,634,148
47,397,465
–
=34,369,393
P
5,473,515
=7,759,979
P
1,214,742
=5,815,496
P
129,386
=31,126,873
P
6,817,643
=79,071,741
P
< 1 year
=3,039,525
P
1 to < 2 years
=2,491,604
P
2 to < 3 years
=2,225,209
P
> 3 years
=4,405,254
P
Total
=12,161,592
P
Credit Risk
The Group’s holding of cash and short-term investments exposes the Group to credit risk of the
counterparty. Credit risk management involves dealing only with institutions for which credit
limits have been established. The treasury policy sets credit limits for each counterparty. Given
the Group’s diverse base of counterparties, it is not exposed to large concentration of credit risk.
*SGVMC112179*
- 96 The table below shows the maximum exposure to credit risk for the components of the
consolidated balance sheet. The maximum exposure is shown at gross, before the effect of
mitigation through the use of master netting arrangements or collateral agreements.
Cash and cash equivalents
Short-term investments
FVPL financial assets
Financial assets at FVPL
Derivative assets
Accounts and notes receivables
Trade
Real estate
Electronics manufacturing
Automotive
Information technology and business
process outsourcing
International and others
Advances
Related parties
Others
AFS investments
Quoted shares of stocks
Unquoted shares of stocks
Held-to-maturity investments
Bonds
Total credit risk exposure
2007
2008
(In Thousands)
=36,835,549
P
P
=42,885,792
3,687,606
1,008,924
2,233,201
80,520
622,097
143,322
10,428,525
3,115,891
639,346
9,293,014
2,941,419
753,661
332,964
2,914
2,735,712
8,330,920
1,895,094
343,977
5,783
2,231,057
2,290,117
1,580,113
1,499,982
1,614,520
628,112
1,796,854
65,405
P
=76,869,710
67,947
=63,220,628
P
*SGVMC112179*
- 97 The analysis of accounts and notes receivables that were past due but not impaired follows:
December 31, 2008
Trade:
Real estate
Electronics manufacturing
Automotive
Information technology and
business process outsourcing
International and others
Advances to other companies
Related parties
Others
Total
Neither Past
Due nor
Impaired
<30 days
30-60 days
P
=8,132,446
2,942,598
245,499
P
=907,944
138,169
274,359
P
=267,659
16,415
89,929
P
=369,772
244
28,933
200,326
–
1,521,357
8,104,280
1,506,297
P
=22,652,803
64,596
1,542
249,737
56,138
38,823
P
=1,731,308
20,296
1,681
27,017
47,536
69,285
P
=539,818
31,365
258
383,020
44,731
72,592
P
=930,915
Neither Past
Due nor
Impaired
<30 days
30-60 days
=7,770,857
P
2,808,752
529,296
=862,024
P
112,452
112,582
=240,163
P
6,636
75,724
=119,959
P
3,590
34,662
275,986
–
1,823,158
1,954,683
1,229,089
=16,391,821
P
15,379
3,465
58,432
49,694
37,824
=1,251,852
P
23,194
2,019
96,265
36,372
36,835
=517,208
P
2,901
–
92,315
36,217
38,085
=327,729
P
Past Due but not Impaired
60-90 days 90-120 days
(In Thousands)
>120 days
Total
Impaired
Total
P
=132,440
–
7,777
P
=671,869
18,465
18,956
P
=2,349,684
173,293
419,954
P
=83,124 P
=10,565,254
36,277
3,152,168
217
665,670
16,381
189
8,563
41,372
87,538
P
=294,260
–
270
546,018
36,863
76,826
P
=1,369,267
132,638
3,940
1,214,355
226,640
345,064
P
=4,865,568
19,120
352,084
60,134
64,074
–
2,735,712
111,076
8,441,996
113,936
1,965,297
P
=423,884 P
=27,942,255
Past Due but not Impaired
60-90 days 90-120 days
(In Thousands)
>120 days
Total
Impaired
Total
=225,138
P
8,999
14,975
=162,262
P
990
12,529
=1,609,546
P
132,667
250,472
=32,119
P
31,180
–
=9,412,522
P
2,972,599
779,768
7,732
415
83,532
35,691
48,433
=424,915
P
18,785
910
77,355
177,460
143,779
=594,070
P
67,991
6,809
407,899
335,434
304,956
=3,115,774
P
December 31, 2007
Trade:
Real estate
Electronics manufacturing
Automotive
Information technology and
business process outsourcing
International and others
Advances to other companies
Related parties
Others
Total
18,261
362,238
60,134
66,943
–
2,231,057
105,507
2,395,624
126,749
1,660,794
=373,950 P
P
=19,881,545
*SGVMC112179*
- 98 The table below shows the credit quality of the Group’s financial assets as of December 31, 2008 and 2007 (in thousands):
December 31, 2008
Cash and cash equivalents
Short-term investments
FVPL financial assets
Financial assets at FVPL
Derivative assets
Accounts and notes receivables
Trade
Real estate
Electronics manufacturing
Automotive
Information technology and
business process outsourcing
International and others
Advances to other companies
Related parties
Others
AFS Investments
Quoted shares of stocks
Unquoted shares of stocks
HTM Investments
Quoted debt investments
Neither past due nor impaired
High Grade Medium Grade
Low Grade
P
=42,885,792
P
=–
P
=–
1,008,924
–
–
Total
P
=42,885,792
1,008,924
Past due but
not impaired
P
=–
–
Impaired
P
=–
–
Total
P
=42,885,792
1,008,924
2,233,201
80,520
–
–
–
–
2,233,201
80,520
–
–
–
–
2,233,201
80,520
6,042,439
867,658
192,080
1,600,010
1,682,919
53,419
489,997
392,021
–
8,132,446
2,942,598
245,499
2,349,684
173,293
419,954
83,124
36,277
217
10,565,254
3,152,168
665,670
200,326
–
1,499,498
7,436,850
1,367,398
–
–
7,942
667,430
138,899
–
–
13,917
–
–
200,326
–
1,521,357
8,104,280
1,506,297
132,638
3,940
1,214,355
226,640
345,064
19,120
60,134
–
111,076
113,936
352,084
64,074
2,735,712
8,441,996
1,965,297
1,499,585
–
–
1,564,917
–
–
1,499,585
1,564,917
–
–
–
–
1,499,585
1,564,917
65,405
P
=65,379,676
–
P
=5,715,536
–
P
=895,935
65,405
P
=71,991,147
–
P
=4,865,568
–
P
=423,884
65,405
P
=77,280,599
*SGVMC112179*
- 99 December 31, 2007
Cash and cash equivalents
Short-term investments
FVPL financial assets
Financial assets at FVPL
Derivative assets
Accounts and notes receivables
Trade
Real estate
Electronics manufacturing
Information technology and
business process outsourcing
Automotive
International and others
Advances
Related parties
Others
AFS Investments
Quoted shares of stocks
Unquoted shares of stocks
HTM Investments
Quoted debt investments
Neither past due nor impaired
High Grade Medium Grade
Low Grade
=36,835,549
P
=–
P
=–
P
3,687,606
–
–
622,097
143,322
–
–
–
–
622,097
143,322
Past due but
not impaired
=–
P
–
–
–
–
5,294,456
1,307,280
1,748,757
1,025,486
727,644
475,986
7,770,857
2,808,752
1,609,546
132,667
32,119
31,180
9,412,522
2,972,599
–
329,296
–
1,743,470
1,950,857
738,654
275,986
200,000
–
79,688
3,826
241,517
–
–
–
–
–
248,918
275,986
529,296
–
1,823,158
1,954,683
1,229,089
67,991
250,472
6,809
407,899
335,434
304,956
18,261
–
60,134
–
105,507
126,749
362,238
779,768
66,943
2,231,057
2,395,624
1,660,794
495,538
–
132,574
1,796,854
–
–
628,112
1,796,854
–
–
–
–
628,112
1,796,854
67,947
=53,216,072
P
–
=5,504,688
P
–
=1,452,548
P
67,947
=60,173,308
P
–
=3,115,774
P
–
=373,950
P
67,947
=63,663,032
P
Total
=36,835,549
P
3,687,606
Impaired
=–
P
–
–
–
–
Total
=36,835,549
P
3,687,606
622,097
143,322
*SGVMC112179*
- 100 The credit quality of the financial assets was determined as follows:
Cash and cash equivalents, short-term investments, FVPL financial assets, quoted AFS
investments and HTM investments - based on the nature of the counterparty and the Group’s
internal rating system.
Receivables:
Real estate - high grade pertains to receivables with no default in payment; medium grade pertains
to receivables with up to 3 defaults in payment; and low grade pertains to receivables with more
than 3 defaults in payment.
Electronics manufacturing - high grade pertains to receivable with favorable credit terms and can
be offered with a credit term of 15 to 45 days; medium grade pertains to receivable with normal
credit terms and can be offered with a credit term of 15 to 30 days; and low grade pertains to
receivables under advance payment or confirmed irrevocable Stand-by Letter of Credit and
subjected to semi-annual or quarterly review for possible upgrade.
Automotive - high grade pertains to receivables from corporate accounts and medium grade for
receivables from noncorporate accounts.
Available-for-sale investments - the unquoted investments are unrated.
29. Registration with the Philippine Export Zone Authority (PEZA)
Some activities of certain subsidiaries are registered with the PEZA. Under the registration, these
subsidiaries are entitled to certain tax and nontax incentives, which include, but are not limited to,
income tax holiday (ITH) and duty-free importation of inventories and capital equipment. Upon
the expiration of the ITH, the subsidiaries will be liable for payment of a five percent (5%) tax on
gross income earned from sources within the PEZA economic zone in lieu of payment of national
and local taxes.
30. Note to Consolidated Statements of Cash Flows
Noncash investing activities are as follows:
2008
Property/liquidating dividend
P
=–
2007
(In Thousands)
=–
P
2006
=16,573
P
31. Interest in a Joint Venture
MDC has a 51% interest in Makati Development Corporation - First Balfour, Inc. Joint Venture
(the Joint Venture), a jointly controlled operation whose purpose is to design and build St. Luke’s
Medical Center (the Project) in Fort Bonifacio Global City, Taguig.
*SGVMC112179*
- 101 The Project was started on January 31, 2007. The Project is a world-class medical facility
comprising, more or less, of a 611-bed hospital and a 378-unit medical office building, with an
approximate gross floor area of 154,000 square meters, which meets international standards, and
all standards and guidelines of applicable regulatory codes of the Philippines and complies with
the criteria of the Environment of Care of the Joint Commission International Accreditation.
The Joint Venture expects that the Project will be completed in 30 months from Day 1 as
stipulated in the contract with the Project Owner.
The Group’s share in the assets, liabilities, income and expenses of the Joint Venture at
December 31, 2008 and 2007 and for the years then ended, which are included in MDC’s
financial statements, are as follows:
2008
(In Thousands)
Current assets
Cash and cash equivalents
Receivables
Due from customers for contract work
Inventory
Other current assets
Property and equipment
Total assets
Total liabilities
Revenue
Contract costs
Interest and other income
Income before income tax
Income tax expense
Net profit
P
=181,953
440,569
229,596
18,349
135,674
16,978
1,023,119
802,821
1,422,023
(1,218,026)
16,516
220,513
(2,250)
P
=218,263
2007
=639,224
P
230,052
72,596
–
145,418
18,695
1,105,985
1,053,085
376,610
(344,496)
24,635
56,749
(3,848)
=52,901
P
Provision for income tax expense pertains to final tax on interest income.
32. Commitments and Contingencies
Commitments
ALI has an existing contract with the Bases Conversion Development Authority (BCDA) to
develop, under a lease agreement, a mall with an estimated gross leasable area of 152,000 square
meters on a 9.8-hectare lot inside Fort Bonifacio. The lease agreement covers 25 years,
renewable for another 25 years subject to reappraisal of the lot at market value. The annual fixed
lease rental amounts to P
=106.5 million while the variable rent ranges from 5% to 20% of gross
revenue.
Subsequently, ALI transferred its rights and obligations granted to or imposed under the lease
agreement to SSECC, its subsidiary, in exchange for equity.
*SGVMC112179*
- 102 As part of the bid requirement, ALI procured a performance bond in 2003 from the Government
Service Insurance System in favor of BCDA amounting to P
=3.9 billion to guarantee the committed
capital to BCDA. Moreover, SSECC obtained standby letters of credit to guarantee the payment
of the fixed and variable rent as prescribed in the lease agreement.
On April 15, 2003, ALI entered into a Joint Development Agreement (JDA) with BCDA for
development of another lot inside Fort Bonifacio with a gross area of 11.6 hectares for residential
purposes. Pursuant to the agreement, BCDA shall contribute its title and interest to the lot and
ALI in turn shall provide the necessary cash and expertise to undertake and complete the
implementation of the residential development. ALI commits to invest sufficient capital to
complete the residential development.
ALI procured a surety bond with a face value of P
=122.9 million issued by an insurance company
in favor and for the benefit of BCDA as beneficiary. The surety bond shall be continuing in
nature and shall secure the obligation of ALI to pay BCDA annual minimum revenue share for
each of the first 8 selling periods of the residential project.
In 2002, ALI agreed to underwrite the subscription to NTDCC additional shares amounting to
=1.4 billion over a 4-year equity schedule up to 2007 in exchange for a 5% underwriting fee (net
P
of a 1.5% rebate to existing shareholders who subscribed).
MDC, in the normal course of business, furnishes performance bonds in connection with its
construction projects. These bonds shall guarantee MDC’s execution and completion of the work
indicated in the respective construction contracts.
On October 30, 2008, the Company entered into a Memorandum of Agreement with BPI and
Globe to form a mobile microfinance bank, the purpose of which is to extend wholesale
microfinance loans to microfinance institutions, offer other microfinance products and use mobile
technology to deliver financial services to retail clients. The bank, which the Company, BPI and
Globe will own 20%, 40% and 40%, respectively, will have an authorized capitalization of
=500.0 million and a subscribed capitalization of P
P
=350.0 million.
On April 15, 2008, the Company acted as guarantor to a US$50 million transferable term loan
facility between AYC, a subsidiary, as borrower and several lenders who are also the lead
arrangers of the Agreement.
Repayment dates for advances made to AYC are in six month intervals from 2011 to 2013. The
Company unconditionally guaranteed the due and punctual payment of advances if for any reason
AYC does not make timely payment. The Company waived all rights of subrogation,
contribution, and claims of prior exhaustion of remedies. The Company’s obligation as guarantor
will remain in full force until no sum remains to be lent by the lenders, and the lenders recover the
advances.
AI North America, Inc. (AINA), a subsidiary of BHI, obtained as US$3 million letter of credit as
security for the release of a loan to one of its subsidiary. As security for the letter or credit, AINA
is required to maintain a US$3 million certificate of deposit with the bank. AINA, together with
another individual, jointly and severally guarantees the obligation of its subsidiary.
*SGVMC112179*
- 103 Contingencies
The Group has various contingent liabilities arising in the ordinary conduct of business which are
either pending decision by the courts or being contested, the outcome of which are not presently
determinable.
In the opinion of management and its legal counsel, the eventual liability under these lawsuits or
claims, if any, will not have a material or adverse effect on the Group’s financial position and
results of operations. The information usually required by PAS 37, Provisions, Contingent
Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected to
prejudice the outcome of these lawsuits, claims and assessments.
As a result of the explosion which occurred on 19 October 2007 at the basement of the Makati
Supermarket Building, the Philippine National Police - Multi-Agency Investigation Task Force
and the Department of Interior and Local Government - Inter-Agency task Force (DILG-IATF)
filed complaints with and recommended to the Department of Justice (“DOJ”) the prosecution of
certain officers/employees of Makati Supermarket Corporation, the owner of the building, as well
as some officers/employees of Ayala Property Management Corp. (APMC), among other
individuals, for criminal negligence. In a Joint Resolution dated 23 April 2008, the DOJ special
panel of prosecutors ruled that there was no probable cause to prosecute the APMC
officers/employees for criminal negligence. This was affirmed by the DOJ Secretary in a
Resolution dated 17 November 2008. A Motion for Reconsideration was filed by the DILG-IATF
to question the DOJ Secretary’s Resolution which remains unresolved to date. No civil case has
been filed by any of the victims of the incident.
33. Subsequent Event
In January 2009, ALI issued P
=2.38 billion FXCNs consisting of 5, 7 and 10-year notes to various
primary institutional lenders and will mature on various dates up to 2019.
*SGVMC112179*
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE A - MARKETABLE SECURITIES (CURRENT MARKETABLE EQUITY SECURITIES AND
OTHER SHORT-TERM CASH INVESTMENTS)
As of December 31, 2008
(in thousand Pesos)
Name of Issuing entity &
association of each issue
Number of shares or principal amount of
bonds & interest
Amount shown in the
balance sheet
Valued based on market quotation at
balance sheet date
Income received &
accrued
A. OTHER SHORT-TERM CASH INVESTMENTS 1/
Special Savings Account
BPI
Other Banks
Sub-Total
4,258,139
3,356,917
7,615,056
236,925
364,633
601,558
Time Deposits (Peso)
BPI
Other Banks
Sub-Total
1,613,092
881,166
2,494,258
38,129
5,748
43,877
98
658,987
659,085
9,418
9,418
31,363
3,791,218
3
791 218
28,773
669,346
21,094
642,450
33,264
9,504
47,520
78,408
143,593
5,496,533
24,662
1
152,640
152
640
6
1,957
8,904
9,449
6
5
197,630
10,631,248
10,196,416
616,322
50,000
1,200,000
39,091
44,223
71,000
22,848,300
283,727
461,839
119,245
2,233
787
152
24,277
42,942
2,051
23
937,276
Others
BPI
Others
Sub-Total
Money Market Placements (FX)
Banco Santander
Bank of Tokyo
BPI
Citibank
Deutsche Bank
HSBC
Metro Bank
Mizuho Bank
RCBC
Security Bank
Standard Chartered Bank
Others
Sub-Total
Money Market Placements (Peso)
ANZ
BPI
BPI-Family
BDO
Chase
Chinabank
Citibank
Deutsche Bank
Metrobank
Security Bank
Standard Chartered Bank
Union Bank
Sub-Total
B. SHORT-TERM INVESMENTS 2/
C. CURRENT MARKETABLE SECURITIES 3/
Total
NOT APPLICABLE
NOT APPLICABLE
39,113,232
1,789,759
1/ Short-term highly liquid investments with varying periods up to three months shown as part of the Cash and Cash Equivalents account in the Balance Sheet. Short-term cash equivalents is 18%
of the total assets as of December 31, 2008.
2/ Money market placements with varying maturity periods of more than three months and up to six months and investment management account (IMA) amounting to P1,008,924 are booked
under the Short-term investment account which is 0.5% of the total asets as of December 31, 2008.
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE B - AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES
AND PRINCIPAL STOCKHOLDERS (OTHER THAN RELATED PARTIES)
As of December 31, 2008
(in thousand Pesos)
BEGINNING BALANCE
ADDITIONS
NOTES
ACCOUNTS
NOTES
ACCOUNTS
RECEIVABLE * RECEIVABLE RECEIVABLE* RECEIVABLE
Various Employees of the ff:
Ayala Corporation
Ayala Automotive Holdings Corp. and subsidiaries
Ayala Aviation Corporation
Azalea International Venture Partners, Ltd.
Azalea Technology Investments, Inc.
and subisidiaries
Integrated Microelectronics, Inc.
and subsidiaries
Ayala Land, Inc. and subsidiaries
425,179
1,768
144
4,067
8,299
367
1,291
42,970
502
264,116
691,709
DEDUCTIONS
ENDING BALANCE
NOTES
ACCOUNTS ACCOUNTS RECEIVABLE
NON-CURRENT
RECEIVABLE* RECEIVABLE
CURRENT
82,039
1,836
259
353
5,347
545
454
966
184
1,923
505
865
2,497
13,646
407
880
760
543
1,623
488
1,254
1,129
17,674
149,055
181,513
235,673
281,281
569,593
559,561
1,137,476
202,935
286,612
492,014
523,741
1,020,302
95,253
16,818
130,630
* Notes receivables includes interest bearing notes with various maturity dates and interest rates.
ENDING BALANCE
NOTES RECEIVABLE *
CURRENT
NON-CURRENT
-
53,581
332,529
-
272
2,366
219
557
168,057
168,057
89,262
143,672
207,592
542,706
TOTALS
388,607
13,646
3,045
1,099
1,686
95,253
481,729
985,065
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE C - NON-CURRENT MARKETABLE EQUITY SECURITIES,
OTHER LONG-TERM INVESTMENT IN STOCKS AND OTHER INVESTMENTS
As of December 31, 2008
(in thousand Pesos except number of shares)
BEGINNING BALANCE
NAME OF COMPANY
INVESTMENTS IN ASSOCIATES & JOINT VENTURES
Domestic:
Bank of the Philippine Islands and subsidiaries
Globe Telecom, Inc. and subsidiaries
EGS Corporation
MWCI and subsidiaries
Emerging City Holdings, Inc.
Cebu Holdings, Inc.and subsidiaries
North Triangle Depot Commercial Corp.
Berkshires Holdings, Inc.
Philwater Holdings Company, Inc.
Bonifacio Land Corporation
Asiacom Philippines, Inc.
Alabang Commercial Corporation
eTelecare Global Solutions, Inc.
ALI Property Partners Holdings Corp.
Foreign:
Arch Asian Partners L.P.
Others
Number of
Shares
Amount in
Pesos
DEDUCTIONS
(2,704,343)
(1,759,072) 1,088,087,904
33.5%
28,533,330
(5,181,533)
(1,923,098)
40,312,267
30.5%
17,999,870
5,820,399
50.0%
3,346,309
2,142,069
44,112,267
21,461,412
3,594,839
48,250
-
-
(24,121)
3,370,430
524,975,503
2,712,515
643,587
50,000
2,485,455
337,411
907,350,948
1,809,630
200,744
-
1,826,640
1,541,375
14,095
-
1,250
1,065,161
144,615
-
200,030,000
1,030,635
251,560
919
16,240
4,664,629
933,592
94,162
89,904
793,543
48,227
11,813
121,362
-
(70,444)
-
573,052
2,753,421
46,830,528
237,831
-
894,192
2,127,851
71,271,632
14,367
(161,100)
44,807
7,396,180
1,036,880
225,523
665,334
5,468,002
-
628,112
628,112
-
631,767
190,103
190,103
-
1,076,546
166,879
39,378
27,500
1,274
14,526
406,651
64,100
1,796,854
-
108,799
11,499
106,963
227,261
Sub-total AFS equity investments
Bonds
2,424,966
67,947
-
417,364
TOTAL-INVESTMENTS IN BONDS & OTHER SECURITIES
2,492,913
-
417,364
Unquoted:
Rohatyn Group
City Sports Club Cebu, Inc.
Tech Ventures
Batangas Assets Corporation
Anvaya shares
Medicali USA
Sirf Technologies, Inc.
Others
Distribution of
Earnings by
Investees
(183,741)
-
10,269,000
158,504
Dividends
received/accrued fr
investments not
accounted for by the
equity method
2,709
30,851,967
6,392,550
ENDING BALANCE
Others (Cost &
Equity Adj )
906,739,921
TOTAL-INVESTMENTS IN ASSOCIATES & JOINT VENTURES
INVESTMENTS IN BONDS & OTHER SECURITIES
AFS equity investments:
Quoted:
PNOC Energy Development Corporation
Others
ADDITIONS
Equity in
Earnings
(Losses) of
Investees for the
period
(70,849)
(89,924)
(100,085)
-
Others-Cost ( &
equity adj)
Effective %
of Ownership
Number of
Shares
(119)
524,975,503
29.9%
3,188,482
-
50,000
50.0%
2,822,866
-
907,350,948
47.2%
1,939,525
-
1,826,640
49.0%
1,555,470
-
1,250
50.0%
1,209,776
-
200,030,000
60.0%
1,193,190
(10,613)
-
4,664,629
5.0%
1,117,658
10,269,000
60.0%
842,970
158,504
50.0%
594,329
(2,682,977)
-
0.0%
-
(1,289,078)
-
0.0%
-
19.2%
958,627
2,837,992
68,140,394
12
(8,330,463)
-
Amount in
Pesos
(7,664,957)
-
-
(2,268)
-
(676)
(406,651)
(409,595)
-
(409,595)
(67,947)
-
(477,542)
-
-
631,767
818,215
1,449,982
-
-
1,185,345
164,611
50,877
27,500
598
14,526
171,063
1,614,520
-
-
-
-
-
-
3,064,502
3,064,502
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE D - INDEBTEDNESS OF UNCONSOLIDATED SUBSIDIARIES & RELATED PARTIES
As of December 31, 2008
Name of Related Parties
Balance at Beginning of Period
N O T
Balance at End of Period
A P P L I C A B L E
Receivables from related parties amounting to P8,441,996k (page 84 of the 2008 audited financial statements) is only 4% of the total
assets of P220,051,966k.
AYALA CORPORATION AND SUBSIDIARIES
Schedule E - INTANGIBLE ASSETS AND OTHER ASSETS (DEFERRED CHARGES)
As of December 31, 2008
(In Thousand Pesos)
DESCRIPTION
INTANGIBLE ASSETS:
Goodwill
Customer relationship
Order backlog
Unpatented technology
Developed software
Licenses
DEFERRED CHARGES
BEGINNING
BALANCE
2,601,647
521,867
2,476
8 761
8,761
140,946
3,275,697
92,412
ADDITIONS AT
COST
492,483
153,680
646,163
-
CHARGED TO
COSTS AND
EXPENSES
(318,766)
(826)
(8 761)
(8,761)
(48,436)
(376,789)
CHARGED TO
OTHER
ACCOUNTS
-
OTHER
CHANGES
ADD/(DED)
374,275
73,780
375
20,635
469,065
(9,306)
ENDING
BALANCE
3,468,405
430,561
2,025
113,145
4,014,136
83,106
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE F - LONG-TERM DEBT
As of December 31, 2008
(in thousand pesos)
TITLE OF ISSUE & TYPE OF OBLIGATION
THE COMPANY:
Bank loans - with interest rates ranging from 6.3% to 6.6%
per annum in 2008 and 4.5% to 5.3% per annum in 2007
and varying maturity dates up to 2013
Fixed Rate Corporate Notes (FXCNs) with interest rates
ranging from 6.7% to 10.4% per annum and varying maturiy
dates up to 2014
Bonds, due 2012
Syndicated term loan
SUBSIDIARIES:
Loans from banks and other institutions:
Foreign Currency - with interest rates ranging from 2.7% to 15%
per annum due in 2008 and 6.0% to 15.0% per annum in 2007
Philippine peso - with interest rates ranging from 9.5% to 20.0%
per annum in 2008 and 5.0% to 20.0% per annum in 2007
Bonds:
Due 2009
Due 2013
Fixed Rate Corporate Notes (FXCNs)
TOTAL
CURRENT PORTION
OF LONG-TERM
LONG-TERM DEBT
DEBT
TOTAL
5,000
6,985,000
6,990,000
17,500
17
500
0
1,667
10,645,000
10
645 000
6,000,000
1,583,240
10,662,500
10
662 500
6,000,000
1,584,907
1,177,063
9,808,494
10,985,557
170,711
1,347,774
7,648,417
17,456,911
7,819,128
18,804,685
106,930
106,930
0
4,000,000
4,000,000
106,930
4,000,000
4,106,930
0
3,580,000
3,580,000
1,478,871
50,250,151
51,729,022
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE G - INDEBTEDNESS TO RELATED PARTIES
(LONG-TERM LOANS FROM RELATED COMPANIES)
As of December 31, 2008
(in thousand Pesos)
Name of Related Parties
BPI
Balance at Beginning of Period
3,650,000
Balance at End of Period
5,575,000
The P1,925,000k or 53% increase during the period is largely due to the availment of lower interest loans the proceeds of which was used to pre-pay
expensive debts, thus significanlty reducing the financing costs at the Parent Company level.
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE H - GUARANTEES OF SECURITIES OF OTHER ISSUERS
As of December 31, 2008
Name of issuing entity of securities guaranteed Title of issue of each class of securities
by the company for which this statement is filed
guaranteed
Total amount guaranteed and
outstanding
Amount owned by person for
which statement is filed
Nature of guaranty
AC International Finance Limited
US$20M Revolving Credit Facility
AYC Finance Limited
US$150M Transferable Term Loan Facility US$150M (Guaranteed and
Agreement
Outstanding as of 12/31/08)
Unconditional & irrevocable guarantee
for the punctual payment of the
guaranteed indebtedness. The
guarantor shall be liable as if it is the
sole princiapl debtor and note merely a
surety.
y The guaranty
g
y likewise includes
compliance with financial ratios, semiannual submission of financial
statements, 100% ownership of AYC
Finance's issued voting share capital,
among others.
US$50M Transferable Term Loan Facility
Agreement
Unconditional & irrevocable guarantee
for the punctual payment of the
guaranteed indebtedness. The
guarantor shall be liable as if it is the
sole princiapl debtor and note merely a
surety. The guaranty likewise includes
compliance with financial ratios, semiannual submission of financial
statements, 100% ownership of AYC
Finance's issued voting share capital,
among others.
Undrawn facility as of 12/31/08
US$25M partial drawdown
(Guaranteed and Outstanding as
of 12/31/08)
Unconditional and irrevocable
guartantee for the proper and punctual
payment of indebtedness. The
Guarantor shall be liable as if it were
the sole principal debtor.
AYALA CORPORATION
SCHEDULE I - CAPITAL STOCK
As of December 31, 2008
TITLE OF ISSUE
Common Stock issued & subscribed 1/
Less: Treasury Shares
Common shares outstanding
NUMBER OF
SHARES
AUTHORIZED
# OF SHARES
ISSUED/
SUBSCRIBED
600,000,000
600,000,000
498,361,838
(1,378,044)
496,983,794
Preferred A shares 2/
12,000,000
12,000,000
Preferred B shares
58,000,000
58,000,000
1/ Ayala Corporation has stock option plans for the
key officers (Executive Stock Option Plan-ESOP)
and employees (Employee Stock Ownership Plan ESOWN) covering 3% of the Company's capital
stock.
2/ Cumulative, nonvoting and redeemable with a
par value of P100 per share and is listed and traded
at the Philippine Stock Exchange. It may be
redeemed at the option of Ayala Corporation starting
in the fifth year. The offering price is P500 per share
with a dividend rate of 8.88% per annum.
3/ Preferred A shares held by Ayala Land, Inc.
(200,000 shares) and Manila Water Company, Inc.
(300,000 shares)
# OF SHARES RESERVED
FOR OPTIONS, WARRANTS,
CONVERSION & RIGHTS
# OF SHARES
HELD BY
AFFILIATES
DIRECTORS,
OFFICERS &
EMPLOYEES
3,108,418
500,000 3/
OTHERS
AYALA CORPORATION
SCHEDLUE J - RETAINED EARNINGS AVAILABLE FOR DIVIDEND DISTRIBUTION
As of December 31, 2009
(In thousand pesos)
Unappropriated retained earnings, as adjusted to available for
dividend distribution, beginning *
Add:
Net income actually earned/realized during the period
Net income during the period closed to Retained Earnings (Parent)
(Less): Non-actual/unrealized income net of tax
Equity in net income of associate/joint venture
Unrealized foreign exchange gain - net (except those attributable
to Cash and Cash Equivalents)
Unrealized actuarial gain
Fair value adjustment (M2M gains)
Fair value adjustment in Investment Property resulting to gain
Adjustment due to deviation from PFRS/GAAP-gain
Other unrealized gains or adjustments to the retained earnings as
a result of certain transactions accounted for under the PFRS
Sub-total
Add:
30,477,024
Non-actual losses
Depreciation on revaluation increment (after tax)
Adjustment due to deviation from PFRS/GAAP - loss
Loss on fair value adjustment of investment property (after tax)
7,336,481
7,336,481
-
Net income actually earned during the period
Add (Less):
Dividend declarations during the period
Appropriations of Retained Earnings during the period
Reversals of appropriations
Effects of prior period adjustments
T reasury shares
7,336,481
(6,676,752)
(390,848)
(7,067,600)
TOTAL RETAINED EARNINGS, END AVAILABLE FOR DIVIDEND*
30,745,906
*Reconciliation of consolidated retained earnings to retained earnings available for dividend follows:
Consolidated retained earnings balance
Accumulated equity in net earnings of subsidiaries, associates and
joint ventures
Effect of prior period adjustments - IFRIC 12 adoption
T reasury shares
Retained Earnings available for dividends
January 1, 2008
60,461,247
(29,535,904)
(288,626)
(159,693)
30,477,024
December 31, 2008
61,604,466
(30,308,020)
(550,540)
30,745,906
Globe Telecom, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2008, 2007 and 2006
and
Independent Auditors’ Report
SyCip Gorres Velayo & Co.
SyCip Gorres Velayo & C o.
6760 Ayala Av enue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.c om.ph
BOA/PRC Reg. No. 0001
SEC Acc reditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Globe Telecom, Inc.
5th Floor, Globe Telecom Plaza, Pioneer Highlands
Pioneer corner Madison Streets
Mandaluyong City
We have audited the accompanying consolidated financial statements of Globe Telecom, Inc. and
Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2008, 2007 and
2006, and the consolidated statements of income, consolidated statements of changes in equity
and consolidated statements of cash flows for the years then ended, and a summary of significant
accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with Philippine Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud
or error; selecting and applying appropriate accounting policies; and making accounting estimates
that are reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
A member firm of Ernst & Young Global Limited
*SGVMC112197*
-2We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Globe Telecom, Inc. and Subsidiaries as of December 31, 2008, 2007 and
2006, and its financial performance and its cash flows for the years then ended in accordance with
Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Gemilo J. San Pedro
Partner
CPA Certificate No. 32614
SEC Accreditation No. 0094-AR-1
Tax Identification No. 102-096-610
PTR No. 1566465, January 5, 2009, Makati City
February 3, 2009
*SGVMC112197*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Available-for-sale investments
Held-to-maturity investments
Receivables - net
Inventories and supplies
Derivative assets
Prepayments and other current assets - net
Total Current Assets
Noncurrent Assets
Property and equipment - net
Investment property - net
Intangible assets - net
Investment in a joint venture
Deferred income tax - net
Goodwill
Other noncurrent assets - net
Total Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses
Provisions
Derivative liabilities
Income tax payable
Unearned revenues
Notes payable
Current portion of:
Long-term debt
Other long-term liabilities
Total Current Liabilities
Noncurrent Liabilities
Deferred income tax - net
Long-term debt - net of current portion
Derivative liabilities
Other long-term liabilities - net of current portion
Total Noncurrent Liabilities
Total Liabilities
Equity
Paid-up capital
Cost of share-based payments
Cumulative translation adjustment
Retained earnings
Total Equity
December 31
2007
(In Thousand Pesos)
Notes
2008
28, 30
28
28
28
4, 28
5
28
6, 28
P
= 5,782,224
–
–
–
7,473,346
1,124,322
169,012
2,992,226
17,541,130
P
= 6,191,004
500,000
–
2,350,032
6,383,541
1,112,146
528,646
1,675,004
18,740,373
P
= 7,505,715
6,155,349
293,614
857,563
5,527,905
993,495
1,626,667
1,254,682
24,214,990
7
8
9
10
24
32
11
93,540,390
259,223
2,983,290
73,529
523,722
346,992
4,474,398
102,201,544
P
= 119,742,674
91,527,820
291,207
2,434,623
83,257
637,721
–
2,905,851
97,880,479
P
= 116,620,852
95,052,719
314,503
2,150,318
37,332
801,863
–
2,008,108
100,364,843
P
= 124,579,833
12, 28
13
28
P
= 17,032,474
202,514
163,989
1,237,969
3,247,711
4,002,160
P
= 18,435,453
219,687
326,721
1,361,420
1,866,531
500,000
P
= 16,485,265
248,310
558,087
831,381
1,270,075
–
14, 28
15, 28
7,742,227
99,145
33,728,189
4,803,341
86,416
27,599,569
6,271,601
93,422
25,758,141
24
14, 28
28
15, 28
4,581,915
28,843,711
21,665
2,475,639
35,922,930
69,651,119
5,502,890
25,069,511
14,110
3,017,962
33,604,473
61,204,042
5,539,999
32,935,256
528,036
2,870,250
41,873,541
67,631,682
14, 28
17
16, 18
28
17
33,861,398
386,905
(35,382)
15,878,634
50,091,555
P
= 119,742,674
33,720,380
306,358
184,408
21,205,664
55,416,810
P
= 116,620,852
2006
33,484,361
340,743
(193,790)
23,316,837
56,948,151
P
= 124,579,833
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112197*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Notes
REVENUES
Service revenues
Nonservice revenues
Interest income
Others - net
COSTS AND EXPENSES
General, selling and administrative
Depreciation and amortization
Cost of sales
Financing costs
Impairment losses and others
Equity in net losses of a joint venture
16
19
20
Years Ended December 31
2008
2007
2006
(In Thousand Pesos, Except Per Share Figures)
P
= 62,894,488
1,923,560
420,425
725,711
65,964,184
P
= 63,208,652
2,300,064
728,621
1,804,481
68,041,818
P
= 57,033,619
2,915,389
854,865
2,151,570
62,955,443
23,757,126
17,028,068
3,117,172
3,000,391
1,205,679
9,728
48,118,164
21,304,473
17,188,998
3,322,777
5,224,939
941,260
9,023
47,991,470
18,080,931
17,137,553
4,618,735
4,978,749
534,948
5,834
45,356,750
17,846,020
20,050,348
17,598,693
21
7, 8, 9
5
22
23
10
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM)
INCOME TAX
Current
Deferred
24
7,268,584
(698,442)
6,570,142
NET INCOME
Earnings Per Share
Basic
Diluted
27
Cash dividends declared per common share
17
6,841,240
(67,911)
6,773,329
4,391,427
1,452,593
5,844,020
P
= 11,275,878
P
= 13,277,019
P
= 11,754,673
P
= 84.75
P
= 84.61
P
= 100.07
P
= 99.58
P
= 88.56
P
= 88.32
P
= 125.00
P
= 116.00
P
= 50.00
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112197*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Notes
Capital
Stock
Cost of Cumulative
Additional
Paid-in Share-Based Translation
Capital
Payments Adjustment
Retained
Earnings
Total
For the Year Ended December 31, 2008 (In Thousand Pesos)
As of January 1, 2008
Fair value changes to derivatives
accounted for under cash flow
hedge
Transferred to income and expense for
the period
Tax effect of items taken directly to or
transferred from equity
Changes in fair value of available-forsale investment in equity securities
Exchange differences in translating
foreign operation
Net loss recognized directly in equity
Net income for the period
Total income for the period
Dividends on:
Common stock
Preferred stock
Cost of share-based payments
Collection of subscriptions receivable
Exercise of stock options
As of December 31, 2008
P
=7,367,002 P
=26,353,378
28
P
=306,358
P
=184,408 P
=21,205,664 P
=55,416,810
–
–
–
(457,080)
–
(457,080)
–
–
–
146,981
–
146,981
–
–
–
108,535
–
108,535
–
–
–
(19,734)
–
(19,734)
–
–
–
–
–
–
–
–
–
–
–
–
1,508
(219,790)
–
(219,790)
–
–
11,275,878
11,275,878
1,508
(219,790)
11,275,878
11,056,088
17
18
18
–
–
–
–
–
–
40,742
–
331
99,945
P
=7,408,075 P
=26,453,323
–
–
182,324
–
(101,777)
P
=386,905
– (16,542,271) (16,542,271)
–
(60,637)
(60,637)
–
–
182,324
–
–
40,742
–
–
(1,501)
(P
=35,382) P
=15,878,634 P
=50,091,555
For the Year Ended December 31, 2007 (In Thousand Pesos)
As of January 1, 2007
Fair value changes to derivatives
accounted for under cash flow
hedge
Transferred to income and expense for
the period
Tax effect of items taken directly to or
transferred from equity
Changes in fair value of available-forsale investment in equity securities
Net gain recognized directly in equity
Net income for the period
Total income for the period
Dividends on:
Common stock
Preferred stock
Cost of share-based payments
Collection of subscriptions receivable
Exercise of stock options
As of December 31, 2007
P
= 7,349,654 P
= 26,134,707
28
P
= 340,743
(P
= 193,790) P
= 23,316,837 P
= 56,948,151
–
–
–
193,165
–
193,165
–
–
–
(26,069)
–
(26,069)
–
–
–
194,944
–
194,944
–
–
–
–
–
–
–
–
–
–
–
–
16,158
378,198
–
378,198
–
–
13,277,019
13,277,019
16,158
378,198
13,277,019
13,655,217
17
18
18
–
–
–
–
–
–
4,660
–
12,688
218,671
P
= 7,367,002 P
= 26,353,378
–
–
129,914
–
(164,299)
P
= 306,358
– (15,338,743) (15,338,743)
–
(49,449)
(49,449)
–
–
129,914
–
–
4,660
–
–
67,060
P
= 184,408 P
= 21,205,664 P
= 55,416,810
(Forward)
*SGVMC112197*
-2-
Notes
Capital
Stock
Cost of Cumulative
Additional
Paid-in Share-Based Translation
Capital
Payments Adjustment
Retained
Earnings
Total
For the Year Ended December 31, 2006 (In Thousand Pesos)
As of January 1, 2006
Fair value changes to derivatives
accounted for under cash flow
hedge
Transferred to income and expense for
the period
Tax effect of items taken directly to or
transferred from equity
Changes in fair value of available-forsale investment in equity securities
Net gain recognized directly in equity
Net income for the period
Total income for the period
Dividends on:
Common stock
Preferred stock
Cost of share-based payments
Collection of subscriptions receivable
Exercise of stock options
As of December 31, 2006
P
= 7,333,741 P
= 25,981,667
28
P
= 312,644
(P
= 235,892) P
= 18,226,650 P
= 51,618,810
–
–
–
(254,589)
–
(254,589)
–
–
–
277,736
–
277,736
–
–
–
7,716
–
7,716
–
–
–
–
–
–
–
–
–
–
–
–
11,239
42,102
–
42,102
–
–
11,754,673
11,754,673
11,239
42,102
11,754,673
11,796,775
17
18
18
–
–
–
–
–
–
6,946
–
8,967
153,040
P
= 7,349,654 P
= 26,134,707
–
–
161,628
–
(133,529)
P
= 340,743
–
(6,599,817) (6,599,817)
–
(64,669)
(64,669)
–
–
161,628
–
–
6,946
–
–
28,478
(P
= 193,790) P
= 23,316,837 P
= 56,948,151
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112197*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization
Interest expense
Bond redemption cost
Cost of share-based payments
Gain on disposal of property and equipment
Equity in net losses of a joint venture
Provisions for (reversals of) other probable
losses
Loss (gain) on derivative instruments
Impairment losses (reversal of impairment
losses) on property and equipment
Interest income
Dividend income
Operating income before working capital changes
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables
Inventories and supplies
Prepayments and other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Unearned revenues
Other long-term liabilities
Cash generated from operations
Interest paid
Income taxes paid
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to:
Property and equipment
Intangible assets
Proceeds from sale of property and equipment
Decrease (increase) in:
Short-term investments
Available-for-sale investments
Held-to-maturity investments
Other noncurrent assets
Acquisition of subsidiaries
Interest received
Net cash flows used in investing activities
Years Ended December 31
2008
2007
(In Thousand Pesos)
P
= 17,846,020
P
= 20,050,348
2006
P
= 17,598,693
7, 8, 9
22
14, 22
16, 18
7
10
17,028,068
2,255,878
–
182,324
(13,210)
9,728
17,188,998
2,996,347
614,697
129,914
(13,780)
9,023
23
22
(5,031)
(105,642)
3,179
(61,463)
23
19
(31,172)
(420,425)
(27)
36,746,511
(71,431)
(728,621)
–
40,117,211
88,673
(854,865)
–
38,737,810
(1,054,496)
(12,176)
(1,515,398)
(855,636)
(118,652)
(669,283)
2,165,694
378,964
(299,287)
(2,446,630)
1,381,180
(58,031)
33,040,960
(2,407,243)
(7,117,556)
23,516,161
2,718,024
596,456
(94,271)
41,693,849
(3,231,924)
(6,193,383)
32,268,542
(390,344)
(31,609)
(192,634)
40,368,594
(4,140,041)
(3,711,866)
32,516,687
(18,782,883)
(167,671)
125,497
(13,824,879)
(191,738)
35,849
(11,998,065)
(587,883)
68,520
500,000
–
2,350,032
(1,586,773)
(351,499)
352,990
(17,560,307)
5,655,349
293,567
(1,492,469)
(936,486)
–
696,015
(9,764,792)
(6,155,349)
937,942
(824,122)
(993,432)
–
692,636
(18,859,753)
7
9
17,137,553
4,213,976
–
161,628
(22,597)
5,834
84,833
324,082
(Forward)
*SGVMC112197*
-2Years Ended December 31
2008
2007
(In Thousand Pesos)
Notes
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings:
Long-term
Short-term
Repayments of borrowings:
Long-term
Short-term
Payments of dividends to stockholders:
Common
Preferred
Collection of subscriptions receivable and
exercise of stock options
Net cash flows used in financing activities
2006
14
P
= 11,500,000
6,603,375
P
= 13,121,044
500,000
P
=–
–
14
(4,814,990)
(3,100,540)
(22,107,813)
–
(10,429,453)
–
(16,542,271)
(49,449)
(15,338,743)
(64,669)
(6,599,817)
(68,334)
39,241
(6,364,634)
71,720
(23,818,461)
35,424
(17,062,180)
(408,780)
(1,314,711)
(3,405,246)
17
18
NET DECREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
28, 30
6,191,004
7,505,715
10,910,961
CASH AND CASH EQUIVALENTS AT
END OF YEAR
28, 30
P
= 5,782,224
P
= 6,191,004
P
= 7,505,715
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112197*
GLOBE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Globe Telecom, Inc. (hereafter referred to as “Globe Telecom”) is a stock corporation
organized under the laws of the Philippines, and enfranchised under Republic Act (RA)
No. 7229 and its related laws to render any and all types of domestic and international
telecommunications services. Globe Telecom is one of the leading providers of digital wireless
communications services in the Philippines under the Globe and Touch Mobile (TM) brand
using a fully digital network. It also offers domestic and international long distance
communication services or carrier services. Globe Telecom’s principal executive offices are
located at 5th Floor, Globe Telecom Plaza, Pioneer Highlands, Pioneer corner Madison
Streets, Mandaluyong City, Metropolitan Manila, Philippines. Globe Telecom is listed in the
Philippine Stock Exchange (PSE) and has been included in the PSE composite index since
September 17, 2001. Major stockholders of Globe Telecom include Ayala Corporation (AC),
Singapore Telecom, Inc. (STI) and Asiacom Philippines, Inc. None of these companies
exercise control over Globe Telecom.
Globe Telecom owns 100% of Innove Communications, Inc. (“Innove”). Innove is a stock
corporation organized under the laws of the Philippines and enfranchised under RA No. 7372
and its related laws to render any and all types of domestic and international
telecommunications services. Innove is one of the providers of digital wireless communication
services in the Philippines. In May 2008, the National Telecommunications Commission (NTC)
approved the assignment of Innove’s consumer prepaid subscriber contracts in favor of Globe.
The transfer did not result in the recognition of a gain or loss in the consolidated financial
statements. Innove also offers a broad range of wireline voice and data communication
services, including domestic and international long distance communication services or carrier
services as well as broadband internet services. Innove has a license to establish, install,
operate and maintain a nationwide local exchange carrier (LEC) service, particularly integrated
local telephone service with public payphone facilities and public calling stations, and to render
and provide international and domestic carrier and leased line services. Innove’s principal
executive office is located at 18th Floor, Innove IT Plaza, Samar Loop corner Panay Road,
Cebu Business Park, Cebu City, Philippines.
Globe Telecom owns 100% of G-Xchange, Inc. (GXI), a corporation formed for the purpose of
developing, designing, administering, managing and operating software applications and
systems, including systems designed for the operations of bill payment and money remittance,
payment and delivery facilities through various telecommunications systems operated by
telecommunications carriers in the Philippines and throughout the world and to supply software
and hardware facilities for such purposes. GXI is registered with the Bangko Sentral ng
Pilipinas (BSP) as a remittance agent. GXI handles the mobile payment and remittance
service using Globe Telecom’s network as transport channel under the GCash brand. The
service, which is integrated into the cellular services of Globe Telecom and Innove, enables
easy and convenient person-to-person fund transfers via short messaging services (SMS) and
allows Globe Telecom and Innove subscribers to easily and conveniently put cash into and get
cash out of the GCash system. GXI’s principal executive office is located at 4th Floor, Globe
Telecom Plaza, Pioneer Highlands, Pioneer corner Madison Streets, Mandaluyong City,
Metropolitan Manila, Philippines.
*SGVMC112197*
-2Globe Telecom owns 100% of Entertainment Gateway Group Corporation (“EGGC”),
EGGstreme (Hong Kong) Limited (EHL) and Karton Limited (KL) (collectively referred here as
“EGG Group”). EGG Group is engaged in the development and creation of wireless products
and services accessible through telephones or other forms of communication devices. EGGC
was incorporated on July 23, 2001 with registered office address at 3F Bloomingdale Building,
Salcedo Street, Legaspi Village, Makati City, Metropolitan Manila, Philippines. EGGC is
registered with the Department of Transportation and Communication (DOTC) as content
provider. Globe Telecom acquired EGG Group on June 26, 2008 (see Note 32).
Globe Telecom owns 100% of GTI Business Holdings, Inc. (GTI). The primary purpose of this
company is to invest, purchase, subscribe for or otherwise acquire and own, hold, sell or
otherwise dispose of real and personal property of every kind and description. GTI was
incorporated on November 25, 2008, with registered office address at 5th Floor, Globe
Telecom Plaza, Pioneer Highlands, Pioneer corner Madison Streets, Mandaluyong City,
Metropolitan Manila, Philippines.
2. Summary of Significant Accounting Policies
2.1 Basis of Financial Statement Preparation
The accompanying consolidated financial statements of Globe Telecom and its whollyowned subsidiaries, collectively referred to as the “Globe Group”, have been prepared
under the historical cost convention method, except for derivative financial instruments and
available-for-sale (AFS) financial assets that are measured at fair value.
The consolidated financial statements of the Globe Group are presented in Philippine Peso
(PHP), Globe Telecom’s functional currency, and rounded to the nearest thousands except
when otherwise indicated.
On February 3, 2009, the Board of Directors (BOD) approved and authorized the release of
the consolidated financial statements of Globe Telecom, Inc. and Subsidiaries as of and for
the years ended December 31, 2008, 2007 and 2006.
2.2 Statement of Compliance
The consolidated financial statements of the Globe Group have been prepared in
compliance with Philippine Financial Reporting Standards (PFRS).
*SGVMC112197*
-32.3 Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Globe
Telecom and its subsidiaries as of and for the years ended December 31, 2008, 2007 and
2006. The subsidiaries, which are incorporated in the Philippines and Hongkong, are as
follows:
Name of Subsidiary Principal Activity
Innove
Wireless and wireline voice and data
communication services
GXI
Software development for
telecommunications applications
and money remittance services
EGG Group
Mobile content and application
development services
GTI
Investment holding company
Percentage of
Ownership
100%
100%
100%
100%
Subsidiaries are consolidated from the date on which control is transferred to the Globe
Group and cease to be consolidated from the date on which control is transferred out of the
Globe Group. The financial statements of the subsidiaries are prepared for the same
reporting year as Globe Telecom using uniform accounting policies for like transactions and
other events in similar circumstances. All significant intercompany balances and
transactions, including intercompany profits and losses, were eliminated during
consolidation in accordance with the accounting policy on consolidation.
2.4 Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year
except for the adoption of the following Philippine Interpretations of International Financial
Reporting Interpretations Committee (IFRIC) which became effective on January 1, 2008,
and Amendments to an existing standard that became effective on July 1, 2008.
·
Amendments to Philippine Accounting Standards (PAS) 39, Financial Instruments:
Recognition and Measurement, and PFRS 7, Financial Instruments: Disclosure, are
effective beginning July 1, 2008. The Amendments to PAS 39 introduce the possibility
of reclassification of securities out of the held for trading category in rare circumstances
and reclassification to the loans and receivable category if there is intent and ability to
hold the securities for the foreseeable future or to held-to-maturity if there is intent and
ability to hold the securities until maturity. The Amendments to PFRS 7 introduce the
disclosures relating to these reclassifications. These Amendments have no impact on
the consolidated financial statements since the Globe Group does not have financial
assets classified as held for trading.
*SGVMC112197*
-4·
Philippine Interpretation IFRIC11, PFRS 2 Group and Treasury Share Transactions,
requires arrangements whereby an employee is granted rights to an entity’s equity
instruments to be accounted for as an equity-settled scheme by the entity even if (a) the
entity chooses or is required to buy those equity instruments (e.g., treasury shares)
from another party, or (b) the shareholder(s) of the entity provide the equity instruments
needed. It also provides guidance on how subsidiaries, in their separate financial
statements, account for such schemes when their employees receive rights to the
equity instruments of the parent. Adoption of this Interpretation has no impact on the
consolidated financial statements.
·
Philippine Interpretation IFRIC 12, Service Concession Arrangement, covers contractual
arrangements arising from public-to-private service concession arrangements if control
of the assets remains in public hands but the private sector operator is responsible for
construction activities as well as for operating and maintaining the public sector
infrastructure. Adoption of this Interpretation has no impact on the consolidated
financial statements.
·
Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction, provides guidance on how to
assess the limit on the amount of surplus in a defined benefit plan that can be
recognized as an asset under PAS 19, Employee Benefits. Adoption of this
Interpretation has no impact on the consolidated financial statements.
In addition, the Globe Group early adopted Philippine Interpretation IFRIC 13, Customer
Loyalty Programmes, beginning January 1, 2008. This Interpretation requires customer
loyalty award credits to be accounted for as a separate component of the sales transaction
in which they are granted and therefore form part of the fair value of the consideration
received which is allocated to the award credits and realized in consolidated statements of
income over the period that the award credits are redeemed or has expired.
In the third quarter of 2008, the Globe Group implemented new loyalty programmes which
are within the scope of the Interpretation. Accordingly, the Globe Group accounted for
these transactions by allocating the consideration received or receivable between the sale
of services and award credits. The portion of the consideration allocated to the award
credits, which amounted to P
= 8.05 million as of December 31, 2008, is accounted for as
deferred revenues (included under the “Unearned revenues” account). This will be
recognized as revenue upon the award redemption. The adoption of this Interpretation did
not result in a restatement of prior year consolidated financial statements.
*SGVMC112197*
-52.5 Future Changes in Accounting Policies
The Globe Group will adopt the following standards and interpretations enumerated below
when these become effective. Except as otherwise indicated, the Globe Group does not
expect the adoption of these new and amended PFRS and Philippine Interpretations to
have significant impact on the consolidated financial statements.
·
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
The Amendment will become effective January 1, 2009. It allows an entity, in its
separate financial statements, to determine the cost of investments in subsidiaries,
jointly controlled entities or associates (in its opening PFRS financial statements) as
one of the following amounts: (a) cost determined in accordance with PAS 27; (b) at the
fair value of the investment at the date of transition to PFRS, determined in accordance
with PAS 39; or (c) previous carrying amount (as determined under generally accepted
accounting principles) of the investment at the date of transition to PFRS.
·
PFRS 2, Share-based Payment - Vesting Condition and Cancellations
This Standard will become effective January 1, 2009. It has been revised to clarify the
definition of a vesting condition and prescribes the treatment for an award that is
effectively cancelled. It defines a vesting condition as a condition that includes an
explicit or implicit requirement to provide services. It further requires non-vesting
conditions to be treated in a similar fashion to market conditions. Failure to satisfy a
non-vesting condition that is within the control of either the entity or the counterparty is
accounted for as cancellation. However, failure to satisfy a non-vesting condition that is
beyond the control of either party does not give rise to a cancellation.
·
PFRS 8, Operating Segments
The Globe Group will adopt PFRS 8, Operating Segments, effective January 1, 2009.
PFRS 8 will replace PAS 14, Segment Reporting, and adopts a full management
approach to identifying, measuring and disclosing the results of an entity’s operating
segments. The information reported would be that which management uses internally
for evaluating the performance of operating segments and allocating resources to those
segments. Such information may be different from that reported in the consolidated
balance sheets and consolidated statements of income and the Globe Group will
provide explanations and reconciliations of the differences. This Standard is only
applicable to an entity that has debt or equity instruments that are traded in a public
market or that files (or is in the process of filing) its financial statements with a securities
commission or similar party. The Globe Group will assess the impact of this Standard
on its current manner of reporting segment information.
·
Amendments to PAS 1, Presentation of Financial Statements
These Amendments will become effective January 1, 2009. In accordance with the
Amendments to PAS 1, the statement of changes in equity shall include only
transactions with owners, while all non-owner changes will be presented in equity as a
single line with details included in a separate statement. Owners are defined as holders
of instruments classified as equity.
*SGVMC112197*
-6In addition, the Amendments to PAS 1 provide for the introduction of a new statement
of comprehensive income that combines all items of income and expenses recognized
in the profit or loss together with “Other comprehensive income”. Entities may choose
to present all items in one statement, or to present two linked statements, a separate
statement of income and a statement of comprehensive income. These Amendments
also require additional requirements in the presentation of the consolidated statements
of financial position and owner’s equity as well as additional disclosures to be included
in the financial statements. Adoption of these Amendments will not have significant
impact on the Globe Group except for the presentation of consolidated statements of
comprehensive income and additional disclosures to be included in the consolidated
financial statements.
·
Amendment to PAS 23, Borrowing Costs
This Amendment will become effective January 1, 2009. It requires the capitalization of
borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an
asset that necessarily takes a substantial period of time to get ready for its intended use
or sale. In accordance with the transitional requirements in the Standard, the Globe
Group will adopt this as a prospective change. Accordingly, borrowing costs will be
capitalized on qualifying assets with a commencement date after January 1, 2009. No
changes will be made for borrowing costs incurred to this date that have been
expensed.
·
Amendment to PAS 27, Consolidated and Separate Financial Statements - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
This Amendments will become effective July 1, 2009 which has changes in respect of
the holding companies separate financial statements including (a) the deletion of “cost
method”, making the distinction between pre- and post-acquisition profits no longer
required; and (b) in cases of reorganizations where a new parent is inserted above an
existing parent of the group (subject to meeting specific requirements), the cost of the
subsidiary is the previous carrying amount of its share of equity items in the subsidiary
rather than its fair value. All dividends will be recognized in profit or loss.
·
Amendments to PAS 32, Financial Instruments: Presentation, and PAS 1, Presentation
of Financial Statements - Puttable Financial Instruments and Obligations Arising on
Liquidation
These Amendments will become effective January 1, 2009 and specify, among others,
that puttable financial instruments will be classified as equity if they have all of the
following specified features: (a) the instrument entitles the holder to require the entity to
repurchase or redeem the instrument (either on an ongoing basis or on liquidation) for a
pro rata share of the entity’s net assets; (b) the instrument is in the most subordinate
class of instruments, with no priority over other claims to the assets of the entity on
liquidation; (c) all instruments in the subordinate class have identical features; (d) the
instrument does not include any contractual obligation to pay cash or financial assets
other than the holder’s right to a pro rata share of the entity’s net assets; and (e) the
total expected cash flows attributable to the instrument over its life are based
substantially on the profit or loss, a change in recognized net assets, or a change in the
fair value of the recognized and unrecognized net assets of the entity over the life of
the instrument.
*SGVMC112197*
-7·
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
This Interpretation will become effective January 1, 2009 and provides guidance on
identifying foreign currency risks that qualify for hedge accounting in the hedge of net
investment; where within the group the hedging instrument can be held in the hedge of
a net investment; and how an entity should determine the amount of foreign currency
gains or losses, relating to both the net investment and the hedging instrument, to be
recycled on disposal of the net investment.
·
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate
Financial Statements
The revised PFRS 3 will become effective January 1, 2010. It introduces a number of
changes in the accounting for business combinations that will impact the amount of
goodwill recognized, the reported results in the period that an acquisition occurs, and
future reported results. The revised PAS 27 requires, among others, that (a) change in
ownership interests of a subsidiary (that do not result in loss of control) will be
accounted for as an equity transaction and will have no impact on goodwill nor will it
give rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated
between the controlling and non-controlling interests (previously referred to as ‘minority
interests’); even if the losses exceed the non-controlling equity investment in the
subsidiary; and (c) on loss of control of a subsidiary, any retained interest will be
remeasured to fair value and this will impact the gain or loss recognized on disposal.
The changes introduced by the revised PFRS 3 and PAS 27 must be applied
prospectively and will affect future acquisitions and transactions with non-controlling
interests. The Globe Group will assess the impact of this Interpretation on its current
manner of consolidating the financial statements.
·
Amendment to PAS 39, Financial Instruments: Recognition and Measurement –Eligible
hedged items
This Amendment, which will be effective July 1, 2009, addresses only the designation
of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or
portion in particular situations. The Amendment clarifies that an entity is permitted to
designate a portion of the fair value changes or cash flow variability of a financial
instrument as a hedged item. The Globe Group will assess the impact of this
Amendment on its current manner of accounting for hedged items.
·
Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate
This Interpretation, which will be effective January 1, 2012, covers accounting for
revenue and associated expenses by entities that undertake the construction of real
estate directly or through subcontractors. This Interpretation requires that revenue on
construction of real estate be recognized only upon completion, except when such
contract qualifies as construction contract to be accounted for under PAS 11,
Construction Contracts, or involves rendering of services in which case revenue is
recognized based on stage of completion. Contracts involving provision of services
with the construction materials and where the risks and reward of ownership are
transferred to the buyer on a continuous basis, will also be accounted for based on
stage of completion. This Interpretation will not be applicable to the Globe Group.
*SGVMC112197*
-82.5.1
Improvements to PFRSs
In May 2008, the International Accounting Standards Board issued its first omnibus
of amendments to certain standards, primarily with a view to removing
inconsistencies and clarifying wording. There are separate transitional provisions
for each standard and will become effective January 1, 2009. Except as otherwise
indicated, the Globe Group does not expect the adoption of these new standards to
have significant impact on the consolidated financial statements.
· PFRS 5, Non-current Assets Held for Sale and Discontinued Operations
When a subsidiary is held for sale, all of its assets and liabilities will be classified
as held for sale under PFRS 5, even when the entity retains a non-controlling
interest in the subsidiary after the sale.
· PAS 1, Presentation of Financial Statements
Assets and liabilities classified as held for trading are not automatically classified
as current in the balance sheet.
· PAS 16, Property, Plant and Equipment
The Amendment replaces the term ‘net selling price’ with ‘fair value less costs to
sell’, to be consistent with PFRS 5, Non-current Assets Held for Sale and
Discontinued Operations, and PAS 36, Impairment of Asset.
In addition, items of property, plant and equipment held for rental that are
routinely sold in the ordinary course of business after rental, are transferred to
inventory when rental ceases and they are held for sale. Proceeds of such sales
are subsequently shown as revenue. Cash payments on initial recognition of
such items, the cash receipts from rents and subsequent sales are all shown as
cash flows from operating activities.
· PAS 19, Employee Benefits
It revises the definition of: (a) “past service costs” to include reductions in benefits
related to past services (“negative past service costs”) and to exclude reductions
in benefits related to future services that arise from plan amendments.
Amendments to plans that result in a reduction in benefits related to future
services are accounted for as a curtailment, (b) “return on plan assets” to exclude
plan administration costs if they have already been included in the actuarial
assumptions used to measure the defined benefit obligation, and (c) “short-term”
and “other long-term” employee benefits to focus on the point in time at which the
liability is due to be settled. Also, it deletes the reference to the recognition of
contingent liabilities to ensure consistency with PAS 37, Provisions, Contingent
Liabilities and Contingent Assets.
· PAS 20, Accounting for Government Grants and Disclosures of Government
Assistance
Loans granted with no or low interest rates will not be exempt from the
requirement to impute interest. The difference between the amount received and
the discounted amount is accounted for as a government grant.
*SGVMC112197*
-9· PAS 23, Borrowing Costs
It revises the definition of borrowing costs to consolidate the types of items that
are considered components of “borrowing costs”, i.e., components of the interest
expense calculated using the effective interest rate method.
· PAS 28, Investment in Associates
If an associate is accounted for at fair value in accordance with PAS 39, only the
requirement of PAS 28 to disclose the nature and extent of any significant
restrictions on the ability of the associate to transfer funds to the entity in the form
of cash or repayment of loans will apply. Also, an investment in an associate is a
single asset for the purpose of conducting the impairment test. Therefore, there
is no separate allocation to the goodwill included in the investment balance.
· PAS 29, Financial Reporting in Hyperinflationary Economies
It revises the reference to the exception that assets and liabilities should be
measured at historical cost, such that it notes property, plant and equipment as
being an example, rather than implying that it is a definitive list.
· PAS 31, Interest in Joint ventures
If a joint venture is accounted for at fair value, in accordance with PAS 39, only
the requirements of PAS 31 to disclose the commitments of the venturer and the
joint venture, as well as summary financial information about the assets,
liabilities, income and expense will apply.
· PAS 36, Impairment of Assets
When discounted cash flows are used to estimate “fair value less cost to sell”
additional disclosure is required about the discount rate, consistent with
disclosures required when the discounted cash flows are used to estimate “value
in use”.
· PAS 38, Intangible Assets
Expenditure on advertising and promotional activities is recognized as an
expense when the Group either has the right to access the goods or has received
the services.
· PAS 39, Financial Instruments: Recognition and Measurement
Improvements to PAS 39 are: (a) changes in circumstances relating to derivatives
- specifically derivatives designated or de-designated as hedging instruments
after initial recognition - are not reclassifications; (b) when financial assets are
reclassified as a result of an insurance company changing its accounting policy in
accordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a change
in circumstance, not a reclassification; (c) removes the reference to a “segment”
when determining whether an instrument qualifies as a hedge; and (d) requires
use of the revised effective interest rate (rather than the original effective interest
rate) when re-measuring a debt instrument on the cessation of fair value hedge
accounting.
*SGVMC112197*
- 10 · PAS 40, Investment Properties
It revises the scope (and the scope of PAS 16, Property, Plant and Equipment) to
include property that is being constructed or developed for future use as an
investment property. Where an entity is unable to determine the fair value of an
investment property under construction, but expects to be able to determine its
fair value on completion, the investment under construction will be measured at
cost until such time as fair value can be determined or construction is complete.
· PAS 41, Agriculture
It removes the reference to the use of a pre-tax discount rate to determine fair
value, thereby allowing use of either a pre-tax or post-tax discount rate
depending on the valuation methodology used. Also, it removes the prohibition
to take into account cash flows resulting from any additional transformations
when estimating fair value. Instead, cash flows that are expected to be
generated in the ‘most relevant market’ are taken into account.
2.6 Significant Accounting Policies
2.6.1
Revenue Recognition
The Globe Group provides mobile and wireline voice and data communication
services which are both provided under postpaid and prepaid arrangements.
Revenue is recognized when the delivery of the products or services has occurred
and collectibility is reasonably assured.
Revenue is stated at amounts invoiced and accrued to customers, taking into
consideration the bill cycle cut-off (for postpaid subscribers), the amount charged
against preloaded airtime value (for prepaid subscribers), switch-monitored traffic
(for carriers and content providers) and excludes value-added tax (VAT) and
overseas communication tax. Inbound traffic revenues, net of estimated prompt
payment discounts, and outbound traffic charges, are accrued based on actual
volume of traffic monitored by Globe Group’s network and in the traffic settlement
system.
2.6.1.1 Service Revenue
2.6.1.1.1 Subscribers
Revenues from subscribers principally consist of: (1) fixed
monthly service fees for postpaid wireless and wireline voice and
data subscribers and wireless prepaid subscription fees for
discounted promotional short messaging services (SMS);
(2) usage of airtime and toll fees for local, domestic and
international long distance calls in excess of consumable fixed
monthly service fees, less (a) bonus airtime credits and airtime on
free Subscribers’ Identification module (SIM), (b) prepaid reload
discounts, and (c) interconnection fees; (3) revenues from valueadded services (VAS) such as SMS in excess of consumable
fixed monthly service fees (for postpaid) and free SMS allocations
*SGVMC112197*
- 11 (for prepaid), multimedia messaging services (MMS), content and
infotext services, net of interconnection fees and payout to
content providers; (4) inbound revenues from other carriers which
terminate their calls to the Globe Group’s network less estimated
prompt payment discount; (5) revenues from international
roaming services; (6) usage of broadband and internet services in
excess of fixed monthly service fees; and (7) one-time service
connection fees (for wireline voice and data subscribers).
Postpaid service arrangements include fixed monthly service
fees, which are recognized over the subscription period on a prorata basis. Telecommunications services provided to postpaid
subscribers are billed throughout the month according to the bill
cycles of subscribers. As a result of bill cycle cut-off, monthly
service revenues earned but not yet billed at the end of the month
are estimated and accrued. These estimates are based on actual
usage less estimated consumable usage using historical ratio of
consumable usage over billable usage.
Proceeds from over-the-air reloading channels and the sale of
prepaid cards are deferred and shown as “Unearned revenues” in
the consolidated balance sheets. Revenue is recognized upon
actual usage of airtime value net of discounts on promotional
calls and net of discounted promotional SMS usage and bonus
reloads. Unused airtime value is recognized as revenue upon
expiration.
The Globe Group offers loyalty programmes which allow its
subscribers to accumulate points when they purchase services
from the Globe Group. The points can then be redeemed for free
services, discounts and raffle coupons, subject to a minimum
number of points being obtained. The consideration received or
receivable is allocated between the sale of services and award
credits. The portion of the consideration allocated to the award
credits is accounted for as unearned revenues. This will be
recognized as revenue upon the award redemption.
2.6.1.1.2 Traffic
Inbound revenues refer to traffic originating from other
telecommunications providers terminating to the Globe Group’s
network, while outbound charges represent traffic sent out or
mobile content delivered using agreed termination rates and/or
revenue sharing with other foreign and local carriers and content
providers. Adjustments are made to the accrued amount for
discrepancies between the traffic volume per Globe Group’s
records and per records of the other carriers and content
providers as these are determined and/or mutually agreed upon
by the parties. Uncollected inbound revenues are shown as
traffic settlements receivable under the “Receivables” account,
*SGVMC112197*
- 12 while unpaid outbound charges are shown as traffic settlements
payable under the “Accounts payable and accrued expenses”
account in the consolidated balance sheets unless a legal right of
offset exists. Prompt payment discount is recognized based on
the Globe Group’s estimate of the probability and amount of
availment following the established historical pattern of discount
availments of the carriers.
2.6.1.2 Nonservice revenues
Proceeds from sale of handsets, phonekits, wireline telephone sets, SIM
packs and other phone accessories are recognized upon delivery of the
item. The related net realizable value of handsets, phonekits, wireline
telephone sets, SIM packs and accessories sold to customers are presented
as “Cost of sales” in the consolidated statements of income.
2.6.1.3 Others
Interest income is recognized as it accrues using the effective interest rate
method.
Lease income from operating lease is recognized on a straight-line basis
over the lease term.
Dividend income is recognized when the Globe Group’s right to receive
payment is established.
2.6.2
Subscriber Acquisition and Retention Costs
The related costs incurred in connection with the acquisition of subscribers are
charged against current operations. Subscriber acquisition costs primarily include
commissions, handset and phonekit subsidies and selling expenses. Handset and
phonekit subsidies represent the difference between the cost of handsets,
accessories and SIM cards (included in the “Cost of sales” and “Provision for
inventory obsolescence and market decline” account), and the price offered to the
subscribers (included in the “Nonservice revenues” account). Retention costs for
existing postpaid subscribers are in the form of free handsets and bill credits. Free
handsets are charged against current operations and included under the “General,
selling and administrative expenses” account in the consolidated statements of
income upon delivery or when there is a contractual obligation to deliver. Bill credits
are deducted from service revenues upon application against qualifying subscriber
bills.
2.6.3
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 date of placement and that are
subject to an insignificant risk of changes in value.
*SGVMC112197*
- 13 2.6.4
Financial Instruments
2.6.4.1 General
2.6.4.1.1
Initial recognition and fair value measurement
Financial instruments are recognized in the Globe Group’s
consolidated balance sheets when the Globe Group becomes a
party to the contractual provisions of the instrument. Purchases
or sales of financial assets that require delivery of assets within
the time frame established by regulation or convention in the
marketplace are recognized on the settlement date.
Financial instruments are recognized initially at fair value of the
consideration given (in the case of an asset) or received (in the
case of a liability). Except for financial instruments at fair value
through profit or loss (FVPL), the initial measurement of financial
assets includes transaction costs.
The Globe Group classifies its financial assets into the following
categories: financial assets at FVPL, held-to-maturity (HTM)
investments, AFS investments, and loans and receivables. The
Globe Group classifies its financial liabilities into financial liabilities
at FVPL and other financial liabilities. The classification depends
on the purpose for which the investments were acquired and
whether they are quoted in an active market. Management
determines the classification of its investments at initial
recognition and, where allowed and appropriate, re-evaluates
such designation at every reporting date.
The fair value for financial instruments traded in active markets at
the balance sheet date is based on their quoted market price or
dealer price quotations (bid price for long positions and ask price
for short positions), without any deduction for transaction costs.
When current bid and asking prices are not available, the price of
the most recent transaction provides evidence of the current fair
value as long as there has not been a significant change in
economic circumstances since the time of the transaction.
For all other financial instruments not listed in an active market,
the fair value is determined by using appropriate valuation
techniques. Valuation techniques include net present value
techniques, comparison to similar instruments for which market
observable prices exist, option pricing models, and other relevant
valuation models. Any difference noted between the fair value
and the transaction price is treated as expense or income, unless
it qualifies for recognition as some type of asset or liability.
*SGVMC112197*
- 14 Where the transaction price in a non-active market is different
from the fair value of other observable current market
transactions in the same instrument or based on a valuation
technique whose variables include only data from observable
market, the Globe Group recognizes the difference between the
transaction price and fair value (a “Day 1” profit) in the
consolidated statements of income. In cases where no
observable data is used, the difference between the transaction
price and model value is only recognized in the consolidated
statements of income when the inputs become observable or
when the instrument is derecognized. For each transaction, the
Globe Group determines the appropriate method of recognizing
the “Day 1” profit amount.
2.6.4.1.2
Financial Assets or Financial Liabilities at FVPL
This category consists of financial assets or financial liabilities
that are held for trading or designated by management as FVPL
on initial recognition. Derivative instruments, except those
covered by hedge accounting relationships, are classified under
this category.
Financial assets or financial liabilities at FVPL are recorded in the
consolidated balance sheets at fair value, with changes in fair
value being recorded in the consolidated statements of income.
Interest earned or incurred is recorded as “Interest income or
expense”, respectively, in the consolidated statements of income
while dividend income is recorded when the right of payment has
been established.
Financial assets or financial liabilities are classified in this
category as designated by management on initial recognition
when any of the following criteria are met:
· the designation eliminates or significantly reduces the
inconsistent treatment that would otherwise arise from
measuring the assets or liabilities or recognizing gains or
losses on a different basis; or
· the assets and liabilities are part of a group of financial assets,
financial liabilities or both which are managed and their
performance are evaluated on a fair value basis in accordance
with a documented risk management or investment strategy; or
· the financial instrument contains an embedded derivative,
unless the embedded derivative does not significantly modify
the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.
*SGVMC112197*
- 15 2.6.4.1.3 HTM investments
HTM investments are quoted non-derivative financial assets with
fixed or determinable payments and fixed maturities for which the
Globe Group’s management has the positive intention and ability
to hold to maturity. Where the Globe Group sells other than an
insignificant amount of HTM investments, the entire category
would be tainted and reclassified as AFS investments. After initial
measurement, HTM investments are subsequently measured at
amortized cost using the effective interest rate method, less any
impairment losses. Amortized cost is calculated by taking into
account any discount or premium on acquisition and fees that are
an integral part of the effective interest rate. The amortization is
included in “Interest income” in the consolidated statements of
income. Gains and losses are recognized in consolidated
statements of income when the HTM investments are
derecognized and impaired, as well as through the amortization
process. The effects of restatement of foreign currencydenominated HTM investments are recognized in the
consolidated statements of income.
As of December 31, 2007 and 2006, the Globe Group has
classified certain special deposits as HTM investments. These
investments matured in 2008.
2.6.4.1.4 Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are not entered into with the intention of immediate
or short-term resale and are not classified as financial assets held
for trading, designated as AFS investments or designated at
FVPL.
This accounting policy relates to the balance sheet caption
“Receivables”, which arise primarily from subscriber and traffic
revenues and other types of receivables, “Short-term
investments”, which arise primarily from unquoted debt securities,
and other nontrade receivables included under “Prepayments and
other current assets”.
Receivables are recognized initially at fair value, which normally
pertains to the billable amount. After initial measurement,
receivables are subsequently measured at amortized cost using
the effective interest rate method, less any allowance for
impairment losses. Amortized cost is calculated by taking into
account any discount or premium on the issue and fees that are
an integral part of the effective interest rate. Penalties,
termination fees and surcharges on past due accounts of
*SGVMC112197*
- 16 postpaid subscribers are recognized as revenues upon collection.
The losses arising from impairment of receivables are recognized
in the “Impairment losses and others” account in the consolidated
statements of income. The level of allowance for impairment
losses is evaluated by management on the basis of factors that
affect the collectibility of accounts (see accounting policy on
2.6.4.2 Impairment of Financial Assets).
Short-term investments and other nontrade receivables are
recognized initially at fair value, which normally pertains to the
consideration paid. Similar to receivables, subsequent to initial
recognition, short-term investments and other nontrade
receivables are measured at amortized cost using the effective
interest rate method, less any allowance for impairment losses.
2.6.4.1.5
AFS investments
AFS investments are those investments which are designated as
such or do not qualify to be classified as designated as FVPL,
HTM investments or loans and receivables. They are purchased
and held indefinitely, and may be sold in response to liquidity
requirements or changes in market conditions. They include
equity investments, money market papers and other debt
instruments.
After initial measurement, AFS investments are subsequently
measured at fair value. Interest earned on holding AFS
investments are reported as interest income using the effective
interest rate. The unrealized gains and losses arising from the
fair valuation of AFS investments are excluded from reported
earnings and are reported as “Cumulative translation adjustment”
(net of tax where applicable) in the equity section of the
consolidated balance sheets. When the investment is disposed
of, the cumulative gains or losses previously recognized in equity
is recognized in the consolidated statements of income.
When the fair value of AFS investments cannot be measured
reliably because of lack of reliable estimates of future cash flows
and discount rates necessary to calculate the fair value of
unquoted equity instruments, these investments are carried at
cost, less any allowance for impairment losses. Dividends earned
on holding AFS investments are recognized in the consolidated
statements of income when the right of payment has been
established.
The losses arising from impairment of such investments are
recognized as “Impairment losses and others” in the consolidated
statements of income.
*SGVMC112197*
- 17 2.6.4.1.6 Other financial liabilities
Issued financial instruments or their components, which are not
designated at FVPL are classified as other financial liabilities
where the substance of the contractual arrangement results in the
Globe Group having an obligation either to deliver cash or
another financial asset to the holder, or to satisfy the obligation
other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of own equity shares. The
components of issued financial instruments that contain both
liability and equity elements are accounted for separately, with the
equity component being assigned the residual amount after
deducting from the instrument as a whole the amount separately
determined as the fair value of the liability component on the date
of issue. After initial measurement, other financial liabilities are
subsequently measured at amortized cost using the effective
interest rate method. Amortized cost is calculated by taking into
account any discount or premium on the issue and fees that are
an integral part of the effective interest rate. Any effects of
restatement of foreign currency-denominated liabilities are
recognized in the consolidated statements of income.
This accounting policy applies primarily to the Globe Group’s
debt, accounts payable and other obligations that meet the above
definition (other than liabilities covered by other accounting
standards, such as income tax payable).
2.6.4.1.7 Derivative Instruments
2.6.4.1.7.1 General
The Globe Group enters into short-term deliverable and
nondeliverable currency forward contracts to manage its
currency exchange exposure related to short-term foreign
currency-denominated monetary assets and liabilities and
foreign currency linked revenues. The Globe Group also
enters into structured currency forward contracts where call
options are sold in combination with such currency forward
contracts.
The Globe Group enters into deliverable prepaid forward
contracts that entitle the Globe Group to a discount on the
contracted forward rate. Such contracts contain embedded
currency derivatives that are bifurcated and marked-to-market
through earnings, with the host debt instrument being
accreted to its face value.
*SGVMC112197*
- 18 The Globe Group enters into short-term interest rate swap
contracts to manage its interest rate exposures on certain
short-term floating rate peso investments. The Globe Group
also enters into long-term currency and interest rate swap
contracts to manage its foreign currency and interest rate
exposures arising from its long-term loan. Such swap
contracts are sometimes entered into in combination with
options. The Globe Group also sells covered currency
options as cost subsidy for outstanding currency swap
contracts.
2.6.4.1.7.2 Recognition and measurement
Derivative financial instruments are recognized and measured
in the consolidated balance sheets at fair values. The method
of recognizing the resulting gain or loss depends on whether
the derivative is designated as a hedge of an identified risk
and qualifies for hedge accounting treatment. The objective
of hedge accounting is to match the impact of the hedged
item and the hedging instrument in the consolidated
statements of income. To qualify for hedge accounting, the
hedging relationship must comply with strict requirements
such as the designation of the derivative as a hedge of an
identified risk exposure, hedge documentation, probability of
occurrence of the forecasted transaction in a cash flow
hedge, assessment (both prospective and retrospective
bases) and measurement of hedge effectiveness, and
reliability of the measurement bases of the derivative
instruments.
Upon inception of the hedge, the Globe Group documents the
relationship between the hedging instrument and the hedged
item, its risk management objective and strategy for
undertaking various hedge transactions, and the details of the
hedging instrument and the hedged item. The Globe Group
also documents its hedge effectiveness assessment
methodology, both at the hedge inception and on an ongoing
basis, as to whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items.
Hedge effectiveness is likewise measured, with any
ineffectiveness being reported immediately in the
consolidated statements of income.
*SGVMC112197*
- 19 2.6.4.1.7.3 Types of Hedges
The Globe Group designates derivatives which qualify as
accounting hedges as either: (a) a hedge of the fair value of a
recognized fixed rate asset, liability or unrecognized firm
commitment (fair value hedge); or (b) a hedge of the cash
flow variability of recognized floating rate asset and liability or
forecasted sales transaction (cash flow hedge).
Fair Value Hedges
Fair value hedges are hedges of the exposure to variability in
the fair value of recognized assets, liabilities or unrecognized
firm commitments. The gain or loss on a derivative instrument
designated and qualifying as a fair value hedge, as well as
the offsetting loss or gain on the hedged item attributable to
the hedged risk are recognized in the consolidated statements
of income in the same accounting period. Hedge
effectiveness is determined based on the hedge ratio of the
fair value changes of the hedging instrument and the
underlying hedged item. When the hedge ceases to be highly
effective, hedge accounting is discontinued.
As of December 31, 2008, 2007 and 2006, there were no
derivatives designated and accounted for as fair value
hedges.
Cash Flow Hedges
The Globe Group designates as cash flow hedges the
following derivatives: (a) interest rate swaps as cash flow
hedge of the interest rate risk of a floating rate foreign
currency-denominated obligation and (b) certain foreign
exchange forward contracts as cash flow hedge of expected
United States Dollar (USD) revenues.
A cash flow hedge is a hedge of the exposure to variability in
future cash flows related to a recognized asset, liability or a
forecasted sales transaction. Changes in the fair value of a
hedging instrument that qualifies as a highly effective cash
flow hedge are recognized in “Cumulative translation
adjustment,” which is a component of equity. Any hedge
ineffectiveness is immediately recognized in the consolidated
statements of income.
If the hedged cash flow results in the recognition of a
nonfinancial asset or liability, gains and losses previously
recognized directly in equity are transferred from equity and
included in the initial measurement of the cost or carrying
value of the asset or liability. Otherwise, for all other cash
flow hedges, gains and losses initially recognized in equity are
transferred from equity to the consolidated statements of
*SGVMC112197*
- 20 income in the same period or periods during which the
hedged forecasted transaction or recognized asset or liability
affect earnings.
Hedge accounting is discontinued prospectively when the
hedge ceases to be highly effective. When hedge accounting
is discontinued, the cumulative gains or losses on the hedging
instrument that has been reported in “Cumulative translation
adjustment” is retained in equity until the hedged transaction
impacts the consolidated statements of income. When the
forecasted transaction is no longer expected to occur, any net
cumulative gains or losses previously reported in “Cumulative
translation adjustment” is recognized immediately in the
consolidated statements of income.
The effective portion of the hedge transaction coming from
the fair value changes of the currency forwards are
subsequently recycled to the consolidated statements of
income and is presented as part of the US dollar-based
revenues.
2.6.4.1.7.4 Other Derivative Instruments Not Accounted for as
Accounting Hedges
Certain freestanding derivative instruments that provide
economic hedges under the Globe Group’s policies either do
not qualify for hedge accounting or are not designated as
accounting hedges. Changes in the fair values of derivative
instruments not designated as hedges are recognized
immediately in the consolidated statements of income. For
bifurcated embedded derivatives in financial and nonfinancial
contracts that are not designated or do not qualify as hedges,
changes in the fair values of such transactions are recognized
in the consolidated statements of income.
2.6.4.1.8 Offsetting
Financial assets and financial liabilities are offset and the net
amount is reported in the consolidated balance sheets if, and only
if, there is a currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net
basis, or to realize the asset and settle the liability simultaneously.
This is not generally the case with master netting agreements;
thus, the related assets and liabilities are presented gross in the
consolidated balance sheets.
2.6.4.2 Impairment of Financial Assets
The Globe Group assesses at each balance sheet date whether a financial
asset or group of financial assets is impaired.
*SGVMC112197*
- 21 2.6.4.2.1
Assets carried at amortized cost
If there is objective evidence that an impairment loss on financial
assets carried at amortized cost (e.g. receivables) has been
incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of
estimated future cash flows discounted at the asset’s original
effective interest rate. Time value is generally not considered
when the effect of discounting is not material. The carrying
amount of the asset is reduced through the use of an allowance
account. The amount of the loss shall be recognized in the
consolidated statements of income.
The Globe Group first assesses whether objective evidence of
impairment exists individually for financial assets that are
individually significant, and individually or collectively for financial
assets that are not individually significant. If it is determined that
no objective evidence of impairment exists for an individually
assessed financial asset, whether significant or not, the asset is
included in a group of financial assets with similar credit risk
characteristics and that group of financial assets is collectively
assessed for impairment. Assets that are individually assessed
for impairment and for which an impairment loss is or continues to
be recognized are not included in a collective assessment of
impairment.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an
event occurring after the impairment was recognized, the
previously recognized impairment loss is reversed. Any
subsequent reversal of an impairment loss is recognized in the
consolidated statements of income to the extent that the carrying
value of the asset does not exceed its amortized cost at the
reversal date.
With respect to receivables, the Globe Group performs a regular
review of the age and status of these accounts, designed to
identify accounts with objective evidence of impairment and
provide the appropriate allowance for impairment losses. The
review is accomplished using a combination of specific and
collective assessment approaches, with the impairment losses
being determined for each risk grouping identified by the Globe
Group.
*SGVMC112197*
- 22 2.6.4.2.1.1 Subscribers
Full allowance for impairment losses is provided for
receivables from permanently disconnected wireless and
wireline subscribers. Permanent disconnections are made
after a series of collection steps following nonpayment by
postpaid subscribers. Such permanent disconnections
generally occur within a predetermined period from statement
date.
The allowance for impairment loss on wireless subscriber
accounts is determined based on the results of the net flow to
write-off methodology. Net flow tables are derived from
account-level monitoring of subscriber accounts between
different age brackets, from current to 1 day past due to 210
days past due. The net flow to write-off methodology relies on
the historical data of net flow tables to establish a percentage
(“net flow rate”) of subscriber receivables that are current or in
any state of delinquency as of reporting date that will
eventually result in write-off. The allowance for impairment
losses is then computed based on the outstanding balances
of the receivables as of balance sheet date and the net flow
rates determined for the current and each delinquency
bracket. The impact of these enhancements on the Globe
Group’s recorded impairment losses on receivables is not
material.
For active residential and business wireline voice subscribers,
full allowance is generally provided for outstanding
receivables that are past due by 90 and 150 days,
respectively. Full allowance is likewise provided for
receivables from wireline data corporate accounts that are
past due by 150 days.
Regardless of the age of the account, additional impairment
losses are also made for wireless and wireline accounts
specifically identified to be doubtful of collection when there is
information on financial incapacity after considering the other
contractual obligations between the Globe Group and the
subscriber.
Specific tests of impairment are not performed on subscriber
receivables since the balances are individually insignificant.
*SGVMC112197*
- 23 2.6.4.2.1.2 Traffic
For traffic receivables, impairment losses are made for
accounts specifically identified to be doubtful of collection
regardless of the age of the account. For receivable balances
that appear doubtful of collection, allowance is provided after
review of the status of settlement with each carrier and
roaming partner, taking into consideration normal payment
cycles, recovery experience and credit history of the parties.
2.6.4.2.1.3 Other receivables
Other receivables from dealers, credit card companies and
other parties are provided with allowance for impairment
losses if specifically identified to be doubtful of collection
regardless of the age of the account.
2.6.4.2.2 AFS financial assets carried at cost
If there is objective evidence that an impairment loss has been
incurred on an unquoted equity instrument that is not carried at
fair value because its fair value cannot be reliably measured, or
on a derivative asset that is linked to and must be settled by
delivery of such unquoted equity instrument, the amount of the
loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar
financial asset. The carrying amount of the asset is reduced
through use of an allowance account.
2.6.4.2.3 AFS financial assets carried at fair value
If an AFS financial asset carried at fair value is impaired, an
amount comprising the difference between its cost and its current
fair value, less any impairment loss previously recognized in the
consolidated statements of income, is transferred from equity to
the consolidated statements of income. Reversals of impairment
losses in respect of equity instruments classified as AFS are not
recognized in the consolidated statements of income. Reversals
of impairment losses on debt instruments are made through the
consolidated statements of income if the increase in fair value of
the instrument can be objectively related to an event occurring
after the impairment loss was recognized in the consolidated
statements of income.
2.6.4.3 Derecognition of Financial Instruments
2.6.4.3.1 Financial Asset
A financial asset (or, where applicable a part of a financial asset
or part of a group of financial assets) is derecognized where:
·
the rights to receive cash flows from the asset have expired;
*SGVMC112197*
- 24 ·
the Globe Group retains the right to receive cash flows from
the asset, but has assumed an obligation to pay them in full
without material delay to a third party under a “pass-through”
arrangement; or
·
the Globe Group has transferred its rights to receive
cashflows from the asset and either (a) has transferred
substantially all the risks and rewards of ownership or (b) has
neither transferred nor retained the risk and rewards of the
asset but has transferred the control of the asset.
Where the Globe Group has transferred its rights to receive cash
flows from an asset and has neither transferred nor retained
substantially all the risks and rewards of the asset nor transferred
control of the asset, the asset is recognized to the extent of the
Globe Group’s continuing involvement in the asset.
2.6.4.3.2 Financial Liability
A financial liability is derecognized when the obligation under the
liability is discharged or cancelled or expires. Where an existing
financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is
treated as a derecognition of the original liability and the
recognition of a new liability, and the difference in the respective
carrying amounts is recognized in the consolidated statements of
income.
2.6.5
Inventories and Supplies
Inventories and supplies are stated at the lower of cost or net realizable value
(NRV). NRV for handsets and accessories and wireline telephone sets is the selling
price in the ordinary course of business less direct costs to sell, while NRV for SIM
packs, call cards, spare parts and supplies consists of the related replacement
costs. In determining the NRV, the Globe Group considers any adjustment
necessary for obsolescence, which is generally provided 100% for nonmoving items
after a certain period. Cost is determined using the moving average method.
2.6.6
Property and Equipment
Property and equipment, except land, are carried at cost less accumulated
depreciation, amortization and impairment losses. Land is stated at cost less any
impairment losses.
The initial cost of an item of property and equipment includes its purchase price and
any cost attributable in bringing the property and equipment to its intended location
and working condition. Cost also includes: (a) interest and other financing charges
on borrowed funds used to finance the acquisition of property and equipment to the
extent incurred during the period of installation and construction; and (b) asset
retirement obligations (ARO) specifically on property and equipment
installed/constructed on leased properties.
*SGVMC112197*
- 25 Subsequent costs are capitalized as part of property and equipment only when it is
probable that future economic benefits associated with the item will flow to the
Globe Group and the cost of the item can be measured reliably. All other repairs
and maintenance are charged against current operations as incurred.
Assets under construction (AUC) are carried at cost and transferred to the related
property and equipment account when the construction or installation and related
activities necessary to prepare the property and equipment for their intended use
are complete, and the property and equipment are ready for service.
Depreciation and amortization of property and equipment commences once the
property and equipment are available for use and computed using the straight-line
method over the estimated useful lives (EUL) of the property and equipment.
Leasehold improvements are amortized over the shorter of their EUL or the
corresponding lease terms.
The EUL of property and equipment are reviewed annually based on expected
asset utilization as anchored on business plans and strategies that also consider
expected future technological developments and market behavior to ensure that the
period of depreciation and amortization is consistent with the expected pattern of
economic benefits from items of property and equipment.
When property and equipment is retired or otherwise disposed of, the cost and the
related accumulated depreciation, amortization and impairment losses are removed
from the accounts and any resulting gain or loss is credited to or charged against
current operations.
2.6.7
ARO
The Globe Group is legally required under various contracts to restore leased
property to its original condition and to bear the cost of dismantling and
deinstallation at the end of the contract period. The Globe Group recognizes the
present value of these obligations and capitalizes these costs as part of the
balances of the related property and equipment accounts, which are depreciated on
a straight-line basis over the useful life of the related property and equipment or the
contract period, whichever is shorter.
The amount of ARO is accrued and such accretion is recognized as interest
expense.
2.6.8
Investment Property
Investment property is initially measured at cost, including transaction costs.
Subsequent to initial recognition, investment property is carried at cost less
accumulated depreciation and any impairment losses.
Expenditures incurred after the investment property has been put in operation, such
as repairs and maintenance costs, are normally charged against income in the
period in which the costs are incurred.
*SGVMC112197*
- 26 Depreciation of investment property is computed using the straight-line method over
its useful life, regardless of utilization. The EUL and the depreciation method are
reviewed periodically to ensure that the period and method of depreciation are
consistent with the expected pattern of economic benefits from items of investment
properties.
Transfers are made to investment property, when, and only when, there is a change
in use, evidenced by the end of the owner occupation, commencement of an
operating lease to another party or completion of construction or development.
Transfers are made from investment property when, and only when, there is a
change in use, evidenced by the commencement of owner occupation or
commencement of development with the intention to sell.
Investment property is derecognized when it has either been disposed of or
permanently withdrawn from use and no future benefit is expected from its disposal.
Any gain or loss on derecognition of an investment property is recognized in the
consolidated statements of income in the period of derecognition.
2.6.9
Intangible Assets
Costs incurred to acquire software (not an integral part of its related hardware or
equipment) and telecommunications equipment software licenses are capitalized as
intangible assets. Costs directly associated with the development of identifiable
software that generate expected future benefits to the Globe Group are recognized
as intangible assets. All other costs of developing and maintaining software
programs are recognized as expense when incurred.
Subsequent to initial recognition, intangible assets are measured at cost less
accumulated amortization and any impairment losses. The EUL of intangible assets
with finite lives are assessed at the individual asset level. Intangible assets with
finite lives are amortized on a straight-line basis over their useful lives. The periods
and method of amortization for intangible assets with finite useful lives are reviewed
annually or more frequently when an indicator of impairment exists.
A gain or loss arising from derecognition of an intangible asset is measured as the
difference between the net disposal proceeds and the carrying amount of the asset
and is recognized in the consolidated statements of income when the asset is
derecognized.
2.6.10 Business Combinations and Goodwill
Business combinations are accounted for using the purchase method. The cost of
an acquisition is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange, plus costs
directly attributable to the acquisition. Identifiable assets (including previously
unrecognized intangible assets) acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at fair values at the date
of acquisition, irrespective of the extent of any minority interest.
*SGVMC112197*
- 27 Goodwill is initially measured at cost being the excess of the cost of the business
combination over the Group’s share in the net fair value of the acquiree’s
identifiable assets, liabilities and contingent liabilities. If the cost of the acquisition is
less than the fair value of the net assets of the subsidiary acquired, the difference is
recognized directly in the consolidated statements of income.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of the impairment testing, goodwill acquired in
a business combination is, from the acquisition date, allocated to each of the
Group’s cash-generating units (CGU) that are expected to benefit from the
synergies of the combination, irrespective of whether other assets or liabilities of the
acquiree are assigned to those units.
Goodwill allocated to a cash-generating unit is included in the carrying amount of
the CGU being disposed when determining the gain or loss on disposal. For partial
disposal of operation within the CGU, the goodwill associated with the disposed
operation is included in the carrying amount of the operation when determining gain
or loss on disposal and measured on the basis of the relative values of the
operation disposed of and the portion of the CGU retained, unless another method
better reflects the goodwill associated with the operation disposed of.
2.6.11 Investment in a Joint Venture
Investment in a joint venture (JV) is accounted for under the equity method, less any
impairment losses. A JV is an entity, not being a subsidiary nor an associate, in
which the Globe Group exercises joint control together with one or more venturers.
Under the equity method, the investment in a JV are carried in the consolidated
balance sheets at cost plus post-acquisition changes in the Globe Group’s share in
net assets of the JV, less any allowance for impairment losses. The consolidated
statements of income include Globe Group’s share in the results of operations of its
JV. Where there has been a change recognized directly in the JV’s equity, the
Globe Group recognizes its share of any changes and discloses this, when
applicable, in the consolidated statements of changes in equity.
2.6.12 Impairment of Nonfinancial Assets
For assets excluding goodwill, an assessment is made at the balance sheet date to
determine whether there is any indication that an asset may be impaired, or whether
there is any indication that an impairment loss previously recognized for an asset in
prior periods may no longer exist or may have decreased. If any such indication
exists and when the carrying value of an asset exceeds its estimated recoverable
amount, the asset or CGU to which the asset belongs is written down to its
recoverable amount. The recoverable amount of an asset is the greater of its net
selling price and value in use. Recoverable amounts are estimated for individual
assets or investments or, if it is not possible, for the CGU to which the asset
belongs. For impairment loss on specific assets or investments, the recoverable
amount represents the net selling price.
*SGVMC112197*
- 28 In assessing value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset.
An impairment loss is recognized only if the carrying amount of an asset exceeds its
recoverable amount. An impairment loss is charged against operations in the year
in which it arises. A previously recognized impairment loss is reversed only if there
has been a change in estimate used to determine the recoverable amount of an
asset, however, not to an amount higher than the carrying amount that would have
been determined (net of any accumulated depreciation and amortization for
property and equipment, investment property and intangible assets) had no
impairment loss been recognized for the asset in prior years. A reversal of an
impairment loss is credited to current operations.
For assessing impairment of goodwill, a test for impairment is performed annually
and when circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of each
CGU (or group of CGUs) to which the goodwill relates. Where the recoverable
amount of the CGU is less than their carrying amount an impairment loss is
recognized. Impairment losses relating to goodwill cannot be reversed in future
periods.
2.6.13 Income Tax
2.6.13.1
Current Tax
Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be recovered from or paid to the
tax authority. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted as at the balance
sheet date.
2.6.13.2
Deferred Income Tax
Deferred income tax is provided using the balance sheet liability method
on all temporary differences, with certain exceptions, at balance sheet
date between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary
differences, with certain exceptions. Deferred income tax assets are
recognized for all deductible temporary differences, with certain
exceptions, and carryforward benefits of unused tax credits from excess
minimum corporate income tax (MCIT) over regular corporate income tax
and net operating loss carryover (NOLCO) to the extent that it is
probable that taxable income will be available against which the
deductible temporary differences and the carryforward benefits of
unused MCIT and NOLCO can be used.
*SGVMC112197*
- 29 Deferred income tax is not recognized when it arises from the initial
recognition of an asset or liability in a transaction that is not a business
combination and, at the time of transaction, affects neither the
accounting income nor taxable income or loss. Deferred income tax
liabilities are not provided on nontaxable temporary differences
associated with investment in a domestic associate and a JV.
Deferred income tax relating to items recognized directly in equity is
included in the related equity account and not in the consolidated
statements of income.
The carrying amounts of deferred income tax assets are reviewed at
each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable income will be available to allow all or
part of the deferred income tax assets to be utilized.
Deferred income tax assets and liabilities are offset, if a legally
enforceable right exists to set off current income tax assets against
current income tax liabilities and the deferred income taxes relate to the
same taxable entity and the same taxation authority.
Deferred income tax assets and liabilities are measured at the tax rates
that are expected to apply in the year when the assets are realized or the
liabilities are settled based on tax rates (and tax laws) that have been
enacted or substantively enacted as at the balance sheet date.
Movements in the deferred income tax assets and liabilities arising from
changes in tax rates are charged or credited to income for the period.
2.6.14 Provisions
Provisions are recognized when: (a) the Globe Group has present obligation (legal
or constructive) as a result of a past event; (b) it is probable (i.e., more likely than
not) that an outflow of resources embodying economic benefits will be required to
settle the obligation; and (c) a reliable estimate can be made of the amount of the
obligation. Provisions are reviewed at each balance sheet date and adjusted to
reflect the current best estimate. If the effect of the time value of money is material,
provisions are determined by discounting the expected future cash flows at a pretax rate that reflects current market assessment 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 interest
expense under “Financing costs” in the consolidated statements of income.
2.6.15 Share-based Payment Transactions
Certain employees (including directors) of the Globe Group receive remuneration in
the form of share-based payment transactions, whereby employees render services
in exchange for shares or rights over shares (“equity-settled transactions”)
(see Note 18).
*SGVMC112197*
- 30 The cost of equity-settled transactions with employees is measured by reference to
the fair value at the date at which they are granted. In valuing equity-settled
transactions, vesting conditions, including performance conditions, other than
market conditions (conditions linked to share prices), shall not be taken into account
when estimating the fair value of the shares or share options at the measurement
date. Instead, vesting conditions are taken into account in estimating the number of
equity instruments that will vest.
The cost of equity-settled transactions is recognized in the consolidated statements
of income, together with a corresponding increase in equity, over the period in which
the service conditions are fulfilled, ending on the date on which the relevant
employees become fully entitled to the award (‘vesting date’). The cumulative
expense recognized for equity-settled transactions at each reporting date until the
vesting date reflects the extent to which the vesting period has expired and the
number of awards that, in the opinion of the management of the Globe Group at
that date, based on the best available estimate of the number of equity instruments,
will ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards
where vesting is conditional upon a market condition, which are treated as vesting
irrespective of whether or not the market condition is satisfied, provided that all
other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an
expense is recognized as if the terms had not been modified. In addition, an
expense is recognized for any increase in the value of the transaction as a result of
the modification, measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the
date of cancellation, and any expense not yet recognized for the award is
recognized immediately. However, if a new award is substituted for the cancelled
award, and designated as a replacement award on the date that it is granted, the
cancelled and new awards are treated as if they were a modification of the original
award, as described in the previous paragraph. The dilutive effect of outstanding
options is reflected as additional share dilution in the computation of earnings per
share (EPS) (see Note 27).
2.6.16 Treasury Stock
Treasury stock is recorded at cost and is presented as a deduction from equity.
When the shares are retired, the capital stock account is reduced by its par value
and the excess of cost over par value upon retirement is debited to additional paidin capital to the extent of the specific or average additional paid-in capital when the
shares were issued and to retained earnings for the remaining balance.
*SGVMC112197*
- 31 2.6.17 Pension Cost
Pension cost is actuarially determined using the projected unit credit method. This
method reflects services rendered by employees up to the date of valuation and
incorporates assumptions concerning employees’ projected salaries. Actuarial
valuations are conducted with sufficient regularity, with option to accelerate when
significant changes to underlying assumptions occur. Pension cost includes current
service cost, interest cost, expected return on any plan assets, actuarial gains and
losses and the effect of any curtailment or settlement.
The net pension asset recognized by the Globe Group in respect of the defined
benefit pension plan is the lower of: (a) the fair value of the plan assets less the
present value of the defined benefit obligation at the balance sheet date, together
with adjustments for unrecognized actuarial gains or losses that shall be recognized
in later periods; or (b) the total of any cumulative unrecognized net actuarial losses
and past service cost and the present value of any economic benefits available in
the form of refunds from the plan or reductions in future contributions to the plan.
The defined benefit obligation is calculated annually by an independent actuary
using the projected unit credit method. The present value of the defined benefit
obligation is determined by using risk-free interest rates of government bonds that
have terms to maturity approximating the terms of the related pension liabilities or
applying a single weighted average discount rate that reflects the estimated timing
and amount of benefit payments.
A portion of actuarial gains and losses is recognized as income or expense if the
cumulative unrecognized actuarial gains and losses at the end of the previous
reporting period exceeded the greater of 10% of the present value of defined
benefit obligation or 10% of the fair value of plan assets. These gains and losses
are recognized over the expected average remaining working lives of the
employees participating in the plan.
2.6.18 Borrowing Costs
Borrowing costs are capitalized if these are directly attributable to the acquisition,
construction or production of a qualifying asset. Capitalization of borrowing costs
commences when the activities for the asset’s intended use are in progress and
expenditures and borrowing costs are being incurred. Borrowing costs are
capitalized until the assets are ready for their intended use. These costs are
amortized using the straight-line method over the EUL of the related property and
equipment. If the resulting carrying amount of the asset exceeds its recoverable
amount, an impairment loss is recognized. Borrowing costs include interest charges
and other related financing charges incurred in connection with the borrowing of
funds, as well as exchange differences arising from foreign currency borrowings
used to finance these projects to the extent that they are regarded as an adjustment
to interest costs. Premiums on long-term debt are included under the “Long-term
debt” account in the consolidated balance sheets and are amortized using the
effective interest rate method.
Other borrowing costs are recognized as expense in the period in which these are
incurred.
*SGVMC112197*
- 32 2.6.19 Leases
The determination of whether an arrangement is, or contains a lease, is based on
the substance of the arrangement and requires an assessment of whether the
fulfillment of the arrangement is dependent on the use of a specific asset or assets
and the arrangement conveys a right to use the asset. A reassessment is made
after inception of the lease only if one of the following applies:
·
·
·
·
there is a change in contractual terms, other than a renewal or extension of the
arrangement;
a renewal option is exercised or an extension granted, unless that term of the
renewal or extension was initially included in the lease term;
there is a change in the determination of whether fulfillment is dependent on a
specified asset; or
there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from
the date when the change in circumstances gave rise to the reassessment for any
of the scenarios above, and at the date of renewal or extension period for the
second scenario.
2.6.19.1
Group as Lessee
Finance leases, which transfer to the Globe Group 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
and included in the “Property and equipment” account with the
corresponding liability to the lessor included in the “Other long-term
liabilities” account in the consolidated balance sheets. 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 as “Interest
expense” in the consolidated statements of income.
Capitalized leased assets are depreciated over the shorter of the EUL of
the assets and the respective lease terms.
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 consolidated
statements of income on a straight-line basis over the lease term.
2.6.19.2
Group as Lessor
Finance leases, where the Globe Group transfers substantially all the risk
and benefits incidental to ownership of the leased item to the lessee, are
included in the consolidated balance sheets under “Prepayments and
other current assets” account. A lease receivable is recognized
equivalent to the net investment (asset cost) in the lease. All income
resulting from the receivable is included in the “Interest income” account
in the consolidated statements of income.
*SGVMC112197*
- 33 Leases where the Globe Group does not transfer substantially all the risk
and benefits of ownership of the assets are classified as operating
leases. Initial direct costs incurred in negotiating operating leases are
added to the carrying amount of the leased asset and recognized over
the lease term on the same basis as the rental income. Contingent rents
are recognized as revenue in the period in which they are earned.
2.6.20 Selling, Advertising and Promotions Expenses
Selling, advertising and promotions expenses are charged against current
operations as incurred.
2.6.21 Foreign Currency Transactions
The functional and presentation currency of the Globe Group is the Philippine Peso,
except for EGGstreme (Hongkong) Limited (EGGstreme) whose functional currency
is the Hongkong Dollar (HKD). Transactions in foreign currencies are initially
recorded at the functional currency rate prevailing at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at
the functional currency rate of exchange ruling at the balance sheet date.
Nonmonetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rate as at the date of the initial
transaction and are not subsequently restated. Nonmonetary items measured at
fair value in a foreign currency are translated using the exchange rate at the date
when the fair value was determined. All foreign exchange differences are taken to
the consolidated statements of income, except where it relates to equity securities
where gains or losses are recognized directly in equity.
As at the reporting date, the assets and liabilities of EGGstreme are translated into
the presentation currency of the Globe Group at the rate of exchange prevailing at
the balance sheet date and its consolidated statements of income is translated at
the monthly weighted average exchange rates during the year. The exchange
differences arising on the translation are taken directly to a separate component of
equity under “Cumulative translation adjustments” account. Upon disposal of
EGGstreme, the cumulative translation adjustments relating to EGGstreme shall be
recognized in the consolidated statements of income.
2.6.22 EPS
Basic EPS is computed by dividing earnings applicable to common stock by the
weighted average number of common shares outstanding, after giving retroactive
effect for any stock dividends, stock splits or reverse stock splits during the period.
Diluted EPS is computed by dividing net income by the weighted average number of
common shares outstanding during the period, after giving retroactive effect for any
stock dividends, stock splits or reverse stock splits during the period, and adjusted
for the effect of dilutive options and dilutive convertible preferred 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. If the required dividends to be
*SGVMC112197*
- 34 declared on convertible preferred shares divided by the number of equivalent
common shares, assuming such shares are converted, would decrease the basic
EPS, then such convertible preferred shares would be deemed dilutive. Where the
effect 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.
2.6.23 Segment Reporting
The Globe Group’s major operating business units are the basis upon which the
Globe Group reports its primary segment information. The Globe Group’s business
segments consist of: (1) mobile communication services; (2) wireline communication
services; and (3) mobile content and application development services. The Globe
Group generally accounts for intersegment revenues and expenses at agreed
transfer prices.
2.6.24 Contingencies
Contingent liabilities are not recognized in the consolidated financial statements.
These are disclosed unless the possibility of an outflow of resources embodying
economic benefits is remote. Contingent assets are not recognized in the
consolidated financial statements but are disclosed when an inflow of economic
benefits is probable.
2.6.25 Subsequent Events
Any post period-end event up to the date of approval of the BOD of the
consolidated financial statements that provides additional information about the
Globe Group’s position at balance sheet date (adjusting event) is reflected in the
consolidated financial statements. Any post period-end event that is not an
adjusting event is disclosed in the consolidated financial statements when material.
3. Management’s Significant Accounting Judgments and Use of Estimates
3.1 Judgments and Estimates
The preparation of the accompanying consolidated financial statements in conformity with
PFRS requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The estimates
and assumptions used in the accompanying consolidated financial statements are based
upon management’s evaluation of relevant facts and circumstances as of the date of the
consolidated financial statements. Actual results could differ from such estimates.
Judgments and estimates are continually evaluated and are based on historical experience
and other factors, including expectations of future events that are believed to be
reasonable under the circumstances.
*SGVMC112197*
- 35 3.1.1
Judgments
3.1.1.1 Leases
The Globe Group has entered into various lease agreements as lessee and
lessor. The Globe Group has determined that it retains all the significant
risks and rewards on equipment and office spaces leased out on operating
lease and various items of property and equipment acquired through finance
lease.
3.1.1.2 Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded on
the consolidated balance sheet cannot be derived from active markets, they
are determined using a variety of valuation techniques that include the use
of mathematical models. The input to these models is taken from
observable markets where possible, but where this is not feasible, a degree
of judgment is required in establishing fair values. The judgments include
considerations of liquidity and model inputs such as correlation and volatility
for longer dated derivatives.
As of December 31, 2008, 2007 and 2006, the fair value of financial assets
and liabilities that were determined using valuation techniques, inputs and
assumptions are based on market observable data and conditions and
reflect appropriate risk adjustments that market participants would make for
credit and liquidity risks existing as of the periods indicated.
The Globe Group considers a market as active if it is one in which
transactions are taking place regularly on an arm’s length basis. On the
other hand, the Globe Group considers a market as inactive if there is a
significant decline in the volume and level of trading activity and the
available prices vary significantly over time among market participants or the
prices are not current.
3.1.1.3 HTM investments
The classification as HTM investments requires significant judgment. In
making this judgment, the Globe Group evaluates its intention and ability to
hold such investments to maturity. If the Globe Group fails to keep these
investments to maturity other than in certain specific circumstances - for
example, selling an insignificant amount close to maturity - it will be required
to reclassify the entire portfolio as AFS investments. The investments would
therefore be measured at fair value and not at amortized cost.
3.1.1.4 Financial assets not quoted in an active market
The Globe Group classifies financial assets by evaluating, among others,
whether the asset is quoted or not in an active market. Included in the
evaluation on whether a financial asset is quoted in an active market is the
determination on whether quoted prices are readily and regularly available,
and whether those prices represent actual and regularly occurring market
transactions on an arm’s length basis.
*SGVMC112197*
- 36 3.1.1.5 Allocation of goodwill to cash-generating units
The Globe Group allocated the carrying amount of goodwill to the mobile
content and application development services business CGU, for the Group
believes that this CGU represents the lowest level within the Globe Group at
which the goodwill is monitored for internal management reporting purposes;
and not larger than a segment based on the Globe Group’s primary reporting
format in accordance with PAS 14.
3.1.2
Estimates
3.1.2.1 Revenue recognition
The Globe Group’s revenue recognition policies require management to
make use of estimates and assumptions that may affect the reported
amounts of revenues and receivables.
The Globe Group’s agreements with local and foreign carriers for inbound
and outbound traffic subject to settlements require traffic reconciliations
before actual settlement is done, which may not be the actual volume of
traffic as measured by management. Initial recognition of revenues is based
on observed traffic in the network since normal historical experience
adjustments are not material to the consolidated financial statements.
Differences between the amounts initially recognized and actual settlements
are taken up in the accounts upon final reconciliation with other carriers.
However, there is no assurance that such use of estimates will not result in
material adjustments in future periods.
The Globe Group records inbound revenues net of the estimated prompt
payment discount, based on the established historical pattern of discount
availments of the carriers.
Total unsettled net inbound traffic revenues from local and foreign traffic
carriers as of December 31, 2008, 2007 and 2006 (included under
“Receivables”) amounted to P
= 3,618.01 million, P
= 2,605.91 million and
P
= 1,959.17 million, respectively (see Note 4). Total unsettled net outbound
traffic to local and foreign carriers as of December 31, 2008, 2007 and 2006
(included under “Accounts payable and accrued expenses”) amounted to
P
= 1,545.54 million, P
= 2,085.88 million and P
= 1,501.93 million, respectively
(see Note 12).
The Globe Group estimates the fair value of points awarded under its new
loyalty programmes, which are within the scope of Philippine Interpretation
IFRIC 13, based on historical trend of availment. As of December 31, 2008,
the estimated liability for unredeemed points included in “Unearned
revenues” amounted to P
= 8.05 million.
*SGVMC112197*
- 37 3.1.2.2 Allowance for impairment losses on receivables
The Globe Group maintains an allowance for impairment losses at a level
considered adequate to provide for potential uncollectible receivables. The
Globe Group performs a regular review of the age and status of these
accounts, designed to identify accounts with objective evidence of
impairment and provide the appropriate allowance for impairment losses.
The review is accomplished using a combination of specific and collective
assessment approaches, with the impairment losses being determined for
each risk grouping identified by the Globe Group. The amount and timing of
recorded expenses for any period would differ if the Globe Group made
different judgments or utilized different methodologies. An increase in
allowance for impairment losses would increase the recorded operating
expenses and decrease current assets.
Impairment losses on receivables for the years ended December 31, 2008,
2007 and 2006 amounted to P
= 979.78 million, P
= 711.40 million and
P
= 422.83 million, respectively (see Note 23). Receivables, net of allowance
for impairment losses, amounted to P
= 7,473.35 million, P
= 6,383.54 million and
P
= 5,527.91 million as of December 31, 2008, 2007 and 2006, respectively
(see Note 4).
3.1.2.3 Obsolescence and market decline
The Globe Group, in determining the NRV, considers any adjustment
necessary for obsolescence which is generally provided 100% for
nonmoving items after a certain period. The Globe Group adjusts the cost of
inventory to the recoverable value at a level considered adequate to reflect
market decline in the value of the recorded inventories. The Globe Group
reviews the classification of the inventories and generally provides
adjustments for recoverable values of new, actively sold and slow-moving
inventories by reference to prevailing values of the same inventories in the
market.
The amount and timing of recorded expenses for any period would differ if
different judgments were made or different estimates were utilized. An
increase in allowance for obsolescence and market decline would increase
recorded operating expenses and decrease current assets.
Inventory obsolescence and market decline for the years ended December
31, 2008 and 2007 amounted to P
= 262.10 million and P
= 298.12 million,
respectively. Reversal of inventory obsolescence and market decline for the
year ended December 31, 2006 amounted to P
= 61.39 million (see Note 23).
Inventories and supplies, net of allowances, amounted to P
= 1,124.32 million,
P
= 1,112.15 million and P
= 993.50 million as of December 31, 2008, 2007 and
2006, respectively (see Note 5).
*SGVMC112197*
- 38 3.1.2.4 ARO
The Globe Group is legally required under various contracts to restore
leased property to its original condition and to bear the costs of dismantling
and deinstallation at the end of the contract period. These costs are
accrued based on an in-house estimate, which incorporates estimates of
asset retirement costs and interest rates. The Globe Group recognizes the
present value of these obligations and capitalizes the present value of these
costs as part of the balance of the related property and equipment accounts,
which are being depreciated and amortized on a straight-line basis over the
EUL of the related asset or the lease term, whichever is shorter. The market
risk premium was excluded from the estimate of the fair value of the ARO
because a reasonable and reliable estimate of the market risk premium is
not obtainable.
Since a market risk premium is unavailable, fair value is assumed to be the
present value of the obligations. The present value of dismantling costs is
computed based on an average credit adjusted risk free rate of 11.17%,
6.96% and 7.50% in 2008, 2007 and 2006, respectively. Assumptions used
to compute ARO are reviewed and updated annually.
The amount and timing of recorded expenses for any period would differ if
different judgments were made or different estimates were utilized. An
increase in ARO would increase recorded operating expenses and increase
noncurrent liabilities.
In 2008, the Globe Group updated its assumptions on timing of settlement
and estimated cash outflows arising from ARO on its leased premises. As a
result of the changes in estimates reckoned as of January 1, 2008, the
Globe Group adjusted downward its ARO liability (included under “Other
long-term liabilities” account) by P
= 714.78 million against the book value of
the assets on leased premises (see Note 15).
As of December 31, 2008, 2007 and 2006, ARO amounted to
P
= 1,081.41 million, P
= 1,623.83 million and P
= 1,316.61 million, respectively
(see Note 15).
3.1.2.5 EUL of property and equipment, investment property and intangible assets
Globe Group reviews annually the EUL of these assets based on expected
asset utilization as anchored on business plans and strategies that also
consider expected future technological developments and market behavior.
It is possible that future results of operations could be materially affected by
changes in these estimates brought about by changes in the factors
mentioned.
A reduction in the EUL of property and equipment, investment property and
intangible assets would increase the recorded depreciation and amortization
expense and decrease noncurrent assets.
*SGVMC112197*
- 39 The EUL of property and equipment of the Globe Group are as follows:
Years
Telecommunications equipment:
Tower
Switch
Outside plant, cellsite
structures and improvements
Distribution dropwires and other
wireline assets
Cellular equipment and others
Buildings
Leasehold improvements
Investments in cable systems
Furniture, fixtures and equipment
Transportation and work equipment
20
7 and 10
10 and 20
2-10
2-10
20
5 years or lease term, whichever is shorter
15
3-5
2-5
The EUL of investment property is 20 years.
Intangible assets are amortized over the EUL of the related hardware or
equipment ranging from 3 to 10 years or life of the telecommunications
equipment where it is assigned.
In 2006, the Globe Group recognized additional depreciation on
telecommunications equipment amounting to P
= 790.06 million due to
shortened remaining useful lives of certain assets resulting from continuing
upgrades made to the network and changes in estimated remaining useful
lives of certain components of network assets as a result of the application
of a more comprehensive approach to component accounting. These
changes have been accounted for as a change in accounting estimates.
In 2007, Globe changed the EUL of certain wireless network elements
resulting from new information affecting the expected utilization of these
assets. The wireline business also recognized additional depreciation due to
shortened remaining useful lives of certain assets as a result of continuing
network upgrade and expansion. The net effect of the change in EUL
resulted in lower depreciation of P
= 105.31 million for the year ended
December 31, 2007.
In 2008, the Globe Group changed the EUL of certain telecommunications
equipment and infrastructures resulting from new information affecting the
expected utilization of these assets. The net effect of the change in EUL
resulted in lower depreciation of P
= 159.76 million for the year ended
December 31, 2008.
As of December 31, 2008, 2007 and 2006, property and equipment,
investment property and intangible assets amounted to P
= 96,782.90 million,
P
= 94,253.65 million and P
= 97,517.54 million, respectively (see Notes 7, 8
and 9).
*SGVMC112197*
- 40 3.1.2.6 Asset impairment
3.1.2.6.1 Impairment of nonfinancial assets other than goodwill
The Globe Group assesses impairment of assets (property and
equipment, investment property, intangible assets and investment
in a JV) whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
The factors that the Globe Group considers important which could
trigger an impairment review include the following:
·
·
·
significant underperformance relative to expected historical or
projected future operating results;
significant changes in the manner of use of the acquired
assets or the strategy for the overall business; and
significant negative industry or economic trends.
An impairment loss is recognized whenever the carrying amount
of an asset or investment exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s net selling price
and value in use. The net selling price is the amount obtainable
from the sale of an asset in an arm’s length 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 investments or, if it is not
possible, for the CGU to which the asset belongs.
For impairment loss on specific assets or investments, the
recoverable amount represents the net selling price.
In 2007, the Globe Group reversed a portion of estimated
provision for impairment losses amounting to P
= 178.80 million on a
certain network asset component based on adjusted component
values resulting from its continuing implementation of
comprehensive asset component accounting.
For the Globe Group, the CGU is the combined mobile and
wireline asset groups of Globe Telecom and Innove. This asset
grouping is predicated upon the requirement contained in
Executive Order (EO) No.109 and RA No.7925 requiring
licensees of Cellular Mobile Telephone System (CMTS) and
International Digital Gateway Facility (IGF) services to provide
400,000 and 300,000 LEC lines, respectively, as a condition for
the grant of such licenses.
In determining the present value of estimated future cash flows
expected to be generated from the continued use of the assets or
holding of an investment, the Globe Group is required to make
estimates and assumptions that can materially affect the
consolidated financial statements.
*SGVMC112197*
- 41 Property and equipment, investment property, intangible assets
and investment in a joint venture amounted to P
= 96,856.43 million,
P
= 94,336.91 million and P
= 97,554.87 million as of December 31,
2008, 2007 and 2006, respectively (see Notes 7, 8, 9 and 10).
3.1.2.6.2 Impairment of goodwill
The Globe Group’s impairment test for goodwill is based on value
in use calculations that use a discounted cash flow model. The
cash flows are derived from the budget for the next five years and
do not include restructuring activities that the Group is not yet
committed to or significant future investments that will enhance
the asset base of the CGU being tested. The recoverable
amount is most sensitive to the discount rate used for the
discounted cash flow model as well as the expected future cash
inflows and the growth rate used for extrapolation purposes.
3.1.2.7 Deferred income tax assets
The carrying amounts of deferred income tax assets are reviewed at each
balance sheet date and reduced to the extent that it is no longer probable
that sufficient taxable income will be available to allow all or part of the
deferred income tax assets to be utilized (see Note 24).
As of December 31, 2008, 2007 and 2006, Innove has net deferred income
tax assets amounting to P
= 523.72 million, P
= 637.72 million and
P
= 801.86 million, respectively. As of December 31, 2008, 2007 and 2006,
Globe Telecom has net deferred income tax liabilities amounting to
P
= 4,581.92 million, P
= 5,502.89 million and P
= 5,540.00 million, respectively
(see Note 24). Globe Telecom and Innove have no unrecognized deferred
income tax assets as of December 31, 2008, 2007 and 2006. GXI has not
recognized deferred income tax assets on its NOLCO since there is no
assurance that GXI will generate sufficient taxable income to allow all or part
of its NOLCO to be utilized.
3.1.2.8 Financial assets and liabilities
Globe Group carries certain financial assets and liabilities at fair value, which
requires extensive use of accounting estimates and judgment. While
significant components of fair value measurement were determined using
verifiable objective evidence (i.e., foreign exchange rates, interest rates,
volatility rates), the amount of changes in fair value would differ if the Globe
Group utilized different valuation methodologies. Any changes in fair value
of these financial assets and liabilities would affect the consolidated
statements of income and consolidated statements of changes in equity.
Financial assets comprising of available-for-sale investments and derivative
assets carried at fair values as of December 31, 2008, 2007 and 2006,
amounted to P
= 230.34 million, P
= 584.11 million and P
= 1,959.28 million,
respectively, and financial liabilities comprising of derivative liabilities carried
*SGVMC112197*
- 42 at fair values as of December 31, 2008, 2007 and 2006, amounted to
P
= 185.65 million, P
= 340.83 million and P
= 1,086.12 million, respectively
(see Note 28.10).
3.1.2.9 Pension and other employee benefits
The determination of the obligation and cost of pension and other employee
benefits is dependent on the selection of certain assumptions used in
calculating such amounts. Those assumptions include, among others,
discount rates, expected returns on plan assets and salary rates increase
(see Note 18). In accordance with PAS 19, actual results that differ from the
Globe Group’s assumptions, subject to the 10% corridor test, are
accumulated and amortized over future periods and therefore, generally
affect the recognized expense and recorded obligation in such future
periods.
As of December 31, 2008, 2007 and 2006, Globe Group has unrecognized
net actuarial losses of P
= 115.40 million, P
= 511.80 million and P
= 259.74 million,
respectively (see Note 18.2).
The Globe Group also determines the cost of equity-settled transactions
using assumptions on the appropriate pricing model. Significant
assumptions for the cost of share-based payments include, among others,
share price, exercise price, option life, risk-free interest rate, expected
dividend and expected volatility rate.
Cost of share-based payments for the years ended December 31, 2008,
2007 and 2006 amounted to P
= 182.32 million, P
= 129.91 million and
P
= 161.63 million, respectively (see Notes 16 and 18.1).
The Globe Group also estimates other employee benefit obligations and
expenses, including cost of paid leaves based on historical leave availments
of employees, subject to the Globe Group’s policy. These estimates may
vary depending on the future changes in salaries and actual experiences
during the year.
The accrued balance of other employee benefits (included under the
“Accounts payable and accrued expenses” account and in the “Other longterm liabilities” account in the consolidated balance sheets) as of
December 31, 2008, 2007 and 2006 amounted to P
= 340.47 million,
P
= 294.35 million and P
= 246.98 million, respectively.
While the Globe Group believes that the assumptions are reasonable and
appropriate, significant differences between actual experiences and
assumptions may materially affect the cost of employee benefits and related
obligations.
*SGVMC112197*
- 43 3.1.2.10 Contingencies
Globe Telecom and Innove are currently involved in various legal
proceedings. The estimate of the probable costs for the resolution of these
claims has been developed in consultation with internal and external counsel
handling Globe Telecom and Innove’s defense in these matters and is based
upon an analysis of potential results. Globe Telecom and Innove currently
do not believe that these proceedings will have a material adverse effect on
the consolidated financial position. It is possible, however, that future results
of operations could be materially affected by changes in the estimates or in
the effectiveness of the strategies relating to these proceedings
(see Note 26).
3.1.2.11 Purchase Price Allocation
The purchase price allocation relating to the Globe Group’s acquisition of
EGG Group has been prepared on a preliminary basis. The provisional fair
values of the assets acquired and liabilities assumed as of date of
acquisition were based on the net book values of the identifiable assets and
liabilities since these approximate the fair values. The difference between
the total consideration and the net assets amounting to P
= 346.99 million was
initially allocated to goodwill.
4. Receivables
This account consists of receivables from:
Notes
Subscribers
Traffic settlements - net
Others
Less allowance for impairment losses
Subscribers
Traffic settlements and others
16
2008
P
= 4,563,825
3,618,010
478,170
8,660,005
785,812
400,847
1,186,659
P
= 7,473,346
2007
2006
(In Thousand Pesos)
P
= 4,759,249
P
= 5,947,904
2,605,913
1,959,169
401,854
305,615
7,767,016
8,212,688
1,097,423
286,052
1,383,475
P
= 6,383,541
2,485,188
199,595
2,684,783
P
= 5,527,905
Traffic settlements receivable are presented net of traffic settlements payable amounting to
P
= 5,297.07 million, P
= 7,297.75 million and P
= 3,675.43 million as of December 31, 2008, 2007 and
2006, respectively.
Traffic settlements receivable is presented net of traffic settlements payable from the same
carrier based on a currently enforceable legal right to offset the recognized amounts, and there
is an intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously.
Receivables are non-interest bearing and are generally collectible in the short-term.
*SGVMC112197*
- 44 -
5. Inventories and Supplies
This account consists of:
2008
At cost:
SIM packs
Call cards and others
Spare parts and supplies
Wireline telephone sets
At NRV:
Handsets and accessories
Spare parts and supplies
Wireline telephone sets
Call cards and others
SIM packs
2007
(In Thousand Pesos)
2006
P
= 107,322
24,200
9,323
–
140,845
P
= 34,453
13,105
8,423
264,404
320,385
P
= 90,405
21,390
7,287
–
119,082
437,023
339,893
200,005
5,262
1,294
983,477
P
= 1,124,322
382,192
310,919
63,476
8,173
27,001
791,761
P
= 1,112,146
520,352
204,675
65,958
8,564
74,864
874,413
P
= 993,495
Inventories recognized as expense during the year amounting to P
= 3,379.28 million,
P
= 3,620.89 million and P
= 4,557.34 million in 2008, 2007 and 2006, respectively, is included as
part of “Cost of sales” and “Provision for inventory obsolescence and market decline” accounts
(see Note 23) in the consolidated statements of income. An insignificant amount is included
under “General, selling and administrative expense” as part of “Utilities, supplies and other
administrative expenses” account (see Note 21).
6. Prepayments and Other Current Assets
This account consists of:
Loan receivable from Globe Telecom
retirement fund
Prepayments
Input VAT - net
Miscellaneous receivables - net
Other current assets - net
Notes
2008
28.10
P
= 800,000
617,379
334,579
431,955
P
=–
534,959
8,521
245,985
P
=–
392,840
43,000
188,263
808,313
P
= 2,992,226
885,539
P
= 1,675,004
630,579
P
= 1,254,682
28.10
16,
25.1d,
28.10
2007
(In Thousand Pesos)
2006
As of December 31, 2008 and 2006, Innove, GXI and EGG reported net input VAT amounting
to P
= 334.58 million and P
= 43.00 million, net of output VAT of P
= 157.05 million and P
= 85.26 million,
respectively. GXI’s net input VAT amounting to P
= 8.52 million as of December 31, 2007 is
presented net of output VAT of P
= 0.16 million.
*SGVMC112197*
- 45 In 2008, the Globe Group granted a loan to the retirement fund amounting to P
= 800.00 million.
The loan bears 6.20% interest and is due in March 2009.
“Other current assets” account includes accrued interest receivable, deferred VAT, creditable
taxes withheld, among others.
7. Property and Equipment
The rollforward analysis of this account follows:
2008
Telecommunications
Equipment
Cost
At January 1
Additions
Retirements/disposals
Reclassifications/adjustments
At December 31
Accumulated Depreciation,
Amortization and
Impairment Losses
At January 1
Depreciation and amortization
Retirements/disposals/adjustments
At December 31
Net Book Value at
December 31
Buildings and
Leasehold
Improvements
Investments in
Cable Systems
Furniture, Transportation
and Work
Fixtures and
Equipment
Equipment
(In Thousand Pesos)
Land
Assets Under
Construction
Total
P
= 139,902,905
5,134,081
(304,569)
4,256,568
148,988,985
P
= 21,364,791
71,342
(5,377)
804,605
22,235,361
P
= 9,928,378
97,936
–
158,894
10,185,208
P
= 5,127,124
494,805
(13,325)
(128,753)
5,479,851
P
= 1,643,361
495,182
(226,391)
213,034
2,125,186
P
= 948,315
547,526
–
–
1,495,841
78,114,745
13,790,032
(668,998)
91,235,779
9,087,641
898,730
(1,483)
9,984,888
3,246,716
672,279
–
3,918,995
4,247,291
593,715
(282,636)
4,558,370
1,071,086
279,015
(97,729)
1,252,372
–
–
–
–
–
–
–
–
P
= 921,481
P
= 872,814
P
= 1,495,841
P
= 13,980,362
P
= 93,540,390
Land
Assets Under
Construction
Total
P
= 57,753,206
P
= 12,250,473
P
= 6,266,213
Telecommunications
Equipment
Buildings and
Leasehold
Improvements
Investments in
Cable Systems
P
= 8,380,425 P
= 187,295,299
13,345,254
20,186,126
(30,008)
(579,670)
(7,715,309)
(2,410,961)
13,980,362
204,490,794
95,767,479
16,233,771
(1,050,846)
110,950,404
2007
Cost
At January 1
Additions
Retirements/disposals
Reclassifications/adjustments
At December 31
Accumulated Depreciation,
Amortization and
Impairment Losses
At January 1
Depreciation and amortization
Retirements/disposals/adjustments
At December 31
Net Book Value at
December 31
P
= 130,620,854
3,253,235
(34,080)
6,062,896
139,902,905
65,330,126
12,973,133
(188,514)
78,114,745
P
= 61,788,160
P
= 20,377,768
145,563
(9,157)
850,617
21,364,791
7,114,230
1,910,873
62,538
9,087,641
P
= 12,277,150
P
= 10,017,962
181,975
–
(271,559)
9,928,378
2,641,340
659,958
(54,582)
3,246,716
P
= 6,681,662
Furniture, Transportation
and Work
Fixtures and
Equipment
Equipment
(In Thousand Pesos)
P
= 4,515,457
269,558
(15,476)
357,585
5,127,124
P
= 1,478,232
316,667
(147,596)
(3,942)
1,643,361
P
= 897,914
–
–
50,401
948,315
P
= 6,643,502 P
= 174,551,689
9,563,221
13,730,219
(50,019)
(256,328)
(7,776,279)
(730,281)
8,380,425
187,295,299
3,439,085
781,626
26,580
4,247,291
974,189
218,888
(121,991)
1,071,086
–
–
–
–
–
–
–
–
P
= 879,833
P
= 572,275
P
= 948,315
P
= 8,380,425
79,498,970
16,544,478
(275,969)
95,767,479
P
= 91,527,820
*SGVMC112197*
- 46 2006
Telecommunications
Equipment
Cost
At January 1
Additions
Retirements/disposals
Reclassifications/adjustments
At December 31
Accumulated Depreciation,
Amortization and
Impairment Losses
At January 1
Depreciation and amortization
Retirements/disposals/adjustments
At December 31
Net Book Value at
December 31
Buildings and
Leasehold
Improvements
Investments in
Cable Systems
Furniture, Transportation
Fixtures and
and Work
Equipment
Equipment
(In Thousand Pesos)
Land
Assets Under
Construction
P
= 124,240,124
2,029,891
(586,074)
4,936,913
130,620,854
P
= 18,936,608
119,722
(41,548)
1,362,986
20,377,768
P
= 9,062,539
1,085,011
–
(129,588)
10,017,962
P
= 4,081,346
371,135
(67,869)
130,845
4,515,457
P
= 1,332,825
301,720
(156,447)
134
1,478,232
P
= 897,914
–
–
–
897,914
52,804,231
13,040,824
(514,929)
65,330,126
5,359,332
1,786,497
(31,599)
7,114,230
2,060,828
622,632
(42,120)
2,641,340
2,615,819
872,593
(49,327)
3,439,085
894,672
205,366
(125,849)
974,189
–
–
–
–
–
–
–
–
P
= 897,914
P
= 6,643,502
P
= 65,290,728
P
= 13,263,538
P
= 7,376,622
P
= 1,076,372
P
= 504,043
Total
P
= 2,875,733 P
= 161,427,089
10,385,091
14,292,570
(16,946)
(868,884)
(6,600,376)
(299,086)
6,643,502
174,551,689
63,734,882
16,527,912
(763,824)
79,498,970
P
= 95,052,719
Assets under construction include intangible components of a network system which are
reclassified to depreciable intangible assets only when assets become available for use.
In 2008, the Group purchased a parcel of land from a related party amounting to
P
= 547.53 million.
Fully depreciated property and equipment still in use amounted to P
= 29,537.04 million,
P
= 15,268.34 million and P
= 10,833.65 million in 2008, 2007 and 2006, respectively.
The carrying values of property and equipment held under finance leases where the Globe
Group is the lessee are immaterial.
The Globe Group’s information about borrowing costs follows:
2008
Capitalized interest
Other capitalized borrowing costs
P
= 465,133
1,059
P
= 466,192
2007
(In Thousand Pesos)
P
= 78,679
20,484
P
= 99,163
2006
P
= 45,530
2,550
P
= 48,080
The Globe Group uses its borrowed funds to finance the acquisition of property and equipment
and bring it to its intended location and working condition. Borrowing costs incurred relating to
these acquisitions were included in the cost of property and equipment using 4.34%, 2.80%
and 1.13% capitalization rates in 2008, 2007 and 2006, respectively.
Investments in cable systems include the cost of the Globe Group’s ownership share in the
capacity of certain cable systems under a joint venture or a consortium or private cable set-up
and indefeasible rights of use (IRUs) of circuits in various cable systems. It also includes the
cost of cable landing station and transmission facilities where the Globe Group is the landing
party.
Disposal of property and equipment resulted in gains of P
= 13.21 million, P
= 13.78 million and
P
= 22.60 million in 2008, 2007 and 2006, respectively.
*SGVMC112197*
- 47 -
8. Investment Property
The rollforward analysis of this account follows:
2008
Cost
At January 1
Additions
Reclassifications/adjustments
At December 31
Accumulated Depreciation
At January 1
Depreciation
Reclassifications/adjustments
At December 31
Net Book Value at December 31
2007
(In Thousand Pesos)
2006
P
= 403,687
–
(13,046)
390,641
P
= 403,687
–
–
403,687
P
= 308,455
95,232
–
403,687
112,480
23,297
(4,359)
131,418
P
= 259,223
89,184
23,296
–
112,480
P
= 291,207
48,917
19,197
21,070
89,184
P
= 314,503
Investment property represents the portion of a building that is currently being held for lease to
third parties (see Note 25.1b). Additions to investment property during the year represent new
leases of office spaces to third parties.
The details of income and expenses related to the investment property follow:
2008
2007
(In Thousand Pesos)
P
= 41,690
P
= 40,570
19,973
23,564
Lease income
Direct expenses
2006
P
= 33,445
40,788
The fair value of the investment property as determined by market data approach, amounted to
P
= 293.53 million based on the report issued by an independent appraiser dated January 6,
2009.
9. Intangible Assets
The rollforward analysis of this account follows:
2008
Cost
At January 1
Additions
Reclassifications*
Disposals
At December 31
Accumulated Amortization
At January 1
Amortization
Reclassifications*
Disposals
At December 31
Net Book Value at December 31
2007
(In Thousand Pesos)
2006
P
= 5,548,510
167,671
1,264,295
(11,904)
6,968,572
P
= 4,626,740
191,738
730,281
(249)
5,548,510
P
= 3,848,130
587,883
191,469
(742)
4,626,740
3,113,887
771,000
104,122
(3,727)
3,985,282
P
= 2,983,290
2,476,422
621,224
16,252
(11)
3,113,887
P
= 2,434,623
1,884,940
590,444
1,044
(6)
2,476,422
P
= 2,150,318
*Reclassification arises from intangibles initially classified as assets under construction under property and equipment and
reclassified to depreciable intangible assets only when assets become available for use.
*SGVMC112197*
- 48 Intangible assets pertain to telecommunications equipment software licenses, corporate
application software and other VAS software applications that are not integral to the hardware
or equipment.
10. Investment in a Joint Venture
Investment in BMPL
Globe Telecom and other leading Asia Pacific mobile operators (JV partners) signed an
Agreement in 2004 (JV Agreement) to form a regional mobile alliance, which will operate
through a Singapore-incorporated company, Bridge Mobile Pte. Ltd. (BMPL). The joint venture
company is a commercial vehicle for the JV partners to build and establish a regional mobile
infrastructure and common service platform and deliver different regional mobile services to
their subscribers.
The other joint venture partners with equal stake in the alliance include Bharti Tele-Ventures
Limited, Maxis Communications Berhad, Optus Mobile Pty. Limited, Singapore Telecom Mobile
Pte. Ltd., Taiwan Cellular Corporation, PT Telekomunikasi Selular and Hongkong CSL Ltd.
Under the JV Agreement, each partner shall contribute USD4.00 million based on an agreed
schedule of contribution. Globe Telecom may be called upon to contribute on dates to be
determined by the JV. As of December 31, 2008, Globe Telecom has invested a total of
USD2.20 million in the joint venture.
This account consists of:
2008
Acquisition cost
Accumulated equity in net losses:
At January 1
Add equity in net losses
At December 31
P
= 111,280
(28,023)
(9,728)
P
= 73,529
2007
(In Thousand Pesos)
P
= 111,280
2006
P
= 56,332
(19,000)
(9,023)
P
= 83,257
(13,166)
(5,834)
P
= 37,332
The Globe Group’s interest in the JV is accounted for as follows:
2008
Assets:
Current
Non-current
Liabilities:
Current
Non-current
Income
Expenses
P
= 79,110
13,014
(8,867)
–
18,083
(27,811)
2007
(In Thousand Pesos)
P
= 93,088
13,319
(10,927)
(3,344)
21,465
(30,344)
2006
P
= 46,160
9,423
(11,262)
(1,300)
15,180
(20,869)
*SGVMC112197*
- 49 -
11. Other Noncurrent Assets
This account consists of:
Notes
Advance payments to suppliers and
contractors
Prepaid pension
Deferred input VAT
Miscellaneous deposits
AFS investment in equity
securities - net
Others - net
18
28.2.4
2008
2007
(In Thousand Pesos)
2006
P
= 2,114,203
1,140,923
751,000
386,678
P
= 992,212
162,754
1,112,370
364,628
P
= 355,959
247,437
938,513
340,134
61,324
20,270
P
= 4,474,398
55,461
218,426
P
= 2,905,851
39,002
87,063
P
= 2,008,108
12. Accounts Payable and Accrued Expenses
This account consists of:
Accrued project costs
Accounts payable
Accrued expenses
Traffic settlements - net
Output VAT
Dividends payable
Notes
2008
25.3
16
16
P
= 5,258,619
5,156,011
4,837,196
1,545,539
174,472
60,637
P
= 17,032,474
17.3
2007
2006
(In Thousand Pesos)
P
= 4,448,646
P
= 4,548,838
6,747,779
5,855,423
4,893,285
4,378,534
2,085,881
1,501,931
210,413
135,870
49,449
64,669
P
= 18,435,453
P
= 16,485,265
Traffic settlements payable are presented net of traffic settlements receivable amounting to
P
= 4,313.98 million, P
= 7,011.72 million and P
= 5,135.88 million as of December 31, 2008, 2007 and
2006, respectively.
Traffic settlements payable is presented net of traffic settlements receivable from the same
carrier based on a currently enforceable legal right to offset the recognized amounts, and there
is an intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously.
As of December 31, 2008 and 2006, Globe Telecom reported net output VAT amounting to
P
= 174.47 million and P
= 135.87 million, net of input VAT of P
= 330.34 million and P
= 156.16 million,
respectively. As of December 31, 2007, Globe Telecom and Innove reported net output VAT
amounting to P
= 210.41 million, net of input VAT of P
= 384.49 million.
“Accrued expenses” account includes accruals for selling, advertising and promotions, rent,
repairs and maintenance, services and other operating expenses.
*SGVMC112197*
- 50 -
13. Provisions
The rollforward analysis of this account follows:
Notes
At beginning of year
Provisions
Reversals
At end of year
23
2008
P
= 219,687
(5,031)
(12,142)
P
= 202,514
2007
2006
(In Thousand Pesos)
P
= 248,310
P
= 231,455
3,179
84,833
(31,802)
(67,978)
P
= 219,687
P
= 248,310
Provisions relate to various pending regulatory claims and assessments over the Globe
Group’s mobile and wireline business. The information usually required by PAS 37, Provisions,
Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be
expected to prejudice the outcome of these claims and assessments. As of February 3, 2009,
the remaining pending regulatory claims and assessments are still being resolved.
The provisions includes Innove’s provision relating to NTC permit fees amounting to
P
= 117.26 million, which were assessed by NTC on March 27, 1996 as required under Section
40 (g) of the Public Service Act. Innove, together with other telecommunications companies,
particularly the members of the Telecommunications Operators of the Philippines, had decided
not to pay the assessed permit fees. Innove has retained these provisions pending the
resolution of the ongoing Supreme Court (SC) case on the matter. The expected timing of the
settlement of the permit fees cannot be anticipated pending resolution of these matters.
14. Notes Payable and Long-term Debt
Notes payable consist of short-term promissory notes from local banks for working capital
requirement amounting to P
= 4,002.16 million and P
= 500.00 million as of December 31, 2008 and
2007, respectively. These notes bear interest ranging from 8.38% to 10.00% and 5.25% per
annum in 2008 and 2007, respectively.
Long-term debt consists of:
2008
Banks:
Local
Foreign
Corporate notes
Retail bonds
2012 Senior Notes
Less current portion
P
= 15,160,390
4,836,265
13,846,398
2,742,885
–
36,585,938
7,742,227
P
= 28,843,711
2007
(In Thousand Pesos)
P
= 6,534,518
6,193,028
14,407,000
2,738,306
–
29,872,852
4,803,341
P
= 25,069,511
2006
P
= 8,475,367
9,365,119
3,607,000
2,990,741
14,768,630
39,206,857
6,271,601
P
= 32,935,256
*SGVMC112197*
- 51 The maturities of long-term debt at nominal values excluding unamortized debt issuance costs
as of December 31, 2008 follow (in thousand pesos):
Due in:
2009
2010
2011
2012
2013 and thereafter
P
= 7,768,533
4,038,723
5,349,325
12,150,275
7,363,750
P
= 36,670,606
Unamortized debt issuance costs on retail bonds included in the above long-term debt as of
December 31, 2008 amounted to P
= 84.67 million.
The interest rates and maturities of the above loans are as follows:
Maturities
Interest Rates
2009-2012
3.14% to 6.44% in 2008
5.65% to 8.61% in 2007
4.20% to 8.62% in 2006
2009-2013
5.21% to 9.11% in 2008
5.09% to 11.02% in 2007
6.22% to 11.02% in 2006
Corporate notes
2011-2013
5.77% to 13.79% in 2008
5.15% to 16.00% in 2007
6.22% to 16.00% in 2006
Retail bonds
2009
5.49% to 11.70% in 2008
5.16% to 11.70% in 2007
6.57% to 11.83% in 2006
Banks:
Foreign
Local
14.1 Bank Loans and Corporate Notes
Globe Telecom’s unsecured corporate notes, which consist of fixed and floating rate notes
and peso-denominated bank loans, bear interest at stipulated and prevailing market rates.
The US dollar-denominated unsecured loans extended by commercial banks bear interest
based on US Dollar London Interbank Offered Rate (USD LIBOR) or Commercial Interest
Reference Rate (CIRR) plus margins.
The loan agreements with banks and other financial institutions provide for certain
restrictions and requirements with respect to, among others, maintenance of financial
ratios and percentage of ownership of specific shareholders, incurrence of additional longterm indebtedness or guarantees and creation of property encumbrances.
14.2 Retail Bonds
The retail bonds are with fixed and floating interest rates based on MART 1 plus margins.
The retail bonds have maturities ranging from 3 to 5 years. The retail bonds may be
redeemed in whole, but not in part, at any time, by giving not less than 30 nor more than
60 days prior notice, at a price equal to 100% of the principal amount of the bonds,
together with accrued and unpaid interest to the date fixed for redemption, if Globe
Telecom will pay additional amounts due to change in tax and/or other regulations.
*SGVMC112197*
- 52 The agreements covering the retail bonds provide conditional restrictions with respect to,
among others, maintenance of certain financial ratios, sale, transfer, assignment or
disposal of assets and creation of property encumbrances.
14.3 Senior Notes
Globe Telecom’s 2012 redeemable Senior Notes was issued on April 4, 2002 bearing
interest at 9.75% p.a and maturing on April 12, 2012.
The 2012 Senior Notes provided certain restrictions, which includes among others,
incurrence of additional debt, certain dividend payments, liens, repayments of certain
debts, merger/consolidation and sale of assets in general.
On August 22, 2006 and September 1, 2006, Globe Telecom repurchased
USD6.46 million in face value of its 2012 Senior Notes. Bond redemption costs (included
in “Financing costs” account) incurred in 2006 amounted to P
= 23.24 million.
On February 23, 2007, Globe Telecom exercised its option to call its USD293.54 million
2012 Senior Notes via an irrevocable notice issued to the Agent, the Bank of New York.
On April 16, 2007, Globe Telecom fully settled and redeemed the 2012 Senior Notes
through the Agent (see Note 28.3).
Under the bond indenture, Globe Telecom was liable to pay the bondholders 104.875% of
the outstanding principal of the 2012 Senior Notes. Globe Telecom charged to other
financing costs (included in the “Financing costs” account) the bond redemption premium
of 4.875%, accelerated the unamortized bond premium of P
= 356.48 million over the
remaining period up to settlement, and derecognized the carrying value of the bifurcated
call option on the Senior Notes of P
= 971.18 million (see Note 28.3).
Consequently, the total amount of bond redemption-related financing costs incurred for
the year ended December 31, 2007 amounted to P
= 1,301.51 million of which the cash
component amounted to only P
= 686.81 million, representing the 4.875% bond redemption
premium (see Note 22).
Loss on derivative instruments for the year ended December 31, 2007 includes the losses
on the bond option value prior to the bond call date amounting to P
= 454.09 million.
Following the bond redemption, the mark-to-market losses amounting to P
= 263.88 million
on Globe Telecom’s cross currency swaps entered into to hedge the Senior Notes and
deferred under “Cumulative translation adjustment” account was charged to consolidated
statements of income in 2007 (see Note 22).
As of February 3, 2009, Globe Telecom is not in breach of any loan covenants.
*SGVMC112197*
- 53 -
15. Other Long-term Liabilities
This account consists of:
ARO
Noninterest bearing liabilities
Accrued lease obligations and
others
Advance lease
Notes
2008
25.4, 28.2.5
P
= 1,081,408
821,805
25.1
25.4
Less current portion
591,642
79,929
2,574,784
99,145
P
= 2,475,639
2007
2006
(In Thousand Pesos)
P
= 1,623,830
P
= 1,316,612
830,637
1,062,635
564,881
85,030
3,104,378
86,416
P
= 3,017,962
470,331
114,094
2,963,672
93,422
P
= 2,870,250
The maturities of other long-term liabilities at nominal amounts as of December 31, 2008 follow
(in thousand pesos):
Due in:
2009
2010
2011
2012
2013 and thereafter
P
= 98,117
105,889
114,363
123,605
2,132,810
P
= 2,574,784
In 2008, Globe Group updated its assumptions on timing of settlement and estimated cash
outflows arising from ARO on its leased premises. As a result of the changes in estimates
reckoned as of January 1, 2008, Globe Group adjusted downward its ARO liability (included
under “Other long-term liabilities” account) by P
= 714.78 million against the book value of the
assets on leased premises.
The rollforward analysis of the Globe Group’s ARO follows:
Notes
At beginning of year
Capitalized to property and equipment
during the year - net of reversal
Accretion expense during the year
Adjustments due to changes in
estimates
At end of year
2008
P
= 1,623,830
30
22
95,086
77,269
(714,777)
P
= 1,081,408
2007
2006
(In Thousand Pesos)
P
= 1,316,612
P
= 907,053
150,051
157,167
281,557
128,002
–
P
= 1,623,830
–
P
= 1,316,612
*SGVMC112197*
- 54 -
16. Related Party Transactions
Globe Telecom and Innove, in their regular conduct of business, enter into transactions with
their major stockholders, AC and STI, and certain related parties. These transactions, which
are accounted for at market prices normally charged to unaffiliated customers for similar goods
and services, include the following:
16.1 Globe Telecom
(a) Globe Telecom has interconnection agreements with STI. The related net traffic
settlements receivable (included in “Receivables” account in the consolidated balance
sheets) and the interconnection revenues (included in “Service revenues” account in
the consolidated statements of income) earned are as follows:
2008
Traffic settlements receivable - net
Interconnection revenues
P
= 216,348
1,817,912
2007
2006
(In Thousand Pesos)
P
= 63,391
P
= 61,061
1,573,686
1,028,552
(b) Globe Telecom and STI have a technical assistance agreement whereby STI will
provide consultancy and advisory services, including those with respect to the
construction and operation of Globe Telecom’s networks and communication
services, equipment procurement and personnel services. In addition, Globe
Telecom has software development, supply, license and support arrangements, lease
of cable facilities, maintenance and restoration costs and other transactions with STI.
The details of fees (included in repairs and maintenance under the “General, selling
and administrative expenses” account in the consolidated statements of income)
incurred under these agreements are as follows:
2008
Maintenance and restoration costs
and other transactions
Software development, supply,
license and support
Technical assistance fee
2007
(In Thousand Pesos)
2006
P
= 216,813
P
= 201,576
P
= 240,542
2,637
83,514
2,074
86,935
29,467
78,872
The net outstanding balances due to STI (included in the “Accounts payable and
accrued expenses” account in the consolidated balance sheets) arising from these
transactions are as follows:
2008
Maintenance and restoration costs
and other transactions
Software development, supply,
license and support
Technical assistance fee
2007
(In Thousand Pesos)
2006
P
= 115,243
P
= 54,047
P
= 24,203
28,569
23,838
14,218
25,080
31,004
25,606
*SGVMC112197*
- 55 (c) Globe Telecom reimburses AC for certain operating expenses. The net outstanding
liabilities to AC related to these transactions as of December 31, 2008 are not
material.
(d) Globe Telecom has preferred roaming service contract with BMPL. Under this
contract, Globe Telecom will pay BMPL for services rendered by the latter which
include, among others, coordination and facilitation of preferred roaming arrangement
among JV partners, and procurement and maintenance of telecommunications
equipment necessary for delivery of seamless roaming experience to customers.
Globe Telecom also earns or incurs commission from BMPL for regional top-up
service provided by the JV partners. As of December 31, 2008, balances related to
these transactions were not material.
The summary of consolidated outstanding balances resulting from transactions with
related parties follows:
Traffic settlements receivable - net
(included in “Receivables”
account)
Other current assets
Accounts payable and accrued
expenses
Notes
2008
2007
(In Thousand Pesos)
2006
4
6
P
= 216,348
2,602
P
= 63,391
1,925
P
= 61,061
1,651
12
191,331
121,820
100,413
The Globe Group’s compensation of key management personnel by benefit type are as
follows:
Short-term employee benefits
Share-based payments
Post-employment benefits
Notes
2008
18
18
P
= 1,833,508
182,324
112,620
P
= 2,128,452
2007
2006
(In Thousand Pesos)
P
= 1,499,760
P
= 1,223,191
129,914
161,628
65,563
33,850
P
= 1,695,237
P
= 1,418,669
There are no agreements between the Globe Group and any of its directors and key
officers providing for benefits upon termination of employment, except for such benefits to
which they may be entitled under the Globe Group’s retirement plans.
17. Equity
Globe Telecom’s authorized capital stock consists of:
Shares
Preferred stock - Series “A” P
= 5 per share
Common stock - P
= 50 per share
2008
2007
2006
Amount
Shares
Amount
Shares
Amount
(In Thousand Pesos and Number of Shares)
250,000 P
= 1,250,000
179,934 8,996,719
250,000 P
= 1,250,000
179,934 8,996,719
250,000 P
= 1,250,000
179,934 8,996,719
*SGVMC112197*
- 56 Globe Telecom’s issued and subscribed capital stock consists of:
2008
2007
2006
Amount
Shares
Amount
Shares
Amount
(In Thousand Pesos and Number of Shares)
158,515 P
= 792,575
158,515 P
= 792,575
158,515 P
= 792,575
132,340 6,617,008
132,334 6,616,677
132,080 6,603,989
(1,508)
(42,250)
(46,910)
P
= 7,408,075
P
= 7,367,002
P
= 7,349,654
Shares
Preferred stock
Common stock
Subscriptions receivable
17.1 Preferred Stock
Preferred stock - Series “A” has the following features:
(a) Convertible to one common share after 10 years from issue date at not less than the
prevailing market price of the common stock less the par value of the preferred
shares;
(b) Cumulative and nonparticipating;
(c) Floating rate dividend;
(d) Issued at P
= 5 par;
(e) With voting rights;
(f) Globe Telecom has the right to redeem the preferred shares at par plus accrued
dividends at any time after 5 years from date of issuance; and
(g) Preferences as to dividend in the event of liquidation.
The dividends for preferred shares are declared upon the sole discretion of the Globe
Telecom’s BOD. As of December 31, 2008, the Globe Group has no dividends in arrears
to its preferred stockholders.
17.2 Common Stock
The rollforward of outstanding common shares are as follows:
Shares
At beginning of year
Exercise of stock options
At end of year
2008
2007
2006
Amount
Shares
Amount
Shares
Amount
(In Thousand Pesos and Number of Shares)
132,334 P
= 6,616,677
6
331
132,340 P
= 6,617,008
132,080 P
= 6,603,989
254
12,688
132,334 P
= 6,616,677
131,900 P
= 6,595,022
180
8,967
132,080 P
= 6,603,989
*SGVMC112197*
- 57 17.3 Cash Dividends
Information on Globe Telecom’s BOD declaration of cash dividends follows:
Date
Per
share
Preferred stock dividends declared on:
December 11, 2006
December 7, 2007
December 2, 2008
Common stock dividends declared on:
February 7, 2006
July 31, 2006
February 5, 2007
August 10, 2007
November 6, 2007
February 4, 2008
August 5, 2008
Amount
Record
Payable
(In Thousand Pesos, Except Per Share Figures)
P
= 0.41
0.31
0.38
P
= 64,669
49,449
60,637
20.00
30.00
33.00
33.00
50.00
37.50
87.50
2,638,072
3,961,745
4,359,650
4,362,385
6,616,708
4,962,508
11,579,763
December 31, 2006 March 15, 2007
December 18, 2007 March 17, 2008
December 18, 2008 March 17, 2009
February 21, 2006
August 17, 2006
February 19, 2007
August 29, 2007
November 20, 2007
February 18, 2008
August 21, 2008
March 15, 2006
September 12, 2006
March 15, 2007
September 14, 2007
December 17, 2007
March 13, 2008
September 15, 2008
On January 29, 2004, the BOD of Globe Telecom approved a dividend policy to declare
cash dividends to its common stockholders on a regular basis as may be determined by
the BOD from time to time. The BOD had set out a dividend payout rate of approximately
50% of prior year’s net income payable semi-annually in March and September of each
year. This will be reviewed annually, taking into account Globe Telecom’s operating
results, cash flows, debt covenants, capital expenditure levels and liquidity.
On July 31, 2006, the BOD of Globe Telecom amended the dividend policy increasing the
dividend payout rate at approximately 75% of prior year’s net income to be implemented
starting 2006’s second semi-annual cash dividend declaration.
On November 6, 2007, the BOD declared a special cash dividend of P
= 50 per common
share based on shareholders on record as of November 20, 2007 with the payment date
of December 17, 2007. The special dividend was in consideration of the record
profitability and strong operating cash flows of Globe Telecom, and to optimize Globe
Telecom’s capital structure and enhance shareholder value.
On August 5, 2008, the BOD approved the declaration of the second semi-annual cash
dividends in 2008 of P
= 4,962.61 million (P
= 37.50 per common share) and additional special
dividend of P
= 6,616.81 million (P
= 50.00 per common share) to common stockholders of
record as of August 21, 2008 and payable on September 15, 2008.
Cash Dividends Declared After Balance Sheet Date
On February 3, 2009, the BOD approved the declaration of the first semi-annual cash
dividend of P
= 32 per common share, payable to shareholders on record as of February 17,
2009. Total dividends of P
= 4.234.88 million will be paid on March 10, 2009.
*SGVMC112197*
- 58 17.4 Retained Earnings Available for Dividend Declaration
The total unrestricted retained earnings available for dividend declaration amounted to
P
= 12,061.77 million as of December 31, 2008. This amount excludes the undistributed net
earnings of consolidated subsidiaries, accumulated equity in net earnings of a joint
venture accounted for under the equity method, and unrealized gains recognized on
asset and liability currency translations and fair value adjustments. The Globe Group is
also subject to loan covenants that restrict its ability to pay dividends (see Note 14).
18. Employee Benefits
18.1 Stock Option Plans
The Globe Group has a stock-based compensation plan called the Executive Stock
Option Plan (ESOP). The number of shares allocated under the plans shall not exceed
the aggregate equivalent of 6% of the authorized capital stock.
On August 1, 2008, the Globe Group granted additional stock options to key executives
and senior management personnel under the ESOP. The grant requires the grantees to
pay a nonrefundable option purchase price of P
= 1,000.00 until September 30, 2008, which
is the closing date for the acceptance of the offer. In order to avail of the privilege, the
grantees must remain with Globe Telecom or its affiliates from grant date up to the
beginning of the exercise period of the corresponding shares.
The following are the stock option grants to key executives and senior management
personnel of the Globe Group under the ESOP from 2003 to 2008:
Date of Grant
April 4, 2003
Number of
Options
Granted
680,200
Exercise Price
P
= 547.00 per share
Exercise Dates
50% of options exercisable from
April 4, 2005 to April 14, 2013; the
remaining 50% exercisable from
April 4, 2006 to April 14, 2013
July 1, 2004
803,800
P
= 840.75 per share
50% of options exercisable from
July 1, 2006 to June 30, 2014; the
remaining 50% from July 1, 2007
to June 30, 2014
P
= 357.94
Black-Scholes
option pricing
model
June 30, 2006
749,500
P
= 854.75 per share
50% of the options become
exercisable from March 24, 2008
to March 23, 2016; the remaining
50% become exercisable from
March 24, 2009 to March 23,
2016
P
= 292.12
Trinomial option
pricing model
May 17, 2007
604,000
P
= 1,270.50 per
50% of the options become
share exercisable from May 17, 2009 to
May 16, 2017, the remaining 50%
become exercisable from May 17,
2010 to May 16, 2017
P
= 375.89
Trinomial option
pricing model
August 1, 2008
635,750
P
= 1,064.00 per
share
P
= 305.03
Trinomial option
pricing model
50% of the options become
exercisable from August 1, 2010
to July 31, 2018, the remaining
50% become exercisable from
August 1, 2011 to July 31, 2018
Fair Value
of each
Option
P
= 283.11
Fair Value
Measurement
Black-Scholes
option pricing
model
*SGVMC112197*
- 59 The exercise price is based on the average quoted market price for the last 20 trading
days preceding the approval date to offer the stock options.
A summary of the Globe Group’s stock option activity and related information follows:
Outstanding, at beginning of year
Granted
Exercised
Expired/forfeited
Outstanding, at end of year
Exercisable, at end of year
2008
2007
2006
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Number of Exercise
Number of
Number of
Shares
Price
Shares
Price
Shares
Price
(In Thousands and Per Share Figures)
1,617,114
P
=994.57
1,590,940 P
= 811.62
1,281,350
P
= 730.01
650,450
1,052.32
604,000 1,270.50
749,500
854.75
(247,332)
846.80
(465,776)
782.32
(435,810)
647.80
(90,500)
935.02
(112,050)
766.69
(4,100)
604.32
1,929,732
P
=1,035.76
1,617,114 P
= 994.57
1,590,940
P
= 811.62
363,032
P
=792.12
309,614 P
= 785.65
447,540
P
= 712.80
The average share prices at dates of exercise of stock options as of December 31, 2008,
2007 and 2006 amounted to P
= 1,461.82, P
= 1,242.57 and P
= 989.03, respectively.
As of December 31, 2008, 2007 and 2006, the weighted average remaining contractual
life of options outstanding is 8.13 years, 8.29 years and 8.17 years, respectively.
The following assumptions were used to determine the fair value of the stock options at
effective grant dates:
Share price
Exercise price
Expected volatility
Option life
Expected dividends
Risk-free interest
rate
August 1, 2008 May 17, 2007 June 30, 2006
P
= 1,130.00
P
= 1,340.00
P
= 930.00
P
= 1,064.00
P
= 1,270.50
P
= 854.75
31.73%
38.14%
29.51%
10 years
10 years
10 years
6.64%
4.93%
5.38%
9.62%
7.04%
10.30%
July 1, 2004
P
= 835.00
P
= 840.75
39.50%
10 years
4.31%
12.91%
April 4, 2003
P
= 580.00
P
= 547.00
34.64%
10 years
2.70%
11.46%
The expected volatility measured at the standard deviation of expected share price
returns was based on analysis of share prices for the past 365 days.
Cost of share-based payments for the years ended December 31, 2008, 2007 and 2006
amounted to P
= 182.32 million, P
= 129.91 million and P
= 161.63 million, respectively.
18.2 Pension Plan
The Globe Group has a funded, noncontributory, defined benefit pension plan covering
substantially all of its regular employees. The benefits are based on years of service and
compensation on the last year of employment.
*SGVMC112197*
- 60 The components of pension expense (included in staff costs under “General, selling and
administrative expenses”) in the consolidated statements of income are as follows:
2008
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial losses (gains)
Total pension expense
Actual return (loss) on plan assets
P
= 221,289
136,160
(138,301)
28,314
P
= 247,462
(P
= 184,599)
2007
2006
(In Thousand Pesos)
P
= 168,374
P
= 92,191
80,224
67,443
(127,872)
(108,839)
11,157
(2,605)
P
= 131,883
P
= 48,190
P
= 96,495
P
= 222,688
The funded status for the pension plan of Globe Group is as follows:
2008
Benefit obligation
Plan assets
Unrecognized net actuarial losses
Asset recognized in the consolidated
balance sheets*
P
= 1,319,742
(2,344,764)
(1,025,022)
(115,403)
(P
= 1,140,425)
2007
2006
(In Thousand Pesos)
P
= 1,690,615
P
= 1,267,209
(1,341,568)
(1,254,906)
349,047
12,303
(511,801)
(259,740)
(P
= 162,754)
(P
= 247,437)
*Of this amount, P
= 1,140.92 million is included in “Other noncurrent assets” account, while the P
= 0.50 million is
included in “Accrued expenses” under “Accounts payable and accrued expenses” account.
The following tables present the changes in the present value of defined benefit obligation
and fair value of plan assets:
Present value of defined benefit obligation
2008
Balance at beginning of year
Interest cost
Current service cost
Benefits paid
Actuarial losses (gains)
Balance at end of year
2007
2006
(In Thousand Pesos)
P
= 1,690,615
P
= 1,267,209
P
= 648,825
136,160
80,224
67,443
221,289
168,374
92,191
(58,635)
(62,354)
(87,941)
(640,381)
233,443
521,104
P
= 1,319,742
P
= 1,690,615
P
= 1,267,209
Fair value of plan assets
2008
Balance at beginning of year
Expected return
Contributions
Benefits paid
Actuarial gains (losses)
Balance at end of year
2007
2006
(In Thousand Pesos)
P
= 1,341,568
P
= 1,254,906
P
= 1,066,441
138,301
127,872
108,839
1,225,345
47,200
31,603
(87,941)
(58,635)
(62,354)
(272,509)
(29,775)
110,377
P
= 2,344,764
P
= 1,341,568
P
= 1,254,906
The Globe Group does not expect to make additional contributions to its retirement fund in
2009.
*SGVMC112197*
- 61 As of December 31, 2008, the allocation of the fair value of the plan assets of the Globe
Group follows:
Investments in fixed income securities:
Corporate
Government
Investments in equity securities
Others
Payables
69.38%
12.80%
15.76%
36.53%
(34.47%)
In 2008, Globe, Innove and GXI pooled its plan assets for single administration by the
fund managers. The EGGC retirement fund is being managed separately and the defined
benefit obligation is immaterial.
The allocation of the fair value of the plan assets of Globe Telecom as of December 31
follows:
2007
68.00%
30.00%
2.00%
Investments in debt securities
Investments in equity securities
Others
2006
72.00%
25.00%
3.00%
The allocation of the fair value of the plan assets of Innove as of December 31 follows:
2007
66.00%
32.00%
2.00%
Investments in debt securities
Investments in equity securities
Others
2006
74.00%
17.00%
9.00%
As of December 31, 2008, the pension plan assets of Globe Telecom and Innove include
shares of stock of Globe Telecom with total fair value of P
= 38.70 million, and shares of
stock of other related parties with total fair value of P
= 61.87 million.
The assumptions used to determine pension benefits of Globe Telecom and Innove are
as follows:
Discount rate
Expected rate of return on plan assets
Salary rate increase
2008
12.33%
10.00%
7.00%
2007
8.25%
10.00%
7.00%
2006
6.25% - 7.00%
10.30%
6.50%
In 2008, the Globe Group applied a single weighted average discount rate that reflects the
estimated timing and amount of benefit payments and the currency in which the benefits
are to be paid. In 2007 and 2006, the Globe Group used risk-free interest rates of
government securities that have terms to maturity approximating the terms of the related
pension liabilities.
The overall expected rate of return on plan assets is determined based on the market
prices prevailing on that date, applicable to the period over which the obligation is to be
settled.
*SGVMC112197*
- 62 Amounts for the current and previous four years are as follows:
2008
Defined benefit
obligation
Plan assets
Deficit (surplus)
2007
2006
(In Thousand Pesos)
P
= 1,319,742
2,344,764
(1,025,022)
P
= 1,690,615
1,341,568
349,047
Experience adjustments:
Loss on plan liabilities
Gain (loss) on plan assets
P
= 1,267,209
1,254,906
12,303
2005
2004
P
= 648,825
1,066,441
(417,616)
603,622
1,018,309
(414,687)
2008
2007
(In Thousand Pesos)
2006
(51,340)
(272,539)
(170,819)
29,780
(72,590)
102,010
19. Interest Income
Interest income is earned from the following sources:
2008
Short-term placements
Cash in banks
Others
P
= 394,824
23,033
2,568
P
= 420,425
2007
(In Thousand Pesos)
P
= 566,358
161,630
633
P
= 728,621
2006
P
= 640,545
212,755
1,565
P
= 854,865
20. Other Income
This account consists of:
Rent
Foreign exchange gain - net
Miscellaneous
Notes
2008
8, 25b
28
P
= 210,003
–
515,708
P
= 725,711
2007
2006
(In Thousand Pesos)
P
= 220,258
P
= 229,488
1,431,214
1,706,387
153,009
215,695
P
= 1,804,481
P
= 2,151,570
The peso to US dollar exchange rates amounted to P
= 47.655, P
= 41.411 and P
= 49.045 as of
December 31, 2008, 2007 and 2006, respectively.
The Globe Group’s net foreign currency-denominated liabilities amounted to USD85.37 million,
USD188.16 million and USD408.88 million as of December 31, 2008, 2007 and 2006,
respectively (see Note 28).
These combinations of net liability movements and peso rate depreciation/appreciation resulted
in foreign exchange loss in 2008 (see Note 22) and gain in 2007 and 2006.
*SGVMC112197*
- 63 -
21. General, Selling and Administrative Expenses
This account consists of:
Staff costs
Selling, advertising and promotions
Rent
Utilities, supplies and other
administrative expenses
Repairs and maintenance
Professional and other contracted
services
Insurance and security services
Others
Notes
2008
2007
2006
(In Thousand Pesos)
P
= 4,536,508
P
= 3,564,239
4,469,486
3,524,546
2,569,773
2,080,746
18
25
P
= 5,076,635
4,494,329
2,883,397
5
16
2,709,850
2,495,162
2,243,308
2,205,476
2,121,369
2,122,192
2,429,615
1,731,878
1,936,260
P
= 23,757,126
1,831,121
1,578,296
1,870,505
P
= 21,304,473
1,394,191
1,441,091
1,832,557
P
= 18,080,931
“Others” account includes miscellaneous expenses, taxes and licenses, delivery charges and
various other items that are individually immaterial.
22. Financing Costs
This account consists of:
Notes
Interest expense*
Foreign exchange loss - net
Loss (gain) on derivative instruments
Swap and other financing costs - net
20
14.3, 28
14.3
2008
2007
2006
(In Thousand Pesos)
P
= 2,255,878
P
= 2,996,347
P
= 4,213,976
759,299
–
–
(1,681)
801,617
338,061
(13,105)
1,426,975
426,712
P
= 3,000,391
P
= 5,224,939
P
= 4,978,749
*This account is net of capitalized expense (see Note 7).
Interest expense is incurred on the following:
Notes payable and long-term debt
Accretion expense
Suppliers’ credit
Others
Notes
2008
14
15, 25.4
P
= 2,035,281
163,206
–
57,391
P
= 2,255,878
2007
2006
(In Thousand Pesos)
P
= 2,726,466
P
= 3,982,743
268,390
228,768
–
1,993
1,491
472
P
= 2,996,347
P
= 4,213,976
In 2007 and 2006, net foreign exchange gain was presented as part of “Other income - net”
account in the consolidated statements of income.
*SGVMC112197*
- 64 -
23. Impairment Losses and Others
This account consists of:
2008
Impairment loss (reversal of impairment
loss) on:
Receivables
Property and equipment
Provisions for (reversal of):
Inventory obsolescence and market decline
Other probable losses
2007
(In Thousand Pesos)
P
= 979,779
(31,172)
262,103
(5,031)
P
= 1,205,679
2006
P
= 711,396
(71,431)
P
= 422,834
88,673
298,116
3,179
P
= 941,260
(61,392)
84,833
P
= 534,948
24. Income Tax
The significant components of the deferred income tax assets and liabilities of the Globe Group
represent the deferred income tax effects of the following:
2008
Deferred income tax assets on:
Unearned revenues already subjected to
income tax
Allowance for impairment losses on receivables
ARO
Unrealized foreign exchange losses
Accrued rent expense
Inventory obsolescence and market decline
Accumulated impairment losses on property and
equipment
Accrued vacation leave
Provision for other probable losses
Cost of share-based payments
Unrealized loss on derivative transactions
Others
Deferred income tax liabilities on:
Excess of accumulated depreciation and
amortization of Globe Telecom equipment for
tax purposes (a) over financial reporting
purposes (b)
Undepreciated capitalized borrowing costs
already claimed as deduction for tax purposes
Unamortized discount on noninterest bearing
liability
Prepaid pension
Unrealized foreign exchange gain
Unrealized gains on derivative transactions
Net deferred income tax liabilities
(a) Sum-of-the-years digit method
(b) Straight-line method
2007
(In Thousand Pesos)
2006
P
= 1,003,875
369,120
317,732
231,086
122,030
94,045
P
= 686,740
496,717
291,520
–
110,959
73,017
P
= 484,780
954,927
212,967
–
91,212
47,374
67,195
52,095
27,928
7,796
4,993
235
2,298,130
126,320
68,129
38,829
300,714
–
489
2,193,434
190,290
57,591
48,847
155,520
–
14,525
2,258,033
5,644,695
5,150,375
5,077,030
591,238
1,404,139
1,369,788
108,041
12,349
–
–
6,356,323
P
= 4,058,193
133,822
49,454
264,485
56,328
7,058,603
P
= 4,865,169
164,094
69,291
241,894
74,072
6,996,169
P
= 4,738,136
*SGVMC112197*
- 65 Net deferred tax assets and liabilities presented in the consolidated balance sheets on a net
basis by entity are as follows:
2008
Net deferred tax assets (Innove)
Net deferred tax liabilities (Globe Telecom)
2007
2006
(In Thousand Pesos)
P
= 637,721
P
= 801,863
5,502,890
5,539,999
P
= 523,722
4,581,915
Net deferred tax assets and liabilities of GXI and EGGC are immaterial.
The details of GXI’s NOLCO are as follows (in thousand pesos):
Inception Year
2006
2007
2008
Amount
P
= 36,720
47,823
61,799
P
= 146,342
Expiry Year
2009
2010
2011
GXI’s NOLCO amounting to P
= 18.18 million expired in 2008.
The remaining balance of unexpired NOLCO of GXI, which can be claimed as a deduction from
taxable income in future years, was not recognized since there is no assurance that GXI will
generate sufficient taxable income to allow all or part of its NOLCO to be utilized.
The reconciliation of the provision for income tax at statutory tax rate and the actual current
and deferred provision for income tax follows:
2008
Provision at statutory income tax rate
Add (deduct) tax effects of:
Deferred tax on unexercised stock options
and basis differences on deductible and
reported stock compensation expense
Tax rate difference arising from the change
in expected timing of deferred tax
assets’/liabilities’ reversal
Equity in net losses of a joint venture
Income subjected to lower tax rates
Others
Actual provision for income tax
P
= 6,246,107
2007
2006
(In Thousand Pesos)
P
= 7,017,622
P
= 6,159,543
294,620
25,911
3,405
(77,364)
77,463
P
= 6,570,142
(205,738)
(112,168)
(84,299)
3,158
(107,454)
150,040
P
= 6,773,329
(238,374)
2,042
(96,045)
129,022
P
= 5,844,020
The current provision for income tax includes the following:
2008
Regular corporate income tax
Final tax
2007
2006
(In Thousand Pesos)
P
= 7,194,104
P
= 6,723,422
P
= 4,251,899
74,480
117,818
139,528
P
= 7,268,584
P
= 6,841,240
P
= 4,391,427
Starting 2009, the corporate tax rate shall decrease from 35% to 30%.
*SGVMC112197*
- 66 Globe Telecom and Innove are entitled to certain tax and nontax incentives and has availed of
incentives for tax and duty-free importation of capital equipment for its services under its
franchise.
25. Agreements and Commitments
25.1 Lease Commitments
(a) Operating lease commitments - Globe Group as lessee
Globe Telecom and Innove lease certain premises for some of its
telecommunications facilities and equipment and for most of its business centers
and cell sites. The operating lease agreements are for periods ranging from 1 to 10
years from the date of the contracts and are renewable under certain terms and
conditions. The agreements generally require certain amounts of deposit and
advance rentals, which are shown as part of the “Other noncurrent assets” account
in the consolidated balance sheets. The Globe Group also has short term
renewable leases on transmission cables and equipment. The Globe Group’s
rentals incurred on these leases (included in “General, selling and administrative
expenses” account in the consolidated statements of income) amounted to
P
= 2,883.40 million, P
= 2,569.77 million and P
= 2,080.75 million for the years ended
December 31, 2008, 2007 and 2006, respectively (see Note 21).
As of December 31, 2008, the future minimum lease payments under this operating
lease are as follows (in thousand pesos):
Not later than one year
After one year but not more than five years
After five years
(b)
P
= 2,469,300
8,013,595
2,588,834
P
= 13,071,729
Operating lease commitments - Globe Group as lessor
Globe Telecom and Innove have certain lease agreements on equipment and office
spaces. The operating lease agreements are for periods ranging from 1 to 14 years
from the date of contracts. These include Globe Telecom’s lease agreement with
C2C Pte.Ltd. (C2C) (see related discussion on Agreements with C2C).
Total lease income amounted to P
= 198.10 million, P
= 207.73 million and
P
= 215.52 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
*SGVMC112197*
- 67 The future minimum lease receivables under these operating leases are as follows
(in thousand pesos):
Within one year
After one year but not more than five years
After five years
(c)
P
= 201,180
680,359
382,702
P
= 1,264,241
Finance lease commitments - Globe Group as lessee and lessor
Globe Telecom and Innove have entered into finance lease agreements for various
items of property and equipment. The said leased assets are capitalized and are
depreciated over its EUL of three years, which is also equivalent to the lease term.
As of December 31, 2008, 2007 and 2006, residual present value of net minimum
lease payments due and receivable are immaterial.
25.2 Agreements and Commitments with Other Carriers
Globe Telecom and Innove have existing correspondence agreements with various
foreign administrations and interconnection agreements with local telecommunications
companies for their various services. Globe and Innove also have international roaming
agreements with other operators in foreign countries, which allow its subscribers access to
foreign networks. The agreements provide for sharing of toll revenues derived from the
mutual use of interconnection facilities.
25.3 Arrangements and Commitments with Suppliers
Globe Telecom and Innove have entered into agreements with various suppliers for the
delivery, installation, or construction of their property and equipment. Under the terms of
these agreements, delivery, installation or construction commences only when purchase
orders are served. Billings are based on the progress of the project installation or
construction. While the construction is in progress, project costs are accrued based on
the billings received. When the installation or construction is completed and the property
is ready for service, the balance of the related purchase orders is accrued. The
consolidated accrued project costs as of December 31, 2008, 2007 and 2006 included in
the “Accounts payable and accrued expenses” account in the consolidated balance
sheets amounted to P
= 5,258.62 million, P
= 4,448.65 million and P
= 4,548.84 million,
respectively (see Note 12). As of December 31, 2008, the consolidated expected future
payments amounted to P
= 17,387.80 million. The settlement of these liabilities is
dependent on the payment terms agreed with the supplier.
Globe Telecom entered into an agreement with Nokia Siemens Network, GMBH for the
latter to buy Globe Telecom’s existing Nokia Intelligent Network (Nokia IN) platforms,
utilized for its prepaid billing and charging operations upon decommissioning. The sale is
expected to result in a gain equivalent to the difference between the contract amount and
the carrying amount of the Nokia IN platforms in 2009 when the conditions for the sale
transaction are fulfilled.
*SGVMC112197*
- 68 25.4 Agreements with C2C
In 2001, Globe Telecom signed a cable equipment supply agreement with C2C. In
March 2002, Globe Telecom entered into an equipment lease agreement for the same
equipment obtained from C2C with GB21 Hong Kong Limited (GB21).
Subsequently, GB21, in consideration of C2C’s agreement to assume all payment
obligations pursuant to the lease agreement, assigned all its rights, obligations and
interest in the equipment lease agreement to C2C. As a result of the said assignment of
receivables and payables by GB21 and C2C under the two agreements, Globe Telecom’s
liability arising from the cable equipment supply agreement with C2C was effectively
converted into a noninterest bearing long-term obligation accounted for at net present
value under PAS 39 starting 2005 with carrying values amounting to P
= 821.81 million,
P
= 830.64 million and P
= 1,062.64 million as of December 31, 2008, 2007 and 2006,
respectively (see Note 15).
In January 2003, Globe Telecom received advance lease payments from C2C for its use
of a portion of Globe Telecom’s cable landing station facilities amounting to
USD4.11 million. Accordingly, based on agreed amortization schedule, Globe Telecom
recognized lease income amounting to P
= 11.90 million, P
= 12.53 million and P
= 13.97 million
for the years ended December 31, 2008, 2007 and 2006, respectively.
The current and noncurrent portions of the said advances shown as part of the “Other
long-term liabilities” account in the consolidated balance sheets are as follows
(see Note 15):
2008
Current
Noncurrent
P
= 12,256
67,673
P
= 79,929
2007
2006
(In Thousand Pesos)
P
= 11,305
P
= 13,389
73,725
100,705
P
= 85,030
P
= 114,094
25.5 Investment in Pilipinas Savings Bank
On October 30, 2008, Globe Telecom signed a memorandum of agreement with Ayala
Corporation and the Bank of the Philippine Islands (BPI) to form the country’s first mobile
microfinance bank using Pilipinas Savings Bank, a wholly owned subsidiary of BPI, as the
vehicle for the joint venture. Globe Telecom has committed to invest a 40% stake in the
bank.
26. Contingencies
Globe Telecom and Innove are contingently liable for various claims arising in the ordinary
conduct of business and certain tax assessments which are either pending decision by the
courts or are being contested, the outcome of which are not presently determinable. In the
opinion of management and legal counsel, the eventual liability under these claims, if any, will
not have a material or adverse effect on the Globe Group’s financial position and results of
operations. There are no new material legal claims for the year.
*SGVMC112197*
- 69 -
27. Earnings Per Share
The Globe Group’s earnings per share amounts were computed as follows:
2008
2007
2006
(In Thousand Pesos and Number of Shares,
Except Per Share Figures)
Net income attributable to common
shareholders for basic earnings per
share
Add dividends on preferred shares
Net income attributable to shareholders for
diluted earnings per share
Weighted average number of shares for
basic earnings per share
Dilutive shares arising from:
Convertible preferred shares
Stock options
Adjusted weighted average number of
common stock for diluted earnings per
share
Basic earnings per share
Diluted earnings per share
P
= 11,215,241
60,637
P
= 13,227,570
49,449
P
= 11,690,004
64,669
11,275,878
13,277,019
11,754,673
132,337
132,184
131,998
262
674
564
576
800
301
133,273
P
= 84.75
P
= 84.61
133,324
P
= 100.07
P
= 99.58
133,099
P
= 88.56
P
= 88.32
28. Risk Management and Financial Instruments
28.1 General
The Globe Group adopts an expanded corporate governance approach in managing its
business risks. An Enterprise Risk Management Policy was developed to systematically
view the risks and to provide a better understanding of the different risks that could
threaten the achievement of the Globe Group’s mission, vision, strategies, and goals, and
to provide emphasis on how management and employees play a vital role in achieving the
Globe Group’s mission of enriching people’s lives.
The policies are not intended to eliminate risk but to manage it in such a way that
opportunities to create value for the stakeholders are achieved. Globe Group risk
management takes place in the context of the normal business processes such as
strategic planning, business planning, operational and support processes.
The application of these policies is the responsibility of the BOD through the Chief
Executive Officer. The Chief Financial Officer and concurrent Chief Risk Officer
champions and oversees the entire risk management function supported by a risk
management unit. Risk owners have been identified for each risk and they are
responsible for coordinating and continuously improving risk strategies, processes and
measures on an enterprise-wide basis in accordance with established business
objectives.
*SGVMC112197*
- 70 The risks are managed through the delegation of management and financial authority and
individual accountability as documented in employment contracts, consultancy contracts,
letters of authority, letters of appointment, performance planning and evaluation forms,
key result areas, terms of reference and other policies that provide guidelines for
managing specific risks arising from the Globe Group’s business operations and
environment.
Globe Group continues to monitor and manage its financial risk exposures according to its
BOD approved policies.
The succeeding discussion focuses on Globe Group’s financial risk management.
28.2 Financial Risk Management Objectives and Policies
The main purpose of the Globe Group’s financial instruments is to fund its operations and
capital expenditures. The main risks arising from the use of financial instruments are
liquidity risk, foreign currency risk, interest rate risk, and credit risk. Globe Telecom also
enters into derivative transactions, the purpose of which is to manage the currency and
interest rate risk arising from its financial instruments.
Globe Telecom’s BOD reviews and approves the policies for managing each of these
risks. The Globe Group monitors market price risk arising from all financial instruments
and regularly reports financial management activities and the results of these activities to
the BOD.
The Globe Group’s risk management policies are summarized below:
28.2.1 Interest Rate Risk
The Globe Group’s exposure to market risk from changes in interest rates relates
primarily to the Globe Group’s long-term debt obligations. Please refer to table
presented under 28.2.5 Liquidity Risk.
Globe Telecom’s policy is to manage its interest cost using a mix of fixed and
variable rate debt, targeting a ratio of between 31-62% fixed rate USD debt to total
USD debt, and between 44-88% fixed rate PHP debt to total PHP debt. To
manage this mix in a cost-efficient manner, Globe Telecom enters into interest rate
swaps, in which Globe Telecom agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference to
an agreed-upon notional principal amount.
After taking into account the effect of currency and interest rate swaps, 35% and
55% of the Globe Group’s USD and PHP borrowings, respectively, as of
December 31, 2008 and 38% and 56% of the Globe Group’s USD and PHP
borrowings, respectively, as of December 31, 2007, are at a fixed rate of interest.
*SGVMC112197*
- 71 The following table demonstrates the sensitivity of income before tax to a
reasonably possible change in interest rates, with all other variables held constant.
2008
Increase/decrease
in basis points
USD
+200 bps
-200 bps
+100 bps
-100 bps
PHP
Effect on income
before tax
Effect on equity
Increase (decrease)
Increase (decrease)
(In Thousand Pesos)
(P
= 29,780)
P
= 27,412
30,815
(28,606)
(63,938)
(1,790)
63,840
1,818
2007
Increase/decrease
in basis points
USD
PHP
+5 bps
-5 bps
+100 bps
-100 bps
Effect on income
Effect on equity
before tax
Increase (decrease)
Increase (decrease)
(In Thousand Pesos)
(P
= 1,424)
P
= 2,288
1,425
(2,291)
6,257
(24,760)
(6,689)
25,157
28.2.2 Foreign Exchange Risk
The Globe Group’s foreign exchange risk results primarily from movements of the
PHP against the USD with respect to USD-denominated financial assets,
USD-denominated financial liabilities and certain USD-denominated revenues.
Majority of revenues are generated in PHP, while substantially all of capital
expenditures are in USD. In addition, 12% and 20% of debt as of December 31,
2008 and 2007, respectively, are denominated in USD before taking into account
any swap and hedges.
Information on the Globe Group’s foreign currency-denominated monetary assets
and liabilities and their PHP equivalents are as follows:
2008
US
Dollar
2006
Peso
Equivalent
P
= 997,203
–
2,456,648
$140,430
88
53,849
P
= 6,887,362
4,326
2,641,048
9
83,414
389
3,454,240
750
195,117
36,774
9,569,510
99,873
149,586
22,112
271,571
4,135,830
6,194,516
915,667
11,246,013
88,118
492,199
23,679
603,996
4,321,763
24,139,882
1,161,337
29,622,982
Net foreign currencydenominated liabilities
$85,366 P
=4,068,141
$188,157
*This table excludes derivative transactions disclosed in Note 28.3.
P
= 7,791,773
Assets
Cash and cash equivalents
Short-term investments
Receivables
Prepayments and other
current assets
Liabilities
Accounts payable and
accrued expenses
Long-term debt
Other long-term liabilities
2007
Peso
US
Dollar
Equivalent
(In Thousands)
US
Dollar
Peso
Equivalent
$40,776
–
68,004
P
=1,943,159
–
3,240,744
$24,081
–
59,324
14
108,794
661
5,184,564
92,464
82,774
18,922
194,160
4,406,395
3,944,575
901,735
9,252,705
$408,879 P
= 20,053,472
*SGVMC112197*
- 72 The following table demonstrates the sensitivity to a reasonably possible change in
the PHP to USD exchange rate, with all other variables held constant, of the Globe
Group’s income before tax (due to changes in the fair value of financial assets and
liabilities).
2008
Increase/decrease
in Peso to
Effect on income before
Effect on Equity
US Dollar exchange rate tax Increase (decrease)
Increase (decrease)
(In Thousand Pesos)
+.40
(P
= 37,971)
(P
= 4,291)
-.40
37,971
4,291
2007
Increase/decrease
in Peso to
US Dollar exchange
rate
+.125
-.125
Effect on income before
tax
Effect on Equity
Increase (decrease)
Increase (decrease)
(In Thousand Pesos)
(P
= 22,133)
(P
= 15,453)
22,133
15,453
In addition, the consolidated expected future payments on foreign currencydenominated purchase orders related to capital projects amounted to
USD264.66 million and USD225.00 million as of December 31, 2008 and 2007,
respectively. The settlement of these liabilities is dependent on the achievement
of project milestones and payment terms agreed with the suppliers and
contractors. In 2008 and 2007, foreign exchange exposure assuming a
+/- 40 centavos and +/- 12.50 centavos movement in PHP to USD rate on
commitments amounted to P
= 105.86 million and P
= 28.13 million gain or loss,
respectively.
The Globe Group’s foreign exchange risk management policy is to maintain a
hedged balance sheet position, after taking into account expected USD flows from
operations and financing transactions. Globe Telecom enters into short-term
foreign currency forwards and long-term foreign currency swap contracts in order
to achieve this target.
28.2.3 Credit Risk
Applications for postpaid service are subjected to standard credit evaluation and
verification procedures. The Credit Management unit of the Globe Group
continuously reviews credit policies and processes and implements various credit
actions, depending on assessed risks, to minimize credit exposure. Receivable
balances of postpaid subscribers are being monitored on a regular basis and
appropriate credit treatments are applied at various stages of delinquency.
Likewise, net receivable balances from carriers of traffic are also being monitored
and subjected to appropriate actions to manage credit risk. The maximum credit
exposure relates to receivables net of any allowances provided.
*SGVMC112197*
- 73 With respect to credit risk arising from other financial assets of the Globe Group,
which comprise cash and cash equivalents, short-term investments, available for
sale financial assets, HTM assets, and certain derivative instruments, the Globe
Group’s exposure to credit risk arises from the default of the counterparty, with a
maximum exposure equal to the carrying amount of these instruments. The Globe
Group’s investments comprise of short-term bank deposits and government
securities. Credit risk from these investments is managed on a Globe Group basis.
For its investments with banks, the Globe Group has a counterparty risk
management policy which allocates investment limits based on counterparty credit
rating and credit risk profile.
The Globe Group makes a quarterly assessment of the credit standing of its
investment counterparties, and allocates investment limits based on size, liquidity,
profitability, and asset quality. For investments in government securities, these are
denominated in local currency and are considered to be relatively risk-free. The
usage of limits is regularly monitored. For its derivative counterparties, the Globe
Group deals only with counterparty banks with investment grade ratings. Credit
ratings of derivative counterparties are reviewed quarterly.
The Globe Group has not executed any credit guarantees in favor of other parties.
There is also no concentration of credit risk within the Globe Group.
Credit exposures from subscribers and carrier partners continue to be managed
closely for possible deterioration. When necessary, credit management measures
are proactively implemented and identified collection risks are being provided for
accordingly. Outstanding credit exposures from financial instruments are
monitored daily and allowable exposures are reviewed quarterly.
The table below shows the aging analysis of the Globe Group’s receivables as of
December 31. Comparative amounts for 2006 are not presented since efforts
required to present the information shown below will be impracticable.
2008
Wireless receivables:
Consumer
Key corporate accounts
Other corporations and
Small and Medium
Enterprises (SME)
Wireline receivables:
Consumer
Key corporate accounts
Other corporations and
SME
Others
Traffic receivables:
Foreign
Local
Other receivables
Total
Neither Past
Due Nor
Impaired
Less than
30 days
Past Due But Not Impaired
31 to
61 to
More than
60 days
90 days
90 days
(In Thousands Pesos)
Impaired
Financial
Assets
Total
P
=403,189
20,824
P
=370,507
116,519
P
=193,777
104,325
P
=100,177
51,295
P
=255,357
53,863
P
=131,423
62,132
P
=1,454,430
408,958
98,183
522,196
79,355
566,381
42,239
340,341
20,586
172,058
50,188
359,408
139,099
332,654
429,650
2,293,038
211,371
280,441
120,057
37,900
91,340
20,637
71,724
15,581
–
336,903
288,433
87,958
782,925
779,420
79,239
571,051
–
247,028
404,985
12,625
172,190
284,167
3,281
116,153
203,458
3,686
11,994
348,897
1,667
60,579
436,970
–
687,183
2,249,528
21,259
2,879,081
350,684
3,229,765
472,932
P
=4,795,944
–
–
–
–
P
=983,991
–
–
–
–
P
=627,789
–
–
–
–
P
=379,202
–
–
–
–
P
=709,972
79,559
308,686
388,245
5,238
P
=1,163,107
2,958,640
659,370
3,618,010
478,170
P
=8,660,005
*SGVMC112197*
- 74 2007
Neither Past
Due Nor
Impaired
Less than
30 days
P
= 383,776
13,950
67,501
465,227
P
= 349,596
116,406
61,985
527,987
P
= 151,452
95,807
29,066
276,325
P
= 70,953
46,418
16,763
134,134
234,259
314,822
110,065
659,146
129,635
35,681
336,910
502,226
71,227
13,728
205,634
290,589
1,644,169
689,189
2,333,358
385,331
P
= 3,843,062
–
–
–
–
P
= 1,030,213
–
–
–
–
P
= 566,914
Wireless receivables:
Consumer
Corporate
SME
Wireline receivables:
Consumer
Corporate
SME
Traffic receivables:
Foreign
Local
Other receivables
Total
Past Due But Not Impaired
31 to
61 to
More than
60 days
90 days
90 days
(In Thousands Pesos)
Impaired
Financial
Assets
Total
P
= 155,202
181,610
73,691
410,503
P
= 266,268
191,683
216,574
674,525
P
= 1,377,247
645,874
465,580
2,488,701
55,060
12,499
172,296
239,855
7,941
188,545
11,365
207,851
163,053
143,251
64,577
370,881
661,175
708,526
900,847
2,270,548
–
–
–
–
P
= 373,989
–
–
–
–
P
= 618,354
38,449
234,106
272,555
16,523
P
= 1,334,484
1,682,618
923,295
2,605,913
401,854
P
= 7,767,016
Total allowance for impairment losses amounting to P
= 1,186.66 million and
P
= 1,383.48 million includes allowance for impairment arising from collective
assessment amounting to P
= 23.55 million and P
= 48.99 million as of December 31,
2008 and 2007, respectively.
The table below provides information regarding the credit risk exposure of the
Globe Group by classifying assets according to the Globe Group’s credit ratings of
receivables as of December 31. The Globe Group’s credit rating is based on
individual borrower characteristics and their relationship to credit event
experiences.
2008
Neither past-due nor impaired
Medium
High Quality
Quality Low Quality
(In Thousands Pesos)
Wireless receivables:
Consumer
Key corporate accounts
Other corporations and SME
Wireline receivables:
Consumer
Key corporate accounts
Other corporations and SME
Total
Total
P
= 278,522
17,006
11,171
306,699
P
= 64,959
2,338
37,113
104,410
P
= 59,708
1,480
49,899
111,087
P
= 403,189
20,824
98,183
522,196
82,158
273,941
30,481
386,580
P
= 693,279
44,684
6,499
12,146
63,329
P
= 167,739
84,529
1
36,612
121,142
P
= 232,229
211,371
280,441
79,239
571,051
P
= 1,093,247
*SGVMC112197*
- 75 2007
Neither past-due nor impaired
Medium
High Quality
Quality
Low Quality
(In Thousands Pesos)
Wireless receivables:
Consumer
Corporate
SME
Wireline receivables:
Consumer
Corporate
SME
Total
Total
P
= 338,862
12,354
54,692
405,908
P
= 41,007
923
7,755
49,685
P
= 3,907
673
5,054
9,634
P
= 383,776
13,950
67,501
465,227
95,950
308,286
68,009
472,245
P
= 878,153
127,670
–
40,053
167,723
P
= 217,408
10,639
6,536
2,003
19,178
P
= 28,812
234,259
314,822
110,065
659,146
P
= 1,124,373
High quality accounts are accounts considered to be high value and have
consistently exhibited good paying habits. Medium quality accounts are active
accounts with propensity of deteriorating to mid-range age buckets. These
accounts do not flow through to permanent disconnection status as they generally
respond to credit actions and update their payments accordingly. Low quality
accounts are accounts which have probability of impairment based on historical
trend. These accounts show propensity to default in payment despite regular
follow-up actions and extended payment terms. Impairment losses are also
provided for these accounts based on net flow rate.
Traffic receivables that are neither past due nor impaired are considered to be high
quality given the reciprocal nature of the Globe Group’s interconnect and roaming
partner agreements with the carriers and the Globe Group’s historical collection
experience.
Other receivables are considered high quality accounts as these are substantially
from credit card companies and Globe dealers.
The following is a reconciliation of the changes in the allowance for impairment
losses for receivables as of December 31 (in thousand pesos) (see Note 4):
2008
At beginning of year
Charges for the year
Reversals/write offs/
adjustments
At end of year
Subscribers
Consumer
Corporate
P
= 481,599
P
= 336,558
501,426
146,725
(582,099)
P
= 400,926
(363,297)
P
= 119,986
Traffic
Settlements
SME and Others
P
= 279,266
P
= 286,052
187,523
134,504
(201,889)
P
= 264,900
(19,709)
P
= 400,847
Non-trade
(Notes 6
and 10)
Total
P
= 35,720 P
= 1,419,195
9,601
979,779
(1,568) (1,168,562)
P
= 43,753 P
= 1,230,412
*SGVMC112197*
- 76 2007
At beginning of year
Charges for the year
Reversals/write offs/
adjustments
At end of year
Subscribers
Consumer
Corporate
P
= 1,740,442
P
= 430,435
463,312
80,959
(1,722,155)
P
= 481,599
(174,836)
P
= 336,558
SME
P
= 314,311
77,614
(112,659)
P
= 279,266
Traffic
Settlements
and Others
P
= 199,595
90,507
(4,050)
P
= 286,052
Non-trade
(Notes 6
and 10)
Total
P
= 43,581 P
= 2,728,364
(996)
711,396
(6,865) (2,020,565)
P
= 35,720 P
= 1,419,195
2006
At beginning of year
Charges for the year
Reversals/write-offs/adjustments
At end of year
Subscribers
P
= 4,468,009
396,587
(2,379,408)
P
= 2,485,188
Traffic
Settlements
Non-trade
and Others (Note 6 and 11)
P
= 215,618
P
= 71,134
42,559
(16,312)
(58,582)
(11,241)
P
= 199,595
P
= 43,581
Total
P
= 4,754,761
422,834
(2,449,231)
P
= 2,728,364
28.2.4 Liquidity risk
The Globe Group seeks to manage its liquidity profile to be able to finance capital
expenditures and service maturing debts. To cover its financing requirements, the
Globe Group intends to use internally generated funds and available long-term and
short-term credit facilities. As of December 31, 2008 and 2007, Globe Group has
available uncommitted short-term credit facilities of USD39.00 million and
P
= 5,297.10 million, and USD39.00 million and P
= 4,520.00 million, respectively. In
2008, the Globe Group also has USD66.00 million committed long-term facilities
which remain undrawn.
As part of its liquidity risk management, the Globe Group regularly evaluates its
projected and actual cash flows. It also continuously assesses conditions in the
financial markets for opportunities to pursue fund raising activities, in case any
requirements arise. Fund raising activities may include bank loans, export credit
agency facilities and capital market issues.
*SGVMC112197*
- 77 The following tables show comparative information about the Globe Group’s financial instruments as of December 31 that are exposed to interest
rate risk and presented by maturity profile including forecasted interest payments for the next five years from December 31, 2008 figures (in
thousands).
Long-term Liabilities:
2008
Liabilities:
Long-term debt
Fixed rate
USD notes
Interest rate
Philippine peso
Interest rate
Floating rate
USD notes
Interest rate
Philippine peso
Interest rate
Total
USD Debt
Total
PHP Debt
Debt
Issuance
Costs
Carrying
Value
(in PHP)
Fair Value
(in PHP)
2009
2010
2011
2012
2013
$6,140
6.44%
$–
–
$–
–
$–
–
$–
–
$6,140
P
=–
P
=–
P
= 292,610
P
= 299,267
P
=–
P
= 4,080,000
P
= 6,087,000
P
= 920,000
– 13.79%; 5.97%; 13.79%; 5.97%; 13.79%; 5.97%;
6.68%; 7.03%
6.68%; 7.03%
6.68%; 7.03%
–
15,787,000
47,091
15,739,909
16,314,939
$–
–
95,556
–
10,045
4,543,655
4,588,401
P
= 6,443,750
PDSF3mo+
1.30%;
PDSF1mo+
1.10% margin;
PDSF3mo+
1% margin;
PDSF1mo+
1.25% margin
–
16,037,296
27,532
16,009,764
16,009,764
$101,696
P
=31,824,296
P
=84,668
P
=36,585,938
P
=37,212,371
P
=–
$2,925
P
=6,874,083
$–
P
=–
$–
P
=–
$–
P
=–
$–
P
= 4,700,000
11.70%
$32,222
3mo/6mo
LIBOR+.43%
margin (rounded
to .06%);
LIBOR+.85%
$32,222
$26,112
$5,000
3mo/6mo
3mo/6mo
3mo/6mo
LIBOR+.43%
LIBOR+.43%
LIBOR+.43%
margin (rounded margin (rounded margin (rounded
to .06%);
to .06%);
to .06%)
LIBOR+.85%
LIBOR+.85%
P
= 1,240,373
P
= 2,503,173
PDSF3mo+ PDSF3mo+1.30%;
1.38%; PDSF1mo+1.10%
margin;
PDSF1mo+
1% margin
PDSF3mo+1%
margin;
PDSF1mo+1%
margin
P
= 25,000
PDSF3mo+
1.30%;
PDSF1mo+
1.10% margin;
PDSF3mo+1%
margin
P
= 5,825,000
PDSF3mo+
1.30%;
PDSF1mo+
1.10% margin;
PDSF3mo+1%
margin;
PDSF1mo+
1.50% margin
Interest Expense*
PHP Debt
P
=2,244,472
P
=1,870,132
P
=1,522,663
P
=845,511
USD Debt
$1,775
$824
$263
$63
*Used month-end LIBOR and Philippine Dealing and Exchange Corporation (PDEX) rates.
*Using P
= 47.655-USD exchange rate as of December 31, 2008.
P
=391,305
$–
*SGVMC112197*
- 78 2007
Liabilities:
Long-term debt
Fixed rate
USD notes
Interest rate
Philippine peso
Interest rate
Floating rate
USD notes
Interest rate
Philippine peso
Interest rate
Total
USD Debt
Total
PHP Debt
Debt
Issuance Carrying Value
Costs
(in PHP)
Fair Value
(in PHP)
2008
2009
2010
2011
2012
$11,116
6.44%
$6,140
6.44%
$–
–
$–
–
$–
–
$17,256
P
=–
P
=–
P
= 714,596
P
= 731,506
P
= 2,208,550
10.72%-11.70%
P
= 4,700,000
11.70%
P
=–
–
P
= 520,000
16%
P
= 6,087,000
13.79%, 5.97%
–
13,515,550
–
13,515,550
14,700,078
$35,421
LIBOR+1.2%,
LIBOR+.85%,
3mo/6mo
LIBOR+.43%
$33,822
LIBOR+1.20%,
LIBOR+.85%,
3mo/6mo
LIBOR+.43%
$32,222
LIBOR+.85%,
3mo/6mo
LIBOR+.43%
$26,111
LIBOR+.85%,
3mo/6mo,
LIBOR+.43%
$5,000
3mo/6mo
LIBOR+.43%
132,576
–
11,657
5,478,432
5,579,271
P
= 1,240,373
P
= 2,496,923
PDSF3mo+1.38%; PDSF1mo+1%
PDSF1mo+1%
margin;
margin;
PDSF3mo+
PDSF1mo+1.30%
1.30%;
PDSF1mo+
margin
1.10% margin
P
=–
P
= 5,800,000
PDSF1mo+
1.50% margin;
PDSF3mo+
1.30%;
PDSF1mo+
1.10% margin
–
10,221,719
57,445
10,164,274
10,221,719
$149,832
P
= 23,737,269
P
= 69,102
P
= 29,872,852
P
= 31,232,574
P
=–
$15,638
P
= 5,358,263
$–
P
=–
$–
P
=–
$–
P
=–
$–
P
= 684,423
PDSF1mo+1%
margin;
PDSF1mo+
1.30%
margin
Interest Expense*
PHP Debt
P
= 1,801,058
P
= 1,388,110
USD Debt
$6,925
$4,818
*Used month-end LIBOR and PDEX rates.
*Using P
= 41.411-USD exchange rate as of December 31, 2007.
P
= 1,021,604
$2,814
P
= 837,860
$951
P
= 309,631
$130
*SGVMC112197*
- 79 2006
Liabilities:
Long-term debt
Fixed rate
USD notes
Interest rate
Philippine peso
Interest rate
Floating rate
USD notes
Interest rate
Philippine peso
Interest rate
Total
USD Debt
Total
PHP Debt
Premium
and
Issuance
Costs
Carrying
Value
(in PHP)
Fair Value
(in PHP)
2007
2008
2009
2010
2011
2012
$18,383
6.55%
$11,116
6.44%
$6,140
6.44%
$–
–
$–
–
$293,540
10.83%
$329,179
P
=–
P
= 371,961
P
= 1,306,400
P
= 2,249,800
P
= 4,700,000
10.18%-10.47% 10.18%-10.47% 10.47%-11.70%
P
=–
0.00%
P
= 520,000
16%
P
= 1,087,000
13.79%
–
9,863,200
(9,258)
9,853,942
11,488,488
P
= 16,516,545 P
= 18,829,694
$69,902
$28,254
LIBOR+.45%, LIBOR+ 3.20%,
LIBOR+1%, LIBOR+1.75%,
LIBOR+1.20%, LIBOR+1.20%,
LIBOR+1.38%,
LIBOR+.85%
LIBOR+2%,
LIBOR+2.05%,
LIBOR+3.2%,
LIBOR only;
LIBOR+.85%
$23,822
LIBOR+1.20%,
LIBOR+.85%
$22,222
LIBOR+.85%
$11,111
LIBOR+.85%
$–
155,311
–
–
7,617,204
5,220,964
P
= 797,447
PDSF1mo+
1.30% margin;
PDSF1mo+1%
margin
P
= 1,240,373
PDSF1mo+
1.30% margin;
PDSF1mo+1%
margin
P
= 2,496,923
PDSF1mo+
1% ;
PDSF3mo+
1.30%
P
=–
PDSF3mo+
1.75%;
PDSF1mo+1%
margin
P
=–
–
5,219,166
–
5,219,166
5,219,166
$484,490 P
= 15,082,366
P
= 362,703
P
= 684,423
PDSF1mo+
1.30% margin;
PDSF1mo+1%
margin
P
= 39,206,857 P
= 40,758,312
Used month-end LIBOR and PDEX rates.
Using P
= 49.045-USD exchange rate as of December 31, 2006.
*SGVMC112197*
- 80 The following tables present the maturity profile of the Globe Group’s other liabilities and derivative instruments (undiscounted cash flows including
swap costs payments/receipts except for other long-term liabilities) as of December 31 (in thousands):
2008
Other Liabilities:
Less than
Accounts payable and accrued expenses
On demand
1 year
1 to 2 years
2 to 3 years
P
= 1,522,730
P
= 15,509,744
P
=–
–
163,989
–
4,002,160
–
–
Derivative liabilities
Notes payable
Other long-term liabilities
3 to 4 years
4 to 5 years
Over 5 years
Total
P
=–
P
=–
P
=–
P
=–
P
= 17,032,474
–
21,665
–
–
185,654
–
–
–
–
4,002,160
–
85,861
93,632
102,107
111,348
121,426
307,431
821,805
P
= 5,524,890
P
= 15,759,594
P
= 93,632
P
= 102,107
P
= 133,013
P
= 121,426
P
= 307,431
P
= 22,042,093
Derivative Instruments:
2009
Receive
Projected Swap Coupons*:
Principal Only Swaps
Interest Rate Swaps
P
=–
–
Pay
P
= 5,580
3,293
2010
Receive
P
=–
–
2011
Receive
Pay
P
= 5,580
15,306
P
=–
4,093
2012
Receive
Pay
P
= 5,580
–
P
=–
4,491
2013 and beyond
Receive
Pay
Pay
P
= 2,798
–
P
=–
–
P
=–
–
*Projected USD swap coupons were converted to PHP at the balance sheet rate. Further, it was assumed that 3m Libor, 3m PDSTF, and 6m PDSTF would stay at December 31, 2008 levels.
2009
Receive
Projected Principal Exchanges*:
Principal Only Swaps
$–
Forwards (Deliverable and
Nondeliverable)
P
= 1,018,058
2010
Receive
Pay
2011
Receive
Pay
P
=
$–
P
=–
$–
P
=–
$2,500
P
= 140,825
$–
P
=–
$22,000
P
=–
–
–
–
–
–
–
–
Pay
2012
Receive
Pay
2013 and beyond
Receive
Pay
*Projected principal exchanges represent commitments to purchase USD for payment of USD debts with the same maturities. Projected USD payments on NDFs were converted to PHP at
balance sheet rate.
*SGVMC112197*
- 81 2007
Other Liabilities:
Less than
On demand
1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
P
= 1,151,747
P
= 17,283,706
P
=–
P
=–
P
=–
P
=–
P
=–
P
= 18,435,453
Derivative liabilities
–
326,721
–
–
–
14,110
–
340,831
Notes payable
–
500,000
–
–
–
–
–
500,000
Other long-term liabilities
–
72,623
79,196
86,364
94,181
102,705
395,568
830,637
P
= 1,151,747
P
= 18,183,050
P
= 79,196
P
= 86,364
P
= 94,181
P
= 116,815
P
= 395,568
P
= 20,106,921
Accounts payable and accrued expenses
Derivative Instruments:
2008
2009
2010
2011
2012 and beyond
Receive
Pay
Receive
Pay
Receive
Pay
Receive
Pay
Receive
Pay
P
=–
P
= 21,447
P
=–
P
= 13,259
P
=–
P
= 13,259
P
=–
P
= 13,259
P
=–
P
= 6,648
Projected Swap Coupons*:
Principal Only Swaps
Interest Rate Swaps
50,058
–
22,902
–
756
–
1,680
–
956
–
*Projected USD swap coupons were converted to PHP at the balance sheet rate. Further, it was assumed that 3m Libor, 3m PDSTF, and 6m PDSTF would stay at December 31, 2007 levels.
2008
2009
2010
2011
2012 and beyond
Receive
Pay
Receive
Pay
Receive
Pay
Receive
Pay
Receive
Pay
$5,000
P
= 280,850
$–
P
=–
$–
P
=–
$–
P
=–
$5,000
P
= 281,650
P
= 242,256
–
P
= 964
–
–
–
–
–
–
–
Projected Principal Exchanges*:
Principal Only Swaps
Forwards (Deliverable and
Nondeliverable)
*Projected principal exchanges represent commitments to purchase USD for payment of USD debts with the same maturities. Projected USD payments on NDFs were converted to PHP at balance sheet rate.
*SGVMC112197*
- 82 28.2.5 Hedging Objectives and Policies
The Globe Group uses a combination of natural hedges and derivative hedging to
manage its foreign exchange exposure. It uses interest rate derivatives to reduce
earnings volatility related to interest rate movements.
It is the Globe Group’s policy to ensure that capabilities exist for active but
conservative management of its foreign exchange and interest rate risks. The
Globe Group does not engage in any speculative derivative transactions.
Authorized derivative instruments include currency forward contracts (freestanding
and embedded), currency swap contracts, interest rate swap contracts and
currency option contracts (freestanding and embedded). Certain currency swaps
are entered with option combination or structured provisions.
28.3 Derivative Financial Instruments
The Globe Group’s freestanding and embedded derivative financial instruments are
accounted for as hedges or transactions not designated as hedges. The table below sets
out information about the Globe Group’s derivative financial instruments and the related
fair value as of December 31 (in thousands):
2008
Derivative instruments designated as hedges:
Cash flow hedges:
Nondeliverable forwards*
Interest rate swaps
Derivative instruments not designated
as hedges:
Freestanding:
Deliverable and nondeliverable forwards**
Interest rate swaps
Currency swaps and cross
currency swaps
Embedded:
Currency forwards
Currency options***
Net
Derivative
Asset
Derivative
Liability
Notional
Amount
Notional
Amount
$10,000
25,000
P
=–
–
P
=–
–
P
= 19,456
37,804
75,100
13,333
–
2,000,000
109,454
8,086
70,705
14,752
2,500
–
–
29,731
25,564
3
–
–
51,470
2
P
= 169,012
13,206
–
P
= 185,654
*All sell position
**Buy position: USD31,550; Sell position: USD43,550
****All embedded options are long call positions.
*SGVMC112197*
- 83 2007
Notional
Amount
Derivative instruments designated as hedges:
Cash flow hedges:
Nondeliverable forwards*
$120,000
Interest rate swaps
35,000
Derivative instruments not designated
as hedges:
Freestanding:
Nondeliverable forwards**
46,000
Interest rate swaps
15,000
Currency swaps and cross
currency swaps
10,000
Embedded:
Currency forwards***
34,305
Currency options****
430
Net
Notional
Amount
Derivative
Asset
Derivative
Liability
P
=–
–
P
= 267,865
–
P
=–
15,026
–
2,000,000
115,064
58,922
97,027
11,613
–
–
172,194
–
–
86,781
14
P
= 528,646
44,971
–
P
= 340,831
*Sell position: USD120,000
**Buy position: USD20,000; Sell position: USD26,000
***Buy position: USD10,118; Sell position USD24,187
****All embedded options are long call positions.
2006
Derivative instruments designated as hedges:
Cash flow hedges:
Currency and cross currency swaps
Interest rate swaps
Derivative instruments not designated
as hedges:
Freestanding:
Nondeliverable forwards*
Currency swaps and cross
currency swaps
Interest rate swaps
Sold currency call options (including
premiums receivable)
Embedded:
Interest call option on 2012
Senior Notes (see Note 14.3)
Currency forwards**
Currency options***
Net
Notional
Amount
Notional
Amount
Derivative
Asset
Derivative
Liability
$55,807
12,098
P
=–
–
P
=–
8,644
P
= 574,654
–
74,000
–
23,526
66,633
73,742
17,000
–
2,000,000
–
139,178
402,365
17,705
3,000
–
–
–
293,540
–
1,425,270
–
6,416
898
–
–
30,029
20
P
= 1,626,667
24,766
–
P
= 1,086,123
*Buy position: USD5,000; Sell position: USD40,000; Subsidized: USD29,000
**The embedded currency forwards are at a net sell position.
***All embedded options are long call positions
*SGVMC112197*
- 84 The table below also sets out information about the maturities of Globe Group’s derivative
instruments as of December 31 that were entered into to manage interest and foreign
exchange risks related to the long-term debt and US dollar-based revenues (in
thousands).
2008
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
Derivatives:
Currency Swaps:
Notional amount
Weighted swap rate
Pay fixed rate
Interest Rate Swaps
Fixed-Floating
Notional Peso
Notional USD
Pay-floating rate
Receive-fixed rate
Floating-Fixed
Notional Peso
Notional USD
Pay-fixed rate
Receive-floating rate
Deliverable and Nondeliverable
Forwards
Notional USD
Forward rate
Total
$–
$–
$–
$2,500
$–
$2,500
P
=56.33
4.62%
P
=1,000,000
–
–
–
–
–
–
$5,000
–
–
$20,984
$5,000
LIBOR+4.23% - Mart +1.38%
9.75% - 11.70%
P
=1,000,000
$13,333
–
$13,333
–
$6,667
–
–
–
–
$20,984
$33,333
4.54% - 7.09%
USD LIBOR - Mart +1.38%
$85,100
–
–
–
–
$85,100
P
=42.80 - P
=54.10
2007
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
Derivatives:
Currency Swaps:
Notional amount
Weighted swap rate
Pay fixed rate
Interest Rate Swaps
Fixed-Floating
Notional Peso
Notional USD
Pay-floating rate
Receive-fixed rate
Floating-Fixed
Notional Peso
Notional USD
Pay-fixed rate
Receive-floating rate
Nondeliverable Forwards
Notional USD
Forward rate
$5,000
Total
$5,000
$10,000
P
= 56.25
4.62% - 5.89%
– P
= 1,000,000
–
–
–
–
–
–
–
$5,000
$24,148
$5,000
LIBOR+4.23% - Mart +1.38%
9.75% - 11.70%
– P
= 1,000,000
$11,667
$13,333
–
$13,333
–
$6,667
–
–
$24,148
$45,000
4.84% - 7.09%
USD LIBOR - Mart +1.38%
–
–
–
$166,000
P
= 42.34 - P
= 46.34
$166,000
–
*SGVMC112197*
- 85 2006
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years
Derivatives:
Currency Swaps:
Notional amount
Weighted swap rate
Pay fixed rate
Cross-Currency Swaps:
Floating-Fixed
Notional amount
Pay-fixed rate
Receive-floating rate
Weighted swap rate
Floating-Floating
Notional amount
Pay-floating rate
Receive-floating rate
Weighted swap rate
Interest Rate Swaps
Fixed-Floating
Notional Peso
Notional USD
Pay-floating rate
Receive-fixed rate
Floating- Fixed
Notional Peso
Notional USD
Pay-fixed rate
Receive-floating rate
Nondeliverable Forwards
Notional USD
Forward rate
>5 years
Total
$13,879
$10,000
$10,000
$5,000
$15,000
$65,000
$118,879
P
= 53.524
4.62%-10.25%
$6,094
$417
–
–
–
–
$6,511
11.00% - 15.23%
USD LIBOR
P
= 51.52
$3,742
$417
–
–
–
–
$4,159
Mart +1.25% - 1.90%
USD LIBOR
P
= 51.03
–
–
– P
= 1,000,000
–
–
–
–
–
–
–
$5,000
$20,389
$5,000
LIBOR+4.23%-Mart
+1.38%
9.75%-11.70%
–
$24,098
– P
= 1,000,000
–
–
–
–
–
–
–
–
$20,389
$24,098
USD 2.30% - 7.10%
USD LIBOR -Mart +1.38%
$74,000
–
–
–
–
$74,000
P
= 49.18 - P
= 51.72
–
The Globe Group’s other financial instruments that are exposed to interest rate risk are
cash and cash equivalents, AFS and HTM investments. These mature in less than a year
and are subject to market interest rate fluctuations.
The Globe Group’s other financial instruments which are non-interest bearing and
therefore not subject to interest rate risk are trade and other receivables, accounts
payable and accrued expenses and long-term liabilities.
The subsequent sections will discuss the Globe Group’s derivative financial instruments
according to the type of financial risk being managed and the details of derivative financial
instruments that are categorized into those accounted for as hedges and those that are
not designated as hedges.
28.4 Derivative Instruments Accounted for as Hedges
The following sections discuss in detail the derivative instruments accounted for as cash
flow hedges.
·
Interest Rate Swaps
As of December 31, 2008 and 2007, the Globe Group has USD25.00 million and
USD35.00 million, respectively, in notional amount of interest rate swap that has been
designated as cash flow hedge. The interest rate swap effectively fixed the
benchmark rate of the hedged loan at 4.84% over the duration of the agreement,
which involves semi-annual payment intervals up to January 2011.
*SGVMC112197*
- 86 As of December 31, 2008 and 2007, the fair value of the outstanding swap amounted
to P
= 37.80 million loss and P
= 15.03 million loss, respectively, of which P
= 24.57 million
and P
= 9.77 million (net of tax), respectively, is reported as “Cumulative translation
adjustment” in the equity section of the consolidated balance sheets. Accumulated
swap income/(cost) for the year ended December 31, 2008 and 2007 amounted to
(P
= 19.46 million) and P
= 7.36 million, respectively.
·
Nondeliverable Forwards
The Globe Group entered into short-term nondeliverable currency forward contracts
to hedge the changes in the cash flows of USD revenues related to changes in
foreign currency exchange rates. These currency forward contracts with a notional
amount of USD10.00 million have maturities until December 2009. The fair value of
the outstanding short-term nondeliverable currency forwards as of December 31,
2008 and 2007 amounted to P
= 19.46 million loss and P
= 267.86 million gain,
respectively, of which P
= 12.65 million and P
= 174.11 million (net of tax), respectively, is
reported in the equity section of the consolidated balance sheet.
28.5 Other Derivative Instruments not Designated as Hedges
The Globe Group enters into certain derivatives as economic hedges of certain underlying
exposures. Such derivatives, which include embedded and freestanding currency
forwards, embedded call options, and certain currency swaps with option combination or
structured provisions, are not designated as accounting hedges. The gains or losses on
these instruments are accounted for directly in the consolidated statements of income.
This section consists of freestanding derivatives and embedded derivatives found in both
financial and nonfinancial contracts.
28.6 Freestanding Derivatives
Freestanding derivatives that are not designated as hedges consist of currency forwards,
options, currency and interest rate swaps entered into by the Globe Group. Fair value
changes on these instruments are accounted for directly in the consolidated statements of
income.
·
Currency Swaps and Cross-Currency Swaps
The Globe Group also has outstanding foreign currency swap agreements with
certain banks, under which it swaps the principal of USD2.50 million
USD-denominated loans into PHP up to April 2012. Under these contracts, swap
costs are payable in semi-annual intervals in PHP or USD. The fair value loss of the
currency swaps as of December 31, 2008 amounted to P
= 29.73 million.
·
Deliverable and Nondeliverable Forwards
The Globe Group entered into short-term deliverable and nondeliverable currency
forward contracts. These currency forward contracts have a notional amount of
USD75.10 million and with maturities extending to December 2009. The net fair value
gain amounted to P
= 38.75 million and P
= 18.04 million in December 31, 2008 and 2007,
respectively.
*SGVMC112197*
- 87 ·
Interest Rate Swaps
The Globe Group has outstanding interest rate swap contracts which swap certain
fixed and floating USD-denominated loans into floating and fixed rate with semiannual payments interval up to April 2012. The swaps have outstanding notional of
USD13.33 million and USD15.00 million as of December 31, 2008 and 2007,
respectively.
The Globe Group also has an outstanding interest rate swap contract with a notional
amount of P
= 1,000.00 million, which effectively swaps a fixed rate PHP-denominated
bond into floating rate, with quarterly payment intervals up to February 2009. The
Globe Group also has an outstanding interest rate swap contracts amounting to
P
= 1,000.00 million that effectively swap the floating rate coupon back to a fixed rate,
with quarterly payment intervals up to February 2009.
The fair values on the interest rate swaps as of December 31, 2008 and 2007
amounted to P
= 8.09 million net gain and P
= 14.75 million net loss, and P
= 58.92 million
net gain and P
= 11.61 million net loss, respectively.
28.7 Embedded Derivatives and Other Financial Instruments
The Globe Group’s embedded derivatives include embedded currency derivatives noted
in both financial and nonfinancial contracts and embedded call options in debt
instruments.
·
Embedded Currency Forwards
As of December 31, 2008 and 2007, the total outstanding notional amount of
currency forwards embedded in nonfinancial contracts amounted to USD25.56 million
and USD34.30 million, respectively. The nonfinancial contracts consist mainly of
foreign currency-denominated purchase orders with various expected delivery dates.
The fair value of the embedded currency forwards as of December 31, 2008 and
2007 amounted to P
= 38.26 million and P
= 41.81 million, respectively.
·
Embedded Currency Options
The outstanding notional amount of the currency option embedded in non-financial
contracts and the corresponding fair values as of December 31, 2008 are immaterial,
while the notional amount as of December 31, 2007 amounted to USD0.43 million
with a fair value of P
= 0.01 million gain.
28.8 Fair Value Changes on Derivatives
The net movements in fair value changes of all derivative instruments are as follows:
2008
At beginning of year
Net changes in fair value of derivatives:
Designated as accounting hedges
Not designated as accounting hedges
Less fair value of settled instruments
At end of year
P
= 187,815
(457,080)
34,265
(235,000)
(218,358)
(P
= 16,642)
December 31
2007
2006
(In Thousand Pesos)
P
= 540,544
P
= 817,145
193,165
(1,512,636)
(778,927)
(966,742)
P
= 187,815
(254,589)
45,462
608,018
67,474
P
= 540,544
*SGVMC112197*
- 88 28.9 Hedge Effectiveness Results
As of December 31, 2008 and 2007, the effective fair value changes on the Globe
Group’s cash flow hedges that were deferred in equity amounting to P
= 37.22 million loss
and P
= 164.34 million gain, net of tax, respectively. Total ineffectiveness for the year ended
December 31, 2008 is immaterial.
The distinction of the results of hedge accounting into “Effective” or “Ineffective” represent
designations based on PAS 39 and are not necessarily reflective of the economic
effectiveness of the instruments.
28.10 Categories of Financial Assets and Financial Liabilities
The table below presents the carrying value of Globe Group’s financial instruments by
category as of December 31:
2008
2007
(In Thousand Pesos)
2006
Financial assets:
Financial assets at FVPL:
Derivative assets designated as cash flow hedges
Derivative assets not designated as hedges
AFS financial assets
AFS investment in equity securities - net
HTM investments
Loans and receivables - net*
P
=–
169,012
–
61,324
–
14,491,808
P
= 267,865
260,781
–
55,461
2,350,032
13,328,704
P
= 8,644
1,618,023
293,614
39,002
857,563
19,471,402
Financial liabilities:
Financial liabilities at FVPL:
Derivative liabilities designated as cash flow hedges
Derivative liabilities not designated as hedges
Financial liabilities at amortized cost**
57,260
128,394
57,781,521
15,026
325,805
48,160,525
574,654
511,469
55,880,129
* This consists of cash and cash equivalents, short-term investments, receivables and other nontrade receivables.
**This consists of accounts payable, accrued expenses, notes payable, long-term debt (including current portion) and other long-term
liabilities (including current portion).
As of December 31, 2008, 2007 and 2006, the Globe Group has no investments in foreign
securities.
*SGVMC112197*
- 89 28.11 Fair Values of Financial Assets and Financial Liabilities
The table below presents a comparison of the carrying amounts and estimated fair values
of all the Globe Group’s financial instruments as of:
December 31
2008
2007
2006
Carrying Value
Fair Value Carrying Value
Fair Value Carrying Value
Fair Value
(In Thousand Pesos)
Financial assets:
Cash and cash equivalents
Short-term investments
AFS investments
HTM investments
Receivables - net
Derivative assets
Other nontrade receivables*
AFS investment in equity
securities - net
P
=5,782,224
–
–
–
7,473,346
169,012
1,236,238
P
=5,782,224
–
–
–
7,473,346
169,012
1,236,238
P
= 6,191,004
500,000
–
2,350,032
6,383,541
528,646
254,159
P
= 6,191,004
500,000
–
2,350,032
6,383,541
528,646
254,159
P
= 7,505,715
6,155,349
293,614
857,563
5,527,905
1,626,667
282,433
P
= 7,505,715
6,155,349
293,614
857,825
5,527,905
1,626,667
282,433
61,324
61,324
55,461
55,461
39,002
39,002
16,392,155
15,140,306
15,140,306
340,831
500,000
1,086,123
–
1,086,123
–
31,232,574
39,206,857
40,758,312
1,486,606
1,532,966
1,561,973
Financial liabilities:
Accounts payable and
accrued expenses
15,779,976
15,779,976
16,392,155
Derivative liabilities (including
current portion)
185,654
185,654
340,831
Notes payable
4,002,160
4,002,160
500,000
Long-term debt (including
current portion)
36,585,938
37,212,371
29,872,852
Other long-term liabilities
(including current portion)
1,413,447
1,413,447
1,395,518
*This consists of loan, accrued interest and miscellaneous receivables.
The following discussions are methods and assumptions used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate such value.
28.11.1 Non-derivative Financial Instruments
The fair values of cash and cash equivalents, short-term investments, AFS
investments, subscriber receivables, traffic settlements receivable, loan
receivable, miscellaneous receivables, accrued interest receivables, accounts
payable, accrued expenses and notes payable are approximately equal to their
carrying amounts considering the short-term maturities of these financial
instruments.
The fair value of AFS investments are based on quoted prices. Unquoted AFS
equity securities are carried at cost, subject to impairment.
For variable rate financial instruments that reprice every three months, the
carrying value approximates the fair value because of recent and regular
repricing based on current market rates. For variable rate financial instruments
that reprice every six months, the fair value is determined by discounting the
principal amount plus the next interest payment using the prevailing market rate
for the period up to the next repricing date. The discount rates used range from
0.87% to 2.42% (for USD loans). The variable rate PHP loans reprice every six
months. For noninterest bearing obligations, the fair value is estimated as the
present value of all future cash flows discounted using the prevailing market rate
of interest for a similar instrument.
*SGVMC112197*
- 90 28.11.2. Derivative Instruments
The fair value of freestanding and embedded forward exchange contracts is
calculated by using the net present value concept.
The fair values of interest rate swaps, currency and cross currency swap
transactions are determined using valuation techniques with inputs and
assumptions that are based on market observable data and conditions and
reflect appropriate risk adjustments that market participants would make for credit
and liquidity risks existing at the balance sheet date. The fair value of interest
rate swap transactions is the net present value of the estimated future cash
flows. The fair values of currency and cross currency swap transactions are
determined based on changes in the term structure of interest rates of each
currency and the spot rate.
Embedded currency options are valued using the simple option pricing model of
Bloomberg.
29. Segment Reporting
The Globe Group’s reportable segments consist of:
Mobile Communications Services - represents digital cellular telecommunications services that
allow subscribers to make and receive local, domestic long distance and international long
distance calls and short messaging services to and from any place within the coverage area.
Revenues principally consist of one-time registration fees, fixed monthly consumable service fees
for postpaid, preloaded airtime on sold SIM packs, subscription fees for prepaid bucket pricing
service promotions, airtime and toll fees for intranetwork, domestic and international outbound call
and text messaging services used by subscribers in excess of fixed consumable postpaid
balances which vary based primarily on the monthly volume of calls and text messaging services,
the network on which the call/service terminates and exchange rate movements to a certain
extent. Revenues also include inbound toll fees from local and foreign carriers and partners,
revenues from VAS such as content downloads and web browsing, proceeds from sale of
phonekits, handsets, SIM packs and other phone accessories.
Wireline Communications Services - represents fixed line telecommunications services which offer
subscribers local, domestic long distance and international long distance voice services in addition
to broadband and internet services and a number of VAS in various areas covered by the
Certificate of Public Convenience and Necessity (CPCN) granted by the NTC. Revenues consist
principally of fixed monthly basic fee for service and equipment, one-time fixed line and
broadband and internet service connection fee, VAS charges, and toll fees for domestic and
international long distance calls of voice and broadband subscribers, and inbound toll fees from
local and foreign carriers. This also includes a variety of telecommunications services tailored to
meet the specific needs of corporate communications such as leased lines, Very Small Aperture
Terminal (VSAT), international packet-switching services, broadband, and internet services.
*SGVMC112197*
- 91 Others - represents mobile value added content and application development services. Revenues
principally consist of revenue share with various carriers on content downloaded by their
subscribers and contracted fees for other application development services provided to various
partners.
The Globe Group’s segment information is as follows (in thousand pesos):
2008
Mobile
Wireline
Communications Communications
Services
Services
P
= 55,590,483
P
= 7,258,697
Service revenues
1,725,265
198,295
Nonservice revenues
4,382,680
155,662
Intersegment revenues
375,076
45,326
Interest income
6,249,230
190,976
Other income - net
68,322,734
7,848,956
Total revenue
General, selling and
(24,418,306)
(6,286,814)
administrative
Depreciation and
(13,685,266)
(3,131,284)
amortization
(4,209,998)
(209,120)
Cost of sales
238,295
(3,237,770)
Financing costs
Impairment losses and
(546,825)
(658,854)
others
Equity in net losses of
(9,728)
–
a joint venture
Income (loss) before
22,214,841
(2,198,821)
income tax
Benefit from (provision
(7,276,351)
706,209
for) income tax
P
= 14,938,490
(P
= 1,492,612)
Net income (loss)
Other segment
information:
P
= 14,889,684
P
= 5,446,395
Capital expenditure
Others
P
= 45,308
–
–
23
78
45,409
Eliminations
P
=–
–
(4,538,342)
–
(5,714,573)
(10,252,915)
Consolidated
P
= 62,894,488
1,923,560
–
420,425
725,711
65,964,184
(61,647)
7,009,641
(23,757,126)
(1,061)
–
(916)
(210,457)
1,301,946
–
(17,028,068)
(3,117,172)
(3,000,391)
–
–
(1,205,679)
–
–
(9,728)
(18,215)
(2,151,785)
–
(P
= 18,215)
–
(P
= 2,151,785)
P
= 17,718
P
=–
17,846,020
(6,570,142)
P
= 11,275,878
P
= 20,353,797
2007
Service revenues
Nonservice revenues
Intersegment revenues
Interest income
Other income - net
Total revenue
General, selling and administrative
Depreciation and amortization
Cost of sales
Financing costs
Impairment losses and others
Equity in net losses of a joint venture
Income (loss) before income tax
Benefit from (provision for) income tax
Net income (loss)
Other segment information:
Capital expenditure
Mobile
Wireline
Communications Communications
Services
Services
P
= 56,410,341
P
= 6,798,311
2,263,186
36,878
1,008,887
135,890
565,101
163,520
7,228,846
124,638
67,476,361
7,259,237
(18,055,871)
(4,877,421)
(13,938,120)
(2,938,844)
(3,798,189)
(90,917)
(5,122,657)
(102,282)
(572,189)
(369,071)
(9,023)
–
25,980,312
(1,119,298)
(7,112,783)
339,454
P
= 18,867,529
(P
= 779,844)
P
= 10,151,435
P
= 3,770,522
Eliminations
P
=–
–
(1,144,777)
–
(5,549,003)
(6,693,780)
1,628,819
(312,034)
566,329
–
–
–
(4,810,666)
–
(P
= 4,810,666)
P
=–
Consolidated
P
= 63,208,652
2,300,064
–
728,621
1,804,481
68,041,818
(21,304,473)
(17,188,998)
(3,322,777)
(5,224,939)
(941,260)
(9,023)
20,050,348
(6,773,329)
P
= 13,277,019
P
= 13,921,957
*SGVMC112197*
- 92 2006
Service revenues
Nonservice revenues
Intersegment revenues
Interest income
Other income - net
Total revenue
General, selling and administrative
Depreciation and amortization
Cost of sales
Financing costs
Impairment losses and others
Equity in net losses of a joint venture
Income (loss) before income tax
Benefit from (provision for) income tax
Net income (loss)
Other segment information:
Capital expenditure
Mobile
Wireline
Communications Communications
Services
Services
P
= 50,671,825
P
= 6,361,794
2,888,850
26,539
385,475
117,467
730,291
124,574
4,203,917
3,492
58,880,358
6,633,866
(15,653,285)
(3,670,489)
(14,211,642)
(2,574,042)
(4,535,197)
(84,479)
(4,887,283)
(91,466)
(243,778)
(291,170)
(5,834)
–
19,343,339
(77,780)
(5,856,503)
12,483
P
= 13,486,836
(P
= 65,297)
P
= 12,598,829
Eliminations
P
=–
–
(502,942)
–
(2,055,839)
(2,558,781)
1,242,843
(351,869)
941
–
–
–
(1,666,866)
–
(P
= 1,666,866)
P
= 2,281,624
Consolidated
P
= 57,033,619
2,915,389
–
854,865
2,151,570
62,955,443
(18,080,931)
(17,137,553)
(4,618,735)
(4,978,749)
(534,948)
(5,834)
17,598,693
(5,844,020)
P
= 11,754,673
P
=–
P
= 14,880,453
The segment assets and liabilities as of December 31, 2008, 2007 and 2006 are as follows
(in thousand pesos):
2008
Segment assets
Investment in a joint
venture under equity
method
Consolidated total
assets[1]
Consolidated total
liabilities[1]
Mobile
Wireline
Communications Communications
Services
Services
P
= 116,109,924
P
= 23,130,662
Others
P
= 62,907
Eliminations
(P
= 20,158,070)
Consolidated
P
= 119,145,423
73,529
–
–
P
= 116,183,453
P
= 23,130,662
P
= 62,907
(P
= 20,158,070)
P
= 119,218,952
P
= 67,923,997
P
= 684,540
P
= 75,177
(P
= 3,614,510)
P
= 65,069,204
–
73,529
[1] Consolidated total assets and liabilities do not include deferred income taxes.
2007
Segment assets
Investments in a joint venture under
equity method
Consolidated total assets[1]
Consolidated total liabilities[1]
Mobile
Communications
Services
P
= 115,164,527
Wireline
Communications
Services
P
= 20,727,496
Eliminations
(P
= 19,992,148)
Consolidated
P
= 115,899,875
83,257
P
= 115,247,784
P
= 56,764,134
–
P
= 20,727,496
P
= 2,593,317
–
(P
= 19,992,148)
(P
= 3,656,299)
83,257
P
= 115,983,132
P
= 55,701,152
[1] Consolidated total assets and liabilities do not include deferred income taxes.
*SGVMC112197*
- 93 2006
Segment assets
Investments in a joint venture under
equity method
Consolidated total assets[1]
Consolidated total liabilities[1]
Mobile
Communications
Services
P
= 125,242,295
Wireline
Communications
Services
P
= 17,463,845
Eliminations
(P
= 18,965,502)
Consolidated
P
= 123,740,638
37,332
P
= 125,279,627
P
= 63,070,580
–
P
= 17,463,845
P
= 1,974,920
–
(P
= 18,965,502)
(P
= 2,953,817)
37,332
P
= 123,777,970
P
= 62,091,683
[1] Consolidated total assets and liabilities do not include deferred income taxes.
30. Notes to Consolidated Statements of Cash Flows
The principal noncash transactions are as follows:
2008
Increase (decrease) in liabilities related to the
acquisition of property and equipment
Capitalized ARO
Dividends on preferred shares
P
= 841,965
95,086
60,637
2007
(In Thousand Pesos)
(P
= 343,874)
150,051
49,449
2006
P
= 1,964,868
281,557
64,669
The cash and cash equivalents account consists of:
2008
Cash on hand and in banks
Short-term placements
P
= 1,479,948
4,302,276
P
= 5,782,224
2007
2006
(In Thousand Pesos)
P
= 1,679,081
P
= 2,861,698
4,511,923
4,644,017
P
= 6,191,004
P
= 7,505,715
Cash in banks earn interest at the respective bank deposit rates. Short-term placements
represent short-term money market placements.
The ranges of interest rates of the above placements are as follows:
2008
Placements:
PHP
USD
2007
2006
2.50% to 6.50% 2.25% to 7.79% 3.60% to 7.00%
0.05% to 4.30% 4.01% to 5.50% 3.70% to 4.70%
31. Capital Management
The primary objective of the Globe Group’s capital management is to ensure that it maintains a
strong credit rating and healthy capital ratios in order to support its business and maximize
shareholder value.
The Globe Group monitors its use of capital using leverage ratios, such as debt to total
capitalization and makes adjustments to it in light of changes in economic conditions and its
financial position.
*SGVMC112197*
- 94 The Globe Group is not subject to externally imposed capital requirements. The ratio of debt to
total capitalization for the years ended December 31, 2008, 2007 and 2006 was at 45%, 35%
and 41%, respectively.
32. Business Combination
32.1 On June 26, 2008, the Globe Group signed an agreement with the shareholders of EGG
Group for the purchase of 100% of the share capital of the three companies. EGG Group
is jointly in the business of development and provision of wireless products and services
accessible through telephones or other forms of communication devices. The business
revenues and profit and loss of the EGG Group from June 26, 2008 to June 30, 2008 are
insignificant. If the acquisition had occurred on January 1, 2008, the Group’s unaudited
service revenues and net income would have been P
= 62,948.16 million and
P
= 11,260.38 million, respectively. Since acquisition date, the EGG Group’s unaudited
service revenues and net loss amounted to P
= 45.31 million and P
= 18.29 million,
respectively.
The purchase price allocation has been prepared on a preliminary basis, and reasonable
changes are expected as additional information becomes available. The following is a
summary of the provisional fair values of the assets acquired and liabilities assumed as of
the date of acquisition:
Receivables - net
Prepayments and other current assets - net
Property and equipment - net
Accounts payable and accrued expenses
Net assets
Goodwill arising from acquisition
Total consideration, satisfied by cash
Fair value
recognized
on acquisition
(In Thousand
Pesos)
P
= 35,308
8,842
8,306
52,456
47,949
4,507
346,992
P
= 351,499
The business combination was fully consummated on August 1, 2008 upon release of the
purchase consideration held in escrow pending fulfilment of certain conditions.
32.2 Impairment testing of Goodwill
Goodwill acquired through business combination with EGG Group was allocated to the
mobile content and applications development services business CGU, which is part of the
“Others” reporting segment.
The recoverable amount of the CGU which exceeds the carrying amount by
P
= 98.00 million as of December 31, 2008 has been determined based on value in use
calculation using cash flow projections from financial budgets covering a 5-year period.
The pretax discount rate applied to cash flow projections is 15% and cash flows beyond
the 5-year period are extrapolated using a 3% long-term growth rate.
*SGVMC112197*
- 95 The calculations of value in use for CGU are most sensitive to the following assumptions:
(a) 5-year growth rates on subscriber base and average revenue per user based on
management’s projections; (b) contract values of application development services
contracts based on management’s target growth rates; (c) discount rate based on the
risk-adjusted weighted average cost of capital of the telecommunications industry; and
(d) long-term growth rate beyond the 5-year period based on the expected long-term
gross domestic product growth of the Philippines.
With regard to the assessment of value in use of the CGU, there are reasonably possible
changes in key assumptions which could cause the carrying value of the CGU to exceed
its recoverable amount. Specifically, this pertains to the 5-year growth rate assumptions.
A reduction in the assumed 21% compounded annual growth rate during the 5-year
period to 12% would give a value in use equal to the carrying amount of the CGU.
*SGVMC112197*
SyCip Gorres Velayo & C o.
6760 Ayala Av enue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.c om.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Manila Water Company, Inc.
MWSS Building, Katipunan Road
Balara, Quezon City
We have audited the accompanying consolidated financial statements of Manila Water Company, Inc.
and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2008 and 2007,
and the consolidated statements of income, consolidated statements of changes in equity and
consolidated statements of cash flows for each of the three years in the period ended
December 31, 2008, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Philippine Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or
error; selecting and applying appropriate accounting policies; and making accounting estimates that are
reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
*SGVMC112683*
A member firm of Ernst & Young Global Limited
MANILA WATER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
2007
(As restated Note 2)
2008
ASSETS
Current Assets
Cash and cash equivalents (Notes 4, 12, 24 and 25)
Short-term cash investments (Notes 4, 24 and 25)
Receivables - net (Notes 5, 12, 16, 17, 24 and 25)
Materials and supplies (Note 6)
Other current assets (Notes 7 and 24)
Total Current Assets
Noncurrent Assets
Property and equipment - net (Notes 8 and 12)
Service concession assets - net (Notes 2 and 9)
Deferred income tax assets - net (Note 17)
Available-for-sale financial assets (Notes 16, 23, 24 and 25)
Other noncurrent assets - (Notes 10 and 25)
Total Noncurrent Assets
P
=3,989,080,400
3,368,007,005
593,137,541
2,879,069
641,858,624
8,594,962,639
=1,536,620,847
P
1,387,910,704
371,588,131
41,334,362
784,632,729
4,122,086,773
722,897,730
557,971,222
23,913,788,976 21,914,371,230
327,660,587
699,647,081
1,551,316,379
597,675,980
1,257,840,997
49,754,389
27,773,504,669 23,819,419,902
P
=36,368,467,308 =
P27,941,506,675
LIABILITIES AND EQUITY
Current Liabilities
Accounts and other payables (Notes 11, 24 and 25)
Current portion of:
Service concession obligation (Notes 2, 9 and 25)
Long-term debt (Notes 12, 24 and 25)
Income tax payable (Note 17)
Payables to stockholders (Notes 16, 24 and 25)
Total Current Liabilities
Noncurrent Liabilities
Long-term debt - net of current portion
(Notes 12, 17, 24 and 25)
Service concession obligation - net of current portion
(Notes 2, 9 and 25)
Customers’ guaranty and other deposits (Notes 24 and 25)
Pension liabilities (Note 14)
Deferred credits
Total Noncurrent Liabilities
Total Liabilities
P
=2,739,940,537
=3,477,889,158
P
558,278,658
454,755,376
368,150,534
110,170,458
4,231,295,563
359,510,518
241,318,202
222,744,167
125,426,433
4,426,888,478
12,897,232,245
5,995,255,579
3,475,379,305
1,034,164,494
114,669,873
158,139,752
17,679,585,669
21,910,881,232
3,845,650,703
736,721,020
91,596,205
366,325,114
11,035,548,621
15,462,437,099
(Forward)
*SGVMC112683*
-2December 31
2007
(As restated 2008
Note 2)
Equity
Attributable to equity holders of Manila Water
Company, Inc.
Capital stock (Note 13)
Preferred stock
Common stock
Additional paid-in capital
Subscriptions receivable
Total paid-up capital
Common stock options outstanding (Note 13)
Retained earnings
Appropriated for capital expenditures (Note 13)
Unappropriated
Unrealized gain on available-for-sale financial assets
(Note 23)
Treasury shares - at cost (Notes 1 and 13)
Minority interests (Note 2)
Total Equity
P
=900,000,000
2,022,878,793
2,922,878,793
3,345,448,824
(108,260,650)
6,160,066,967
7,445,858
=900,000,000
P
2,018,185,310
2,918,185,310
3,234,454,456
(55,940,286)
6,096,699,480
7,969,056
4,000,000,000
4,775,852,924
8,775,852,924
2,000,000,000
4,873,451,623
6,873,451,623
6,670,143
14,950,035,892
(500,000,000)
14,450,035,892
7,550,184
14,457,586,076
P
=36,368,467,308
4,710,168
12,982,830,327
(503,760,751)
12,479,069,576
–
12,479,069,576
=27,941,506,675
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112683*
MANILA WATER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2008
REVENUE
Water
Environmental charges
Sewer
Revenue from projects outside East Zone (Note 26)
Other income
COSTS AND EXPENSES
Depreciation and amortization (Notes 8 and 9)
Salaries, wages and employee benefits (Notes 13, 14 and 16)
Power, light and water
Management, technical and professional fees (Note 16)
Repairs and maintenance
Provision for probable losses (Notes 5 and 6)
Collection fees
Business meetings and representation
Regulatory costs (Note 20)
Taxes and licenses
Water treatment chemicals
Transportation and travel
Occupancy costs (Note 21)
Wastewater costs
Insurance
Postage, telephone and supplies
Costs associated from projects outside East Zone (Note 26)
Advertising
Premium on performance bond (Note 20)
Other expenses
INCOME BEFORE OTHER INCOME (EXPENSES)
OTHER INCOME (EXPENSES)
Revenue from rehabilitation works
Cost of rehabilitation works
Foreign currency differentials (Note 1)
Foreign exchange gains (losses)
Interest income (Notes 18 and 23)
Amortization of deferred credits (Note 2)
Interest expense (Notes 12 and 18)
Mark-to-market gain on derivatives (Notes 10 and 24)
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM) INCOME
TAX (Note 17)
NET INCOME
Years Ended December 31
2007
2006
(As restated (As restated Note 2)
Note 2)
P
= 7,540,086,522
889,922,526
384,836,308
16,523,679
82,221,060
8,913,590,095
=6,241,051,038
P
637,258,409
348,718,965
–
104,874,150
7,331,902,562
=5,250,230,137
P
532,079,975
308,139,512
–
119,190,298
6,209,639,922
1,890,509,326
933,485,911
447,934,228
244,060,464
139,018,031
115,719,486
99,293,367
76,427,203
81,035,813
61,844,785
53,804,074
48,579,938
46,431,282
31,983,177
27,478,356
27,051,201
19,831,471
17,161,314
7,137,869
26,787,863
4,395,575,159
4,518,014,936
1,405,857,421
917,123,438
446,558,592
247,918,896
135,571,565
130,161,196
91,231,669
58,764,671
76,263,265
57,173,375
39,812,351
40,749,284
42,724,394
39,434,407
24,413,526
25,254,047
–
25,531,700
21,659,421
38,119,027
3,864,322,245
3,467,580,317
1,116,216,087
927,678,708
395,943,450
268,529,522
87,020,696
394,252,040
73,125,854
47,149,799
65,660,962
52,454,788
48,884,748
40,539,923
45,541,677
26,118,435
27,272,019
20,369,962
–
22,616,031
25,127,429
26,683,595
3,711,185,725
2,498,454,197
3,051,228,506
(3,051,228,506)
1,424,380,822
(1,452,035,855)
204,888,655
202,903,685
(689,266,684)
47,847,293
(261,282,084)
4,256,732,852
3,998,699,281
(3,998,699,281)
(728,135,596)
1,211,233,434
152,745,791
9,659,567
(528,794,345)
–
116,708,851
3,584,289,168
3,636,971,844
(3,636,971,844)
(544,076,538)
674,275,788
294,978,672
5,445,624
(588,398,364)
–
(157,774,818)
2,340,679,379
1,468,665,210
987,343,057
P
= 2,788,067,642
=2,596,946,111
P
(123,790,274)
=2,464,469,653
P
(Forward)
*SGVMC112683*
-2-
2008
Net Income Attributable to:
Equity holders of Manila Water Company, Inc.
Minority interests (Note 2)
Earnings Per Share (Note 15)
Basic
Diluted
P
= 2,788,020,190
47,452
P
= 2,788,067,642
P
= 1.13
P
= 1.13
Years Ended December 31
2007
2006
(As restated (As restated Note 2)
Note 2)
–
–
=2,596,946,111
P
=2,464,469,653
P
–
–
=2,596,946,111
P
=2,464,469,653
P
P1.06
=
P
=1.06
P1.00
=
=1.00
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112683*
MANILA WATER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
2008
Years Ended December 31
2007
2006
(As restated (As restated Note 2)
Note 2)
ATTRIBUTABLE TO EQUITY HOLDERS OF MANILA
WATER COMPANY, INC.
CAPITAL STOCK (Note 13)
Preferred stock - P
=0.10 par value, 10% cumulative, voting
participating, nonredeemable and nonconvertible
Authorized, issued and outstanding - 4,000,000,000 shares
Preferred stock - P
=1 par value, 8% cumulative, nonvoting,
nonparticipating, nonconvertible, redeemable at the
Company’s option
Authorized and issued - 500,000,000 shares
Common stock - P
=1 par value
Authorized - 3,100,000,000 shares
Issued - 2,005,443,965 shares
Subscribed common stock - 17,434,828 shares in 2008,
12,741,345 shares in 2007 and 11,330,000 shares in 2006
Balance at beginning of year
Additions during the year
Balance at end of year
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year
Additions during the year
Balance at end of year
SUBSCRIPTIONS RECEIVABLE
Balance at beginning of year
Additions during the year
Collections during the year
Balance at end of year
COMMON STOCK OPTIONS OUTSTANDING (Note 13)
Balance at beginning of year
Grants of stock options
Exercise of stock options
Balance at end of year
P
=400,000,000
=400,000,000
P
=400,000,000
P
500,000,000
900,000,000
500,000,000
900,000,000
500,000,000
900,000,000
2,005,443,965
2,005,443,965
2,005,443,965
12,741,345
4,693,483
17,434,828
2,922,878,793
11,330,000
1,411,345
12,741,345
2,918,185,310
–
11,330,000
11,330,000
2,916,773,965
3,234,454,456
110,994,368
3,345,448,824
3,177,058,289
57,396,167
3,234,454,456
3,074,583,093
102,475,196
3,177,058,289
(55,940,286)
(58,702,416)
6,382,052
(108,260,650)
(41,699,920)
(24,241,314)
10,000,948
(55,940,286)
–
(48,422,963)
6,723,043
(41,699,920)
7,969,056
42,479,726
(43,002,924)
7,445,858
6,091,424
36,443,830
(34,566,198)
7,969,056
52,113,307
20,716,388
(66,738,271)
6,091,424
(Forward)
*SGVMC112683*
-2-
2008
RETAINED EARNINGS (Note 13)
Appropriated for capital expenditures:
Balance at beginning of year
Additional appropriations during the year
Balance at end of year
Unappropriated:
Balance at beginning of year, as previously reported
Cumulative effects of:
Change in accounting policy for pension cost (Note 2)
Adoption of accounting standard on service concession
arrangements as of January 1 (Note 2)
Balance at beginning of year, as restated
Net income
Appropriation for capital expenditures
Dividends declared
Balance at end of year
UNREALIZED GAIN ON AVAILABLE-FOR-SALE
FINANCIAL ASSETS (Note 23)
Balance at beginning of year
Changes in fair value of available-for-sale financial assets
Transferred to income and expense during the year
Balance at end of year
TREASURY SHARES - AT COST (Note 13)
Balance at beginning of year
Issuance of treasury shares
Redemption of preferred shares
Balance at end of year
MINORITY INTERESTS (Note 2)
Balance at beginning of year
Acquisition
Net income
Balance at end of year
Total recognized income for the year
Net income for the year
Recognized directly in equity
Years Ended December 31
2007
2006
(As restated (As restated Note 2)
Note 2)
P
= 2,000,000,000
2,000,000,000
4,000,000,000
=–
P
2,000,000,000
2,000,000,000
P–
=
–
–
5,758,369,350
6,115,908,683
4,289,433,364
77,250,341
96,170,235
13,677,916
(962,168,068)
4,873,451,623
2,788,020,190
(2,000,000,000)
(885,618,889)
4,775,852,924
8,775,852,924
(1,158,998,716)
5,053,080,202
2,596,946,111
(2,000,000,000)
(776,574,690)
4,873,451,623
6,873,451,623
(1,146,805,972)
3,156,305,308
2,464,469,653
–
(567,694,758)
5,053,080,203
5,053,080,203
4,710,168
2,285,352
(325,377)
6,670,143
3,850,107
2,012,461
(1,152,400)
4,710,168
65,687,988
8,955,954
(70,793,835)
3,850,107
(503,760,751)
3,760,751
–
(500,000,000)
14,450,035,892
(304,122,551)
361,800
(200,000,000)
(503,760,751)
12,479,069,576
(263,786,861)
59,664,310
(100,000,000)
(304,122,551)
10,811,031,517
–
7,502,732
47,452
7,550,184
–
–
–
–
–
–
–
–
P
= 14,457,586,076
=12,479,069,576
P
=
P10,811,031,517
P
= 2,788,067,642
2,285,352
P
= 2,790,352,994
=2,596,946,111
P
2,012,461
=2,598,958,572
P
=2,464,469,653
P
8,955,954
=2,473,425,607
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112683*
MANILA WATER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2006
2007
(As restated (As restated 2008
Note 2)
Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization (Notes 8 and 9)
Interest expense (Notes 12 and 18)
Share-based payments (Note 13)
Loss on early retirement of loans (Note 12)
Gain on sale of property and equipment
Interest income (Note 18)
Operating income before changes in operating assets and
liabilities
Changes in operating assets and liabilities
Decrease (increase) in:
Receivables
Materials and supplies
Other current assets
Increase (decrease) in:
Accounts and other payables
Payables to stockholders
Net cash generated from operations
Income taxes paid
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received
Proceeds from sale of property and equipment
Additions to:
Property and equipment (Note 8)
Service concession assets (Note 9)
Decrease (increase) in:
Short-term cash investments
Available-for-sale financial assets
Other noncurrent assets
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in customers’ guaranty and other deposits
Long-term debt (Note 12):
Availments
Payments
Payments of service concession obligation
Payments of dividends (Note 13)
Collection from subscriptions receivable
Redemption of preferred shares (Note 13)
Interest paid
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR (Note 4)
CASH AND CASH EQUIVALENTS AT
END OF YEAR (Note 4)
P
= 4,256,732,852
=3,584,289,168
P
=2,340,679,379
P
1,890,509,326
689,266,684
42,479,726
8,893,450
(11,364)
(204,888,655)
1,405,857,421
528,794,345
36,443,830
–
(1,127,644)
(152,745,791)
1,116,216,087
582,952,740
71,638,473
–
(605,350)
(294,978,672)
6,682,982,019
5,401,511,329
3,815,902,657
(176,500,885)
38,455,293
142,774,105
(86,977,429)
30,488,247
(287,492,821)
347,290
8,447,850
(331,969,437)
511,980,737
(15,255,975)
7,184,435,294
(951,272,350)
6,233,162,944
(1,250,761,006)
7,465,760
3,814,234,080
(645,342,291)
3,168,891,789
190,141,809
(7,268,037)
3,675,602,132
–
3,675,602,132
159,840,130
387,348
163,294,300
1,193,921
322,082,806
605,350
(331,931,602)
(3,494,068,555)
(303,357,262)
(3,644,499,340)
(208,117,279)
(3,496,517,829)
(1,980,096,301)
(951,680,424)
(997,529,820)
(7,595,079,224)
(1,210,910,704)
(299,076,730)
(14,518,096)
(5,307,873,911)
(177,000,000)
872,189,443
(13,056,613)
(2,699,814,122)
89,258,112
528,326,225
132,914,364
6,703,740,073
(1,274,679,901)
(463,282,801)
(885,694,826)
24,125,314
–
(379,090,138)
3,814,375,833
1,252,984,067
(2,633,831,329)
(430,878,672)
(775,364,216)
10,362,749
(200,000,000)
(531,202,382)
(2,779,603,558)
4,939,504,216
(995,651,945)
(637,427,146)
(566,714,852)
14,109,230
(100,000,000)
(320,958,781)
2,465,775,086
2,452,459,553
(4,918,585,680)
3,441,563,096
1,536,620,847
6,455,206,527
3,013,643,431
P
= 3,989,080,400
=1,536,620,847
P
=6,455,206,527
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC112683*
MANILA WATER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Manila Water Company, Inc. (the Parent Company) was incorporated on January 6, 1997 and
started commercial operations on January 1, 2000. The Parent Company is a joint venture among
Ayala Corporation (AC), United Utilities Pacific Holdings, BV (United Utilities), a subsidiary of
United Utilities PLC, Mitsubishi Corporation and BPI Capital Corporation (BPI Capital). The
Parent Company and Subsidiaries (collectively referred to as the Group) are involved in providing
water, sewerage and sanitation, and distribution services.
AC held part of its shares in the Company through MWC Holdings, Inc. (MWCHI) until MWCHI
was merged into the Parent Company on October 12, 2004. On May 31, 2004, International
Finance Corporation (IFC) became one of the principal shareholders of the Parent Company.
On December 23, 2004, AC and United Utilities assigned and transferred their participating
preferred shares in the Parent Company comprising of 200.00 million and 133.33 million shares,
respectively, to Philwater Holdings Company, Inc. (Philwater) in exchange for its 333.33 million
common shares. Philwater is a special purpose company, 60.0% owned by AC and 40.0% owned
by United Utilities, the principal assets of which is the 333.33 million participating preferred
shares of the Company. As of December 31, 2008 and 2007, Philwater owns 333.33 million
participating preferred shares of the Parent Company.
On March 18, 2005, the Parent Company launched its Initial Public Offering in which a total of
745.33 million common shares were offered at an offer price of P
=6.50 per share. Of the
745.33 million common shares offered, 244.60 million common shares were from the Parent
Company’s unissued capital stock; 305.40 million common shares were from the Parent
Company’s treasury stock; and 195.33 million common shares were from the Parent Company’s
existing shareholders.
The Parent Company’s principal place of business is MWSS Building, Katipunan Road, Balara,
Quezon City.
On February 21, 1997, the Parent Company entered into a concession agreement (the Agreement)
with Metropolitan Waterworks and Sewerage System (MWSS), a government corporation
organized and existing pursuant to Republic Act (RA) No. 6234, as amended, with respect to the
MWSS East Zone (East Zone). The Agreement sets forth the rights and obligations of the
Company throughout the 25-year concession period. The MWSS Regulatory Office (Regulatory
Office) monitors and reviews the performance of each of the Concessionaires the Parent Company
and Maynilad Water Services, Inc. (Maynilad), the West Zone Concessionaires.
Under the Agreement, MWSS grants the Parent Company (as contractor to perform certain
functions and as agent for the exercise of certain rights and powers under RA No. 6234) the sole
right to manage, operate, repair, decommission, and refurbish all fixed and movable assets (except
certain retained assets) required to provide water delivery and sewerage services in the East Zone
*SGVMC112683*
-2for a period of 25 years commencing on August 1, 1997 (the Commencement Date) to May 6,
2022 (the Expiration Date) or the early termination date as the case may be. While the Parent
Company has the right to manage, operate, repair and refurbish specified MWSS facilities in the
East Zone, legal title to these assets remains with MWSS. The legal title to all fixed assets
contributed to the existing MWSS system by the Parent Company during the Concession remains
with the Parent Company until the Expiration Date (or an early termination date) at which time all
rights, titles and interest in such assets will automatically vest in MWSS.
On Commencement Date, the Parent Company officially took over the operations of the East
Zone. Rehabilitation work for the service area commenced immediately thereafter. As provided
in the Parent Company’s project plans, operational commercial capacity will be attained upon
substantial completion of the rehabilitation work.
Under the Agreement, the Parent Company is entitled to the following rate adjustments:
a. Annual standard rate adjustment to compensate for increases in the consumer price index
(CPI);
b. Extraordinary price adjustment (EPA) to account for the financial consequences of the
occurrence of certain unforeseen events stipulated in the Agreement; and
c. Foreign Currency Differential Adjustment (FCDA) to recover foreign exchange losses
including accruals and carrying costs thereof arising from MWSS loans and any
Concessionaire loans used for capital expenditures and concession fee payments, in
accordance with the provisions set forth in Amendment No. 1 of the Agreement dated
October 12, 2001 (see Notes 2, 10 and 11).
These rate adjustments are subject to a rate adjustment limit which is equivalent to the sum of
Consumer Price index published in the Philippines, Extraordinary Price adjustment and Rebasing
Convergence adjustment as defined in the Agreement.
The Parent Company is also allowed a fixed currency exchange rate adjustment (CERA) of P
=1.00
per cubic meter (cu.m.).
MWSS exercised its option to implement general Rate Rebasing starting January 1, 2003, and
approved through RO Resolution No. 02-007 and Board of Trustees Resolution No. 329-2002,
both dated December 13, 2002. The Parent Company’s new tariff that was implemented gradually
follows:
a. =
P10.06/cu.m. out of the =
P12.22/cu.m. rate rebasing determination will be implemented
effective January 1, 2003; and
b. Subsequent adjustments shall be consistent with the Net Present Value guideline set forth in
the resolution.
On December 13, 2007, MWSS passed Resolution No. 2007-278 adopting and approving the
MWSS-RO's resolutions that contain the final evaluation and determination of the Parent
Company's Rate Rebasing Proposal. Under the said resolution, the MWSS approved a one-time
*SGVMC112683*
-3tariff adjustment of 75.07% over the basic tariff. However, in order to temper the increases in
favor of the customers, the tariff adjustments are to be implemented on a staggered basis over a
five year period, but adjusted for the net present value impact.
The said staggered implementation is premised on certain conditions, such as the adoption of
additional Key Performance Indicators and Business Efficiency Measures, minimum NonRevenue Water level of 25%, rationalization of Sewerage and Environmental Charges, reclassification of some government accounts, exclusion of CERA from the water bill, among
others. The first of a series of annual adjustments were implemented on January 1, 2008
amounting to an increase of P
=5.00 per cubic meter based on the all-in weighted average tariff.
The Parent Company also submitted a Business Plan which was approved by the MWSS-RO. It
included proposed expenditures on (1) a Reliability Investment Plan which will focus on service
level sustainability, earthquake and natural calamity contingency and Angat reliability, and (2) an
Expansion Investment Plan which includes the development of new water sources, network
expansion and implementation of the MWSS wastewater masterplan. These investments amount
to an estimated P
=187 billion to be spent over a fifteen year period, for both capital and operating
expenditures.
The Parent Company’s Board of Directors (BOD) delegated to the Parent Company’s Audit and
Governance Committee the authority to approve the issuance of the 2008 consolidated financial
statements. The Audit and Governance Committee approved and authorized the issue of the
accompanying consolidated financial statements on February 11, 2009.
2. Summary of Significant Accounting Policies
Basis of Preparation
The consolidated financial statements of the Group have been prepared using the historical cost
basis, except for available-for-sale (AFS) financial assets and derivative financial instruments that
have been measured at fair value. The Parent Company and its Subsidiaries’ presentation and
functional currency is the Philippine Peso (P
=).
Statement of Compliance
The consolidated financial statements of the Group have been prepared in compliance with
Philippine Financial Reporting Standards (PFRS).
Basis of Consolidation
The consolidated financial statements include the financial statements of the Parent Company and
its Subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting
period as the Parent Company.
The consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances. All significant intercompany transactions
and balances, including intercompany profits and unrealized profits and losses, are eliminated in
the consolidation.
*SGVMC112683*
-4Subsidiaries are consolidated from the date of acquisition, being the date on which the Group
obtains control, and continue to be consolidated until the date that such control ceases.
The consolidated financial statements comprise the financial statements of the Parent Company
and the following wholly and majority owned subsidiaries:
Manila Water International Solutions
Manila Water Total Solutions
Northern Waterworks and Rivers Cebu, Inc.
Effective Percentages
of Ownership
2008
100
100
90
Minority interests represent the portion of profit or loss and net assets in subsidiaries not wholly
owned and are presented separately in the consolidated statement of income and changes in equity
and within the equity section in the consolidated balance sheet, separately from the Group’s
equity. Transactions with minority interests are handled in the same way as transactions with
external parties.
Changes in Accounting Policies and Disclosures
The accounting policies adopted are consistent with those of the previous financial year except for
the adoption of the following Philippine Interpretations which became effective on
January 1, 2008, and amendments to existing standards that became effective on July 1, 2008:
·
·
·
·
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions
Philippine Interpretation IFRIC 12, Service Concession Arrangements
Philippine Interpretation IFRIC 14, Philippine Accounting Standards(PAS) 19, The Limit
on a Defined Benefit Asset, Minimum Funding Requirement and their Interaction
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and
PFRS 7, Financial Instruments: Disclosures – Reclassification of Financial Assets
Adoption of these changes in PFRS did not have any significant effect to the Group except for
Philippine Interpretation IFRIC 12 which gave rise to revision of the Group’s accounting policies.
The principal effects of Philippine Interpretation IFRIC 12, Service Concession Arrangements
follow:
Based on the Group’s assessment, its service concession agreement with MWSS qualified under
the Intangible Asset model. The effect of the adoption of the Interpretation required the Group to
recognize the fair value of its right to charge its customers, which resulted in the following
consequential effects:
·
Increase in total assets with a corresponding increase in total liabilities. The rehabilitation
works performed by the Group (previously recognized as property and equipment) and the
present value of the total estimated concession fee payments were recognized as intangible
assets in accordance with PAS 38, Intangible Assets. The intangible asset is amortized using
the straight-line method over the life of the concession agreement. Previously, the asset
*SGVMC112683*
-5recognized under the concession agreement was amortized based on the ratio of the nominal
value of total estimated concession fee payments to the remaining projected billable water
volume over the remaining concession period.
·
As the related service concession obligation is now recognized, this resulted in additional
finance cost to the Group due to the accretion of the obligation. The increase in intangible
assets, together with the change in amortization method described above, also resulted in an
increase in amortization expense.
·
In connection with the rehabilitation works performed, the Group also recognized revenue and
costs in accordance with PAS 11, Construction Contracts. It measures the revenue from
rehabilitation works at the fair value of the consideration received or receivable. Given that
the Group has subcontracted the rehabilitation works to outside contractors, the recognized
revenue from rehabilitation works is equal to the related cost.
·
As the service concession obligations are denominated in foreign currencies these were
restated to their peso equivalent using the exchange rate at balance sheet date. The related
foreign currency differential adjustment under the concession agreement provided for a
reimbursement of an amount in excess of the base rate agreed during the rate rebasing exercise
with MWSS. Consequently, the foreign exchange differential adjustment has been capitalized
or credited as part of other noncurrent assets or accounts and other payables, respectively.
The following table shows the impact of the adoption of Philippine Interpretation IFRIC 12 to the
Parent Company’s financial statements as of and for the year ended December 31, 2007 and 2006:
Service concession assets - net
Service concession obligations
Property and equipment - net
Deferred FCDA
Revenue from rehabilitation works
Cost of rehabilitation works
Foreign currency differentials
Foreign exchange gains
Deferred income tax assets - net
Net income
Retained Earnings, January 1
Increase (Decrease)
2007
2006
=18,389,687,603 P
P
=15,548,711,517
4,205,161,221
4,930,623,014
(15,359,529,534) (12,222,047,111)
305,255,413
182,746,025
3,998,699,281
3,636,971,844
3,998,699,281
3,636,971,844
(126,857,065)
(177,911,364)
643,110,753
340,465,641
518,090,497
627,705,917
196,830,648
(12,192,744)
(1,158,998,716) (1,146,805,972)
*SGVMC112683*
-6In 2008, as the corridor approach is the preferred method in accounting for actuarial gains/losses,
the Group changed its accounting policy on retirement cost from immediate recognition of
actuarial gains/losses to corridor approach. The following table shows the impact of the change:
Pension liabilities
Deferred income tax assets
Net income
Retained earnings, January 1
Increase (Decrease)
2007
2006
(P
=118,846,678) (P
=147,954,208)
(41,596,337)
(51,783,973)
(18,919,894)
82,492,319
96,170,235
13,677,916
Future Changes in Accounting Policies
The Group has not applied the following PFRS and Philippine Interpretations which are not yet
effective for the year ended December 31, 2008. Except as otherwise indicated, the Group does
not expect the adoption of these new and amended PFRS and Philippine Interpretations to have
significant impact on its consolidated financial statements.
Effective in 2009
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards – Cost of an Investment
in a Subsidiary, Jointly Controlled Entity or Associate
The amended PFRS 1 allows an entity, in its separate financial statements, to determine the cost of
investments in subsidiaries, jointly controlled entities or associates (in its opening PFRS financial
statements) as one of the following amounts: a) cost determined in accordance with PAS 27; b) at
the fair value of the investment at the date of transition to PFRS, determined in accordance with
PAS 39; or c) previous carrying amount (as determined under generally accepted accounting
principles) of the investment at the date of transition to PFRS.
PFRS 2, Share-based Payment - Vesting Condition and Cancellations
The standard has been revised to clarify the definition of a vesting condition and prescribes the
treatment for an award that is effectively cancelled. It defines a vesting condition as a condition
that includes an explicit or implicit requirement to provide services. It further requires nonvesting conditions to be treated in a similar fashion market conditions. Failure to satisfy a nonvesting condition that is within the control of either the entity or the counterparty is accounted for
as a cancellation. However, failure to satisfy a nonvesting condition that is beyond the control of
either party does not give rise to a cancellation.
PFRS 8, Operating Segments
PFRS 8 will replace PAS 14, Segment Reporting, and adopts a full management approach to
identifying, measuring and disclosing the results of an entity’s operating segments. The
information reported would be that which management uses internally for evaluating the
performance of operating segments and allocating resources to those segments. Such information
may be different from that reported in the consolidated balance sheet and consolidated statement
of income, and the entity will provide explanations and reconciliations of the differences. This
standard is only applicable to an entity that has debt or equity instruments that are traded in a
public market or that files (or is in the process of filing) its financial statements with a securities
commission or similar party. The Group is currently assessing the impact of this Standard on its
manner of reporting information.
*SGVMC112683*
-7Amendments to PAS 1, Presentation of Financial Statements
This Amendment introduces a new statement of comprehensive income that combines all items of
income and expenses recognized in the profit or loss together with ‘other comprehensive income’.
Entities may choose to present all items in one statement, or to present two linked statements, a
separate statement of income and a statement of comprehensive income. This Amendment also
requires additional requirements in the presentation of the balance sheet and owner’s equity as
well as additional disclosures to be included in the financial statements. The Group will assess the
impact of the Standard on its current manner of reporting all items of income and expenses.
Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
These amendments to PAS 27 will be effective on January 1, 2009, and provide changes in respect
of the holding companies, separate financial statements including (a) the deletion of ‘cost method’,
making the distinction between pre- and post-acquisition profits no longer required; and (b) in
cases of reorganizations where a new parent is inserted above an existing parent of the group
(subject to meeting specific requirements), the cost of the subsidiary is the previous carrying
amount of its share of equity items in the subsidiary rather than its fair value. All dividends will be
recognized in profit or loss. However, the payment of such dividends requires the entity to
consider whether there is an indicator of impairment.
Amendment to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation
These amendments specify, among others, that puttable financial instruments will be classified as
equity if they have all of the following specified features: (a) the instrument entitles the holder to
require the entity to repurchase or redeem the instrument (either on an ongoing basis or on
liquidation) for a pro rata share of the entity’s net assets; (b) the instrument is in the most
subordinate class of instruments, with no priority over other claims to the assets of the entity on
liquidation; (c) all instruments in the subordinate class have identical features; (d) the instrument
does not include any contractual obligation to pay cash or financial assets other than the holder’s
right to a pro rata share of the entity’s net assets; and (e) the total expected cash flows attributable
to the instrument over its life are based substantially on the profit or loss, a change in recognized
net assets, or a change in the fair value of the recognized and unrecognized net assets of the entity
over the life of the instrument.
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
This interpretation requires customer loyalty award credits to be accounted for as a separate
component of the sales transaction in which they are granted and therefore part of the fair value of
the consideration received is allocated to the award credits and realized in income over the period
that the award credits are redeemed or have expired.
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
This interpretation provides guidance on identifying foreign currency risks that qualify for hedge
accounting in the hedge of a net investment; where within the group the hedging instrument can be
held in the hedge of a net investment; and how an entity should determine the amount of foreign
currency gains or losses, relating to both the net investment and the hedging instrument, to be
recycled on disposal of the net investment.
*SGVMC112683*
-8Improvements to PFRS
In May 2008, the International Accounting Standards Board issued its first omnibus of
amendments to certain standards, primarily with a view to removing inconsistencies and clarifying
wording. There are the separate transitional provisions for each standard:
·
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
When a subsidiary is held for sale, all of its assets and liabilities will be classified as held for
sale under PFRS 5, even when the entity retains a noncontrolling interest (previously referred
to as ‘minority interests’) in the subsidiary after the sale.
·
PAS 1, Presentation of Financial Statements
Assets and liabilities classified as held for trading are not automatically classified as current in
the balance sheet.
·
PAS 16, Property, Plant and Equipment
The amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’, to be
consistent with PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations and
PAS 36, Impairment of Assets.
Items of property, plant and equipment held for rental that are routinely sold in the ordinary
course of business after rental, are transferred to inventory when rental ceases and they are held
for sale. Proceeds of such sales are subsequently shown as revenue. Cash payments on initial
recognition of such items, the cash receipts from rents and subsequent sales are all shown as
cash flows from operating activities.
·
PAS 19, Employee Benefits
The standard revises the definition of ‘past service cost’ to include reductions in benefits
related to past services (‘negative past service cost’) and to exclude reductions in benefits
related to future services that arise from plan amendments. Amendments to plans that result in
a reduction in benefits related to future services are accounted for as a curtailment.
It also revises the definition of ‘return on plan assets’ to exclude plan administration costs if
they have already been included in the actuarial assumptions used to measure the defined
benefit obligation.
Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus on the
point in time at which the liability is due to be settled.
This deletes the reference to the recognition of contingent liabilities to ensure consistency with
PAS 37, Provisions, Contingent Liabilities and Contingent Assets.
·
PAS 23, Borrowing Costs
This standard revises the definition of borrowing costs to consolidate the types of items that
are considered components of ‘borrowing costs’, i.e., components of the interest expense
calculated using the effective interest rate method.
*SGVMC112683*
-9·
PAS 36, Impairment of Assets
When discounted cash flows are used to estimate ‘fair value less costs to sell’, additional
disclosure is required about the discount rate, consistent with disclosures required when the
discounted cash flows are used to estimate ‘value in use’.
·
PAS 38, Intangible Assets
Expenditure on advertising and promotional activities is recognized as an expense when the
Group either has the right to access the goods or has received the services. Advertising and
promotional activities now specifically include mail order catalogues.
This also deletes references to there being rarely, if ever, persuasive evidence to support an
amortization method for finite life intangible assets that results in a lower amount of
accumulated amortization than under the straight-line method, thereby effectively allowing the
use of the unit-of-production method.
·
PAS 39, Financial Instruments: Recognition and Measurement
Changes in circumstances relating to derivatives specifically derivatives designated or dedesignated as hedging instruments after initial recognition - are not reclassifications.
When financial assets are reclassified as a result of an insurance company changing its
accounting policy in accordance with paragraph 45 of PFRS 4 Insurance Contracts, this is a
change in circumstance, not a reclassification. It also removes the reference to a ‘segment’
when determining whether an instrument qualifies as a hedge. It requires use of the revised
effective interest rate (rather than the original effective interest rate) when re-measuring a debt
instrument on the cessation of fair value hedge accounting.
Effective in 2010
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial
Statements
Revised PFRS 3 introduces a number of changes in the accounting for business combinations that
will impact the amount of goodwill recognized, the reported results in the period that an
acquisition occurs, and future reported results. Revised PAS 27 requires, among others, that (a)
change in ownership interests of a subsidiary (that do not result in loss of control) will be
accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to
a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling and
noncontrolling interests (previously referred to as ‘minority interests’); even if the losses exceed
the noncontrolling equity investment in the subsidiary; and (c) on loss of control of a subsidiary,
any retained interest will be remeasured to fair value and this will impact the gain or loss
recognized on disposal. The changes introduced by revised PFRS 3 and PAS 27 must be applied
prospectively and will affect future acquisitions and transactions with noncontrolling interests.
Amendment to PAS 39, Financial Instruments: Recognition and Measurement –Eligible
Hedged Items
This amendment to PAS 39 will be effective on July 1, 2009, which addresses only the
designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk
or portion in particular situations. The amendment clarifies that an entity is permitted to designate
a portion of the fair value changes or cash flow variability of a financial instrument as a hedged
item.
*SGVMC112683*
- 10 Effective in 2012
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. This interpretation
requires that revenue on construction of real estate be recognized only upon completion, except
when such contract qualifies as construction contract to be accounted for under PAS 11,
Construction Contracts, or involves rendering of services, in which case revenue is recognized
based on stage of completion. Contracts involving provision of services with the construction
materials and where the risks and rewards of ownership are transferred to the buyer on a
continuous basis, will also be accounted for based on stage of completion.
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 dates of acquisition and that are subject to an insignificant risk of change in
value. Other short-term cash placements are classified as short-term cash investments.
Short-term Cash Investments
Short term cash investments are short-term placements with maturities of more than three months
but less than one (1) year from the date of acquisition. These earn interest at the respective shortterm investment rates.
Financial Assets and Financial Liabilities
Date of recognition
The Group recognizes a financial asset or a financial liability on the consolidated balance sheet
when it becomes a party to the contractual provisions of the instrument. Purchases or sales of
financial assets that require delivery of assets within the time frame established by regulation or
convention in the marketplace are recognized on the settlement date. Derivative instruments are
recognized on trade date basis.
Initial recognition of financial instruments
All financial assets are initially recognized at fair value. Except for financial assets at fair value
through profit or loss (FVPL), the initial measurement of financial assets includes transaction
costs. The Group classifies its financial assets in the following categories: financial assets at
FVPL, held-to-maturity (HTM) investments, available-for-sale (AFS) financial assets, and loans
and receivables. The Group classifies its financial liabilities as financial liabilities at FVPL and
other liabilities. The classification depends on the purpose for which the investments were
acquired and whether these are quoted in an active market. Management determines the
classification of its investments at initial recognition and, where allowed and appropriate, reevaluates such designation at every reporting date.
Financial instruments are classified as liability or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity net of any
related income tax benefits.
*SGVMC112683*
- 11 Determination of fair value
The fair value for financial instruments traded in active markets at the balance sheet date is based
on its quoted market price or dealer price quotations (bid price for long positions and ask price for
short positions), without any deduction for transaction costs. When current bid and asking prices
are not available, the price of the most recent transaction provides evidence of the current fair
value as long as there has not been a significant change in economic circumstances since the time
of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation methodologies. Valuation methodologies include net present value
techniques, comparison to similar instruments for which market observable prices exist, option
pricing models, and other relevant valuation models.
Day 1 profit
For transactions other than those related to customers’ guaranty and other deposits, where the
transaction price in a non-active market is different from the fair value from other observable
current market transactions in the same instruments or based on a valuation technique whose
variables include only data from observable market, the Group recognizes the difference between
the transaction price and fair value (a Day 1 profit) in the consolidated statement of income under
“Other income” account unless it qualifies for recognition as some other type of asset. In cases
where use is made of data which is not observable, the difference between the transaction price
and model value is only recognized in the consolidated statement of income when the inputs
become observable or when the instrument is derecognized. For each transaction, the Group
determines the appropriate method of recognizing the ‘Day 1’ profit amount.
Derivatives recorded at FVPL
The Group has certain derivatives that are embedded in the host financial (such as long-term debt)
and nonfinancial (such as purchase orders) contracts. As of December 31, 2008, the Group has
recognized the value of the embedded prepayment option in one of its long-term debt (see
Note 24).
Embedded derivative is separated from the host contract and accounted for as a derivative if all of
the following conditions are met: a) the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks of the host contract; b) a
separate instrument with the same terms as the embedded derivative would meet the definition of a
derivative; and c) the hybrid or combined instrument is not recognized at FVPL. Embedded
derivatives are measured at fair value with fair value changes being reported through profit or loss,
and are carried as assets when the fair value is positive and as liabilities when the fair value is
negative.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under the contract, in which
case reassessment is required. The Group determines whether a modification to cash flows is
significant by considering the extent to which the expected future cash flows associated with the
embedded derivative, the host contract, or both have changed and whether the change is
significant relative to the previously expected cash flows from the contract.
*SGVMC112683*
- 12 Financial assets at FVPL
Financial assets at FVPL include financial assets held for trading and financial assets designated
upon initial recognition as at FVPL.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in
the near term. Derivatives, including separated embedded derivatives, are also classified as held
for trading unless they are designated as effective hedging instruments or a financial guarantee
contract. Gains or losses on investments held for trading are recognized in profit or loss.
Financial assets may be designated at initial recognition as at FVPL if the following criteria are
met:
·
The designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets or recognizing gains or losses on a different basis;
or
·
The assets are part of a group of financial assets which are managed and its performance
evaluated on a fair value basis, in accordance with a documented risk management or
investment strategy; or
·
The financial instrument contains an embedded derivative, unless the embedded derivative
does not significantly modify the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.
The Group’s financial asset designated at FVPL consists of a derivative asset on the Group’s
prepayment option in 2008 and none in 2007 (see Note 10).
HTM investments
HTM investments are quoted nonderivative financial assets with fixed or determinable payments
and fixed maturities for which the Group’s management has the positive intention and ability to
hold to maturity. Where the Group sells other than an insignificant amount of HTM investments,
the entire category would be tainted and reclassified as AFS financial assets. After initial
measurement, these investments are measured at amortized cost using the effective interest rate
method, less impairment in value. Amortized cost is calculated by taking into account any
discount or premium on acquisition and fees that are an integral part of the effective interest rate.
The amortization is included in “Interest” in the consolidated statement of income. Gains and
losses are recognized in income when the HTM investments are derecognized or impaired, as well
as through the amortization process.
As of December 31, 2007, no financial assets have been designated as HTM.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments and fixed
maturities that are not quoted in an active market. These are not entered into with the intention of
immediate or short-term resale and are not designated as AFS financial assets or financial assets at
FVPL. These are included in current assets if maturity is within 12 months from the balance sheet
date; otherwise, these are classified as noncurrent assets. This accounting policy relates to the
consolidated balance sheet captions “Cash and cash equivalents”, “Short-term cash investments”,
“Receivables”, and “Other noncurrent assets - net”.
*SGVMC112683*
- 13 After initial measurement, loans and receivables are subsequently measured at amortized cost
using the effective interest rate method, less allowance for impairment. Amortized cost is
calculated by taking into account any discount or premium on acquisition and fees that are an
integral part of the effective interest rate. The amortization is included in “Interest” in the
consolidated statement of income. The losses arising from impairment of such loans and
receivables are recognized in “Provision for probable losses” in the consolidated statement of
income.
AFS financial assets
AFS financial assets are those which are designated as such or do not qualify to be classified as
financial assets FVPL, HTM investments or loans and receivables. These are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions. These include equity investments, money market papers and other debt instruments.
After initial measurement, AFS financial assets are subsequently measured at fair value. The
effective yield component of AFS debt securities, as well as the impact of restatement on foreign
currency-denominated AFS debt securities, is reported in earnings. The unrealized gains and
losses arising from the fair valuation of AFS financial assets are excluded net of tax from reported
earnings and are reported as ‘Unrealized gain on AFS financial assets’ in the equity section of the
consolidated balance sheet.
When the investment is disposed of, the cumulative gain or loss previously recognized in equity is
recognized as other income in the consolidated statement of income. Where the Group holds more
than one investment in the same security, these are deemed to be disposed of on a first-in first-out
basis. Interest earned on holding AFS financial assets are reported as interest income using the
effective interest rate. Dividends earned on holding AFS financial assets are recognized in the
consolidated statement of income as other income when the right of the payment has been
established. The losses arising from impairment of such investments are recognized as provisions
on impairment losses in the consolidated statement of income.
The details of the Group’s AFS financial assets are disclosed in Note 23.
Other financial liabilities
Other financial liabilities include short-term and long-term debts. All loans and borrowings are
initially recognized at the fair value of the consideration received less directly attributable
transaction costs.
After initial recognition, short-term and long-term debts are subsequently measured at amortized
cost using the effective interest method.
Gains and losses are recognized under the “Other income” and “Other expense” accounts in the
consolidated statement of income when the liabilities are derecognized or impaired, as well as
through the amortization process under the “Interest expense” account.
Customers’ Guaranty and Other Deposits
Customers’ guaranty and other deposits are initially measured at fair value. After initial
recognition, these deposits are subsequently measured at amortized cost using the effective interest
rate method. Amortization of customers’ guaranty and other deposits are included under “Interest
expense” in the consolidated statement of income. The difference between the cash received and
*SGVMC112683*
- 14 its fair value is recognized as “Deferred credits”. Deferred credits are amortized over the
remaining concession period using the effective interest rate method. Amortization of deferred
credits is included under “Other income (expenses)” in the consolidated statement of income.
The unamortized discount of customer’s guaranty and other deposits amounted to P
=158.14 million
and P
=366.33 million, as of December 31, 2008 and 2007, respectively. Additions (refunds) and
amortization of discount of customer’s guaranty and other deposit amounted to (P
=2.03 million)
and P
=206.16 million in 2008, respectively and P
=105.94 million and =
P9.66 million in 2007,
respectively.
Derecognition of Financial Assets and Liabilities
Financial Assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of financial
assets) is derecognized where:
1. the rights to receive cash flows from the asset have expired;
2. the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a “pass-through” arrangement;
or
3. the Group has transferred its rights to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor
retained the risk and rewards of the asset but has transferred the control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset or has entered into a
pass-through arrangement, and has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the
Group’s continuing involvement in the asset. Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at the lower of the original carrying amount of the
asset and the maximum amount of consideration that the Group could be required to repay.
Financial Liabilities
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired. Where an existing financial liability is replaced by another financial
liability from the same lender on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated as a derecognition of the
original liability and the recognition of a new liability, and the difference in the respective carrying
amounts is recognized in profit or loss.
Impairment of Financial Assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial
asset or group of financial assets is impaired. A financial asset or a group of financial assets is
deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one
or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’)
and that loss event (or events) has an impact on the estimated future cash flows of the financial
asset or the group of financial assets that can be reliably estimated.
*SGVMC112683*
- 15 Loans and Receivables
For loans and receivables carried at amortized cost, the Group first assesses whether objective
evidence of impairment exists individually for financial assets that are individually significant, or
collectively for financial assets that are not individually significant. If the Group determines that
no objective evidence of impairment exists for individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risk
characteristics and collectively assesses for impairment. Those characteristics are relevant to the
estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability
to pay all amounts due according to the contractual terms of the assets being evaluated. Assets
that are individually assessed for impairment and for which an impairment loss is, or continues to
be, recognized are not included in a collective assessment for impairment.
Evidence of impairment may include noncollection of the Group’s receivables, which remain
unpaid for a period of 60 days after its due date. The Group shall provide the customer with not
less than seven days’ prior written notice before any disconnection.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows (excluding future credit losses that have not been incurred). The
carrying amount of the asset is reduced through use of an allowance account and the amount of
loss is charged to the consolidated statement of income. Interest income continues to be
recognized based on the original effective interest rate of the asset. Receivables, together with the
associated allowance accounts, are written off when there is no realistic prospect of future
recovery.
If, in a subsequent year, the amount of the estimated impairment loss decreases because of an
event occurring after the impairment was recognized, the previously recognized impairment loss is
reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the
extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics as industry, customer type, customer location, past-due status
and term. Future cash flows in a group of financial assets that are collectively evaluated for
impairment are estimated on the basis of historical loss experience for assets with credit risk
characteristics similar to those in the group. Historical loss experience is adjusted on the basis of
current observable data to reflect the effects of current conditions that did not affect the period on
which the historical loss experience is based and to remove the effects of conditions in the
historical period that do not exist currently. The methodology and assumptions used for
estimating future cash flows are reviewed regularly by the Group to reduce any differences
between loss estimates and actual loss experience.
AFS financial assets
For AFS financial assets, the Group assesses at each balance sheet date whether there is objective
evidence that a financial asset or group of financial assets is impaired.
*SGVMC112683*
- 16 In the case of equity investments classified as AFS financial assets, this would include a
significant or prolonged decline in the fair value of the investments below its cost. Where there is
evidence of impairment, the cumulative loss - measured as the difference between the acquisition
cost and the current fair value, less any impairment loss on that financial asset previously
recognized in the consolidated statement of income - is removed from equity and recognized in the
consolidated statement of income. Impairment losses on equity investments are not reversed
through the consolidated statement of income. Increases in fair value after impairment are
recognized directly in equity.
In the case of debt instruments classified as AFS financial assets, impairment is assessed based on
the same criteria as financial assets carried at amortized cost. Future interest income is based on
the reduced carrying amount and is accrued based on the rate of interest used to discount future
cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of
“Interest income” in the statement of income. If, in subsequent year, the fair value of a debt
instrument increased and the increase can be objectively related to an event occurring after the
impairment loss was recognized in the consolidated statement of income, the impairment loss is
reversed through the consolidated statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated
balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize the asset and settle the
liability simultaneously.
Materials and Supplies
Materials and supplies are valued at the lower of cost or net realizable value (fair value less
costs to sell). Cost is determined using the moving average method.
Property and Equipment
Property and equipment, except land, are stated at cost less accumulated depreciation and
amortization and any impairment in value. Land is stated at cost less any impairment in value.
The initial cost of property and equipment comprises its purchase price, including import duties,
taxes and any directly attributable costs of bringing the property and equipment to its working
condition and location for its intended use, including capitalized borrowing costs incurred during
the construction period. Expenditures incurred after the property and equipment have been put
into operation, such as repairs and maintenance and overhaul costs, are normally charged to
operations in the period in which 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 and equipment beyond its originally
assessed standard of performance, the expenditures are capitalized as additional cost of the related
property and equipment.
*SGVMC112683*
- 17 Depreciation and amortization of property and equipment commences once the property and
equipment are available for use and are calculated on a straight-line basis over the estimated useful
lives (EUL) of the property and equipment or the remaining term of the 25-year concession,
whichever is shorter, as follows:
Office furniture and equipment
Transportation equipment
Leasehold improvements
3 to 5 years
5 years
5 years
Leasehold improvements are amortized over the EUL of the improvements or the term of the
lease, whichever is shorter.
The EUL 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 and equipment.
When property and equipment is retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization and accumulated impairment, if any, are removed from
the accounts and any resulting gain or loss is credited to or charged against current operations.
Service Concession Arrangement with MWSS
The Group accounts for its concession arrangement with MWSS under the Intangible Asset model
as it receives the right (license) to charge users of public service. The Service Concession Asset
(SCA) is amortized using the straight-line method over the life of the concession.
In addition, the Parent Company recognizes and measures revenue in accordance with PAS 11,
Construction Contracts and PAS 18, Revenue Recognition for the services it performs.
Impairment of Nonfinancial Assets
An assessment is made at each balance sheet date to determine whether there is any indication of
impairment of any long-lived assets, or whether there is any indication that an impairment loss
previously recognized for an asset in prior years may no longer exist or may have decreased. If
any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable
amount is calculated as the higher of the asset’s value in use or its net selling price. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset.
An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable
amount. An impairment loss is charged to operations in the year in which it arises.
A previously recognized impairment loss is reversed only if there has been a change in the
estimates used to determine the recoverable amount of an asset, however, not to an amount higher
than the carrying amount that would have been determined (net of any accumulated depreciation
and amortization), had no impairment loss been recognized for the asset in prior years. A reversal
of an impairment loss is credited to current operations.
*SGVMC112683*
- 18 Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement is dependent on
the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after the inception of the lease only if one of the following applies:
(a) There is a change in contractual terms, other than a renewal of or extension of the
arrangement;
(b) A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;
(c) There is a change in the determination of whether fulfillment is dependent on a specified
asset; or
(d) There is a substantial change to the asset.
Where reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment scenarios (a), (c) or (d) and at the date of
renewal or extension period for scenario (b).
A lease where the lessor retains substantially all the risk and benefits of ownership of the asset is
classified as an operating lease.
Revenue Recognition
Water and sewer revenue are recognized when the related water and sewerage services are
rendered. Water and sewerage are billed every month according to the bill cycles of the
customers. As a result of bill cycle cut-off, monthly service revenue earned but not yet billed at
end of the month are estimated and accrued. These estimates are based on historical consumption
of the customers. Twelve percent of the water revenue are recognized as environmental charges as
provided for in the Agreement.
Interest income is recognized as it accrues, taking into account the effective yield of the assets.
When the Group provides construction or upgrade services, the consideration received or
receivable is recognized at its fair value. The Company accounts for revenue and costs relating to
operation services in accordance with PAS 18.
Consultancy fees are recognized when the related services are rendered. Other customer related
fees such as re-opening fees are recognized when re-opening services have been rendered.
Foreign Currency-Denominated Transactions
Foreign exchange differentials arising from foreign currency transactions are credited or charged
to operations. As approved by the MWSS Board of Trustees (BOT) under Amendment No. 1 of
the Concession Agreement, the following will be recovered through billings to customers:
a. Restatement of foreign currency-denominated loans;
b. Excess of actual Concession Fee payments over the amounts of Concession Fees translated
using the base exchange rate assumed in the business plan approved every rate rebasing
exercise (P
=44.00 starting January 1, 2008 and P
=51.86 starting January 1, 2003 - see Notes 1, 9
and 10);
*SGVMC112683*
- 19 c. Excess of actual interest payments translated at exchange spot rates on settlement dates over
the amounts of interest translated at drawdown rates; and
d. Excess of actual payments of other financing charges relating to foreign currencydenominated loans translated at exchange spot rates on settlement dates over the amount of
other financing charges translated at drawdown rates.
In view of the automatic reimbursement mechanism, the Parent Company recognized a deferred
FCDA (included as part of “Other noncurrent assets” or “Accounts and other payables” account in
the balance sheet) with a corresponding credit (debit) to FCDA revenues for the unrealized
foreign exchange losses (net of foreign exchange gains) which have not been billed or which will
be refunded to the customers. The write-off of the deferred FCDA or reversal of deferred credits
pertaining to concession fees will be made upon determination of the rebased foreign exchange
rate which is assumed in the business plan approved by the RO during the latest Rate Rebasing
exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier
date.
Borrowing Costs
Borrowing costs are generally expensed as incurred. Borrowing costs that are directly attributable
to the acquisition, development, improvement and construction of fixed assets (including costs
incurred in connection with rehabilitation works) are capitalized as part of the cost of fixed asset.
The Group uses the general borrowings approach when capitalizing borrowing costs wherein the
amount of borrowing costs eligible for capitalization is determined by applying a capitalization
rate to the expenditures on that asset. The capitalization of those borrowing costs commences
when the activities to prepare the asset are in progress and expenditures and borrowing costs are
being incurred. Capitalization of borrowing costs ceases when substantially all activities
necessary in preparing the related assets for their intended use are complete. Borrowing costs
include interest charges and other related financing charges incurred in connection with the
borrowing of funds. Premiums and/or discounts on long-term debt are included in the “Long-term
debt” account in the Group’s consolidated balance sheet and are amortized using the effective
interest rate method.
Retirement Cost
Retirement cost is actuarially determined using the projected unit credit method. The projected
unit credit method reflects the services rendered by the employees to the date of valuation and
incorporates assumptions concerning employees’ projected salaries. Actuarial valuations are
conducted with sufficient regularity, with option to accelerate when significant changes to
underlying assumptions occur. Retirement cost includes current service cost, interest cost,
actuarial gains and losses and the effect of any curtailment or settlement.
The liability recognized by the Group in respect of the defined benefit pension plan is the present
value of the defined benefit obligation at the balance sheet date together with adjustments for
unrecognized actuarial gains or losses and past service costs that shall be recognized in later
periods. The defined benefit obligation is calculated by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using risk-free interest rates of government bonds
that have terms to maturity approximating to the terms of the related pension liabilities or applying
a single weighted average discount rate that reflects the estimated timing and amount of benefit
payments.
*SGVMC112683*
- 20 Actuarial gains and losses are recognized as income or expense when the net cumulative
unrecognized actuarial gains and losses of the plan at the end of the previous reporting year
exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at
that date. These actuarial gains and losses are recognized over the expected average remaining
working lives of the employees participating in the plan.
Share-based Payment Transactions
Certain employees and officers of the Group receive remuneration in the form of share-based
payment transactions, whereby they render services in exchange for shares or rights over shares
(‘equity-settled transactions’) (see Note 13).
The cost of equity-settled transactions with employees is measured by reference to the fair value at
the date of grant. The fair value is determined by using the Black-Scholes model, further details
of which are given in Note 13.
The cost of equity-settled transactions is recognized in the consolidated statement of income,
together with a corresponding increase in equity, over the period in which the performance
conditions are fulfilled, ending on the date on which the relevant employees become fully entitled
to the award (‘vesting date’). The cumulative expense recognized for equity-settled transactions at
each reporting date until the vesting date reflects the extent to which the vesting period has expired
and the number of awards that, in the opinion of the directors of the Group at that date, will
ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vesting irrespective of whether or not
the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized
as if the terms had not been modified. An additional expense is recognized for any increase in the
value of the equity-settled award (measured at the date of modification). The total increase in
value of the equity-settled award is amortized over the remaining vesting period.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of
cancellation, and any expense not yet recognized for the award is recognized immediately.
However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if it were a
modification of the original award, as described in the previous paragraph.
The dilutive effect of outstanding options is reflected as additional share dilution in the
computation of earnings per share (see Note 15).
Treasury Stock
Treasury stock is recorded at cost and is presented as a deduction from equity. When these shares
are re-issued, the difference between the acquisition cost and the reissued price is charged/credited
to additional paid-in capital. When the shares are retired, the capital stock account is reduced by
its par value and the excess of cost over par value upon retirement is debited to additional paid-in
capital to the extent of the specific or average additional paid-in capital when the shares were
issued and to retained earnings for the remaining balance.
*SGVMC112683*
- 21 Income Tax
Current tax
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantially enacted by the balance sheet
date.
Deferred tax
Deferred income tax is provided, using the balance sheet liability method, for all temporary
differences, with certain exceptions, at the balance sheet date between the tax bases of assets and
liabilities and its carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences with certain
exceptions. Deferred income tax assets are recognized for all deductible temporary differences to
the extent that it is probable that taxable income will be available against which the deferred
income tax asset can be used or when there are sufficient taxable temporary differences which are
expected to reverse in the same period as the expected reversal of the deductible temporary
differences.
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 income will be available
to allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred income
tax assets are reassessed at each balance sheet date and are recognized to the extent that it has
become probable that future taxable income will allow all or part of the deferred income tax assets
to be recovered.
Deferred income tax assets and liabilities are measured at the tax rate that is expected to apply in
the year when the asset is realized or the liability is settled, based on tax rates and tax laws that
have been enacted or substantially enacted as of the balance sheet date.
Deferred tax assets and liabilities are offset, if a legally enforceable right exists to set off current
tax assets against current income tax liabilities and the deferred income taxes relate to the same
taxable entity and the same taxation authority.
Earnings Per Share (EPS)
Basic EPS is computed by dividing net income applicable to common and participating preferred
stock by the weighted average number of common and equivalent preferred shares outstanding
during the year and adjusted to give retroactive effect to any stock dividends declared and changes
to preferred share participation rate during the period. The participating preferred shares
participate in the earnings at a rate of 1/10 of the dividends paid to a common share.
Diluted EPS is computed by dividing earnings attributable to common and participating preferred
shares by the weighted average number of common shares outstanding during the period, after
giving retroactive effect of any stock dividends during the period and adjusted for the effect of
dilutive options. 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 exercise of all
outstanding options have anti-dilutive effect, basic and diluted EPS are stated at the same amount.
*SGVMC112683*
- 22 Assets Held in Trust
Assets which are owned by MWSS but are operated by the Group under the Agreement are not
reflected in the consolidated balance sheet but are considered as Assets Held in Trust (see
Note 21).
Provisions
A provision is recognized when the Group has: (a) a present obligation (legal or constructive) as a
result of a past event; (b) it is probable (i.e. more likely than not) that an outflow of resources
embodying economic benefits will be required to settle the obligation; and (c) 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 assessment 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 interest expense. Where the Group expects a provision to be
reimbursed, the reimbursement is not recognized as a separate asset but only when the
reimbursement is virtually certain. Provisions are reviewed at each balance sheet date and
adjusted to reflect the current best estimate.
Events After Balance Sheet Date
Any post year-end event up to the date of the auditor’s report that provide additional information
about the Group’s position at the balance sheet date (adjusting events) is reflected in the
consolidated financial statements. Any post year-end event that is not an adjusting event is
disclosed in the notes to the consolidated financial statements when material.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. Contingent assets are not recognized in the consolidated financial statements but
disclosed when an inflow of economic benefits is probable.
3. Management’s Judgments and Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with PFRS
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The estimates and assumptions used
in the accompanying consolidated financial statements are based upon management’s evaluation
of relevant facts and circumstances as of the date of the consolidated financial statements. Actual
results could differ from such estimates.
Management believes the following represent a summary of these significant estimates and
judgments:
Service Concession Arrangement (SCA)
In applying Philippine Interpretation IFRIC 12, the Group has made a judgment that the
Agreement as discussed in Note 1, qualifies under the Intangible Asset model. Refer to the
accounting policy on the Parent Company’s SCA for the discussion of Intangible Asset model (see
Note 2).
*SGVMC112683*
- 23 Impairment of AFS financial assets
The Group treats AFS financial assets as impaired when there has been a significant or prolonged
decline in the fair value below its cost or where other objective evidence of impairment exists.
The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group treats
‘significant’ generally as 20% or more and ‘prolonged’ as greater than 6 months for quoted
securities. In addition, the Group evaluates other factors, including the future cash flows and the
discount factors of these securities.
Redeemable Preferred Shares
In 2007, the Group redeemed its outstanding redeemable preferred shares amounting to
=200 million. These shares are treated as equity and are therefore presented under the
P
“stockholders’ equity” section of the consolidated balance sheets as management concluded that
these are not mandatorily redeemable since the redemption of the redeemable preferred shares is at
the Group’s option. See Note 13 for the related balances.
Use of Estimates
Key assumptions concerning the future and other sources of estimation and uncertainty at the
balance sheet date that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.
Estimating allowance for doubtful accounts
The Group maintains allowance for doubtful accounts based on the results of the individual and
collective assessments under PAS 39. Under the individual assessment, the Group is required to
obtain the present value of estimated cash flows using the receivable’s original effective interest
rate. Impairment loss is determined as the difference between the receivable’s carrying amount
and the computed present value. Factors considered in individual assessment are payment history,
past due status and term. The collective assessment would require the Group to group its
receivables based on the credit risk characteristics (industry, customer type, customer location,
past-due status and term) of the customers. Impairment loss is then determined based on historical
loss experience of the receivables grouped per credit risk profile. Historical loss experience is
adjusted on the basis of current observable data to reflect the effects of current conditions that did
not affect the period on which the historical loss experience is based and to remove the effects of
conditions in the historical period that do not exist currently. The methodology and assumptions
used for the individual and collective assessments are based on management's judgment and
estimate. Therefore, the amount and timing of recorded expense for any period would differ
depending on the judgments and estimates made for the year. See Note 5 for the related balances.
Estimating useful lives of property and equipment
The Group estimates the useful lives of its property and equipment based on the period over which
the assets are expected to be available for use. The Group reviews annually the estimated useful
lives of property and equipment based on factors that include asset utilization, internal technical
evaluation, technological changes, environmental and anticipated use of the assets tempered by
related industry benchmark information. It is possible that future results of operations could be
materially affected by changes in the Group’s estimates brought about by changes in the factors
mentioned. A reduction in the estimated useful lives of property and equipment would increase
depreciation and amortization and decrease noncurrent assets. See Note 8 for the related balances.
*SGVMC112683*
- 24 Asset impairment
The Group assesses the impairment of assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the Group
considers important which could trigger an impairment review include the following:
·
·
·
significant underperformance relative to expected historical or projected future operating
results;
significant changes in the manner of usage of the acquired assets or the strategy for the
Group’s overall business; and
significant negative industry or economic trends.
As described in the accounting policy, the Group estimates the recoverable amount as the higher
of the net selling price and value in use.
In determining the present value of estimated future cash flows expected to be generated from the
continued use of the assets, the Group is required to make estimates and assumptions regarding the
expected future cash generation of the assets (property and equipment, concession assets, and
other noncurrent assets), discount rates to be applied and the expected period of benefits. See
Notes 8, 9 and 10 for the related balances.
Deferred tax assets
The Group reviews the carrying amounts of deferred income taxes at each balance sheet date and
reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable income
will be available to allow all or part of the deferred tax assets to be utilized. However, there is no
assurance that the Group will generate sufficient taxable income to allow all or part of the deferred
tax assets to be utilized. See Note 17 for the related balances.
Also, the Group does not recognize certain deferred taxes on deductible temporary differences
where doubt exists as to the tax benefits they will bring in the future.
Share-based payments
The expected life of the options is based on the expected exercise behavior of the stock option
holders and is not necessarily indicative of the exercise patterns that may occur. The expected
volatility is based on the average historical price volatility of several water utility companies
within the Asian region which may be different from the expected volatility of the shares of stock
of the Group. See Note 13 for the related balances.
Pension and other retirement benefits
The determination of the obligation and cost of pension and other retirement benefits is dependent
on the selection of certain assumptions used by actuaries in calculating such amounts
(see Note 14) which include, among others, discount rate, expected return on plan assets and
salary increase rate. While the Group believes that the assumptions are reasonable and
appropriate, significant differences in actual experience or significant changes in assumptions
materially affect retirement obligations.
*SGVMC112683*
- 25 Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the consolidated
balance sheets or disclosed in the rates cannot be derived from active markets, they are determined
using internal valuation techniques using generally accepted market valuation models. The inputs
to these models are taken from observable markets where possible, but where this is not feasible,
estimates are used in establishing fair values. These estimates may include considerations of
liquidity, volatility, and correlation (see Note 24).
Derivative asset on bond call option was valued using the Black’s option model. Valuation inputs
such as discount rate were based on credit adjusted spot rate as of value date while interest rate
volatility was computed based on historical rates or data. (see Note 24).
Contingencies
The Group is currently involved in various legal proceedings. The estimate of the probable costs
for the resolution of these claims has been developed in consultation with internal and outside
counsels handling the defense in these matters and is based upon an analysis of potential results.
The Group currently does not believe these proceedings will have a material adverse affect on the
Group’s financial position. It is possible, however, that future results of operations could be
materially affected by changes in the estimates or in the effectiveness of the strategies relating to
these proceedings (see Note 22).
4. Cash and Cash Equivalents and Short-term Cash Investments
Cash and cash equivalents consists of:
Cash on hand and in banks
Cash equivalents
2008
P
=96,853,126
3,892,227,274
P
=3,989,080,400
2007
=250,549,453
P
1,286,071,394
=1,536,620,847
P
Cash in banks earns interest at the respective bank deposit rates. Cash equivalents are highly
liquid investments that are made for varying periods of up to three months depending on the
immediate cash requirements of the Group, and earn interest at the respective short-term rates.
Short-term cash investments pertain to the Group’s time deposits with maturities of more than
three months up to one (1) year and earn interest ranging from 3.4% to 7.0% in 2008 and 4.0% to
6.0% in 2007.
*SGVMC112683*
- 26 5. Receivables
This account consists of receivables from:
Customers (see Note 16)
Residential
Commercial
Semi-business
Industrial
Receivables from employees
Interest receivable from banks
Others
Less allowance for doubtful accounts (see Note 17)
2008
2007
P
=671,338,344
328,819,265
52,339,598
25,245,387
38,433,481
56,305,817
33,687,736
1,206,169,628
613,032,087
P
=593,137,541
=549,996,210
P
239,536,257
42,411,193
24,729,381
43,449,540
12,916,881
20,923,119
933,962,581
562,374,450
=371,588,131
P
The classes of the Group’s receivables from customers are as follows:
·
·
·
·
Residential - pertains to receivables arising from water and sewer service use for domestic
sanitary purposes only.
Commercial - pertains to receivables arising from water and sewer service use for commercial
purposes.
Semi-business - pertains to receivables arising from water and sewer service use for small
businesses.
Industrial - pertains to receivables arising from water and sewer service use for industrial
purposes, including services for manufacturing.
Movements in the Group’s allowance for doubtful accounts follows:
2008
At January 1
Charge for the year
Write-offs
At December 31
Residential
P
= 302,806,778
58,996,304
–
P
= 361,803,082
Receivable from Customers
Commercial
Semi-Business
P
= 171,648,618
P
= 34,588,202
21,569,342
3,606,846
–
–
P
= 193,217,960
P
= 38,195,048
Industrial
P
= 9,867,188
2,829,333
–
P
= 12,696,521
Receivable
from West Zone
Concessionaire
P
=–
–
–
P
=–
Other
Receivables
P
= 43,463,664
–
(36,344,188)
P
= 7,119,476
Total
P
= 562,374,450
87,001,825
(36,344,188)
P
= 613,032,087
Other
Receivables
=11,129,142
P
54,499,652
(22,165,130)
=43,463,664
P
Total
=932,213,254
P
130,161,196
(500,000,000)
=562,374,450
P
2007
At January 1
Charge for the year
Write-offs
At December 31
Residential
=585,942,770
P
59,016,004
(342,151,996)
=302,806,778
P
Receivable from Customers
Commercial
Semi-Business
217,859,006
=52,532,726
P
12,862,462
3,026,463
(59,072,850)
(20,970,987)
=171,648,618
P
=34,588,202
P
Industrial
=15,939,338
P
756,615
(6,828,765)
=9,867,188
P
Receivable
from West Zone
Concessionaire
=48,810,272
P
–
(48,810,272)
=–
P
Receivables that were assessed to be individually impaired were substantially written-off in 2008
and 2007.
*SGVMC112683*
- 27 6. Materials and Supplies
This account consists of:
2008
P
=2,879,069
–
–
P
=2,879,069
Water treatment chemicals at cost
Water meters at cost
Maintenance materials at NRV
2007
=12,458,800
P
17,511,456
11,364,106
=41,334,362
P
The cost of maintenance materials amounted to P
=54.78 million as of December 31, 2007.
7. Other Current Assets
This account consists of:
2008
P
=294,294,982
201,240,910
143,977,522
2,345,210
P
=641,858,624
Value-added input tax
Advances to contractors
Prepaid expenses
Others
2007
=378,571,385
P
384,923,277
18,941,817
2,196,250
=784,632,729
P
Value-added input tax is fully realizable and will be applied against future output tax. Advances
to contractors are normally applied within a year against progress billings.
8. Property and Equipment
The rollforward analysis of this account follows:
2008
Office Furniture
and Equipment
Cost
At January 1
Additions
Disposals
At December 31
Accumulated depreciation
and amortization
At January 1
Depreciation and amortization
Disposals
At December 31
Net book value at December 31
Transportation
Equipment
Land and
Leasehold
Improvements
Total
P
=465,954,194
102,340,202
–
568,294,396
P
=266,518,067
26,734,093
(4,072,727)
289,179,433
P
=244,332,215
202,857,307
–
447,189,522
P
=976,804,476
331,931,602
(4,072,727)
1,304,663,351
306,945,955
99,976,153
–
406,922,108
P
=161,372,288
52,600,216
51,552,827
(3,696,743)
100,456,300
P
=188,723,133
59,287,083
15,100,130
–
74,387,213
P
=372,802,309
418,833,254
166,629,110
(3,696,743)
581,765,621
P
=722,897,730
*SGVMC112683*
- 28 2007
Office Furniture
And Equipment
Cost
At January 1
Additions
Disposals
At December 31
Accumulated depreciation
and amortization
At January 1
Depreciation and amortization
Disposals
At December 31
Net book value at December 31
Transportation
Equipment
Land and
Leasehold
Improvements
Total
(As restated Note 2)
=383,464,301
P
82,489,893
–
465,954,194
=112,925,601
P
161,769,526
(8,177,060)
266,518,067
=185,234,372
P
59,097,843
–
244,332,215
=681,624,274
P
303,357,262
(8,177,060)
976,804,476
218,725,531
88,220,424
–
306,945,955
=159,008,239
P
40,612,615
20,098,384
(8,110,783)
52,600,216
=213,917,851
P
44,888,596
14,398,487
–
59,287,083
=185,045,132
P
304,226,742
122,717,295
(8,110,783)
418,833,254
=557,971,222
P
9. Service Concession Assets and Obligations
Service Concession Assets
The movements in this account follow:
2008
Cost
Balance at beginning of year
Additions
Balance at end of year
Accumulated amortization
Balance at beginning of year
Amortization
Balance at end of year
Net book value
2007
(As restated Note 2)
P23,127,959,615
P
=27,179,334,606 =
4,051,374,991
3,723,297,962
30,902,632,568 27,179,334,606
3,981,823,250
5,264,963,376
1,283,140,126
1,723,880,216
5,264,963,376
6,988,843,592
=21,914,371,230
P
=23,913,788,976 P
* Included under “Depreciation and amortization” in the consolidated statements of income.
Service concession assets consist of the present value of total estimated concession fee payments,
including regulatory maintenance cost, pursuant to the Concession Agreement and the costs of
rehabilitation works incurred.
Total interest and other borrowing costs capitalized as part of service concession assets amounted
to =
P192.89 million and P
=227.96 million in 2008 and 2007, respectively. The capitalization rates
used in 2008 and 2007 ranged from 4.96% to 6.12%.
*SGVMC112683*
- 29 Service Concession Obligations
The aggregate concession fee pursuant to the Agreement is equal to the sum of the following:
a. 10% of the aggregate peso equivalent due under any MWSS loan which has been disbursed
prior to the Commencement Date, including MWSS loans for existing projects and the Umiray
Angat Transbasin Project (UATP), on the prescribed payment date;
b. 10% of the aggregate peso equivalent due under any MWSS loan designated for the UATP
which has not been disbursed prior to the Commencement Date, on the prescribed payment
date;
c. 10% of the local component costs and cost overruns related to the UATP;
d. 100% of the aggregate peso equivalent due under MWSS loans designated for existing
projects, which have not been disbursed prior to the Commencement Date and have been
either awarded to third party bidders or elected by the Group for continuation; and
e. 100% of the local component costs and cost overruns related to existing projects.
10. Other Noncurrent Assets
This account consists of:
Deferred FCDA (Notes 1 and 2)
Derivative assets (see Note 24)
Miscellaneous
2008
P
=943,933,148
258,404,081
55,503,768
P
=1,257,840,997
2007
(As restated Note 2)
=–
P
–
49,754,389
=49,754,389
P
Deferred FCDA represents amounts in excess of the closing rate over the rebased rate for service
concession obligations and amounts in excess of the closing rate over the drawdown rates for
long-term debt which have not been billed to the customers (see Notes 1 and 2).
Derivative assets pertain to embedded call option on the P
=4.0 billion Peso Bonds that gives the
Parent Company the right to redeem all but not in part of the outstanding bonds on the twelfth
quarterly interest payment date (see Note 24).
*SGVMC112683*
- 30 11. Accounts and Other Payables
This account consists of:
Trade payables
Accrued expenses (Notes 14 and 17)
Compensation
Utilities
Taxes and licenses
Management and professional fees
Collection fees
Occupancy
Others
Deferred FCDA (Notes 1 and 2)
Interest payable
Meter deposit payable
Contracts payable
Others
2008
P
=1,088,535,727
2007
(As restated Note 2)
=1,472,396,091
P
198,787,255
127,070,815
117,513,801
49,306,435
34,846,728
13,708,150
325,472,640
–
378,569,174
246,129,415
134,530,000
25,470,397
P
=2,739,940,537
182,125,520
129,208,078
116,497,146
51,680,856
31,219,331
21,591,203
259,361,490
890,080,377
78,159,582
59,461,261
155,120,409
30,987,814
=3,477,889,158
P
Trade payables and accrued are noninterest-bearing and are normally settled on 15 to 60-day
terms. Other payables are noninterest bearing and are normally settled within one year.
Deferred FCDA represents amounts in excess of the rebased rate over the closing rate for service
concession obligations and amounts in excess of the drawdown rate over the closing rates for
long-term debt which have not been billed to the customers (see Notes 1 and 2).
12. Long-term Debt
This account consists of:
USD loans
EIB loan facility
IFC loan facility
US$20.00 million loan facility
Yen loans
IFC loan facility
EIB loan facility
LBP loan facility
2008
2007
P
=1,393,015,728
1,387,449,503
447,638,659
=–
P
–
=499,230,395
P
1,410,224,494
1,059,928,626
991,486,722
1,081,916,507
734,922,490
420,172,732
(Forward)
*SGVMC112683*
- 31 -
Euro loan
Peso loans
4.0 Billion bonds
2.0 Billion loan facility
1.5 Billion loan facility
Less current portion
2008
P
=26,122,211
2007
=33,679,390
P
4,156,463,232
1,388,696,357
1,090,962,089
13,351,987,621
454,755,376
P
=12,897,232,245
–
1,485,551,504
1,981,100,763
6,236,573,781
241,318,202
=5,995,255,579
P
Unamortized debt discount and issuance costs included in the following long-term debts as of
December 31, 2008 and 2007 follow:
Peso loans
Yen loans
US Dollar loans
Euro loan
2008
P
=20,341,554
46,558,149
74,583,630
1,016,230
P
=142,499,563
2007
=33,347,733
P
33,317,298
5,004,805
1,910,629
=73,580,465
P
The rollforward analysis of unamortized debt discount and issuance costs of long-term debts
follows:
Balance at beginning of the year
Availments
Amortization of transaction costs
Balance at end of the year
2008
P
=73,580,465
87,384,387
(18,465,289)
P
=142,499,563
2007
=87,203,003
P
18,748,674
(32,371,212)
=73,580,465
P
On July 1, 2002, the Group entered into a loan agreement with Deutsche Investitions-und
Entwicklungsgesellschaft mbH (DEG) to partially finance capital expenditures required to expand
water supply and sanitation services and improve the existing facilities of the Group. The loan
was made available in US Dollars in the aggregate principal amount of US$20.00 million and is
payable in 10 years, inclusive of the 3-year grace period. The first installment of US$1.00 million
for principal repayment was made in June 2005 and the remaining balance of US$19.00 million
will be repaid in 14 equal semi-annual installments starting December 2005. As of December 31,
2008 and 2007, outstanding loans amounted to US$9.47 million and US$12.22 million,
respectively.
On March 28, 2003, the Group entered into a loan agreement with IFC (the “First IFC Loan”) to
partially finance the Group’s investment program from 2002-2005 to expand water supply and
sanitation services, improvement on the existing facilities of the Group, and concession fee
payments. The First IFC Loan will be made available in Japanese Yen in the aggregate principal
amount of JPY¥3,591.60 million equivalent to US$30.00 million and shall be payable in 25 semiannual installments, within 12 years which started on July 15, 2006. As of December 31, 2008
and 2007, outstanding loans amounted to JPY¥2,705.33 million and JPY¥3,016.94 million,
respectively.
*SGVMC112683*
- 32 On May 31, 2004, the Group entered into a loan agreement with IFC (the “Second IFC Loan”)
comprising of regular loan in the amount of up to US$20.00 million and a standby loan in the
amount of up to US$10.00 million to finance the investment program from 2004-2007 to expand
water supply and sanitation services, improvement of existing facilities of the Group, and
concession fee payments. The US$20.00 million regular loan shall be payable semi-annually
within 10 years starting June 15, 2007 while the US$10.00 million standby loan shall be payable
in 19 semi-annual installments falling due on June 15 and December 15 in each year, beginning on
the first interest payment date immediately preceding the third anniversary of the activation date.
On November 22, 2006, the Group executed an Amended and Restated Loan Agreement for the
restructuring of the Second IFC Loan. The terms of the second loan were amended to a loan in the
aggregate amount of up to US$30.00 million, no part of which shall consist of a standby loan.
On December 12, 2008, the Parent Company has made a full drawdown on the said facility. As of
December 31, 2008, outstanding loan amounted US$30.00 million.
On November 22, 2006, the Group entered into a loan agreement with IFC (the “Third IFC Loan”)
in the amount of up to US$30.00 million. The Third IFC Loan is a standby facility which may, at
the Group’s option, be disbursed in part or in whole as a US Dollar Loan or as a Philippine Peso
Loan. As of December 31, 2008, no drawdown has been made against such loan facility.
The above loan agreements also provide, among others, that for as long as the loans remain
outstanding, the Group is subject to certain negative covenants requiring prior written bank
approval for specified corporate acts such as the declaration of cash or property dividends (if the
Debt Service Coverage Ratio fall below the 1.2 minimum requirement), selling or mortgaging of a
material portion of the assets, decreasing the Group’s authorized capital stock, guaranteeing the
indebtedness of any person, entering into profit-sharing partnership or joint venture and extending
loans or advances to any related parties, stockholders or directors. The Group is further required
to maintain a debt-equity ratio which should not exceed 2.0 times.
On October 20, 2005, the Group entered into a Subsidiary Loan Agreement with Land Bank of the
Philippines (LBP Loan) to finance the improvement of the sewerage and sanitation conditions in
the East Zone. The loan shall have a term of 17 years, and will be made available in Japanese Yen
in the aggregate principal amount of JPYY6.59 billion payable via semi-annual installments after
the five-year grace period. It will be subject to the same rate of interest payable by LBP under the
World Bank Agreement plus fixed spread of 1.25%. As of December 31, 2008 and 2007,
drawdown on the said facility amounted to JPYY1,882.28 million and JPYY1,468.41 million,
respectively.
Loan disbursements shall be further governed by the provisions of Schedule 1 of the World Bank
Loan Agreement and the Procurement Plan duly approved by the World Bank. Proceeds of the
Loan shall be released based on Eligible Expenditures incurred upon presentation of statements of
eligible expenditures (SOEs) prepared by the Group. The loan agreement also provides, among
others, that for as long as the loan remains outstanding, the Group is subject to certain negative
covenants requiring prior written bank approval for specified corporate acts such as guaranteeing
the indebtedness of any person, extending loans to any other person, engaging in business other
than those provided for in its Charter, selling or mortgaging of a material portion of its assets,
creating or forming another corporation or subsidiary/affiliate and declaring dividends or
*SGVMC112683*
- 33 distributions on its share capital unless the payment or distribution is out of retained earnings. The
loan also requires the Group to ensure that its long-term debt service coverage ratio including its
applicable Concession Fees is not less than 1.2; and ensure that its total liability to equity ratio
does not exceed 2.0.
By virtue of the Accession Agreement to the Amended and Restated Intercreditor Agreement
entered into by IFC and LBP on December 15, 2005, IFC and LBP became a Secured Party in
respect of its Facilities under the Second IFC Loan and the LBP Loan, respectively.
On August 22, 2006, the Group entered into a Credit Facility Agreement (the “2 Billion Peso
Loan”) with five banks and four financial institutions to finance the capital expenditures of the
Group pursuant to the Concession Agreement. This seven (7)-year term loan with an aggregate
principal amount of P
=2.0 billion consists of the following:
·
Tranche 1 Loan: Seven (7)-year term loan amounting to P
=1.50 billion (the Tranche 1 Loan).
Such loan shall be subject to a yearly amortization of P
=10 million at the end of 5th and 6th
years, and bullet repayment of the balance at the end of the 7th year. The applicable interest
for Tranche 1 Loan is the benchmark rate for the 7-year Fixed Rate Treasury Notes (FXTNs)
on drawdown date, plus applicable margin of 0.25%; and
·
Tranche 2 Loan: Seven (7)-year term loan, with a Put Option at the end of the fifth (5th) year,
amounting to P
=500.00 million (the Tranche 2 Loan). Such loan shall be subject to a bullet
repayment at the end of the 5th year if the lenders exercise their Put Option; If the Put Option
is not exercised, the loan will be subject to a yearly amortization of P
=10 million at the end of
5th and 6th years, and bullet repayment of the balance at the end of the 7th year. The applicable
interest for Tranche 2 Loan is the benchmark rate for the 5-year Fixed Rate Treasury Notes
(FXTNs) on drawdown date, plus applicable margin of 0.30%.
On August 25, 2006, the lenders of the 2 Billion Peso Loan entered into an Accession Agreement
to the Amended and Restated Intercreditor Agreement.
On October 9, 2006, the Group entered into a Credit Facility Agreement (the “1.5 Billion Peso
Loan”) with three banks and a financial institution to finance the capital expenditures of the Group
pursuant to the Agreement. This seven (7)-year term loan with an aggregate principal amount of
=1.5 billion consists of the following:
P
·
Tranche 1 Loan: Seven (7)-year term loan amounting to P
=950.00 million (the Tranche 1
Loan). Such loan shall be subject to a yearly amortization of one percent (1%) of the Tranche
1 Loan at the end of 5th and 6th years, and bullet repayment of the balance at the end of the 7th
year. The applicable interest for Tranche 1 Loan is the benchmark rate for the
7-year Fixed Rate Treasury Notes (FXTNs) on drawdown date, plus applicable margin of
0.25%; and
·
Tranche 2 Loan: Seven (7)-year term loan, with a Put Option at the end of the fifth (5th) year,
amounting to P
=550.00 million (the Tranche 2 Loan). Such loan shall be subject to a bullet
repayment at the end of the 5th year if the lenders exercise their Put Option. If the Put Option
is not exercised, the loan will be subject to at the end of 5th and 6th years, and bullet repayment
*SGVMC112683*
- 34 of the balance at the end of the 7th year. The applicable interest for Tranche 2 Loan is the
benchmark rate for the 5-year Fixed Rate Treasury Notes (FXTNs) on drawdown date, plus
applicable margin of 0.30%.
On October 13, 2006, the lenders of the 1.5 Billion Peso Loan entered into an Accession
Agreement to the Amended and Restated Intercreditor Agreement.
These Peso loan agreements also provide, among others, that for as long as the loans remain
outstanding, the Group is subject to certain negative covenants requiring prior written approval for
specified corporate acts such as entering into any merger, acquisition or consolidation with any
other person or entering into any voluntary winding-up, liquidation or dissolution, selling or
mortgaging of a material portion of the assets, decreasing the Group’s authorized capital stock,
guaranteeing the indebtedness of any person, entering into profit-sharing partnership or joint
venture and extending loans or advances to any related parties, stockholders or directors. The
Group is further required to maintain a certain debt-equity ratio.
On June 16, 2008, the Company prepaid a portion of the Peso loan facility from one financial
institution amounting to P
=1.00 billion.
The EUR€2.22 million Euro loan (the “Euro loan”), executed on August 24, 2001, was drawn
under the Danish International Development Agency (DANIDA) credit facility and is secured by
an irrevocable standby letter of credit issued by a local bank. The noninterest-bearing loan is
payable in US Dollars in 16 equal semi-annual consecutive installments starting on March 31,
2003. As of December 31, 2008 and 2007, outstanding loans amounted to US$0.55 million and
US$0.82 million, respectively.
The DANIDA loan provides for the following restrictions relating to, among others: merger or
consolidation or sale or transfer; change in ownership; and lease or otherwise disposal of all or any
substantial portion of the Group’s present or future assets or revenues as to materially affect its
ability to perform its obligations under the DANIDA loan.
On June 20, 2007, the Group entered into a Finance Contract (the “EIB Loan”) with the European
Investment Bank (EIB) to partially finance the capital expenditures of the Group from 2007 to
2010, as specified under Schedule 1 of the Finance Contract. The loan, in the aggregate principal
amount of EUR€60 million, having a term of 10 years, is subject to the Relevant Interbank Rate
plus a spread to be determined by EIB, may be drawn in either fixed-rate or floating-rate tranches,
and is split into the following:
·
Sub-Credit A: In an amount of EUR€40 million to be disbursed in US Dollars or Japanese yen
payable via semi-annual installments after the two and a half-year grace period and is
guaranteed against all risks other than a.) Expropriation or War and Civil Disturbance (EWCD
Event), b.) Non-Transfer of Currency (NTC Event) and c.) Denial of Justice Event as defined
under Schedule B of the Finance Contract, by a consortium of international commercial banks;
and
·
Sub-Credit B: In an amount of EUR€20 million to be disbursed in US Dollars, European Euro
or Japanese Yen payable via semi-annual installments after the two and a half-year grace
period. In addition, disbursements under Sub-Credit B can only be effected if a.) Sub-Credit
A has been full disbursed and b.) EIB has received a Guarantee for Sub-Credit B.
*SGVMC112683*
- 35 Disbursements under the EIB Loan shall be released upon the submission of a summary of
expenditures form and, the contracts for which must satisfy the guidelines set within EIB’s
Procurement Guide 2004 edition. The Finance Contract and the Guarantee Facility Agreement
provides, among others, that for as long as the loan remains outstanding, the Group is subject to
certain negative covenants requiring prior written bank approval for specified corporate acts such
as guaranteeing the indebtedness of any person, extending loans to any other person, engaging in
business other than those provided for in its Charter, selling or mortgaging of a material portion of
its assets, creating or forming another corporation or subsidiary/affiliate and declaring dividends
or distributions on its share capital unless the payment or distribution is out of retained earnings.
The agreements also require the Group to ensure that its long-term debt service coverage ratio
including its applicable Concession Fees is not less than 1.2; and ensure that its total liability to
equity ratio does not exceed 2.0.
Drawdown on the said facility amounted to JPYY2,050.00 million and US$30.00 million in 2008
and JPYY2,050.00 million in 2007.
On June 20, 2007, EIB and the Guarantors of Sub-Credit A of the EIB Loan entered into an
Accession Agreement to the Amended and Restated Intercreditor Agreement.
On October 22, 2008, the Company issued =
P4.0 billion bonds (the 4.0 Billion bonds) having a
term of five years from the issue date with a fixed interest rate equivalent to 8.25% payable
quarterly. Prior to maturity, the Group may redeem in whole and not a part only of the relevant
outstanding bonds on the twelfth interest payment date. The amount payable to the bondholders
in respect of such redemptions shall be calculated based on the principal amount of the bonds
being redeemed, as the sum of 102% of the principal amount and accrued interest on the bonds on
the optional redemption date.
As of December 31, 2008 and 2007, the Group was in compliance with all the loan covenants
required by the creditors.
Previously, all of these loans are secured by way of first ranking charge over all assigned interests,
including the right to receive payments or other consideration under the Agreement, all receivables
and bank accounts, interest over all fixed assets (subject to the limitations under the Agreement)
and assignment of proceeds of insurance policies. The agreement for the assignment of these
rights and interests were signed with the lenders at various dates of the loan signing.
On July 17, 2008, the Parent Company together with all of its Lenders signed an Omnibus
Amendment Agreement and Intercreditor Agreement and these agreements became effective on
September 30, 2008.
Prior to the execution of the Omnibus Amendment Agreement, the obligations of the Parent
Company to pay amounts due and owing or committed to be repaid to the Lenders under the
existing facility agreements were secured by Assignments of Interests by Way of Security
executed by the Parent Company in favor of the Trustee acting on behalf of the Lenders. The
Assignments were also subject to the provisions of the Amended and Restated Intercreditor
Agreement dated March 1, 2004 and its Amendatory Agreement dated 15 December 2005
executed by the Parent Company, the Lenders and the Trustee.
*SGVMC112683*
- 36 Under the Omnibus Amendment Agreement, the lenders effectively released the Parent Company
from the assignment of its present and future fixed assets, receivables and present and future bank
accounts, all the Project Documents (except for the Agreement, Technical Corrections Agreement
and the Department of Finance Undertaking Letter), insurance policies and the performance.
In consideration for the release of the assignment of the above-mentioned assets, the Parent
Company agreed not to create, assume, incur, permit or suffer to exist, any mortgage, lien, pledge,
security interest, charge, encumbrance or other preferential arrangement of any kind, upon or with
respect to any of its properties or assets, whether now owned or hereafter acquired, or upon or
with respect to any right to receive income, subject only to some legal exceptions. The lenders
shall continue to enjoy their rights and privileges as Concessionaire Lenders (as defined under the
Agreement), which include the right to appoint a qualified replacement operator and the right to
receive payments and/or other consideration pursuant to the Agreement in case of a default of
either the Parent Company or MWSS.
13. Equity
The Parent Company’s capital stock consists of:
2007
2008
Shares
Preferred stock - P
=0.10 par value, 10%
cumulative, voting participating,
nonredeemable and nonconvertible
Authorized, issued and
outstanding - 4,000,000,000 shares
Preferred stock - P
=1 par value, 8%
cumulative, nonvoting,
nonparticipating, nonconvertible,
redeemable at the Company’s option
Authorized and issued 500,000,000 shares
Common stock - P
=1 per share
Authorized
Issued and subscribed
Outstanding
Shares
Amount
(In Thousands Except Per Share Figures)
Amount
4,000,000
P
= 400,000
4,000,000
=400,000
P
500,000
500,000
500,000
500,000
3,100,000
2,022,879
2,022,879
3,100,000
2,022,879
2,022,879
3,100,000
2,018,185
2,016,794
3,100,000
2,018,185
2,016,794
The movements in treasury shares follow:
2007
2008
Redeemable
Preferred
Number of shares at beginning of year
Exercise of stock options
Acquisitions
Number of shares at end of year
300,000
–
200,000
500,000
Redeemable
Preferred
Common
(In Thousands)
300,000
1,391
–
(1,391)
200,000
–
500,000
–
Common
1,525
(134)
–
1,391
*SGVMC112683*
- 37 The Agreement as discussed in Note 1 provides that unless waived in writing by the Regulatory
Office, United Utilities PLC (the International Water Operator) and AC (the Sponsor) shall each
own (directly or through a subsidiary at least 51% owned and controlled by United Utilities PLC
or AC) at least 20% of the outstanding capital stock of the Parent Company until December 31,
2002 and at least 10% after the first Rate Rebasing (January 1, 2003) and throughout the
concession period.
Preferred Shares
The dividends for the P
=0.10 par value and P
=1 par value preferred shares are declared upon the sole
discretion of the Parent Company’s BOD, based on retained earnings availability.
On November 29, 2006, the Parent Company’s BOD approved the redemption of P
=100.00 million
redeemable preferred shares on December 29, 2006. The shares were redeemed at par value.
On August 16, 2007, the Parent Company’s BOD approved the full redemption of the outstanding
=200.00 million redeemable preferred shares on September 30, 2007. The shares were redeemed
P
at par value.
Dividends
On February 2, 2006, the Parent Company’s BOD declared cash dividend of P
=0.105 per share on
the outstanding common shares and P
=0.0105 per share on the outstanding 4 billion participating
preferred shares of the Parent Company’s capital stock, payable to stockholders of record as of
February 17, 2006. The said dividends were paid on March 14, 2006.
On August 24, 2006, the Parent Company’s BOD declared cash dividend of P
=0.105 per share on
the outstanding common shares and P
=0.0105 per share on the outstanding participating preferred
shares of the Company’s capital stock, payable to stockholders of record as of September 8, 2006.
The said dividends were paid on September 29, 2006.
On November 29, 2006, the Parent Company’s BOD declared cash dividend of P
=0.0105 per share
on the outstanding participating preferred shares and P
=0.08 per share on the outstanding
redeemable preferred shares of the Parent Company’s capital stock, payable to stockholders of
record as of November 29, 2006. The said dividends were paid on December 29, 2006.
On February 15, 2007, the Parent Company’s BOD declared cash dividend of P
=0.15 per share on
the outstanding common shares and P
=0.015 per share on the outstanding participating preferred
shares of the Parent Company’s capital stock, payable to stockholders of record as of March 1,
2007, to be paid on March 22, 2007. The said dividends were paid on March 20, 2007.
On August 16, 2007, the BOD declared cash dividend of P
=0.15 per share on the outstanding
common shares and P
=0.015 per share on the outstanding participating preferred shares of the
Parent Company’s capital stock, payable to stockholders of record as of September 3, 2007, to be
paid on September 27, 2007. The said dividends were paid on September 24, 2007.
On the same date, the Parent Company’s BOD declared cash dividend of P
=0.06 per share on the
outstanding 200 million redeemable preferred shares paid on September 24, 2007.
*SGVMC112683*
- 38 On November 15, 2007, the Parent Company’s BOD declared cash dividend of P
=0.010 per share
on the outstanding participating preferred shares of the Parent Company’s capital stock, payable to
stockholders of record as of November 15, 2007. The said dividends were paid on December 26,
2007.
On March 31, 2008, the Parent Company’s BOD declared cash dividend of P
=0.175 per share on
the outstanding common shares and P
=0.0175 per share on the outstanding participating preferred
shares of the Parent Company’s capital stock, payable to stockholders of record April 15, 2008.
The said dividends were paid on April 25, 2008.
On July 22, 2008, the Parent Company’s BOD declared cash dividend of P
=0.175 per share on the
outstanding common shares and P
=0.0175 per share on the outstanding participating preferred
shares of the Parent Company’s capital stock, payable to stockholders of record as of August 5,
2008. The said dividends were paid on September 2, 2008.
On December 3, 2008, the Parent Company’s BOD declared cash dividend of P
=0.01 per share on
the outstanding participating preferred shares of the Parent Company’s capital stock, payable to
stockholders of record as of November 30, 2008. The said dividends were paid on December 23,
2008.
There are no dividends in arrears for the Group’s participating preferred shares and redeemable
preferred shares as of December 31, 2008.
In accordance with SEC Memorandum Circular No. 11 issued in December 2008, the Parent
Company’s retained earnings available for dividend declaration as of December 31, 2008
amounted to P
=4.78 billion.
Appropriation for capital expenditures
On February 15, 2007, the Parent Company’s BOD approved the appropriation of a portion of its
retained earnings amounting to P
=2.0 billion for future expansion projects.
On February 7, 2008, the Parent Company’s BOD approved the additional appropriation of a
portion of its retained earnings amounting to P2.0 billion for future expansion projects.
Executive Stock Option Plan (Executive SOP), Expanded Executive SOP and Employee Stock
Ownership Plan (ESOWN)
On February 26, 2004, the Parent Company’s BOD authorized the allocation of up to 20.0 million
of the treasury shares for distribution from time to time as may be authorized by the Chairman of
the Board (Chairman) as incentive and reward to deserving officers of the Parent Company with
rank of Manager 2 and above, including senior officers seconded from any parent company, under
an Executive SOP.
On October 28, 2004, the Parent Company’s BOD approved the allocation of an additional 3.6
million shares for the Executive SOP, which will come from the Company’s unissued shares or
common shares held in treasury. Accordingly, total allocation for the Executive SOP increased to
23.6 million shares.
*SGVMC112683*
- 39 On the same date, the Parent Company’s BOD approved the allocation of 136.40 million common
shares for the subsequent phases of the Parent Company’s Executive SOP (Expanded Executive
SOP) covering 96.40 million common shares, and the ESOWN covering 40.00 million common
shares. The common shares for the ESOWN and the Expanded Executive SOP will come from
the Parent Company’s unissued common shares or common shares held in treasury. The common
shares under the Expanded Executive SOP and ESOWN will be distributed from time to time as
an incentive and reward to deserving Parent Company’s executives (Expanded Executive SOP)
and employees (ESOWN) as may be authorized by the Chairman.
In March 2005, the Parent Company granted 23.6 million options under an Executive SOP with an
exercise price of P
=2.71 per share. To enjoy the rights provided for in the plan, the option holder
should be with the Parent Company at the time the options vest. The vesting schedule of the
option follows:
Year
2006
2007
2008
Vesting Percentage
40%
30%
30%
The option holders may exercise in whole or in part the option that has vested in accordance with
the vesting percentage and vesting schedule, provided that an option exercisable but not actually
exercised within a given year shall accrue and may be exercised at any time thereafter but prior to
the option expiration date, which is 10 years from the date of grant. The option holders may
exercise the option either through payment in cash of the exercise price or using an appropriate
number of shares, the value of which at the indicated exercise price is enough to redeem the
remaining options the option holder wishes to exercise. Fair value of the stock options as of grant
date is estimated at P
=97.88 million.
On November 15, 2005, the Parent Company’s BOD approved the allocation of 25.00 million
common shares, consisting of unissued shares and/or undisposed treasury shares, for distribution
from time to time as may be authorized by the Chairman, as an incentive and reward to deserving
executives of the Parent Company with rank of Manager 1 and above, under an Executive Stock
Ownership Plan (ESOWN).
On February 2, 2006, the Parent Company’s BOD authorized the migration of the ExSOP covering
23.6 million common shares to an ESOWN by giving ExSOP grantees a one-time opportunity to
convert their ExSOP allocation into an ESOWN subscription using the ExSOP subscription price
of =
P2.71 per share. The ESOWN terms are described in the succeeding paragraphs.
The migration resulted in the recognition of the additional fair value of the replacement options
amounting to P
=26.50 million. For the exercised options, the fair value was computed using the
market price at the date of grant less the discounted strike price.
*SGVMC112683*
- 40 On May 2, 2006, the Parent Company granted 13.6 million options under the ESOWN plan with an
exercise price of P
=5.47 per share payable in 10 years. To enjoy the rights provided for in the plan,
the option holder should be with the Parent Company at the time the Holding Period expires. The
Holding Period of the option follows:
Year
After one year from subscription date
After two years from subscription date
After three years from subscription date
Holding Period
40%
30%
30%
On May 21, 2007, the Parent Company granted 2.13 million options under the ESOWN plan with
an exercise price of P
=8.08 per share payable in 10 years. To enjoy the rights provided for in the
plan, the option holder should be with the Parent Company at the time the Holding Period expires.
The grant has the same term s and conditions as the 2006 grant.
On June 15, 2008, the Parent Company granted 7.8 million options under the ESOWN plan with
an exercise price of P
=15.13 per share payable in 10 years. To enjoy the rights provided for in the
plan, the option holder should be with the Parent Company at the time the Holding Period expires.
The grant has the same term s and conditions as the 2006 grant.
The ESOWN grantees are allowed to subscribe fully or partially to whatever allocation may have
been granted to him. In case of an initial partial subscription, the employee is still allowed to
subscribe to the remaining unsubscribed shares granted to him provided that this would be made at
the start of Year 5 from grant date up to the end of Year 6. Any additional subscription made by
the employee (after the initial subscription) will be subjected to another 3-year holding period.
Movements in the number of stock options outstanding are as follows:
Weighted average
exercise price
2007
Weighted average
exercise price
4,340,000
8.08
3,820,000
=3.72
P
7,798,483
(6,218,483)
15.13
15.13
2,130,000
(1,610,000)
8.08
8.08
2008
At January 1
Granted
Exercised
At December 31
4,340,000
5,920,000
The fair value of equity-settled share options granted was estimated at the date of grant using the
Black-Scholes option pricing model, taking into account the terms and conditions upon which the
options were granted.
Expense arising from equity-settled share-based payment transactions amounted to P
=42.48 million
in 2008 and P
=36.44 million in 2007.
The following assumptions were used to determine the fair value of the stock options:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life of option
Average share price
2008
1.96%
25.64%
8.64%
4 years
=15.13
P
2007
2.58%
27.29%
6.34%
7 years
=12.00
P
2006
3.40%
24.65%
6.90%
7 years
=6.80
P
*SGVMC112683*
- 41 The expected life of the options is based on management’s estimate and is not necessarily
indicative of exercise patterns that may occur. The expected volatility used for the 2007 and 2006
grants was based on the average historical price volatility of several water utility companies within
the Asian region. For the 2008 grant, the Parent Company’s volatility was used as input in the
valuation. The expected volatility reflects the assumption that the historical volatility is indicative
of future trends, which may also not necessarily reflect the actual outcome.
No other features of the options granted were incorporated into the measurement of fair value.
14. Retirement Plan
The Group has a funded, noncontributory tax-qualified defined benefit pension plan covering
substantially all of its regular employees. The benefits are based on current salaries and years of
service and compensation on the last year of employment.
The components of retirement cost (included in “Salaries, wages and employee benefits”) in the
consolidated statements of income for the three years in the period ended December 31, 2008 are
as follow:
2008
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Actuarial losses
Total pension expense
Actual return on plan assets
P
=43,905
28,736
(9,568)
4,001
P
=67,074
(P
=12,730)
2006
2007
(As restated (As restated Note 2)
Note 2)
(In Thousand Pesos)
=38,564
P
=38,564
P
22,798
14,426
(7,262)
–
5,836
566
=59,936
P
=53,556
P
=9,792
P
=3,068
P
The funded status and amounts recognized in the balance sheets for the pension plan as of
December 31, 2008 and 2007 are as follows:
2007
(As restated Note 2)
Benefit obligations
Plan assets
Unrecognized actuarial losses
Net pension liabilities
2008
(In Thousand Pesos)
=348,321
P
P
=296,439
(137,878)
(157,308)
210,443
139,131
(118,847)
(24,461)
=91,596
P
P
=114,670
As of December 31, 2008 and 2007, pension liability pertaining to qualified retirees in the next
year amounted to P
=8.29 million and =
P5.33 million, respectively.
*SGVMC112683*
- 42 Changes in the present value of the defined benefit obligation are as follows:
2007
(As restated Note 2)
2008
(In Thousand Pesos)
=312,301
P
P
=348,321
38,564
43,905
22,798
28,736
(20,741)
(112,683)
(4,601)
(11,840)
=348,321
P
P
=296,439
Balance at beginning of year
Current service cost
Interest cost
Actuarial gains
Benefits paid
Balance at end of year
Changes in the fair values of plan assets are as follows:
2007
(As restated Note 2)
2008
(In Thousand Pesos)
=80,687
P
P
=137,878
7,262
9,568
52,000
44,000
2,530
(22,298)
(4,601)
(11,840)
=137,878
P
P
=157,308
Balance at beginning of year
Expected return
Contributions
Actuarial gain (loss)
Benefits paid
Balance at end of year
The Group expects to contribute P
=44 million to its benefit pension plan in 2009.
The allocation of the fair value of plan assets is as follows:
Investments in:
Debt securities
Government securities
Equity securities
Others
Unit trust funds
2008
2007
46.4%
39.1%
12.6%
2%
–
–
22.60%
17.60%
1.90%
57.80%
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date, applicable to the period over which the obligation is to be settled.
The assumptions used to determine pension benefits for the Group for the years ended
December 31, 2008, 2007 and 2006 follow:
Discount rate
Salary increase rate
Expected rate of return on plan assets
2008
28.17%
10.70%
5.90%
2007
7.80%
9.00%
9.00%
2006
7.00%
7.00%
9.00%
*SGVMC112683*
- 43 The average expected working lives of employees of the Group as of December 31, 2008 is twenty
(20) years.
Amounts for the current and the previous periods are as follows:
2008
Defined benefit obligation
Plan assets
Deficiency
Experience adjustments on plan liabilities
Experience adjustments on plan assets
P
=296,439
(157,308)
P
=139,131
P
=13,858
(22,298)
2007
2006
(In Thousand Pesos)
=348,321
P
=312,301
P
(137,878)
(80,687)
=210,443
P
=231,614
P
=15,798
P
=1,567
P
2,530
3,069
2005
=131,146
P
–
131,146
=–
P
–
15. Earnings Per Share
Earnings per share amounts attributable to equity holders of the Group for the years ended
December 31, 2008 and 2007 were computed as follows:
2007
2006
(As restated (As restated Note 2)
Note 2)
2008
(In Thousands, Except Per Share Figures)
Net income attributable to equity holders of the
Group
Less dividends on preferred shares*
Net income attributable to common shareholders
for basic and diluted earnings per share
Weighted average number of shares for basic
earnings per share
Dilutive shares arising from stock options
Adjusted weighted average number of common
stock for diluted earnings per share
Basic earnings per share as previously stated
Effect of change in accounting policy for
pension cost
Adoption of accounting standard on service
concession arrangement
Basic earnings per share as adjusted
P
=2,788,020
496,967
=2,596,946
P
465,193
=2,464,470
P
459,164
P
=2,291,053
P
=2,131,753
P
=2,005,306
2,019,834
2,885
2,016,054
2,582
2,005,009
1,644
P
=2,022,719
=1.13
P
=2,018,636
P
=1.15
P
=2,006,653
P
=1.05
P
–
0.01
(0.19)
–
=1.13
P
(0.10)
P1.06
=
0.24
=1.00
P
=1.13
P
=1.06
P
=1.00
P
Diluted earnings per share
*Including participating preferred stocks’ participation in earnings.
*SGVMC112683*
- 44 16. Related Party Transactions
In the normal course of business, the Group has transactions with related parties. The sales and
investments made to related parties are made at normal market prices. Service agreements are
based on rates agreed upon by the parties. Outstanding balances at year-end are unsecured and
interest-free. There have been no guarantees provided or received for any related party
receivables or payables. As of 2008 and 2007, the Group has not made any provision for probable
losses relating to amounts owed by related parties. This assessment is undertaken each financial
year by examining the financial position of the related party and the market in which the related
party operates.
Significant transactions with related parties follow:
a. Sales to related parties amounted to P
=113.20 million, =
P77.40 million and =
P63.29 million in
2008, 2007 and 2006, respectively. The outstanding receivables amounted to P
=0.61 million,
=1.62 million and =
P
P0.62 million as of December 31, 2008, 2007 and 2006, respectively.
b. The Group entered into management agreements with United Utilities B.V., an affiliate of
United Utilities, a principal stockholder, AC, another principal stockholder, and Water Capital
Works, Inc. (WCWI), a joint venture Group formed by AC, United Utilities and BPI Capital.
Under the agreements, AC, United Utilities and WCWI will provide technical and other
knowledge, experience and skills as reasonably necessary for the development, administration
and operation of the concession for which the Group shall pay to each one of them an annual
base fee of US$1.00 million and adjusted for the effect of CPI except for WCWI which has
base fee of 1% of the earned values of the project being supervised. As a result, certain key
management positions are occupied by employees of these related parties. The agreements are
for a period of ten (10) years until 2007 and are renewable for successive periods of five (5)
years. The Board in its meeting last August 16, 2007 approved the renewal of the Technical
Services Agreement with United Utilities, Administrative and Support Services Agreement
with AC and Capital Works Agreement with WCWI for another five years up to 2012. Total
management fees charged to operations amounted to P
=204.10 million, =
P206.62 million and
=228.49 in 2008, 2007 and 2006, respectively. Total outstanding payables amounted to
P
=110.17 million, =
P
P125.43 million and =
P117.96 million as of December 31, 2008, 2007 and
2006, respectively.
c. The Group has investments in debt and equity securities of the principal stockholder and its
subsidiary, which are included in the “available-for-sale financial assets” section of the
consolidated balance sheets. The debt securities amounted to P
=620.00 million and
=400.00 million as of December 31, 2008 and 2007, respectively while the equity securities
P
amounted to P
=149.25 million as of December 31, 2008.
d. Compensation of key management personnel of the Group by benefit type follows:
Short-term employee benefits
Share-based payment (see Note 13)
Post-employment benefits
2008
P
=107,570,044
37,243,253
18,482,905
P
=163,296,202
2007
=99,601,893
P
7,110,000
41,354,775
=148,066,668
P
*SGVMC112683*
- 45 17. Income Taxes
Provision for income tax consists of:
Current
Deferred
2007
(As restated Note 2)
2008
P
=1,096,678,717
371,986,493
P
=1,468,665,210
=867,814,458
P
119,528,599
=987,343,057
P
2006
(As restated Note 2)
=–
P
(123,790,274)
(P
=123,790,274)
The reconciliation of the provision for income tax computed at the statutory income tax rate to the
provision for income tax shown in the consolidated statements of income for the years ended
December 31, 2008, 2007 and 2006 follows:
Statutory income tax rate
Tax effects of:
Interest income subjected to final tax
Nondeductible interest expense
Change in unrecognized deferred tax
Others - net
Effective income tax rate
2008
35.00%
(1.77)
0.93
–
0.34
34.50%
2007
(As restated Note 2)
2006
(As restated Note 2)
35.00%
35.00%
(1.61)
0.84
–
(6.68)
27.55%
(5.11)
2.68
(7.56)
(30.30)
(5.29%)
The Group is registered with the BOI as an agent of water supply and sewerage system for the
East Zone on a pioneer status under the Omnibus Investments Code of 1987. The registration
entitles the Group to, among others, income tax holiday (ITH) for six (6) years from August 2000
or from actual start of commercial operations, whichever comes first but in no case earlier than the
date of registration, and tax credit on domestic capital equipment.
On January 3, 2000, the BOI approved the reckoning date of availment of the ITH incentives to be
January 1, 2000. On December 20, 2005, the BOI granted an extension for the Group’s income
tax holiday status up to December 31, 2006.
The components of the deferred income tax assets (liabilities) of the Group represent the deferred
income tax effects of the following:
Service concession obligation – net
Allowance for doubtful accounts (see Note 5)
Pension liabilities (see Note 14)
Unamortized premium on bonds
Unamortized costs on financial instruments
2008
P
=274,938,333
183,909,626
50,724,898
46,938,970
10,249,908
2007
(As restated Note 2)
=518,090,497
P
196,831,058
53,722,626
–
9,887,222
(Forward)
*SGVMC112683*
- 46 -
2008
7,426,763
Common stock options outstanding
Allowance for inventory write down
Unamortized discount on financial liabilities
Derivative asset on prepayment option
Capitalized borrowing cost
–
(42,749,869)
(77,521,224)
(126,256,818)
P
=327,660,587
2007
(As restated Note 2)
11,402,610
15,252,233
(25,753,159)
–
(79,786,006)
=699,647,081
P
In 2006, the Group has deductible temporary differences consisting of allowance for doubtful
accounts of P
=689.54 million that are available for offset against future taxable income, for which
deferred tax assets have not been recognized. The deferred income tax effects of deductible
temporary difference for which no deferred tax asset was recognized amounted P
=241.34 million.
RA No. 9337
RA No. 9337 was enacted into law amending various provisions in the existing 1997 National
Internal Revenue Code. Among the reforms introduced by the said RA was the reduction in the
regular corporate income tax rate from 35% to 30% beginning January 1, 2009.
Revenue Regulations (RR) No. 16-2008
RR No. 16-2008 provided the implementing guidelines for Section 34 of RA No. 9504 on the use
of the Optional Standard Deduction (OSD) for corporations.
This became effective on July 1, 2008 and was adopted by the Group for transactions for the
period July to December 2008.
The OSD allowed shall be an amount not exceeding 40% of the gross income.
18. Interest Income, Interest Expense and Other Income
Interest income consists of:
Interest income on:
Investments
Others
2008
2007
2006
P
=204,008,942
879,713
P
=204,888,655
=151,063,380
P
1,682,411
=152,745,791
P
=292,935,055
P
2,043,617
=294,978,672
P
2008
2007
2006
P
=535,621,669
=297,372,960
P
=343,030,703
P
135,179,726
199,050,173
224,620,991
18,465,289
P
=689,266,684
32,371,212
=528,794,345
P
15,301,046
=582,952,740
P
Interest expense consists of:
Interest expense on:
Amortization of