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, 2007
(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, 2007
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.
Address of principal office: 34th 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
Number of shares issued &outstanding
Preferred B
Common*
58,000,000
414,363,423
* Net of 323,622 treasury shares
Amount of debt outstanding as of December 31, 2007: P50.0 billion
11.
Are any or all of these securities listed in the Philippine Stock Exchange? Yes [x] No [ ]
The Common shares are listed in the Philippine Stock Exchange.
12.
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 [ ]
13.
Aggregate market value of the voting stock held by non-affiliates: About P81billion (based
on closing stock prices of Ayala Corporation common shares as of April 9, 2008)
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:
2007 Audited Consolidated Financial Statements of Ayala Corporation and Subsidiaries
(incorporated as reference for item 1,6,7, and 8 of SEC Form 17-A)
2007 Audited Consolidated Financial Statements of Bank of the Philippine Islands
(incorporated as reference for item 1 and 6 of SEC Form 17-A)
2007 Audited Consolidated Financial Statements of Globe Telecom, Inc. and Subsidiaries
(incorporated as reference for item 1 and 6 of SEC Form 17-A)
2007 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
Item 6
Item 7
Item 8
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
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
57
60
62
63
64
75
75
79
84
86
88
89
93
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 at Tower One, Ayala Triangle,
Ayala Avenue, Makati City. The Company is a publicly listed company which is 50.90% owned by
Mermac, Inc., 10.57% owned by Mitsubishi Corporation and the rest by the public.
The Company is the holding company of the Ayala Group (the Group), 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; provision of value-added content for
wireless services, on-line business-to-business and business-to-consumer 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, 2007 are AC International Finance, Ltd. (ACIFL - organized in 1995), Ayala Land, Inc. (ALI organized in 1988), Ayala Automotive Holdings Corp. (AAHC – organized in 1991), 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.
In 2006, the company expanded its portfolio with major direct investments through two new
subsidiaries – LiveIT Solutions, Inc. and HR Mall, Inc – which are focused primarily on the BPO
sector.
As to the material reclassification, merger, consolidation or purchase or sale of a
significant amount of assets:
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). This resulted in the Company having a direct
ownership of 69% in AIVPL with Azalea Technology’s ownership interest in AIVPL reduced to
31%.
Further, 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.
On June 20, 2007, AIPL and its subsidiaries (AIPL Group) have undergone restructuring wherein
intermediate Hong Kong holding companies 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.
On October 16, 2006, the Company entered into a Deed of Assignment with AYC Holdings, Ltd.,
a wholly owned subsidiary of ACIFL, where the Company assigned its 832,343,700 shares in IMI
(with original acquisition cost of P
= 520.6 million representing approximately 74.4% of IMI's total
outstanding stock) in exchange for 104,112 shares of AYC Holdings (with par value of US$100
per share). Further, the Company entered into a Deed of Assignment with ACIFL where the
Company assigned its 104,112 shares in AYC Holdings, Ltd. (at a transfer value of US$10.4
million) in exchange for 10,411,200 additional shares of ACIFL with a par value of US$1 per
share.
In 2006, the Company and ALI entered into a Shareholders’ Agreement with ARCH Capital and
Great ARCH Co. Limited, wherein the Company and ALI will invest as much as US$75.0 million
in a private equity Fund that will explore property markets in Asia, excluding Japan and
Philippines. The Company’s investment will be made through Ayala International Pte. Ltd. (AIPL)
which has a strong record of experience in direct property investments in Asia and the United
States. ALI (through a subsidiary) and AIPL will both have interests in the fund management
company, ARCH Capital, which will raise third party capital and pursue investments for the Fund.
As of December 31, 2006, the private equity Fund has not been formed. The total amount of
investment and deposits to ARCH Capital amounted to P
= 3,271 million.
In 2006, the Group had negotiations to sell its equity interests in Makati Property Ventures, Inc.
(MPVI) and Hermill Investments Pte. Ltd. (Hermill). Ayala Hotels, Inc., together with Ocmador
Philippines B. V., agreed to sell MPVI, to DBS Trustee Ltd. (Trustee of Ascott Residence Trust)
on or about March 22, 2007 (Closing date).
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
2
sale of its 23.3% interest in Hermill, the holding company for The Forum Shopping Mall, a 17storey 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.
On October 7, 2006, Conoda, Inc., a subsidiary of LiveIt, entered into an Agreement and Plan of
Merger with Integreon Managed Solutions, Inc. (Integreon) for the purchase of all Integreon
shares. The amount of $18.0 million was put in Integreon.
On December 15, 2006, Next Life, Inc., a subsidiary of LiveIt, entered into an Agreement and
Plan of Merger with Affinity, Inc. (Affinity) for the purchase of all Affinity shares for a total
consideration of $28.0 million.
In 2006, ALI signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments
Ltd. (FIL) to jointly develop a BPO office building in Dela Rosa Street and to purchase the
existing People Support Building. APPHC, the newly formed joint-venture company, is 60%
owned by ALI. The remaining 40% interest is split evenly between MIL and FIL. APPHC is
jointly controlled by ALI, MIL, and FIL.
The contribution of each segment of the business (in million pesos) to the consolidated
revenues of the Company is as follows:
(In Millions)
Revenue
Dec-07
Dec-06
Parent Company/Financial Services/
Telecommunications/Water Utilities
Real Estate and Hotels
Electronics, Information Technology and Business
Process Outsourcing Services
International
Automotive and Others
Net Income
Dec-07
Dec-06
18,211
25,827
13,741
25,809
13,257
5,135
8,043
4,285
21,890
483
12,296
78,707
20,924
469
9,223
70,166
7
235
369
19,003
1,667
251
222
14,468
Total Assets
Dec-07
Dec-06
Parent Company/Financial Services/
Telecommunications/Water Utilities
82,562
Real Estate and Hotels
84,395
Electronics, Information Technology and Business
Process Outsourcing Services
19,501
International
3,562
Automotive and Others
5,416
Deferred Tax Assets/Liabilities
984
196,420
Total Liabilities
Dec-07
Dec-06
72,762
79,477
41,522
31,899
40,386
30,410
19,590
7,375
2,004
1,124
182,332
6,572
1,334
151
156
81,634
8,180
471
607
444
80,498
Please refer also to Note 26 (“Segment Information”) of the Notes to Consolidated Financial
Statements of the 2007 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 5 – 56 for a discussion on Ayala Land, Inc. (ALI), Integrated
Micro Electronic, Inc. (IMI), and Ayala Automotive Holdings Corp. (AAHC) significant
subsidiaries, and Globe Telecom (Globe), Bank of the Philippine Islands (BPI), and Manila Water
Company, Inc.(MWCI), significant associates.
3
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 113 employees as of December 31, 2007, classified as
follows:
Management
68
Staff
45
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 generally 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 counterparty. 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
4
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 2007
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 67.9% of IMI. The transfer by AC of IMI shares to AYC Holdings is discussed
under material reclassification, merger, consolidation or purchase or sale of a significant amount
of assets in page 2 of this report.
Ayala Land, Inc. (ALI) – organized in 1988 when Ayala Corporation decided to spin off its real
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 Development - sale of high-end residential lots and units (including leisure
community developments), middle-income residential lots and units, and affordable 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
5
In 2007, Ayala Land delivered solid financial and operating results amidst initiatives to sustain
growth in value in the coming years. Consolidated net income grew by 13% to P4.4 billion on the
back of significant margin expansion in the company’s key business lines.
Consolidated revenues increased to P25.7 billion from P25.6 billion in 2006. Revenue growth
was tempered by the accelerated residential revenue bookings in 2006 following the adoption of
a standardized revenue recognition policy and the absence of BPO leasing revenues from the
sale of PeopleSupport Building the prior year.
The company realized a significant gain from the sale of preferred shares in KHI-ALI Manila Inc.
to Kingdom Manila B.V. in connection with the development of a luxury hotel complex within
Ayala Center and from the sale of shares in Makati Property Venture Inc. to the Ascott
Residence Trust. Also boosting revenues were higher equity earnings from Ayala Land’s
corporate investment vehicles for Bonifacio Global City and the improved earnings performance
of affiliates Cebu Holdings Inc. and Alabang Commercial Corporation.
Sustained growth across all segments
Residential Development
Capitalizing on a low interest rate environment, strong pent-up domestic demand and robust
overseas remittances, the residential business group generated sales of P13.0 billion from the
sale of 5,670 units across Ayala Land Premier, Community Innovations, and Avida Land. Sales
to overseas Filipinos accounted for 32% of total residential sales, an increase of 17% in value as
a result of various marketing, sales, and channel development activities.
Additional inventory of 5,519 units put in the market during the year included new phases at
existing subdivision projects experiencing steady sales, such as Ayala Westgrove Heights, Ayala
Greenfield Estates, Plantazionne Verdana Homes and various Avida projects.
The bulk of new inventory came from 12 new residential projects. Sales at Nuvali augur well for
the company’s 1,696-hectare landmark sustainable community in Canlubang, Laguna. Abrio, an
Ayala Land Premier project, received overwhelming market response upon launch last
September. Community Innovation’s Treveia and Avida Settings were also very well received
upon launch the following month. By year-end, a total of 672 lots were sold out of the 1,175
launched in these three developments.
Riding on the success of Two Serendra and the popularity of Serendra shops and Bonfacio High
Street, The Aston, the first of four high-rises at Two Serendra was also launched. The company
expanded into other areas in Metro Manila with Avida Towers Makati West, Avida’s first
condominium project in Makati, and Celadon Park 2nd Tower, part of an integrated development
in San Lazaro, Manila.
The company likewise successfully ventured north of Metro Manila with the launch of Marquee, a
middle income residential project, in Angeles, Pampanga.
Shopping Centers
The Ayala Malls turned in an equally strong performance, posting a 95% average occupancy
rate, higher building rental rates, and increased gross leaseable area (GLA).
New and expanded malls increased GLA to 208,000 sqms. Within Ayala Center, Phase 1 of
Greenbelt 5 soft-opened last October. The opening of the retail component of Bonifacio High
Street brought new retail concepts to Bonifacio Global City. Trinoma, the company’s first
superregional mall in the North opened in May and has seen high take-up, rental rates and
pedestrian count by year-end.
Corporate Business
On the corporate business segment, the traditional headquarter office portfolio continued to
command premium rental rates and occupancy rates averaging 99%.
The company redoubled its efforts to expand its portfolio of BPO buildings, both geographically
and in terms of product type. Construction commenced in seven projects in various locations,
6
which will add over 200,000 sqms. of GLA when completed in 2008 and 2009. These projects
include the Dela Rosa E-services building and Glorietta 5 in Makati Central Business District,
San Lazaro Building in Manila, UP North Science & Technology Park, and Nuvali
Technopod. The company also began construction of a BPO building within Bonifacio Global City
and eBloc, a project with Cebu Property Ventures Development Corporation in Asiatown IT Park
in Cebu.
Value Creation and Capture from Strategic Landbank
The company continued to prime its three strategic landholdings and unlock the value of these
assets. In 2007, Ayala Land undertook developments which will pave the way for the
redevelopment of Glorietta 1 in 2009. A retail and parking building between Shangri-La and
Landmark, called The Link, opened in October. Construction of Glorietta 5, consisting of three
levels of retail, five levels of BPO and two levels of basement parking, commenced in April 2007.
A 7,377-sqm. parcel was turned over to KHI Manila for a luxury hotel complex consisting of a
300-room Fairmont Hotel, 30-suite Raffles Hotel, and 189 Raffles-branded private residences.
The project is expected to complete within three years.
Significant progress was also made in priming Bonifacio Global City as a future Central Business
District. As a result of value-enhancing efforts, 64,020 sqms. Of commercial lots were sold at
higher prices. Development activities in Bonifacio Global City were in high gear, with 125
completed and ongoing projects by end of the year, representing a build-up of 2.6 million in
Gross Floor Area. A 29-storey BGC E-Services Building broke ground in November 2007.
Planning is ongoing for a Grade AAA office building that will house the Philippine Stock
Exchange. A major agreement was signed with the Shangri-La Hotels Group for their planned
six-star de luxe hotel and residential project.
At Nuvali, two lanes of the North-South Road, extending from the Sta. Rosa- Tagaytay road all
the way to Montecito, were completed. Construction of the various residential, BPO, and retail
components of Phase 1 of Nuvali in Canlubang was in full swing, with the grand launch
scheduled in the second half of 2008.
Strong Platform for Growth
The company’s balance sheet remained strong with current ratio at 1.65:1. As of end-2007, cash
and cash equivalents stood at P13.6 billion, 43% higher than end-2006 level of P9.5 billion with
the collection of full payments from completed units at Serendra and deposits from preferred
shares subscriptions. Total borrowings were at P10.1 billion, from P12.8 billion as of December
last year, translating to a debt-to-equity ratio of 0.22:1.
Ayala Land spent P15.2 billion for project and capital expenditures in 2007, 11% more than the
P13.7 billion spent the previous year. For 2008, Ayala Land has earmarked an unprecedented
P24.3 billion for capital and project expenditures, with the bulk of the budget allocated for
Residential Development and Corporate Business.
The company has an active pipeline of projects, several of which will be completed and
operational in 2008. In addition to BPO project completions, some 27,500 sqms. GLA of mall
space will come on stream in 2008 with the opening of Phase 2 of Greenbelt 5 and Glorietta 5.
Beyond 2008, new mall space will come from projects such as Q Shopping in Angeles,
Pampanga and a retail-BPO development in Davao City. About 5,600 residential units from new
projects and additional phases of existing projects will be put on the market.
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 11% or more contribution to 2007 consolidated revenues):
Residential development
50%
(high-end lots and units, leisure, upper mid-income
housing, affordable housing)
Shopping centers
16%
7
Interest and Other Income
11%
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 whollyowned 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 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 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 Greenbelt was pursued. In addition to traditional office buildings,
ALI completed three build-to-suit office buildings for BPO firms. 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.
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
Community Innovations, Inc. (incorporated in 2002), 100% owned by ALI, offers various
residential products to the upper middle-income market. CII’s projects over the past three years
include Verdana Homes Mamplasan, The Columns at Ayala Avenue, The Columns at Legazpi
Village and Celadon Residences and Celadon Park.
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 Residences San Fernando,
Avida Residences Sta. Cecilia, and Riego de Dios Village.
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.
8
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.
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.
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 within the Laguna
Technopark.
ALI Property Partners Holdings Corp. (incorporated in 2006), is the Company’s 60%-owned
vehicle for its partnership with MLT Investments (Goldman Sachs) and Filipinas Investments
9
(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.
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 22% 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 2005 included sale of a Makati lot and preferred shares in Ayala Infrastructure
Ventures, Inc. (AIVI), deemed no longer core, with the completion of the MRT-3 rail project.
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.
Various diversification/ new product lines introduced by the company during the last three years
Leisure community project
In 2005, ALI launched its first leisure community project, Anvaya Cove. This 320-hectare
development is located in Morong, Bataan and offers residential lots, villas and beach club
shares.
BPO office buildings
ALI ventured into the development of build-to-suit office buildings catering to business process
outsourcing firms and call centers. PeopleSupport Center broke ground in March 2004 and was
completed in April 2005. Convergys started construction in July 2004 and was completed in
October 2005 while InfoNXX Building was constructed from July to November 2005. In October
2006, ALI signed a Contract of Lease with the University of the Philippines for a 38-hectare BPO
10
campus project which broke ground in March 2007. In December 2006, ALI formed Ayala
Property Partners Corporation (APPCo), a joint venture with Goldman Sachs and Capmark Asia,
and subsequently bought PeopleSupport Building from ALI. APPCo broke ground on the UP
North Science and Technology Park, Dela Rosa E-Services Building, Nuvali Technopod in 2007.
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. In terms of asset size, ALI
is bigger compared to SM Prime but the latter’s 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 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 smaller developers
such as Megaworld and Fil-Estate 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 and Empire East as key competitors. Community Innovations 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 precast concrete panels and columns/other components using the TEX Building System with RP
Patent No. 30327.
11
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.
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 510 employees (1,986 including operating
subsidiaries’ manpower – both consolidated and equitized companies) as of December 31, 2007.
The Company expects to more or less maintain its number of employees in the next 12 months.
The breakdown of the 510 ALI - parent company employees according to type is as follows:
Corporate Sales & Marketing Services Group
Project Development Group
Support Group
Total
8
232
270
510
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 local hotel sector experienced growth in occupancy, rental rates and
revenues per available room. The Company's hotels, known for their premium value and
12
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 is benefiting from the improved performance of
the construction industry, particularly from an uptick in development activities mostly 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 2007, 2006 and 2005 follow: (in P 000)
2007
2006
2005
25,707,229
25,558,842
21,375,369
7,704,392
-
7,422,165
-
5,859,939
-
Net income (Attributable to equity holders of ALI)
Domestic
4,386,362
3,865,602
Foreign
-
3,616,673
-
Consolidated revenues
Domestic
Foreign
Net operating income
Domestic
Foreign
Total assets
Domestic
Foreign
82,981,245
-
78,250,161*
-
71,810,222
-
* Restated to conform with new PAS/FPRS
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.
13
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.
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 and Enclosure system and other electronic parts.
Under its PEZA registrations, the Parent Company’s projects and activities are subject to certain
requirements and are entitled to certain incentives, which include, but are not limited to, income
tax holidays (ITH) and tax and duty free importation of inventories and capital equipment. Upon
the expiration of the ITH on these projects and activities, the Parent Company 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. The Parent Company’s entitlements to ITH
under the current PEZA registrations will expire beginning July 2008 to November 2011 for the
different registered activities.
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, Philippines and USA.
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.
EAZIX is engaged in electronics product design, intended to support the growing need for
research and development, and product development outsourcing of its existing and future
customers. EAZIX is also registered with the PEZA as: (1) an Ecozone Information Technology
enterprise to provide product design services and product solutions which include electronics
hardware design, software and firmware development, component level design, prototyping, preproduction testing and value engineering; and (2) as export service provider of the design
verification and product evaluation of new generation optical disk drives. Under these PEZA
registrations, EAZIX is subject to certain requirements and is entitled to certain incentives as the
Parent Company. In July 2006, the ITH for the “Product design services and product solutions
which include electronics hardware design, software development, mechanical design and
Integrated Circuit (IC) design” project of EAZIX expired and will be subject to 5% final tax on
gross income. The only remaining project that is entitled to ITH is the Toshiba-Samsung Storage
Technology (TSST)/Captive Engineering business (“Design verification and product evaluation of
new generation optical disk drives”) up to January 2010.
On February 2, 2007, the IMI set up IMI Japan, which was registered under the corporate laws of
Japan, for the purpose of transacting business with Japanese customers in the following areas:
14
a) turnkey EMS; b) engineering and design services; and c) original design manufacturing (ODM)
solutions. IMI Japan is also to function as central program management for new business in
coordination with EAZIX (wireless), STEL and Subsidiaries (power management) and IMI USA
(film chip). IMI Japan will get programs/projects from Japanese customers and then give these
to the Parent Company or IMI Singapore. There will be no manufacturing operation in IMI Japan.
IMI continued to benefit from the consistent increase in demand for super multi-drives for
notebook PCs and the emergence of next-generation optical drives (ODDs). This was reflective
of the continued growth of the global electronics manufacturing services (EMS) industry, which
was estimated to have increased revenues by 15% in 2007 to US$177 billion. PC shipments
rose by 13% year-on-year to 271 million units. With these robust global trends, IMI turned in an
8% growth in consolidated revenues to US$423 million in 2007 from US$393 million the previous
year.
Revenues from Philippine operations, which accounted for 53% of IMI group’s total revenues,
grew by 14% as a result of higher volumes from key customers. IMI recently expanded its liquid
crystal display (LCD) business via an upstream integration of printed circuit board (PCB)
assembly operations. A market leader in radio frequency identification device based in Canada
has chosen IMI to provide EMS solutions, including final product assembly.
Group profitability improved as overall gross margins remained healthy and even expanded from
the prior year. This was a result of higher consignment sales and the shift of certain projects,
particularly in Singapore and China, from turnkey to semiturnkey arrangements. However,
operating income declined by 9% due mainly to the continued weakness of the U.S. dollar and
higher general and administrative expenses related to the group’s technology integration
initiatives. Notwithstanding these, net income increased by 3% to US$36 million, inclusive of
some hedging gains.
IMI had several key achievements that are expected to better position the group to capture a
larger share of the growing global EMS market.
First was the expansion of its manufacturing operations in China with the opening of a fifth plant
in Fu Yong, Shenzhen. This 129,167-sq. ft. facility will support power supply, PCB assembly,and
box-build assembly operations. Locally, it has expanded its next-generation ODD assembly lines
in Laguna Technopark.
Second, IMI has streamlined the design and development processes across all its sites and
further improved facilities and design infrastructure. EAZIX Inc., its 100% owned subsidiary, was
merged into IMI paving the way for the establishment of the IMI Design and Engineering Group,
which will help further improve operational efficiency. In line with this, a Value Engineering team
was also established to provide customers with value improvement services to help reduce
production costs and improve product performance. An optics laboratory and a radio frequency
shield room were also constructed while several automotive camera platforms were developed.
Third, IMI implemented its global organizational structure as it transitioned to a group-wide
business unit (BU) structure per market segment. This, in effect, aligns business processes
across all sites. The BU Managers are responsible for developing customer relations and are
accountable for the BUs’ direct profit and loss performance. In addition to this, IMI’s Tokyo sales
office was converted to a wholly owned subsidiary, IMI Japan Inc., which was incorporated in
February 2007. This reorganization will allow greater focus on building relationships with original
equipment manufacturers based in Japan, as well as serve as its front-end design and product
development center.
Moving forward, IMI envisions building pioneering platforms to capture unserved markets and
aims to be a leading global EMS industry player by 2020. In line with this, it focuses more
intensively on the value of “customer intimacy.” This means critically segmenting the market and
offering customized products to each of these based on an in-depth knowledge of its various
customers’ requirements. IMI’s main business value proposition is delivering flexible, customerfocused, integrated electronics solutions of the highest quality and integrity in a cost-effective
manner. This value proposition was the springboard for its new brand logo which was
launched internally last December 2007. The key message embodied in the new IMI brand is:
15
“having the expertise that is flexible and adaptable to therequirements of our customers.” Lastly,
in 2007, IMI received Circuits Assembly’s Service Excellence Award for Highest Overall
Customer Rating for the group of medium-sized EMS providers and in addition was named by
the ASEAN Business Advisory Council as one among the 12 most admired companies in
Southeast Asia. These are in part positive reaffirmations of the strategic directions it has pursued
these past years.
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, the parent company’s Board of Directors (BOD) passed and approved
the merger of Eazix, Inc., a wholly-owed subsidiary, with the Parent company 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, the parent company enter 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
Consumer products
Industrial
Telecom
34%
20%
18%
15%
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:
Japan
USA
Europe
Asia & others
2007
48%
21%
18%
13%
2006
53%
19%
12%
16%
2005
79%
15%
5%
1%
Distribution method of the products or services: Direct Sales/Sales Agent
Competition: IMI sees high potential in emerging opportunities: new applications for automotive,
industrial, and medical electronics; environment-friendly technologies; a growing trend of
outsourcing by original equipment manufacturers in Japan.
The three current forecasts for EMS revenue in 2007 average $177.0 billion, up 15.0% from the
2006 average. For 2008, the forecast mean is $198.3 billion, representing growth of 12.0%.
Year-to-year increases in average forecasts remain below 12% in subsequent years. For the end
of the forecast period in 2011, EMS projections average $271.5 billion.
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.
JapanUSA Europe-
Computer Peripherals, Consumer and Telecom Products
Industrial, Telecom, Consumer and Automotive Products
Industrial, Automotive and Telecom Products
Principal methods of competition:
Price and Quality of Products
16
Principal competitors:
IMI competes with leading EMS providers worldwide. Some of our competitors include
Flextronics, Hon Hai/Foxconn, Solectron, Jabil, Venture, Hanna and Ionics.
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. We
possess the same support, materials management, and other value added services. Through
the past 27 years, IMI has progressed from a basic assembler of integrated circuits into a
complete end-to-end 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 components and
raw materials
Dependency of the company on a single customer or a few customers:
The top 10 customers of IMI comprise 50% 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
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
IMI complies with ISO 14001, international standard for Environment Management Systems as
certified by SGS since year 2000. This certification enables IMI to qualify as a contract
manufacturer for various OEMs.
Employees:
As of December 31, 2007, the Group had 24,573 broken down as follows:
Senior personnel
282
Supervisor & Rank & File
2,974
Direct Labor
21,317
The group expects to have about 25,000 employees within the next 12 months. The company’s
employees are not on strike, nor are they threatening to strike.
Major risk:
There are foreign production sites that offer lower manufacturing cost. Our customer could shift
to EMS companies operating to these countries. In response to this risk, IMI maintains the high
17
quality of its products in order to give the best price-value proposition to its customer. It ensures
flexibility at all times in order to meet the needs of its customers.
IMI inaugurated its subsidiary IMI Japan in 2007. This move will enable IMI to build stronger
relationships with original equipment manufacturers (OEMs) based in Japan, attract more
Japanese OEMs, and provide a front-end and product development center.
IMI’s facilities in China, through the Speedy-Tech acquisition in 2005, enables IMI to compete
with other low-cost countries. We recently established our fifth production facility in Fu Yong,
Shenzhen, China.
IMI’s recently completed merger with Speedy-Tech Electronics enabled the company to access
Speedy-Tech’s manufacturing facilities in Cavite, Philippines and Singapore. More significantly,
IMI has established its presence in China through Speedy-Tech’s production facilities in that
country (three in Shenzhen and one in Jiaxing and one in Chongqing). This move also enabled
IMI to become more competitive with other low-cost countries.
Ayala Automotive Holdings Corporation (AAHC) - is a company incorporated in the
Philippines on March 8, 1991. The Company primarily acts as an investment holding company
of Honda Cars Makati, Inc.(HCMI), Honda Cars Philippines, Inc. (HCPI), Isuzu Automotive
Dealership Inc. (IADI) and Prime Initiatives, Inc. (PII). Its registered address and principal place
of business is at 34th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City.
HCMI is primarily engaged in the sale of vehicles and related parts, accessories and services.
The Company has 10 branches nationwide (Makati, Global City, Pasig, Alabang, Shaw, Cebu,
Mandaue, Negros , Iloilo, and Cagayan). HCMI is a wholly owned subsidiary of AAHC. IADI is
primarily engaged in the sale of vehicles and related parts, accessories and services. The
Company has 6 branches nationwide (Alabang, Pasig, Cavite, Cebu, Iloilo, and Mandaue). IADI
is a wholly owned subsidiary of AAHC. PII acts as an insurance agent with any insurance
company and is a wholly owned subsidiary of AAHC. HCPI is primarily engaged in the
manufacture and distribution of motor vehicles and motor vehicle parts and accessories. HCPI is
12.88% owned by AAHC.
The domestic automotive industry performed strongly in 2007 with unit sales breaching the
100,000 mark for the first time since the Asian financial crisis. Total industry sales reached
117,907 units, 18% higher than previous year’s output of 99,541 units. The brisk sales were
driven largely by strong demand for commercial vehicles, which contributed 65% of total and
which grew by 25% year-on-year to 76,800 units. Passenger car sales, on the other hand, grew
by 7% versus last year, reaching 41,107 units. The launch of new models and variants,
intensified marketing activities, and aggressive financing schemes across all brands mainly
boosted domestic industry sales.
Honda Cars remained to be the second fastest selling brand in the local market. A total of 17,321
Honda cars were sold during the year, exceeding the previous year’s sales by 25% and
outpacing industry growth. Honda’s overall market share increased from 14% in 2006 to 15% in
2007 driven primarily by the strong market reception to the new CR-V model. Honda’s planned
launch of the all-new Accord in 2008 is expected to sustain Honda’s leadership in the industry.
In the meantime, Isuzu Philippines Corporation (IPC) sold 9,770 units in the market, up by 20%
compared to the previous year. It maintained its 13% share of the market and is one of the top
three sellers in the commercial vehicle segment.
Ayala dealerships retained dominance in both Honda and Isuzu networks. Honda dealerships
captured 53% of total Honda nationwide sales with Honda Cars Makati Inc. (HCMI) registering its
second highest sales output on record, surpassed only by the pre-crisis 1996
sales of 10,422 units. Our Honda Cars dealership in Alabang was the top selling dealer
nationwide.
Isuzu Automotive Dealership Inc. (IADI) likewise cornered a bigger share of IPC’s sales at 32%
from 31% the prior year. Our Isuzu Alabang dealership was the top dealer in the whole IPC
network with Isuzu Cebu Inc. as the leading provincial dealer.
18
Combined, Honda and Isuzu dealerships now account for 10% of the country’s total auto
industry’s sales, making Ayala Automotive one of the largest dealership companies in the
country. The strong vehicle sales put our automotive group net income at P388 million, 47%
higher than last year.
To further strengthen the presence in the market and optimize opportunities in high growth
areas, Ayala Automotive opened two new outlets in 2007. Honda Cars Global City was
established in the fast developing Bonfacio Global City while a new Isuzu dealership in Iloilo was
also inaugurated last year.
The commitment to quality has been tested consistently, reflecting in the performance of HCMI
and IADI technicians. HCMI’s technicians dominated all categories in the HCPI’s National
Technicians Contest and IADI’s technicians captured the top three slots in Isuzu’s National
Technicians Contest for the second consecutive year. Despite the numerous challenges facing
the domestic auto industry, Ayala Automotive remains committed to delivering products and
after-sales service of the highest quality to customers. This has been key to its continued growth
and value contribution to the Ayala group.
Any bankruptcy, receivership or similar proceeding: None
Any material reclassification, merger, consolidation, purchase or sale of significant amount of
assets not in the ordinary course of business: Not applicable
Products or services which contribute 10% or more to sales or revenues: Automotive products
and services constitute 98% of total revenues (P11,918M)
Percentage of sales or revenues and net income contributed by foreign sales: Not applicable
Status of any publicly-announced new product or service: All new Honda CR-V and 2007 Isuzu
D-Max were launched in 2007.
Disclose how dependent the company is upon a single customer or a few customers: NA
Transactions with and/or dependence on related parties: Not applicable
Distribution method of the products or services: Retailing through dealerships or sales outlets
Principal methods of competition :
Pricing, after sales service, and product quality and performance
Competition:
Automotive industry has seen intense competition in the recent past years and will continue to be
challenging in the next years. Introduction of new models from traditional car makers and newer
players, aggressive promotions and marketing, and rise of Korean, American and European
brands gave more choices to customers. The rising fuel prices and thrusts to reduce global
warming have prompted manufacturers to introduce energy-saving and earth-friendly models.
Areas where the company operates are:
Passenger Cars – Metro Manila, Cebu, Cagayan de Oro, Negros, Iloilo
Commercial Vehicles – Metro Manila, Cavite, Cebu , Iloilo
Sources and availability of raw materials and the names of principal suppliers:
AAHC is dependent on two distributors. The company have exclusive agreements with Honda
Cars Philippines for Honda automotive products and Isuzu Philippines Corporation for Isuzu
automotive products.
Dealership Agreement
HCMI operates under a dealership agreement with HCPI which is renewable every year. Under
the dealership agreement, HCMI was appointed as a non-exclusive authorized dealer of HCPI
and is bound to comply with the provisions of the dealership agreement. IADI also operates
19
under a dealership agreement with Isuzu Philippines Corporation (IPC) which is likewise
renewable every year. Under the dealership agreement, IADI was appointed as dealer on a nonexclusive basis of IPC and is bound to strictly comply with the provisions of the agreement.
Principal Terms cover the pricing policy, definition of territories and compliance with Corporate
Image standards of both HCPI and IPC.
Research and Development Activities: Not applicable
Compliance with environmental laws: Not applicable
Need for any government approval of principal products or services: Not applicable
Government Regulations
Recent laws include: Lemon Law – although this directly impacts the distributors HCPI and
IPI, Clean-Air Act and DTI’s customer welfare desk
Employees
As of December 31, 2007, HCMI had 1,160 employees, broken down as follows:
Type of Employees
Operations
Sales
Service
Parts
Administration
Total
Number of Employees
246
479
80
355
1,160
AAHC and its subsidiaries are non-unionized. The company’s employees are not on strike, nor
are they threatening to strike. The company expects to more or less maintain its number of
employees.
Risk
The operations of AAHC’s subsidiaries are subject to competition from various brands/models in
the industry. Moreover, they are subject to risk of customers being dissatisfied with products or
services. The Company has launched and enhanced several customer-focused programs that
promote quality and service excellence. Regular and constant customer surveys/studies are
conducted in assessing the effectiveness of these projects and identifying customer concerns
and rising customer expectations. The company remains committed to its pursuit of total
customer satisfaction to ensure long-term growth. The dealerships of AAHC account for about
10% of total new units automotive sales, making it one of the biggest dealership companies in
the Philippines. Honda is known for quality and technology leadership and Isuzu is superior in
the diesel engine technology
Through its strong dealership network, AAHC will continue to pursue quality leadership and
service excellence, affirming its commitment to total customer satisfaction.
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.
20
Bank of the Philippine Islands (BPI) - balance sheets and income statements are shown
below:
Balance Sheets
(In Million Pesos)
December 31, 2007
December 31, 2006
Total Resources
637,285
583,133
Total Liabilities
Capital Funds for Equity Holders
Minority Interest
566,154
70,011
1,120
517,646
64,439
1,048
Total Capital Funds
637,285
583,133
Statements of Income
(In Million pesos)
December 31, 2007
December 31, 2006
Interest Income
Other Income
Total Revenues
32,415
13,604
46,019
33,754
10,641
44,395
Operating expenses
Interest expense
Impairment losses
Provision for Income Tax
Total Expenses
18,311
13,465
1,250
2,767
35,793
16,663
14,558
1,524
2,456
35,201
Net Income for the period
10,226
9,194
10,012
214
10,226
9,040
154
9,194
3.78
3.34
Attributable to:
Equity holders of BPI
Minority Interest
EPS:
Based on 2,704,400K common shares as of
December 31, 2007 and 2006.
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 also issued 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 as investment and consumer banking. This transformation into a universal bank was
21
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.
In the last decade, BPI consummated three bank mergers. 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 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, as well as further reinforced its dominance in branch
banking. 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 (2005-2007).
On August 30, 2005, BPI acquired 7,528,155 common shares or 91.6% of the total outstanding
shares of Prudential Bank through a special block sale in the Philippine Stock Exchange. On
December 29, 2005, BPI merged with Prudential Bank with BPI as the surviving entity. The
merger added 187 branches and increased the share of the middle market segment to the total
loan portfolio.
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.
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 in 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
Hong Kong. It was originally established in August 1974.
22
(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 58% 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) sustained its profitability in 2007, delivering a 15.3%
return-on-equity on a net income of P10.0 billion, which was 11% higher than in 2006. This was
achieved amidst aggressive competition, inflexible costs and margin pressures, as BPI built on
the gains of an improving economy and pursued its organic growth strategy.
Revenues increased by 9%, despite the relatively flat net interest income. Average asset base
expanded by P45 billion, which compensated for the narrower net interest spreads. The growth
in revenues was mainly driven by non-interest income which was up by 28%. Foreign exchange
and securities trading gains augmented the net interest income with a 19% increase. The
insurance subsidiaries almost doubled its pre-tax income from a sale of a property and good
investment income. Bank and foreclosed assets sales, rental income, and fees and commissions
likewise delivered strong gains. Operating expenses were up by 9%, on higher manpower and
other operating costs.
By end-2007, total resources reached P637 billion, 9% ahead of the previous year. Deposits
went up 10% to P513 billion while net loans grew by an unprecedented 12.6%. Asset quality
further improved with the 90-day net non-performing loan (NPL) ratio down to 3.5% from 6.0%.
BPI sold P3.6 billion NPLs to Bank of America, N.A. and resolved the rest through restructuring,
collection and foreclosure.
Capital further rose to P71 billion, 9% higher than prior year. Cash dividends declared amounted
to P2.80 per share, representing a cash yield of 4.5%. Basel II-compliant capital adequacy ratio
was at 14.6%, well within the required limit.
BPI pursued its organic growth strategy, leveraging on its leadership position in corporate and
consumer banking, asset management, remittances, and electronic banking.
In corporate banking, the bank remained a major lender to the country’s leading domestic and
multinational companies. New term loans were granted for power generation, food
manufacturing, business process outsourcing, semiconductor, real estate/shopping malls and
electronics sectors. The depth and breadth of the small and medium scale enterprises (SMEs)
market were further expanded through new trading community relationships with corporate
clients and new provincial lending areas. Loans to this segment grew by 20%. The bank also
23
emerged as the largest private microfinance wholesaler in the country reaching 850,000 microborrowers and indirectly benefiting 4.25 million disadvantaged Filipinos.
Cash management customer base increased by 34% with total monetary transactions growth of
32%. ExpressLink, the bank’s corporate Internet platform, launched Crossborder Funds Transfer
facility to enable corporate clients to make payments to business partners abroad. Best Cash
Management Bank Awards were received from Alpha South East Asia, The Asset for the third
year, and Asiamoney for the fourth year in a row.
New housing loans financed by the bank surged by 34%, thereby increasing the bank’s market
share to 24%. The Step-Up Housing Loan, which is the only housing loan in the industry that
adjusts monthly amortization to the borrower’s earning capacity, was introduced in the market.
BPI Family Savings Bank, the bank’s vehicle for consumer lending, became the official autofinancing partner in the first Philippine International Motor Show of the Chamber of Automotive
Manufacturers of the Philippines Inc. in August 2007.
Credit card billings rose by 22%, benefiting from the Real Thrills instant rewards program
launched in May 2007 and the repositioning of BPI Express Credit Classic. Real Thrills provides
cardholders with discounts and freebies instantly, based on their accumulated purchases or
number of visits. The BPI Express Credit Classic offers reduced finance charges and free life
insurance coverage at 12 times the recent three-month average purchases. BPI was the first to
respond to the Bangko Sentral ng Pilipinas’ (BSP) call for lower finance charges.
In consumer banking, the bank embarked on a service culture building program called “WOW
BPI” to ensure customer satisfaction. The branch personnel were also transformed into solicitous
sellers under the Service and Sales Synergy program. Complementing these programs was
the transformation of the branch premises. BPI Express branches or mini-branches now total 35.
The bank purchased 742 ATMs, the biggest investment in the banking industry, to replace older
models. It likewise invested in 8,000 new point-of-sale (POS) terminals, bringing the POS
network to over 21,000, the second largest in the industry.
For the second straight year, the BSP named BPI as the Top Commercial Bank for OFW
Remittances for 2006. In 2007, the bank’s remittance business grew ahead of the industry at
22%, and captured a 23% share of the market. The Pick-up Anywhere Service was launched in
June 2007 to enable non-depositor beneficiaries to conveniently pick up their remittance in any
BPI branch. To further service the banking needs of the Filipino community and related
parties and entities in the United Kingdom, Bank of the Philippine Islands (Europe) Plc was
opened last October 1, 2007.
The bank’s Asset Management and Trust Group constantly provided its clients with new and
innovative investment options. One of its new investment products was the Philippine Dollar
Bond Index Fund, a dollar denominated bond fund tracking the JP Morgan Asia Credit Index
Philippines Total Return.
BPI Capital Corporation, the bank’s investment banking arm, played key roles in many landmark
deals, which raised almost P230 billion in debt and equity. BPI Securities, the bank’s stock
brokerage arm, was given special recognition by the Philippine Stock Exchange for its active
investor education program.
Ayala Life Assurance Inc., the bank’s life insurance company, launched Save & Protect, the first
and only fully loaded retail insurance in the market. Ayala Plans, an Ayala Life subsidiary, also
introduced MyDollarFundBuilder, the only dollar pension fund in the market for overseas
Filipinos. BPI/MS Insurance Company, for its part, enhanced customer service with the creation
of a Customer Care Unit.
For these accomplishments, BPI received several best bank awards from Asiamoney, Global
Finance, Finance Asia, The Asset, and Alpha Southeast Asia. It also received for the fifth
consecutive year the Best Retail Bank award in the Philippines for 2006 from The Asian Banker.
In addition, the bank was ranked one of the top five in Best in Corporate Governance among
Philippine publicly listed companies in 2007 by the Institute of Corporate Directors in their
24
Corporate Governance Scorecard. And in the latest BSP examination, BPI retained its CAMELS
4 rating.
For 2008, BPI’s priorities are anchored on pursuing customer-centered growth initiatives and
growing the emerging businesses of middle market and SME lending, card banking,
bancassurance and capital markets development. It will capitalize on its traditional areas of
strengths in consumer lending, asset management and overseas banking, and reinforce its
standards of corporate governance.
Distribution Network
BPI has 830 traditional branches across the country, including 137 Express Banking Centers
(EBCs) and 42 “BPI Express” by the end of 2007. 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. The BPI Express is a branch model that
combines electronic banking, over-the-counter servicing and financial counseling.
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 2007, the
ExpressNet consortium had a total of 2,983 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 7,500 ATMs. BPI’s ATM network is likewise interconnected with
the Cirrus international ATM network and VISA International. In addition, BPI also operates an
Express Payment System (point-of-sale/debit card system) involving 13,181 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 as well as
government securities (GS), unit investment trust funds (UITFs) and mutual funds (MFs) online
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 19
Remittance Centers and Desks located in Hong Kong, USA and Europe. BPI also maintains tieups with various foreign entities in locations where this mode of operation is more effective and
cost-efficient.
On the lending side, BPI maintains 9 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 36 universal and
commercial banks in 2007.
In 2007, industry lending posted a substantial growth of 9.2%. Corporate lending remained very
competitive resulting in even narrower spreads while pockets of growth were seen in the middle
corporate market segment. Recent trend towards regionalization of multinational company as
well access to the debt and equity market continued to weigh down on top tier corporate
25
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 overcapacity.
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. 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 published statements as of December 2007, BPI is the third largest bank operating in
the country in terms of assets and loans, second in terms of deposits and asset management
and trust business and the largest in terms of capital.
Patents, Trademarks, Licenses, Franchises, etc.
BPI sells its products and services through the BPI trademark and/or trade name. All its major
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.
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, 2007,
DOSRI loans amounted to 2.36% of loans and advances as per Note 31 of the 2007 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.
26
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:
2005
2006
2007
157.0
228.7
209.3
% of Revenues
0.6
0.8
0.6
Employees
Below is a breakdown of the manpower complement of BPI in 2007 as well as the approved
headcount for 2008.
Unibank
Insurance
Companies
December 31 2007
Officers
Staff
Total
3,160
8,139
11,299
2008
Plan
11,700
151
475
626
700
3,311
8,614
11,925
12,400
Majority of the rank and file employees are members of various unions. New Collective
Bargaining Agreement (CBA) 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.
27
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
a. 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 that prescribe good corporate governance.
b. The Internal Audit Division and the Compliance Office as well as the external auditors
appointed by the Board of Directors reviews compliance with the provisions of the bank’s
Manual of Corporate Governance of the various work units of the bank.
c.
The Board of Directors has four (3) independent directors, a number which is higher than
the minimum of two (2) or 20% of the total composition of the Board, whichever is lesser,
as contained in the bank’s Manual of Corporate Governance and the Securities
Regulation Code.
d. In accordance with industry best practice and in compliance with BSP regulations, the
Board of Directors created a Corporate Governance Committee to handle all matters
relating to corporate governance, and expanded its Treasury Risk Management
Committee to a Risk Management Committee to focus on the management of all types of
risks.
e. In addition to the above, the Personnel Committee of the Board approved the creation of
a Chief Risk Officer position at the Operating Management Level in 2005. The Chief
Risk Officer is responsible for establishing policies and controls all risk-taking activities of
the bank.
f.
As part of the bank’s commitment to improve its corporate governance structure, a Credit
Risk management Solution tool was acquired this year. This tool will not only automate
regulatory reporting but will also enable the bank to develop the necessary models for
even more advanced approaches. The bank will constantly review its organization to
keep pace with new developments in corporate governance practices and in the end
adopt the best leading practices.
For further details on the BPI’s financial condition and operations, please refer to the 2007
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, 2007
Total Current Assets
Non-current Assets
Total Assets
Current Liabilities
Non-current Liabilities
Stockholders' Equity
Total Liabilities & Stockholders' Equity
December 31, 2006
18,740
97,880
24,215
100,365
116,621
124,580
27,600
33,604
55,417
25,758
41,874
56,948
116,621
124,580
28
Globe Telecom
Statements of Income
(In Million Pesos)
December 31, 2007
December 31, 2006
Net Operating Revenues
Other Income
Total Revenues
65,509
2,524
68,033
59,949
3,001
62,950
Operating Expenses
Depreciation and amortization
Cost of sales
Financing costs
Impairment losses and others
Provision for Income Tax
Total Expenses
21,304
17,189
3,323
5,225
941
6,773
54,756
18,081
17,137
4,619
4,979
535
5,844
51,195
Net Income
EPS:
Basic
Diluted
13,277
11,755
100.07
99.58
88.56
88.32
As of December 31, 2007
Basic based on 132,184K common shares
Diluted based on 133,324K common shares
As of Dec. 31, 2006
Basic based on 131,998K common shares
Diluted based on 133,099K common shares
Form and date of organization
Globe Telecom is one of the largest telecommunications companies in the Philippines. It is a full
service telecommunications provider offering digital wireless communication, wireline voice, data
transmission, domestic and international long distance communication, and mobile-commerce
services.
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
Singapore Telecommunications Limited (“SingTel”) after Ayala and STI signed a Memorandum
of Understanding.
29
In 2001, Globe Telecom acquired Isla Communication Company, Inc. (“Islacom”) and made
Islacom a wholly-owned subsidiary.
Consequently, the financial results of Islacom were
consolidated with Globe Telecom on 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 which is pursuant
to Globe Telecom’s 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 G-Cash brand. GXI started commercial operations on 16 October 2004.
In November 2004, Globe 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, Bridge Mobile Pte. Ltd. The joint venture
company 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. As of December 31, 2007, Bridge Alliance had a combined customer base of
175 million subscribers among its partners in India, Thailand, Hong Kong, 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 and was assigned the 10-Megahertz
(MHz) of the 3G radio frequency spectrum.
Description of Business
(a) Overview of the Business
The Globe Group is comprised of the following three focused companies:
• Globe provides the wireless telecommunications services;
•
Innove, a wholly-owned subsidiary, provides the fixed line telecommunications services,
including fixed line voice, consumer broadband, high-speed internet and private data
networks for enterprise clients, internet protocol-based solutions as well as domestic and
international long distance communications services or carrier services. Innove also currently
offers cellular services under the TM prepaid brand. The TM brand is supported in the
integrated cellular networks of Globe and Innove; and
•
As part of its wireless business, Globe also provides mobile commerce services through its
wholly-owned subsidiary, G-Xchange, Inc. (GXI) which was incorporated in 2004.
Despite a challenging and highly competitive market, Globe delivered a robust performance,
posting record revenues and earnings. Globe ended 2007 with service revenues at an all-time
high of P63.2 billion and net income of P13.3 billion, up 11% and 13%, respectively, from the
prior year, notwithstanding a one-time charge of P1.3 billion from the prepayment of its US$300
million bonds. Taking out the impact of the bond redemption charges, foreign exchange and
mark-to-market gains and losses, core net income registered an even higher increase of 27% to
P13.7 billion.
The buoyant economy and strong domestic consumer spending resulted in double-digit revenue
growth for the entire telecommunications industry as SIM penetration rate surpassed 60% by
year-end. Competition, however, remained intense with prices and margins under pressure as
industry participants increasingly tapped the lower income segment. Against this operating
environment.
30
Globe maintained focus on:
1. Further expanding growth in its core wireless business
2. Organically growing the broadband business by stepping up investments in infrastructure, and
3. Effectively managing costs to retain overall profitability.
Expanding the Core Business
In light of the changing and growing demands of a more value-conscious customer base, Globe
made its products and services more affordable, much easier to use, and more relevant to
subscribers.
Innovative products previously launched such as bulk voice offerings, per-second charging for
domestic and international voice calls, and unlimited text promos were sustained. On top of
these, new promotions were launched, such as TM’s P20 for 10 minutes worth of calls valid for
one day, bucket SMS offers, and new variants of the unlimited text promos offering subscribers
options for day or night time unlimited texting.
Recognizing the importance of the overseas Filipino expatriate community, Globe continued to
provide competitive IDD rates to selected destinations such as the U.S., Canada, Saudi Arabia,
Japan and Bridge Alliance partners in Hong Kong, Malaysia, Singapore, Taiwan and Australia.
This was accompanied by a reduction in per-second IDD rate to further stimulate usage and
traffic. Globe maintained its partnership and forged new ones with leading operators to provide
overseasbased Filipinos lower call and SMS rates through its co-branded SIMs that have local
currency reloading capabilities. It also launched an OFW Family Pack specifically suited for the
overseas Filipino worker and his family in the Philippines.
Globe’s core wireless business recorded an 11% revenue expansion on the back of strong
subscriber growth across all its mobile phone brands. Globe sustained leadership in the postpaid
segment, while consistently expanding reach in the prepaid segment. Globe’s prepaid SIM base
grew by 31%, led by the TM brand which accounted for 56% of total subscriber growth and
comprised 37% of Globe’s total SIM base.
With efforts to penetrate more deeply the lower income market, it was important to broaden
access to services and address various affordability levels. This led to reduced SIM pack costs
and lower over the air AMAX reload denominations that allowed Globe and TM subscribers more
reloading options. This was supported by an expanded retail distribution network which grew by
25%, with now over 612,000 active AMAX retailers nationwide.
To further drive growth in its wireless data business, Globe partnered with Yahoo! to provide
access to Yahoo!’s innovative OneSearch facility making Globe the first Asian network and one
of only 14 mobile operators worldwide to offer this service. The company also lowered its regular
local Internet browsing rate to further stimulate data usage among subscribers.
Innovations in product and service offerings were supported by an expansion of Globe’s existing
2G network coverage to better serve the requirements of its growing subscriber base. By year
end, Globe had 6,217 cellsites in operation covering 96% of the country and 99% of the
population.
The positive market response to these innovative products and services coupled with robust
domestic consumption resulted in a 30% growth in Globe’s total wireless subscribers. Globe
ended the year with 20.3 million wireless subscribers, which generated P56.4 billion in service
revenues or 89% of total service revenues for the year. Consistent with expanding its mass
market reach, the TM brand was a key contributor, accounting for over half of total subscriber
net additions.
Organically Grow Broadband
Competition in the wireline business was moving intensely given the aggressive campaigns and
industry players’ moves to secure early mover advantage to address the growing demand in
broadband. Globe has made valuable inroads in the broadband arena, growing its revenues by
almost two-fold from last year to P1.2 billion and expanding its subscriber base by 133% to over
31
120,000. The surge in demand was driven by the various competitive broadband packages it
offered in the market, which continued to gain good traction.
The company has invested and will continue to invest in its back-end facilities and aggressively
roll out additional broadband capacities to offer even better speeds, flexibility and service stability
to existing and potential broadband subscribers.
Effective Cost Management
Given the intense competition and continued pressure on ARPUs, it was important to sustain
overall competitiveness and profitability through more efficient spending and realize savings
where possible. During the year, the strong peso and low interest rates prompted a reduction in
financing costs through the redemption of a US$300 million senior bond originally due in 2012.
This allows the company to realize about P2.3 billion in after-tax interest expense savings over
the remaining term of the bonds. At the operating level, Globe continued to manage subsidy and
marketing expenses to align the cost of acquiring and retaining subscribers. A key component of
its marketing activities this year was a re-branding campaign launched last August. This involved
a company-wide evaluation of its brand architecture to ensure consistency in building equity
across products, services and business segments. Central to this is an organization-wide
reinforcement of Globe’s commitment to putting its customers first. Its new logo, Globe Life, also
embodies the company’s commitment to enrich and transform lives through its services, making
communication technology easy and truly relevant to its customers. With a revitalized mission,
vision and values statement, Globe aims to further strengthen its position and presence in the
market by making a difference in every Filipino’s life.
2008 Outlook and Priorities
The year 2008 will be another exciting yet challenging year as Globe pursues its priorities to
solidify its core wireless business operations, step up investments in its broadband business,
grow new sources of revenues, and deliver further improvements in its core structures. With
prevailing economic uncertainties globally and an increasingly competitive domestic telecom
industry, Globe will continue to focus on the fundamentals to deliver growth and improved returns
to shareholders.
(b) Business Segments
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.
Globe Postpaid includes all postpaid plans such as G-Plans and consumable G-Flex Plans,
Platinum (for the high-end market).
Globe Prepaid and TM are the prepaid brands of the Globe Group. 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 benefits to address specific market segments, each with its
own unique positioning and service offers.
As of 31 December 2007, Globe registered 20.3 million wireless subscribers, a 30% increase
from last year’s 15.7 million as it made SIM pack costs more affordable, introduced lower
denomination reloads across more distributors nationwide, offered a wide selection of voice and
SMS services while managing churn across all its wireless brands. At the end of 2007, prepaid
subscribers comprised 97% of total wireless subscribers, with Globe Prepaid mainly accounting
for 62% of total prepaid subscribers.
Globe also provides our subscribers with mobile payment and remittance services under the
GCash brand. Now on its third year, this service enables our subscribers to perform international
and domestic remittance transactions, pay annual business registration fees, income taxes for
professionals, utility bills, avail of micro-finance transactions, donate to charitable institutions,
and buy Globe prepaid reloads.
32
(i) Products and Services
Wireless Voice
Basic Voice Service
Globe basic wireless voice services include local, national and international long distance access
throughout the Philippines, and international roaming services through various arrangements
with foreign operators.
International Long Distance and Roaming Services
Globe offers international long distance (ILD) services which cover international calls between
the Philippines and over 200 destinations. This service generates revenues from both inbound
and outbound international call traffic with pricing based on agreed international termination rates
for inbound traffic revenues and NTC-approved ILD rates for outbound traffic revenues.
Wireless Data
Basic Data Service
Globe offer 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 2007 compared to 43% in 2006, largely driven by personto-person or P2P 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 2007, subscribers’ SMS
usage averaged approximately 21 SMS messages per day, with our network processing over
384 million SMS messages per day.
Enhanced SMS Services
Globe offers a full range of value-added services covering the areas of information and
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.
M-Commerce service
During the fourth quarter of 2004, Globe launched GCash, the first cashless and cardless
integrated payments service in the world. GCash, Globe’s flagship mobile commerce service,
was born from a simple goal of transforming a mobile phone into a wallet enabling Globe and TM
subscribers access to a cashless and cardless method of making money-transfers by simply
sending a text message.
• GCash continues to establish its presence in the mobile commerce industry. Now on its
fourth year, 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.
(ii) Distribution - Sales and Distribution
To ensure that all subscribers’ needs are properly addressed and met, Globe have established
various sales and distribution channels to manage the different subscribers’ needs.
Independent Dealers
Globe utilizes a number of independent dealers who have their own networks throughout the
Philippines to sell 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. Globe compensate their 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 its 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
33
established a distribution network of dealers and institutions to offer prepaid reloading services.
As of 31 December 2007 Globe have over 610 thousand registered sub-distributors and retailers.
Business Centers
In addition to independent dealers, Globe has 90 wireless business centers and Hub shops in
major cities across the country. Globe have also increased the service offerings at their business
centers, allowing customers to subscribe for wireless services, reload prepaid credits, make
GCash transactions, purchase handsets, accessories and request handset repairs, try out the
communications devices, ask questions about the services and pay bills.
In Hub shops, Globe sells state-of-the-art communications devices and high-technology
communications-related products. As of 31 December 2007, 3 Hub shops are located in
strategic areas in Makati City, San Juan and Mandaluyong City.
Others
Globe also distributes prepaid products (phonekits, SIM kits and prepaid air time cards and
credits) through consumer distribution channels such as convenience stores, gas stations,
drugstores, bookstores, photoshops and fastfood outlets.
Globe also has a dedicated direct sales force to manage corporate accounts and high-end
customers.
Globe’s retail business centers and internal corporate sales staff act as direct sales channels.
2. Wireline Business
Innove, a wholly-owned subsidiary, provides wireline voice communications, private data
networks and Internet services to individuals and enterprises in the Philippines under the
Globelines and GlobeQuest brands.
Globe and Innove have adopted a customer-centric market approach to allow for the
development of products based on specific consumer or business requirements and to better
serve the varied needs of its customers. Dedicated business units have been created and
organized within the Company to focus on the wireless and wireline needs of specific market
segments and customers – be they residential subscribers, wholesalers, small and medium
scale enterprises and other large corporate clients. The Enterprise Business Group (EBG) and
Small and Medium Enterprises (SME) were formed in response to corporate clients’ preferences
for integrated mobile and wireline communications solutions. These customer facing units
(CFUs) had their own dedicated technical and customer relationship teams and were tasked with
creating and delivering end-to-end service offerings for its customers.
In 2007, having served micro to medium enterprises and large scale corporate clients, Globe and
Innove continued to refine its cutomer-focused strategy by expanding the coverage of its
customer facing units and further defining the scope of its EBG and SME groups. This resulted in
the formation of the Business CFU that combines the resources of the EBG, SME and support
units and organizes itself along targeted customer segments while retaining functional lines such
as specialization, scale and key customer relationships. With these changes, the Business CFU
anticipates better segment penetration, stronger customer orientation and better service delivery
and support.
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.
34
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 Philippine 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.
Principal services and their markets indicating their relative contribution to sales or revenues
(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:
1.
Postpaid voice service – Includes basic landline features, including toll-free NDD
calls to other Globe landline subscribers, for a fixed monthly fee. This service is
ideal for personal or small business calling needs and can be customized with
the following optional value-added services - IDD, phone lock, call waiting and
forwarding, multi-calling, call waiting ID, caller ID, special numbers and voice
mail. This service is available in the National Capital Region, Batangas, Cavite,
Visayas and selected areas in Mindanao.
2.
Postpaid voice plus unlimited internet – A business landline with unlimited dialup internet access and is available in the National Capital Region, Batangas,
Cavite and the Visayas.
3.
Globe1 is a PIN-based prepaid card service for local, national and international
long distance using a Globe landline (postpaid and prepaid), payphone or mobile
service.
Data services
Under Globe Business brand, Globe offers end-to-end solutions for corporate clients based on
value-priced, high-speed data services over a nationwide broadband network. These include
domestic and international data services, wholesale and corporate internet access, data center
services, and segment-specific solutions customized to the needs of vertical industries. These
services utilize a network built over a fully-digital nationwide backbone using Synchronous Digital
Hierarchy (SDH), Asynchronous Transfer Mode (ATM) and Internet Protocol (IP) on both fiber
optic and digital microwave technologies.
Internet
Wired Broadband packages for consumers provide good value as each broadband subscription
is bundled with a Globe postpaid line. Globe offer various wireless broadband packages,
including services for limited and full mobility, as well as data-only and bundled voice and data
packages
Business solutions
Globe also has a rich stream of product and service innovations customized for specific business
segments, from SMEs (small and medium enterprises) to corporate and enterprise clients.
1. 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.
2. BillAnalyzer is a web-based tool for corporate representatives to analyze billing
information for corporate subscriptions. It provides a single point of interaction for
viewing multiple bills online via a web page or an interactive kiosk.
35
3. 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.
4. Globe Energy Management System (GEMS) provides customers an affordable
wireless solution for remotely monitoring, controlling and gathering information on
energy consumption of an enterprise to measure energy usage and system
performance.
5. 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. It includes hardware, software,
connectivity options, marketing support, consultancy and after-sales support in
partnership with other service providers.
6. 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.
7. Mobility Bundle is a special Visibility subscription packaged with a full-featured
laptop. With four universal accessibility plans, entrepreneurs and executives can
access the internet and data via GPRS, EDGE, WiFi and dial-up transport channels.
Aside from laptop, a subscriber may also opt to bundle these Universal Access
Plans with a wide range of devices like PDA's and PC Cards
8. Mobile Office enables mobile professionals to securely access corporate email,
browse and download files from a remote hard drive, and access several PCs (home
and office) on one subscription.
9. Mobile Mail allows mobile professionals to securely access enterprise applications,
corporate email, calendar and desktop files via a mobile device or from any internetenabled PC.
10. Message Connect provides customers with broadcast SMS and MMS services
including volume and scheduled sending to groups and recipients, enable mobile
polls, campaigns and arrange for sales bookings, delivery confirmations and other
Line of Business (LOB) applications
11. Store Express allows clients to conveniently link their retail branches, via IP-VPN
delivered using a combination of leased line, DSL or dial-up connection, to the head
office. This provides reliable and fast access to information on retail chain sales and
inventory systems at reasonable rates. Store Express 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 as value-added
services.
12. 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.
13. TxtConnect allows subscribers to send high-volume text broadcasts to preregistered groups such as employees, dealers or customers. With TxtConnect,
messages can be customized to a group of recipients and sent via SMS in bulk of up
to several thousands of people at a time. Recipients can also immediately reply, via
SMS, allowing two-way communication. Value-added services include generation of
reports on sent and received messages, sending messages on a set schedule and
transmitting system-generated SMS messages.
14. TxtHotline enables two-way, real-time SMS between a company’s customer service
group and its customers to handle complaints quickly and easily – at the speed of
text. It also allows a company to build a database of its customers and contact
numbers and analyze and monitor customer service performance.
15. Webeye is a remote web-based video solution that complements any existing CCTV
set-up. The service allows subscribers to monitor physical resources in multiple
outlets and locations via a broadband internet connection.
Other services
Carrier Services
Globe also offer all subscribers carrier services including national and international long distance
services. The carrier services business is a support group to wireless and wireline businesses.
36
International long distance and national long distance service revenues attributable to the
wireless and wireline businesses are reported under the income statements of the respective
businesses.
National Long Distance
Through the Globe/Innove Domestic Toll Service, Globe Handyphone, TM and Globelines
subscribers may make national long distance calls to any subscriber of a Philippine
communications provider located anywhere in the country. Globe were granted inter-exchange
carrier status by the NTC. As an interexchange carrier, the company is allowed to haul traffic
from an originating carrier passing through our transmission network and terminating to the
network of another carrier, thus entitling Globe to IXC or hauling fee. Globe receive settlement
payments from other local communications providers who send national long distance traffic to
the network, and pay settlement charges to local providers when the company send national long
distance traffic to their networks. These payments are based upon individual domestic
interconnect contracts that Globe negotiate with the local communications providers.
International long distance
Globelines launched and continued to offer its Lowest IDD rates promotion where its Globelines
subscribers, Globe1 card users and Globelines Broadband subscribers are charged a reduced
rate of US$0.20 per minute for IDD calls to selected countries. Globe1 card users could also
make IDD calls for P2.50 per minute to selected destinations from any Globelines postpaid and
prepaid lines including payphones nationwide.
(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
have 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 sell 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:
Year Ended 31 December
2007
%
56,410
86.1%
29,870
Data …………………………………..
Wireline……………………………………
(In Millions of Pesos)
2006
%
2005
%
50,672
84.5%
48,481
82.5%
53.0%
28,982
57.2%
28,111
58.0%
26,540
47.0%
21,690
42.8%
20,370
42.0%
Net Service Revenues:
Wireless ……………………………………
1
Voice …………………………………..
2
6,799
10.4%
6,362
10.6%
6,416
10.9%
3
4,602
67.7%
4,312
67.8%
4,396
68.5%
4
2,197
32.3%
2,050
32.2%
2,020
31.5%
63,209
96.5%
57,034
95.1%
54,897
93.4%
2,300
3.5%
2,915
4.9%
3,851
6.6%
65,509
100%
59,949
100%
58,748
100%
Voice ………………………………….
Data …………………………………..
Net Service Revenues………………………
5
Non Service Revenues ……………………
Net Operating Revenues…………………….
__________________________________________
37
1
Wireless voice net 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 net 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;
b) Revenues from local, international and national long distance calls made by postpaid, prepaid wireline subscribers
and payphone customers, net of (i) prepaid and payphone call card discounts (ii) bonus credits and (iii) loyalty
discounts credited to subscriber billings;
c) Revenues from inbound local, international and national long distance calls from other carriers terminating on our
network; and
d) Installation charges and other one-time fees associated with the establishment of the service.
e) Broadband service revenues.
Revenues from (b) and (c) are net of any interconnection or settlement payments to domestic and international carriers.
4
Wireline data net service revenues consist of revenues from:
a) Monthly service fees from international and domestic leased lines;
b) Monthly service fees on Corporate Internet services and charges in excess of free allocation;
c) One-time connection charges associated with the establishment of service.
d) Other wholesale transport services and
e) Revenues from value-added services.
Revenues from (b) are net of any interconnection or settlement payments to other carriers.
5
Non-service revenues are reported net of discounts on phonekits and SIM packs. The costs related to the sale of the
handsets and SIM packs are shown under cost of sales. The difference between non-service revenues and cost of sales
is referred to as subsidy.
Competition
Industry, competitors and methods of competition
1. Wireless Market
The Philippine wireless market has experienced rapid growth in recent years. Accordingly, the
number of wireless subscribers increased from 1.6 million as of 31 December 1998 to approximately
53.9 million as of 31 December 2007. Wireless penetration rates have surged from 1.4% in 1996 to
60.8% by the end of the year. Over the past years, the great majority of cellular growth has taken
place specifically within the digital GSM segment.
Seven wireless operators in the Philippines, including Globe Telecom, have been granted licenses
to provide nationwide wireless service. Wireless operators are free to choose the network
technology that they wish to deploy. 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
Globe
Year of
Commercial
Launch
Subscribers
Wireless
System
Wireless
Technology
GSM
Operating
Spectrum
1994
12,827,892 (1)
Digital
GSM
20MHz
38
Innove *
1993
7,489,704 (1)
Digital
GSM
10MHz
Smart **
1994
20,339,204 (2)
Digital
ETACS/GSM
15MHz
Piltel **
1991
9,701,826
Analog/
Digital
AMPS/CDMA
11MHz
Bayantel
Not applicable
Not applicable
Digital
GSM
10MHz
Extelcom
1991
No data
Analog
AMPS
10MHz
Digital
GSM
10MHz
available
Digitel
3,600,000 (3)
2003
* Wholly-owned subsidiary of Globe. Offers cellular services under the TM prepaid brand.
** Affiliate of PLDT.
Sources:
1) Globe disclosures for the year ended December 31, 2007.
2) PLDT/ Smart/ TNT disclosures as of December 31, 2007
3) Based on publicly available information and Company estimates.
Since 2000, the wireless communications industry has experienced consolidation. PLDT completed
its acquisition and consolidation of Smart and Piltel and Globe acquired Islacom (now named
Innove Communications, Inc.). Currently, Smart and Globe are the two leading wireless operators
in the Philippines in terms of subscribers and revenues. Digitel began its network in 2000 and
formally launched its wireless service under the brand name Sun Cellular in February 2003.
SMS, pioneered by Globe in 1994, continues to be the most popular form of wireless data service
for the mass market. In 2007, wireless data accounted for 47% of total wireless service revenues of
P56.4 billion.
2. Wireline Voice Market
There are eight major local exchange carriers (LEC) in the Philippines with licenses to provide local
and domestic long distance services. The table below sets forth the installed and subscribed lines
for each of the major operators in 2006 and 2007.
Below is a table listing the number of installed and subscribed lines per operator as of December
31, 2007:
Operator
Installed Lines
Subscribed
Lines
Installed
Subscribed
% To Total
% To Total
Bayantel*
443,910
262,320***
6.17
7.51
Bell Telecom *
489,000
271,000
6.79
7.76
Digitel**
653,616
450,000****
9.08
12.89
91,446
22,467
1.27
0.64
1,507,197
421,092
20.94
12.06
213,236
53,908
2.96
1.54
ETPI/TTPI**
Innove
Philcom**
39
Piltel**
236,561
40,415***
3.29
1.16
3,009,791
1,724,702
41.81
49.40
PT&T**
129,000
14,493
1.79
0.42
Other LECS**
425,165
231,124
5.91
6.62
7,198,922
3,491,521
100
100
PLDT
TOTAL
* As of November 30, 2006
** As of December 31, 2006.
*** As of September 30, 2007
****Company estimates.
Sources: National Telecommunications Commission (Statistical Data as of December 31, 2006) Report
The Philippine wireline voice market has experienced modest growth in recent years with the
number of lines in service increasing from 2.9 million in 1999 to approximately 3.6 million by the
end of 2006. Traditional fixed line market growth has been flat over the past years with rapid and
affordable wireless substitution.
Each operator (other than PLDT and Innove, which is authorized to provide nationwide wireline
services) has been granted service areas in which they 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 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. On 5 March 2004, Innove
filed an application with the NTC for the expansion of its fixed line business and was awarded by
the NTC with a nationwide franchise for its wireline business on 17 June 2005.
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, inter-company 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.
Dependency on a single customer or a few customers
Globe Telecom has a wide subscriber base. On the wireless front, Globe wireless subscribers
stood at 20.3 million as of end 2007. There were 709,817 postpaid and 19.6 million prepaid
subscribers. The wireline business ended the year with 421,092 subscribers, comprising of 67%
postpaid and 33% prepaid. Due to increased broadband rollout efforts, broadband subscribers
based expanded by 133% to around 120,000.
No single customer and contract accounted for more than 20% of the Company’s total sales in
2007.
Globe Telecom’s principal suppliers are as follows:
For wireless - Nokia Oy (Finland); Ericsson Radio Systems AB (Sweden), Ericsson (Sweden),
Siemens Corporation (Germany), Alcatel (France), Microwave Networks Inc(US) ., Fujitsu Ltd.
(Japan), ECI Telecoms (Israel), Enavis (Israel), NERA (Norway), NEC Corp. (Japan), ASCOM,
Benning (Germany), SEC Cellyte (US), Hawker Batteries, JNB Batteries, Rohas-Euco (Malaysia),
Transmast, Andrews Corporation, Allen Telecom Group (Micom), Kathrein, Cellwave, Huber &
Suhner, CMG (Netherlands), Comverse Technologies; Harris Radio Corporation (US/Canada),
Cisco Systems (Philippines.); Communications Solutions, Inc., Investors Quality Services, Inc.
(USA), Lucent Technologies (USA), Mitsubishi Corporation (Japan and Philippines), Sumitomo
40
Corporation (Japan), Tomen Corporation (Japan and Philippines), and Tyco Electronics
(Philippines).
SIM cards and call cards are sourced from Axalto International Ltd. (France), Gemplus
Technologies Asia Pte Ltd (France), Banner Plastic Cards (Philippines), and Orga Card Systems
Pte Ltd (Germany).
For wireline - Tomen (Japan), Fujitsu Ltd. (Japan), Tomen Telecom Phils., Sumitomo Corporation
(Japan), Mitsubishi (Japan), Lucent Technologies (USA), NEC (Japan), NESIC (Phils.), Alcatel
(Italy), Mitsubishi Corp. (Japan & Phils.), Melcom Corp. (Philippines.), Comsys Phils, Inc., Cisco
Systems (Philippines.), Datacraft Comm (Phils.), Worldlink Comm. (Philippines.), IECI
(Philippines.), Filipinas Wincomm Corp.(Philippines), RAD Far East Ltd. (Hongkong), Cisco (USA),
RAD (Israel), SR (Canada), DMC (USA), Motorola (US), MCI WorldComm (US), Teleglobe
(Canada), Cable and Wireless (UK), AT&T Global (US), British Telecom (UK), and Singapore
Telecom (Singapore), Comverse Technologies (USA), Lityan (Philippines) and Banner Plastic
Cards (Philippines), Tellabs (USA/Singapore).
Transactions with and/or dependence on related parties
As part of the normal course of its business, Globe Telecom and its subsidiaries enter into
transactions with their major stockholders, AC and STI, and certain related parties. These
transactions are accounted for at market prices normally charged to unaffiliated customers for
similar goods and services.
1. Globe Telecom has interconnection agreements with SingTel. 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:
2006
2005
(In Thousand Pesos)
P
= 61,061
P
= 335,766
P
= 63,391
1,028,552
1,422,249
1,573,686
2007
Traffic settlements receivable - net
Interconnection revenues
2. 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.
3. Globe Telecom reimburses AC for certain operating expenses. The net outstanding liabilities
to AC related to these transactions as of December 31, 2007 were not material.
4. 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, 2007,
balances related to these transactions were not material.
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
Wireless
CPCN (1) July 22, 2002
December 24, 2030
Action Being
Taken
No action required
41
Local Exchange
Carrier
International
Long Distance
Interexchange
Carrier
VSAT
Innove
CPCN (1)
July 22, 2002
December 24, 2030
No action required
CPCN (1)
July 22, 2002
December 24, 2030
No action required
CPCN (1)
February 14, 2003
December 24, 2030
No action required
CPCN (1)
February 6, 1996
February 6, 2021
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
Action Being
Taken
No action required
No action required
No action required
Wireless
April 10, 2017
Local Wireline
April 10, 2017
International Long
April 10, 2017
Distance
Interexchange
CPCN (1) April 30, 2004
April 10, 2017
No action required
Carrier
(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 the company to operate
their respective services for a term that will be predicated upon and co-terminus with the
congressional franchise under RA 7229 (Globe) and RA 7372 (Innove). Globe and Innove were
granted the permanent licenses after having demonstrated the legal, financial and technical
capabilities in operating and maintaining wireless telecommunications systems, local exchange
carrier services and international gateway facilities. Additionally, Globe and Innove 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 has 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 are offered. Globe 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
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 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.
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.
(c)
(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.
42
In 2000, the NTC issued NTC Memorandum Circular No. 13-6-2000 proposing new requirements
for wireless operators, including the following:
•
•
•
•
provide subscribers with their bills within a specified period;
extend the expiry date of prepaid cards from two months to two years;
provide prepaid subscriber balance updates every time they make phone calls;
bill on a per pulse basis using units of six seconds instead of the previous per minute basis;
and
• not to bill calls directed to recorded voice messages.
Globe, together with other cellular operators, sought and obtained a preliminary injunction against
the implementation of NTC Memorandum Circular No. 13-6-2000 from the RTC of Quezon City.
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 (‘CA’) 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 CA. On 2 September 2003, the SC 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. We are currently awaiting resumption of
the proceedings before the RTC of Quezon City. In the event that Globe does not sustain its
position and NTC Memorandum Circular No. 13-6-2000 is implemented in its current form, the
Company would probably incur additional costs for carrying and maintaining prepaid subscribers
in its network.
Research and Development Activities
Globe did not incur research and development costs from 2005 to 2007.
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 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 5,511 active regular employees as of December 31, 2007, of which about
13% are covered by a Collective Bargaining Agreement (CBA) through the Globe Telecom
Workers Union (GTWU). Between 2006 and 2007, 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. 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 for 2007and 2006 are as follows:
Employee Type
2007*
2006*
Rank & File, CBU
3,132
3,055
Supervisory
1,450
1,329
43
Managerial
660
548
Executives
269
229
5,511
5,161
Total
*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 is 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, 20% of debt as of December 31, 2007 are denominated in USD before taking
into account any swap and hedges.
(b) Industry and Operational Risks
1. Competitive Industry
The Philippine telecommunications industry, particularly wireless communications, is highly
competitive, as operators have sought to increase market share by attracting new subscribers.
The principal players in Philippine telecommunications are Globe, 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.
While wireless subscriber growth is expected to continue, it may not continue to grow at the same
rate as in the past. Further reductions in tariffs, deeper penetration into lower-usage subscriber
segments, and the increasing incidence of multi-SIM usage may also result in declining average
revenues per subscriber.
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 will be influenced by the overall political and economic
situation of the Philippines. 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
44
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.
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.
Globe Telecom is committed to continually improve its corporate governance practices. The
Company recently conducted a corporate governance refresher course for the SEG members and
key staff. In the area of risk management, a business continuity planning team has been
organized to lead in the enhancement and implementation of an integrated disaster response and
recovery plan, and to oversee the conduct of a company-wide awareness campaign to highlight
the need for operational effectiveness and resilience.
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
45
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.
For further details on the Globe’s financial condition and operations, please refer to the 2007
Audited Financial Statements which is incorporated herein in the accompanying index to exhibits.
Manila Water Company, Inc. (MWCI) - balance sheets and income statements are shown below:
Balance Sheets
(In Million Pesos)
December 31, 2007
December 31, 2006
Total Current Assets
Total Non-current Assets
4,122
20,313
7,496
16,766
Total Assets
24,435
24,263
Current Liabilities
Non-current Liabilities
Stockholders' Equity
3,708
7,363
13,364
4,399
7,990
11,874
Total Liabilities & Stockholders' Equity
24,435
24,263
Statements of Income
(In Million Pesos)
December 31, 2007
December 31, 2006
Operating Revenues
Interest and Other Income
Total Revenues
7,227
598
7,825
6,090
694
6,785
Operating Expenses
Depreciation and amortization
Provision for income tax
3,132
1,383
892
5,407
3,424
1,135
168
4,391
Net Income
2,419
2,394
1.06
1.06
1.05
1.05
EPS:
Basic
Diluted
As of December 31, 2007
Basic based on 2,016,054K common shares
Diluted based on 2,018,636K common shares
As of December 31, 2006
Basic based on 2,005,009K common shares
Diluted based on 2,006,653K common shares
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 2007 is a momentous year for the Company as it marked ten years of partnership with
46
Metropolitan Waterworks and Sewerage System (“MWSS”). During the year ended December 31,
2007,, the Company had P 7.8 billion of revenues and P2.4 billion of net income after paying close
to P892 milion in taxes following the expiration of the Company’s income tas holiday. Of the
Company’s revenues during this period, 80% or P6.2 billion were generated from water delivery
services. The Company’s total assets as of December 31, 2007 is P24.4 billion and shareholders’
equity of P13.4 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. As of December 31, 2007, the Company supplied an average of 1,378 million liters
per day (“MLD”) of water and distributed water to an estimated customer population of more than
five million in the East Zone through approximately 986,000 households through 657,919 water
service connections. The Company also manages and operates the sewerage system that covers
a portion of its service area, as well as provides sanitation services (including desludging of septic
tanks) to its customers in the East Zone.
From August 1, 1997, at the commencement of
the
Concession
Agreement, to
December 31, 2007, 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, 2007. The Company's non-revenue
water (“NRW”) levels have been significantly reduced from 63.0% at the date of commencement
of operations to an average of 23.9% for the month ended December 31, 2007. Overall, the
Company’s billed water volume has increased from an average of 440.0 MLD at the date of
commencement of operations to an average of 1040 MLD for the month ended December 31,
2007.
Since August 1, 1997 up to December 31, 2007, the Company has spent over P 18.8 billion on
capital expenditures and an additional P4.3 billion on projects funded by MWSS loans paid
through Concession Fees (the “Concession Fee Projects”) by the Company. These capital
expenditures have been used to rehabilitate old facilities inherited from MWSS as well as to
design and plan various new projects to improve water and wastewater services in order to meet
the service obligations of the Company under the Concession Agreement. From 2008 to 2012,
the Company expects to spend P36.6 billion on capital expenditures and Concession Fee
payments. The Company expects to spend approximately P18.5 billion on water capital
expenditures, P7.5 billion on wastewater capital expenditures, P2.8 billion on overhead-related
capital expenditures and P8.0 billion on Concession Fee payments, primarily related to the
development of new water sources. The Company plans to continue to develop new water
sources, rehabilitate and expand its water distribution network, reduce its NRW levels, expand
sanitation services and adopt a low-cost decentralized sewerage strategy.
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”).
47
The Concession
The year 2007 marked Manila Water Company’s tenth year of successful operations with a
number of key milestones achieved during the year.
The company posted a net income of P2.4 billion, resulting from a combination of consistent
revenue growth, which this year grew by 15%, and a deliberate focus on prudent cost and tax
management. While the company absorbed the full impact of the expiration of its income tax
holiday in 2007, its return-on-average equity remained healthy at 19%. These strong financial
results were reflected in Manila Water’s share performance, which gained 97% by year-end, well
outperforming the Philippine Composite Index, which went up by only 21%.
This financial performance was largely driven by key operational achievements, as the company
breached the one billion liter-per-day mark in water sales and further reduced system losses to a
record low, at 23.9%. This level is comparable to, if not better than, many of the company’s
regional counterparts.
Significant operational gains were realized mainly through the company’s aggressive capital
investments in the East Zone, totaling P4.4 billion in 2007. A substantial part of this was used for
projects related to water network improvements and expansion as well as sewerage and
sanitation. For 2007 alone, a total of 689 kms. of pipes were laid resulting in 94,000 new
household connections. A key component of the company’s capital investment program involved
the completion of the Antipolo Water Supply Project, which currently benefits 60,000 households
in that area. Manila Water also completed the P283 million North Septage Treatment Plant in San
Mateo, Rizal, and the P330 million South Septage Treatment Plant located in Taguig, under the
Manila Third Sewerage Project funded by the World Bank. The South Septage Treatment Plant is
considered the largest of its kind in Asia.
Another major milestone for Manila Water was the successful conclusion of its service
improvement and business plan review with its regulators,an exercise conducted every five years.
Along with the new tariffs, Manila Water’s P37 billion capital investment plan for the next five years
was approved within this regulatory framework. This investment plan aims to expand and improve
water and wastewater services within the East Zone of Metro Manila, and ensure the continued
reliability of its services, as it strives to meet the demand of an increasing population within the
company’s coverage area. Furthermore, the new investment plan provides the company more
opportunities to expand its service coverage, including a potential bulk water supply project for the
Bulacan province, which is considered a potential source of growth moving forward.
All of these accomplishments were made possible because of the company’s deliberate strategy
of successfully aligning its business objectives with its social development and environmental
advocacies. Manila Water remained focused on its sustainable development initiatives through its
flagship program for the poor, Tubig Para Sa Barangay (TPSB), which has now benefited more
than one million people from low-income communities. Further complementing the TPSB is the
company’s partnership with the World Bank-funded Global Partnership for Output- Based Aid,
which aims to make the cost of water connections even more affordable to at least 20,000
households in low-income communities. Manila Water also remained committed to its
environmental cause, through programs such as septic tank desludging, watershed management,
commercial effluent reuse, waste-to-energy, and active participation in other like-minded
initiatives.
These efforts were further recognized through several awards and citations. Among the major
awards in 2007 included the Client Leadership Award, a prestigious global award given to a single
company every year by the International Finance Corporation of the World Bank Group. Manila
Water received this award in recognition of its comprehensive approach in promoting sustainable
development in the East Zone and in the water and wastewater industry, while achieving financial
and operational success. Manila Water was likewise awarded Asiamoney’s Best Managed SmallCap Corporate of the Year for the Philippines, in recognition of its accomplishments in the East
Zone and was particularly noted for its proactive approach to investor relations.
Looking forward, Manila Water will continue to pursue its growth objectives, primarily through the
implementation of the company’s recently approved 15-year business plan. With the plan, Manila
48
Water aims to connect an additional one million people over the next five years through the
expansion of its coverage area, even as the company prepares the network to meet the increasing
demands of its existing customers as a result of a growing economy. The company also
recognizes the potential of the Bulacan Bulk Water Supply Project as a major growth driver and is
now actively involved in pushing for the project’s realization.
Manila Water will also focus on improving sewerage coverage in the East Zone. The company has
now started ramping up its wastewater initiatives to improve coverage from the current 12% to
30% by 2012. Other related environmental initiatives, such as gray water reuse and waste-toenergy technology are also seen as opportunities that the company will pursue.
Even as it further develops its business within the East Zone, Manila Water will continue to explore
new ventures outside its concession area. The company is now pursuing projects overseas in
countries like Vietnam, Hong Kong and India.
While there will be challenges as Manila Water pursues its growth initiatives, it remains wellpositioned, owing to its financial strength and operational expertise, to capture opportunities and
translate them to greater value for the company and all its stakeholders.
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 at the next Rate
Rebasing exercise scheduled for 2008.
Thirteen 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 eight BEMs relating to income, operating
expenses, capital expenditures and NRW. The BEMs are evaluated for trends and annual
forecasts. For the past five 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. This year the Company expects to outperform its targets again
through the concerted effort of the organization.
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 4,000 water service connections, and each further subdivided
49
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
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 2007, the Company
supplied approximately 1367 MLD of water and billed 1040 MLD compared to 2006 level of 1,354
MLD of water supplied and billed 948 MLD. The Company serves a total of 986,000 households
through 657,919 water service connections as of December 31, 2007, as compared to December
31, 2006 where a total of 892,000 households were served through 540,723 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
50
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
from ground-sourced water from deep wells located in the East Zone. As of December 31, 2007,
the Company has 18 active operational deep wells with an average production of 15 MLD, and 38
on standby mode for use during water shortages with a capacity of 60 MLD. These deep wells are
located in Quezon City, Mandaluyong, San Juan, Antipolo, Taguig, Cainta, Makati, Marikina,
Rodriguez, San Mateo, Montalban,Taytay and Baras, Rizal. 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 1936 and Balara 2
commissioned in 1958, with common use of chemical preparation and dosing facilities. The
treatment process involves coagulation, flocculation, sedimentation, filtration, Ph adjustment 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, 2007, the Company’s network consisted of 3,421 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 their excessive tendency to leak, the Company is currently replacing all of
its asbestos cement pipes, which at the start were estimated to comprise approximately 25.0% of
the total pipeline length, by 2008. From the start of the concession in 1997 to the end of 2007, the
Company has laid more than 2,566 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 23.9% for the
year ended December 31, 2007. 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 923 (EO 2007) 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.
51
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
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 2007 increased to 11% from just 3% coverage in 1997, totaling
more than 68,000 households benefited from this service. In 2007, the Company operates 31
STPs with a total capacity of 85MLD compared to 40MLD 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, 2007, 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. 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.
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.
52
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.
Employees
As of December 31, 2007, the Company had 1,567 employees. Approximately 47% were nonmanagement employees and 53% held management positions. Four employees were seconded
from Ayala.
The following table presents the number of employees as of the end of the periods indicated:
Year
2000
2001
2002
2003
2004
2005
2006
2007
Former
MWSS
1,525
1,476
1,427
1,407
1,383
1,351
1,338
1,320
Direct Seconded
Hires from Ayala
13
56
109
109
149
219
241
243
6
7
5
5
4
4
3
4
Seconded
from
Bechtel and
United
Utilities1
10
8
4
4
2
2
2
2
Total
Consultants
3
3
2
2
3
3
1
2
1,557
1,550
1,547
1,527
1,541
1,579
1,585
1,571
The following table presents the number of employees by function as of the December 31, 2007:
Group
Office of the President
Finance
Regulation
HR and Corporate Services
Business
Operations
Project Delivery
Management
4
80
25
41
479
149
91
NonManagement
1
2
22
442
181
46
Total
4
81
27
63
921
330
137
Under the Concession Agreement, upon the privatization of MWSS’s services, the Company was
required to make an offer of employment to each person who was then an MWSS employee who
had been allocated to the East Zone Concession with a salary and benefits package comparable
to what they were receiving from MWSS prior to the privatization. Consequently, the Company
absorbed 2,165 employees from MWSS in August 1997. The Company reduced its number of
employees to 1,653 by the end of 1998 through its Early Retirement Incentive Program. As of
December 31, 2007, 1,321 or 84% of the Company’s employees were former employees of
MWSS. The Company’s number of expatriate employees has been reduced from 46 as of the end
of 1997 to two as of December 31, 2007 due to improvements in technology made by United
Utilities, the Company’s technical services provider.
1
In 2004, only employees seconded from United Utilities remained after the divestment by Bechtel
of its shares in the Company.
53
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.
MWCI’s financial performance will be adversely affected if its requests for increases in customer
tariffs are not granted. Under the Concession Agreement, any rate adjustment requires approval
by the MWSS and the Regulatory Office. MWCI is also bound under the Concession Agreement
to comply with certain service obligations and is required to meet numerous performance and
business efficiency targets. Should it perform below the agreed thresholds for these targets,
MWCI may be penalized in the form of a reduction in the amount of expenditures that can be
recovered through tariffs during the Rate Rebasing exercises that are conducted every five years.
Achieving these performance targets will require substantial capital expenditures that MWCI will
be required to fund. Meeting targets could become difficult should MWCI fail to raise the funding
required for its capital works.
Further, the waterworks facilities, including the water supply systems managed by MWCI, may
incur significant loss, damage or other impairments, 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.
Meanwhile, MWCI’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 cost-effective manner.
MWCI’s expansion to territories outside of its current operating areas 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;
54
•
risks related to development of new operations, including assessing the demand for water,
engineering difficulties and inability to begin operations as scheduled; and
•
risks relating to greater competition in these new territories, including the ability of the
Company’s competitors to gain or retain market share by reducing prices.
Management of Risks
As regards the regulatory risks, the successful and transparent conduct of the first and second
rate rebasing exercise serves to mitigate these regulatory risks, as both parties harmoniously
worked together within the regulatory framework of the Concession Agreement. Financing risks
have been addressed by MWCI’s successful fund raising program, through loans procured from
both local and international funding institutions on very reasonable terms, part of which loans have
already been spent on various projects. MWCI has also obtained additional capital from its initial
public offering. In respect of operating risks, MWCI expects that, with the implementation of its
capital investment program, it will be able to further bring down its losses to an even more
favorable level. Meanwhile, to mitigate social risks, MWCI will continue its regular public
consultation and its sustainable development strategy, which brings the Company closer to its
customers.
Manila Water has also institutionalized a risk management system that stemmed from a
Company-wide risk assessment program which was initially implemented the previous year. 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.
As regards risks associated with expansion projects outside of its current operating areas, the
Company has adopted a risk assessment policy that requires the company to carefully evaluate all
risks associated with any new and significant investment, and to determine whether such risks are
manageable, from a risk-reward standpoint.
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
As of December 31, 2007, MWCI has not been involved in any bankruptcy, receivership or similar
proceeding. Further, except as discussed above, MWCI 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.2 MWCI is not engaged in sales to foreign markets. MWCI also has
no publicly-announced new product or service nor own any patents, trademarks, copyrights,
licenses, franchises, concessions and royalty agreements.
2
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.
55
MWCI 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 MWCI. Except as discussed above, government
approval is not necessary for MWCI’s principal products or services. MWCI has not engaged in
any research and development activities for the last three years. Further, Manila Water
institutionalized a risk management system to evaluate and address corporate risks on a regular
basis. In line with its commitment to promote the corporate values of transparency and
accessibility to its investors, Manila Water has fully complied with all the disclosure and reporting
requirements of the Philippine Stock Exchange and the Securities and Exchange Commission.
The investor relations group further conducted quarterly investors’ and analysts’ briefings and
regular meetings with shareholders and fund managers to update them on various corporate
developments.
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 December 31, 2007, the Company’s Compliance Officer, Atty. Glorina N. Padua-de
Castro, reported 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 2007, including the requirements in relation to the board
of directors, board committees, officers and stockholders’ rights and interests.
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 2007. 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.
56
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 was chosen as one of the
recipients of the Corporate Governance Asia Annual Recognition Awards 2007. The award was
given to Manila Water in recognition of its continuing commitment to the development of corporate
governance in the region. 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.
In January 2007, Manila Water was also voted 2nd Best Over-all in Corporate Governance in the
Philippines in a survey conducted by Asiamoney among fund management and brokerage
companies across the region. The criteria for the survey were disclosure and transparency,
responsibilities of management and the board of directors, shareholders’ rights and equitable
treatment, and investor relations. 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 2007
Audited Financial Statements which is incorporated herein in the accompanying index to exhibits.
Other factors pertaining to the description of the business of Ayala Corporation 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, 2007.
Properties are wholly-owned and free of lien unless noted.
Location
Hectares
Primary land use
53
commercial/ residential
Makati 1
Taguig 2
33
commercial/ residential
Makati (outside CBD)
22
residential
Alabang 3
18
commercial
Las Piñas
130
residential
Quezon City 4
52
commercial/ residential
Manila / Pasay 5
2
commercial/ residential
57
Pasig 6
18
328
Metro Manila
Canlubang 7
Laguna (ex-Canlubang) 8
Cavite 9
Batangas/Rizal/Quezon 10
Calabarzon
1,677
854
126
132
2,789
residential
residential/ industrial/ commercial
residential/ industrial
residential
residential
Bulacan
Pampanga 11
Naga
Cabanatuan/ Baguio
Bataan 12
Other Luzon Area
51
11
2
72
289
425
residential
residential
residential
residential
leisure/ residential
Bacolod/Iloilo 13
Cebu 14
Davao
Cagayan De Oro
Visayas/Mindanao
269
189
70
195
723
residential
commercial/ residential
residential
residential
TOTAL
4,265
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;
9-ha. site of Serendra which is under joint development agreement with Bases Conversion Development Authority; 14 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 Standby Letter of Credit with RCBC, term loans with
Security Bank and Land Bank of the Philippines.
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 1.3 has. (under development) which are under joint venture with Manila Jockey Club, Inc. and 0.3ha. 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 1,307 has. which are 70% owned through Aurora Properties, Inc. and Vesta Holdings, Inc.; also
includes 370 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.; 22 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 39ha. property.
11
Pampanga pertains to the site of Avida and CII projects, and an upcoming mall.
58
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 12 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.; 9 has. in Asiatown IT Park which is
owned by Cebu Property Ventures and Development Corporation which in turn is 76% owned by CHI; and 24 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 Deutsche Investitions- und Entwicklungsgesellschaft MBH.
IMI’s local production area (plant and equipment) of 115,654 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 52, 900 sqm. in China. It also has office are of 1,400 sqm. in USA and 300 sqm. in
Hongkong.
AAHC’s owned dealership buildings include the following – Honda Cars Shaw, Honda Cars
Mandaue, Honda Cars Bacolod, Honda Cars Cagayan de Oro, Honda Cars Iloilo,Isuzu Mandaue
and Isuzu Cebu.
Properties leased by AAHC
In '000
Land and Building
Honda Cars Makati
Honda Cars Pasig
Honda Cars Alabang
Isuzu Alabang
Isuzu Pasig
Isuzu Cavite
Land only
Honda Cars Shaw
Honda Cars Negros
Amount of
Lease Payment
42,641.2
41,336.1
46,405.2
17,123.2
8,333.6
4,383.8
10,314.4
41.0
Honda Cebu
Honda Cars Mandaue
266.4
73.2
Honda Cars Iloilo
160.0
Isuzu Mandaue
Isuzu Cebu
3,308.0
2,536.5
Expiration
Date
12/31/2010
12/31/2014
12/31/2011
1/1/2009
9/16/2009
12/1/2011
Term of
Renewal Options
renewable for another 5 years
renewable for another 5 years
renewable for another 5 years
renewable for another 5 years
renewable for another 2 years
renewable as agreed mutually by
both parties
4/30/2014 renewable for another 8 years
9/30/2011 renewable for another 10 years, at
the option of the Lessee
8/31/2013 renewable for another 20 years
6/30/2017 renewable as agreed mutually by
both parties
7/30/2024 renewable for another 5 years, with
the Lessee (who is the sub-lessor)
having the option to renew.
10/1/2008 renewable for another 5 years
5/31/2007 under negotiation; proposal of the
lessor is 2 years extension
Rental Properties
ALI’s key properties for lease include shopping centers and office buildings. It also leases land,
carparks and some residential units. In the year 2007, rental revenues from these properties
accounted for P4.97 billion or 19% of Ayala Land’s consolidated revenues. Lease terms vary
depending on the type of property and tenant.
Property Acquisitions
With 4,265 hectares in its landbank as of end-2007, ALI believes that it has sufficient properties for
development in next 25 years.
The ALI sees a lot of opportunities in further expanding its market share in the sectors that are
experiencing rapid growth—residential, office (primarily BPOs) and shopping centers—as well as
moving or positioning into new growth sectors (e.g. tourism estates) related to its core
businesses. More particularly, ALI sees additional opportunities for strategic acquisitions and
59
investments in the next two to three years, mainly in the form of strategic land parcels within and
outside Mega Manila.
Thus, at the ALI Annual General Stockholders’ Meeting on April 2, 2008, shareholders ratified the
resolution of the Board of Directors approving the allotment and subsequent issuance of up to 1
billion common shares of stock of the Corporation with an aggregate par value of One Billion
Pesos for the purpose of exchanging such shares for properties or assets and/or raise funds to
acquire properties or assets need for the business of the Corporation via issuance of equity or
equity-linked instruenmts; and the amendment of the Amended Articles of Incorporation of the
Corporaiton to exclude the issuance of the shares from the preemptive rights of the stockholders.
There is, however, no imminent transaction requiring the immediate issuance of said shares
Ayala Corp., and IMI have no property acquisition plan for 2008. AAHC intends land lease and
building of Isuzu Rizal (Antipolo) to be funded through bank borrowings in the next 12 months.
Item 3. Legal Proceedings
Ayala Land
As of end-2007, Ayala Land is not involved in any litigation it considers material. However, certain
individuals and entities have claimed an interest in Ayala Land's properties located in Las Piñas,
Metro Manila, which are adjacent to its development in Ayala Southvale.
Prior to purchasing the aforesaid properties, Ayala Land conducted an investigation of the titles to
the properties and had no notice of any title or claim that was superior to the titles purchased by
Ayala Land. Ayala Land traced its titles to their original certificates of title and Ayala Land believes
that it has established its superior ownership position over said parcels of land. Ayala Land 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, Ayala Land filed petitions in local regional trial courts 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 in Ayala Land's favor. These include decisions affirming the title of
Ayala Land 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.
Ayala Land does not intend to develop and sell the rest of the Las Piñas properties until the
litigation is resolved.
Ayala Land has made no provision in respect of such actual or threatened litigations.
In December 1999, plaintiffs Edgardo Vazquez and Vazquez Building Systems Corporation filed a
patent infringement case against Avida Land, Inc. (“Avida”), a wholly-owned subsidiary of Ayala
Land. 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 unit patent; (b) 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 Vazquez patent, because these are not patentable as they do not qualify as
"novelty." In a decision dated 18 December 2007, the Regional Trial Court of Quezon City ruled in
favor of plaintiffs, requiring Avida to compensate the plaintiffs in the amount of Php90,000,000.00
as temperate damages or reasonable royalty with interest at the rate of six percent (6%) per
annum from the date of filing of the complaint as well as moral and exemplary damages and
reasonable attorneys’ fees and cost of suit. Avida filed a notice of appeal to contest this decision
with the Court of Appeals.
As a result of the explosion which occurred on 19 October 2007 at the basement of the Makati
Supermarket Building, the Philippine National Police (“PNP”) has 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
60
Company’s subsidiary, Ayala Property Management Corp. (“APMC”), among other individuals, for
criminal negligence. No criminal case has been filed by the DOJ at this time. No civil case has
likewise been filed by any of the victims. In the event that the DOJ decides to file a criminal case
against certain officers/employees of APMC as recommended by the PNP, the accused, if
convicted after final judgment, can be held not only criminally but also civilly liable. In the event
the accused will not be able to pay for the civil award, APMC will be held subsidiarily liable for
such sums (the amount of which cannot be estimated). ALI and APMC believe, however, that the
facts surrounding the incident do not show any negligence.
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. Hearings are now ongoing with the RTC.
On May 22, 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.
On July 4, 2006, Smart Communications, Inc. (“Smart”) filed a letter-complaint with the National
Telecommunications Commission (“NTC”) against the 500 free text promotion offered by Innove
on its Speak and Surf product. The promotion allows Speak and Surf subscribers to send 500 free
text messages to Globe and Touch Mobile subscribers. Smart complained that this promotion was
predatory and discriminatory. On July 17 the NTC issued a Show-Cause order requiring Globe to
explain its position on this matter. On July 25, 2006, Globe filed its answer. In its answer, Globe
explained that Innove actually pays Globe the regular termination rate of P0.35 per text message,
and that the cost of the “free” texts are sufficiently covered by the monthly service charge of P995
paid by Speak n’ Surf subscribers. In this light, the offer is neither discriminatory nor predatory. In
its answer, Globe also extended an invitation to Smart and other networks to join the promotional
offer. Globe is currently awaiting the disposition of the NTC on this matter.
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
61
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. MWCI filed the Counter-Affidavit of its President in 2005 and is
awaiting the resolution of the cases. MWCI 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 MWCI and Maynilad are not public utilities but agents
and contractors of MWSS. While MWCI is not impleaded as a respondent, certain contingent,
adverse, financial and regulatory consequences might result from a decision granting the petition.
MWCI 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 MWCI, 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. Recently, MWCI received information that the Freedom from Debt
Coalition has filed a motion for reconsideration with the Supreme Court.
IMI, AAHC 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.
62
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 2006 and 2007:
2007
2006 *
High
Low
High
Low
550.00 433.33 304.17
264.58
1st qtr *
2nd qtr
580.00 466.67 393.75
279.17
*
3rd qtr
585.00 402.50 397.92
308.33
645.00 495.00 491.67
377.08
4th qtr
* adjusted to reflect the 20% stock dividend declared in May 2007
The market capitalization of the Company as of end-2007, based on the closing price of
P565.00/share, was approximately P234.12 billion.
The price information of Ayala Common Shares and Ayala Preferred “B” Shares as of the close of
the latest practicable trading date, 9 April 2008, is P405.00 and P113.00, respectively.
There are approximately 7,826 holders of common shares as of 31 January 2008. The following
are the top 20 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 2006
ESOWN Administrator 2007
Philippine Remnants Co., Inc.
ESOWN Administrator 2005
BPI TA 14105123 FAO Consuelo Zobel Alger
Foundation
Cygnet Development Corporation
Sysmart Corporation
Mitsubishi Logistics Corporation
Antonio O. Olbes
Eduardo O. Olbes
Aristón Estrada, Jr.
AC ESOP/ESOWN Account
Andre Jon Tiu
Telengtan Brothers & Sons, Inc.
No. of Common
Shares
210,895,275
111,677,732
43,803,848
21,069,750
13,356,674
1,080,530
642,904
619,912
571,560
499,608
316,381
306,763
254,659
250,356
195,993
163,328
161,040
136,545
109,442
95,040
Percentage
(of Common
Shares)
50.96%
26.98%
10.58%
5.09%
3.23%
0.26%
0.16%
0.15%
0.14%
0.12%
0.08%
0.07%
0.06%
0.06%
0.05%
0.04%
0.04%
0.03%
0.03%
0.02%
As of 31 January 2008, 54.81% or 200,722,429 Common and 57,905,950 Preferred “B” shares are owned
by the public.
63
Dividends
Stock Dividends
PERCENT
20%
20%
RECORD DATE
PAYMENT DATE
April 16, 2004
May 22, 2007
May 12, 2004
June 18, 2007
There were no stock dividend declarations from 2005 to 2006.
Cash Dividends – 2006
CLASS
On common shares
Cash Dividends – 2007
CLASS
On common shares
PAYMENT DATE
January 31, 2006
July 28, 2006
RATE
2.00/share
6.00/share
PAYMENT DATE
RATE
January 30, 2007
July 31, 2007
November 5,2007
January 29, 2008
2.00/share
4.00/share
2.00/share
2.00/share
TERM / RECORD
DATE
January 6. 2006
July 6, 2006
TERM / RECORD
DATE
January 5, 2007
July 6, 2007
October 9, 2007
January 4, 2008
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
There were a total of 185,618 shares issued in 2007 representing exercise of stock options by the
Company’s executives. The aforesaid issuance of shares was covered by the Commission’s
approval of the Company’s Stock Option Plan in December 2005
Item 6. Management’s Discussion and Analysis of Operations
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 P78.7 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.
64
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 P9.7 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 mainly due to an impairment loss on goodwill of
the electronics, information technology and business process outsourcing services group, and
extraordinary charges of the real estate group.
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
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 P27.1 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 P16.2 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,
65
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
(December 31, 2007 Vs December 31, 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 December 31, 2006 and December 31,
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 December 31, 2006 and December 31, 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 December 31, 2006 and December 31, 2007, respectively.
Other current assets – 22% decrease from P3,961mln to P3,098mln
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 December 31, 2006 and
December 31, 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 December 31, 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 December 31, 2006 to 2% as of December 31, 2007.
Investments in associates and joint ventures – 4% increase from P68,569,mln to P71,560mln
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 by the parent company, lower forex rate and return of
investment by the international group. This account slightly decreased from 38% of the total
assets as of December 31, 2006 to 36% as of December 31, 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 December 31, 2006 and
1% as of December 31, 2007.
66
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 December 31, 2006 and
December 31, 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
December 31, 2006 and December 31, 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 December 31,
2006 and December 31, 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 December 31, 2006 and December
31, 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 December 31, 2006 and December 31, 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 December 31, 2006 and December 31, 2007, this account is at 23% and 27% of the
total liabilities, respectively.
Short-term debt –5% increase from P2,504mln to P 2,634mln
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
December 31, 2006 and December 31, 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 December 31, 2006 and December 31, 2007.
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 December 31, 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 December 31, 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 December 31, 2006 and December
31, 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 December 31, 2006 and December 31, 2007.
67
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 December 31, 2006 and December 31, 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 P51,659mln to P60,461mln
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 December 31, 2007 Vs YTD December 31, 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 P8,253mln to
P9,708mln
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
December 31, 2007 and 2006, respectively.
68
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 December
31, 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 December 31, 2007 this account is 7% of the total
costs and expenses vs 9% in December 31, 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
December 31, 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
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
69
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.
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
70
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
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.
71
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
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.
72
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
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.
73
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.
(Amounts in millions, except ratios)
Ayala Corporation (Consolidated)
Revenue
Net Income
Total Assets
Total Debt
Stockholders' Equity
Current Ratio1
Debt to Equity Ratio2
2007
78,708
16,198
196,419
50,032
87,176
1.92
0.57
2006
70,166
12,177
182,332
52,881
77,136
1.70
0.69
2007
25,707
4,386
82,981
10,139
45,705
1.65
0.22
2006
25,559
3,866
78,250
12,837
40,651
1.64
0.32
2007
19,757
1,632
12,424
2,901
6,492
1.70
0.45
2006
20,187
1,779
13,917
4,411
6,455
1.69
0.68
2007
12,238
201
2,848
566
1,322
1.40
0.43
2006
9,179
105
1,855
79
1,164
1.74
0.07
Ayala Land, Inc.
Revenue
Net Income
Total Assets
Total Debt
Stockholders' Equity
Current Ratio1
Debt to Equity Ratio2
Integrated Microelectronics, Inc.
Revenue
Net Income
Total Assets
Total Debt
Stockholders' Equity
Current Ratio1
Debt to Equity Ratio2
Ayala Automotive Holdings Corporation
Revenue
Net Income
Total Assets
Total Debt
Stockholders' Equity
Current Ratio1
Debt to Equity Ratio2
1
Current Assets/Current Liabilities
Total Debt/Stockholders’ Equity (Total Debt includes short-term debt, long-term debt, current
portion of long-term debt, cumulative preferred shares (classified as liabilities))
2
74
The table sets forth the comparative key performance indicators of the Company and its material
subsidiaries.
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 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.
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 Group adopted the following amended Philippine Financial Reporting Standards (PFRS),
International Financial Reporting Interpretations Committee (IFRIC) and Philippine Interpretations
Committee (PIC) Interpretations effective in 2007:
The principal effects of these changes are as follows:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative information about exposure to risks arising from financial
instruments, including specified minimum disclosures about credit risk, liquidity risk and market
risk, including sensitivity analysis to market risk. It replaces disclosure requirements in PAS 32,
Financial Instruments: Disclosure and Presentation and PAS 30, Disclosure in the Financial
Statements of Banks and Similar Financial Institutions. It is applicable to all entities that report
under PFRS.
The Ayala Group of Companies (the “Group”) adopted the amendment to the transitional
provisions of PFRS 7, as approved by the Financial Reporting Standards Council of the
Philippines, which gives transitory relief with respect to the presentation of comparative
information for the new risk disclosures about the nature and extent of risks arising from financial
instruments. Accordingly, the Group does not need to present comparative information for the
disclosures required by paragraphs 31-42 of PFRS 7, unless the disclosure was previously
required under PAS 32. Adoption of PFRS 7 resulted in additional disclosures, which are included
throughout the financial statements. These disclosures include presenting the different classes of
loans and receivables, roll forward of allowance for impairment losses, credit quality of financial
assets, aging of past due but not impaired financial assets, and sensitivity analysis as to changes
in interest and foreign exchange rates.
75
PAS 1 Amendment - Presentation of Financial Statements
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital.
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment (effective for annual
periods beginning on or after 01 November 2006)
The Group adopted the Interpretation beginning January 1, 2007, which prohibits the reversal of
impairment losses on goodwill and AFS equity investments recognized in the interim financial
reports even if impairment is no longer present at the annual balance sheet date. Adoption of the
Interpretation did not have any significant impact on the consolidated financial statements.
Future Changes in Accounting Policies
The Group has not applied the following new and amended PFRS and Philippine Interpretations
which are not yet effective for the year ended 31 December 2007:
•
PFRS 8, Operating Segments (effective for annual periods beginning on or after January
1, 2009).
PFRS 8 requires a management approach to reporting segment information. PFRS 8 will
replace PAS 14, Segment Reporting, and is required to be adopted only by entities whose
debt or equity instruments are publicly traded, or are in the process of filing with the
Securities and Exchange Commission (SEC) for purposes of issuing any class of
instruments in a public market. The Group will apply PFRS 8 in 2009 and will assess the
impact of this standard on its current manner of reporting segment information.
•
PAS 1, Presentation of Financial Statements (Revised) (effective for annual periods
beginning on or after 01 January 2009)
The revised standard requires that the statement of changes in equity includes only
transactions with owners and all non-owner changes are presented in equity as a single
line with details included in a separate statement. Owners are defined as holders of
instruments classified as equity.
In addition, the amendment to PAS 1 provides for the introduction of a new statement of
comprehensive income that combines all items of income and expense recognized in the
statements of income together with ‘other comprehensive income’. The revisions specify
what is included in other comprehensive income, such as gains and losses on availablefor-sale assets, actuarial gains and losses on defined benefit pension plans and changes
in the asset revaluation reserve. Entities can 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. The Group will assess the impact of the standard on
its current manner of reporting all items of income and expenses.
•
PAS 23 Amendment - Borrowing Costs (effective for annual periods beginning on or after
01 January 2009)
The standard has been amended to require capitalization of borrowing costs directly
attributable to the acquisition, construction or production of 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 amendment,
this change in accounting for borrowing costs shall be accounted for prospectively.
Accordingly, borrowing costs will be capitalized on qualifying assets with a
commencement date after 01 January 2009. No changes will be made for borrowing
costs incurred to this date that have been expensed. The Group does not expect that the
adoption of this Standard will have a significant impact on the consolidated financial
statements.
•
Philippine Interpretation IFRIC 11, PFRS 2, Group and Treasury Share Transactions
(effective for annual periods beginning on or after 01 March 2007).
76
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 the entity chooses or is required to buy those equity instruments (e.g., treasury
shares) from another party, or 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. The Group does not expect this interpretation to
have a significant impact on the consolidated financial statements.
•
Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual
periods beginning on or after 01 January 2008).
This Interpretation applies to service concession operators and explains how to account
for the obligations undertaken and rights received in service concession arrangements.
The 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, the Financial Asset Model is used to the
extent of such amount.
Manila Water Company, Inc. is currently assessing the impact of the adoption of this
standard.
•
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (effective for annual
periods beginning on or after 01 July 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 part
of the fair value of the consideration received is allocated to the awards credits and
deferred over the period that the award credits are fulfilled. The Group does not expect
this Interpretation to have a significant impact on the consolidated financial statements as
no such scheme currently exists.
•
Philippine Interpretation IFRIC 14, PAS 19 - Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction (effective for annual periods beginning on or
after 01 January 2008).
This Interpretation provides guidance on how to assess the limit on the amount of surplus
in a defined benefit scheme that can be recognized as an asset under PAS 19, Employee
Benefits. It also explains how the pension asset or liability may be affected by a statutory
or contractual minimum funding requirement.
The Group does not expect this
Interpretation to have a significant impact on the consolidated financial statements.
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.
77
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:
2007
2006
Audit & Audit-related Fees
P 3.00 M
2.75 M
Tax Fees
-
Other Fees
P 0.39 M
4.61 M
No consultancy services were secured from SGV & Co.
In 2007, SGV & Co. rendered the PFRS Seminars to the Company for an aggregate fee of
P0.39M.
The Audit Committee has reviewed the nature of non-audit fees rendered by the external auditors
and the corresponding fees and concluded that these are not significant to impinge on the
independence of the auditors.
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 4 April 2008, SGV & Co., were reappointed as
the Company’s external auditors for the year 2008.
78
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, 48, 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.; 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 forwardlooking 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, 47, 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., Ayala
International Pte. Ltd., 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; and Member of
the East Asia Council of INSEAD. He graduated with B.A. Liberal Arts at Harvard College in 1982.
Meneleo J. Carlos, Jr., Filipino, 78, 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; President of Resins, Inc., Riverbanks Development Corporation; Chairman
of the Federation of Philippine Industries, 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) and Cagayan Electric
Power & Light Company (CEPALCO). He graduated with a B.S. Chemical Engineering degree
and a Certificate of Advanced Studies at Cornell University in 1952.
Toshifumi Inami, Japanese, 56, 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, TeaM Energy and UniCharm
79
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. Mr. Inami had a degree
in BS Mechanical Engineering from Keio University in Japan.
Delfin L. Lazaro, Filipino, 61, was elected to the Board of Ayala on 01 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: Director and Chairman of the Executive Committee of
Globe Telecom, Inc.; Chairman of Ayala Systems Technology, Inc., HRMall, Inc. and Atlas
Fertilizer & Chemicals; Director of Ayala Land, Inc., Integrated Micro-electronics, Inc., Manila
Water Co., Inc., AI North America, Inc., Ayala International Holdings, Ltd.. 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.
Xavier P. Loinaz, Filipino, 64, has served as director of Ayala Corporation since April 2006. He
was a member of the Management Committee of Ayala Corporation (Ayala Group) from 1989 to
2004. He was formerly the President of Bank of the Philippine Islands (BPI) from 1982 to 2004.
Other positions held are: Director of BPI, BPI Capital Corporation, BPI Direct Savings Bank, Inc.,
BPI/MS Insurance Corporation, BPI Family Savings Bank, Inc. and Chairman of the Board of
Directors of Ayala Life Assurance, Inc.; and Member of the Board of Trustees of BPI Foundation,
Inc. He graduated with an AB Economics degree at Ateneo de Manila University in 1963 and took
his MBA-Finance at Wharton School, University of Pennsylvania in 1965.
Mercedita S. Nolledo, Filipino, 66, 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. 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.
Antonino T. Aquino
Jaime I. Ayala
Arthur R. Tan
Charles H. Cosgrove
Aurelio R. Montinola III
Rufino Luis T. Manotok
**
**
Victoria P. Garchitorena
Renato O. Marzan
Chairman & Chief Executive Officer
President & Chief Operating Officer
Senior Managing Director, Senior Counsel & Corporate
Secretary
Senior Managing Director
Senior Managing Director
Senior Managing Director
Senior Managing Director
Senior Managing Director
Senior Managing Director, Corporate Information Officer
& Chief Finance Officer
Managing Director
Managing Director, General Counsel,Assistant Corporate
Secretary & Compliance Officer
80
**
Ramon G. Opulencia
Managing Director & Treasurer
John Philip S. Orbeta
Managing Director
* Members of the Board of Directors
** Management Committee members
Gerardo C. Ablaza, Jr., Filipino, 54 , 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. 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, 60, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since August 1998. He also holds the following positions:
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 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, 45, 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 of the Board of Directors and President of Makati Property Ventures,
Inc.; Chairman of the Board of Directors of Ayala Property Management Corp., Cebu Holdings,
Inc., Cebu Insular Hotel Co., Inc., Cebu Property Ventures & Dev't. Corp., Community Innovations,
Inc., Avida Land Corp., Laguna Technopark, Inc., Makati Development Corp., and Station Square
East Commercial Corp; Member of the Board of Directors and President of Aurora Properties, Inc,
Ayala Hotels, Inc., Ceci Realty Inc., Enjay Hotels, Inc., Roxas Land Corp., Vesta Property
Holdings, Inc. and Anvaya Cove Beach and Nature Club, Inc.; Member of the Board of Directors 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. 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, 52, 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, 57, 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 the Board of Directors of Honda Cars Makati, Inc., Isuzu Automotive
Dealership, Inc., Isuzu Iloilo Corp. and Honda Cars Cebu, Inc.; Chairman of Isuzu Cebu, Inc.;
President and Director of Ayala Automotive Holdings Corp., Philwater Holdings Company and
Ayala Aviation Corp.; and Director of AC International Finance Ltd., AI North America, Inc.,
Asiacom Philippines, Inc., AYC Holdings Ltd., Ayala Systems Technology, Inc., BPI Family
Savings Bank, 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
81
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, 48, 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. and Chairman of the Board of Speedy-Tech Philippines,
Inc. 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.
Victoria P. Garchitorena, Filipino, 63, 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 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.
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; Regional Board of Advisers of MasterCard Incorporated; Director of Ayala Land, Inc.,
Manila Water Company, Inc.; 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, 59, has served as a member of the Management Committee of Ayala
Corporation (Holding Company) since May 2007. He also holds 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., Community Innovations,
Inc., and Ayala Automotive Holdings Corporation; 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, 51, 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. 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
82
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, 46, has served as a member of the Management Committee of
Ayala Corporation (Holding Company) 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. He joined the Ayala
Corporation in May of 2005 as Managing Director and Head of Strategic Human Resources and
Organization Development and was concurrently the Senior Vice President and Head of the
Human Resources Group of Ayala Land, Inc. 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.
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.
Parent Company
Mermac, Inc. holds or owns 50.90% of the total issued and outstanding common stock of the
Company as of 31 December 2007. As of December 31, 2006, the company has no outstanding
receivable/payable from/to Mermac, Inc.
83
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 28 (“Related Party transactions”) of the Notes to Consolidated Financial
Statements of the 2007 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 2007 annual meeting of security holders due to any disagreement
with the Corporation relative to the Corporation’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
Aristón Estrada, Jr. *
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
Managing Director
Solomon M. Hermosura
Managing Director
Ricardo N. Jacinto
Managing Director
Mark Anthony N. Javier **
Managing Director
Rufino F. Melo III
Managing Director
John Philip S. Orbeta
Managing Director
Luis Juan B. Oreta
Managing Director
CEO & 15 Most Highly Compensated
Executive Officers
Year
Actual 2006
(restated)
Salary
Other
Income
P164.62 M
P226.94 M
84
All other officers**** as a group unnamed
Actual 2007
Projected2008
P176.07 M
P193.68 M
P122.45 M
P44.73 M ***
Actual 2006
(restated)
Actual 2007
Projected2008
P228.06 M
P363.51 M
P233.84 M
P257.22 M
P153.60 M
P58.57 M ***
* Retired effective 30 June 2007
** Retired effective 31 December 2007
*** 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. Of the above named officers, there were 72,636 common shares exercised for the year
2007 by the following officers, to wit:
Name
No. of
Shares
Aristón Estrada, Jr.
Solomon M. Hermosura
Ricardo N. Jacinto
Rufino Luis T. Manotok
Rufino F. Melo III
All above-named
72,636
Officers as a group
* Average price at date of grant.
Date of
Grant
Various
Various
Various
Various
Various
Exercise
Price
Various
Various
Various
Various
Various
Market Price at Date
of Grant
Various
Various
Various
Various
Various
166.68
236.71*
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 and June
2007 and to the reverse stock split in May 2005.
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:
Per diem per Board meeting attended:
P500,000.00
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.
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.
85
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 2008.
Title of
Class
Name, address of
Record Owner and
Relationship with Issuer
Name of Beneficial
Owner and
Relationship with
Record Owner
Citizenship
Common
Mermac, Inc.3
35/F Tower One, Ayala
Triangle,
Ayala Ave., Makati City
PCD Nominee Corporation
(Non-Filipino)5
G/F MSE Bldg.
Ayala Ave., Makati City
Mermac, Inc.4
Filipino
210,895,275
50.96%
Hongkong and
Shanghai Banking
Corporation (HSBC)
and Standard
Chartered Bank
(SCB)6
Mitsubishi
Corporation8
Various
111,677,732
26.98%
Japanese
43,803,848
10.58%
Filipino
21,069,750
5.09%
Common
Common
Common
3
Mitsubishi Corporation7
14/F L.V. Locsin Bldg.
6752 Ayala Ave., Makati
City
PCD Nominee Corporation
(Filipino)
G/F MSE Bldg.
Ayala Ave., Makati City
Hongkong and
Shanghai Banking
Corporation (HSBC)
and Standard
Chartered Bank
(SCB)
No. of
Shares
Held
Percent
(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.
4
The Board of Directors of Mermac has the power to decide how Mermac shares in Ayala are to be voted.
5
The PCD is not related to the Company.
6
HSBC and SCB are participants of PCD. The 63,831,501 and 27,048,341 shares beneficially owned by
HSBC and SCB, respectively, form part of the 132,747,482 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.
7
Mitsubishi Corporation (“Mitsubishi”) is not related to the Company.
8
The Board of Directors of Mitsubishi has the power to decide how Mitsubishi shares in Ayala are to be
voted.
86
2)
Title of Class
Security Ownership of Directors and Management as of 31 January 2008.
Name of Beneficial Owner
Directors
Common
Jaime Augusto Zobel de Ayala
Common
Fernando Zobel de Ayala
Common
Meneleo J. Carlos, Jr.
Common
Toshifumi Inami
Common
Delfin L. Lazaro
Common
Xavier P. Loinaz
Common
Mercedita S. Nolledo
CEO and Most Highly Compensated Officers
Common
Jaime Augusto Zobel de Ayala
Common
Fernando Zobel de Ayala
Common
Delfin L. Lazaro
Common
Rufino Luis T. Manotok
Preferred “B”
Common
Mercedita S. Nolledo
Common
Renato O. Marzan
Common
Amount and Nature of
Beneficial Ownership
(direct)
(direct)
(direct)
(direct)
(direct)
(direct)
(direct)
Filipino
Filipino
Filipino
Japanese
Filipino
Filipino
Filipino
0.055463%
0.057912%
0.000000%
0.000000%
0.029018%
0.018634%
0.024178%
261,711
273,270
136,926
131,752
(direct)
(direct)
(direct)
(direct
indirect)
(direct)
(direct)
(direct
indirect)
(direct
indirect)
(direct)
(direct)
(direct)
(direct
indirect)
(direct
indirect)
(direct)
(direct)
(direct
indirect)
(direct)
(direct
indirect)
Filipino
Filipino
Filipino
0.055463%
0.057912%
0.029018%
0.027921%
25,000
114,090
81,074
93,148
Alfredo I. Ayala
Victoria P. Garchitorena
Solomon M. Hermosura
Common
15,000
37,500
68,742
78,240
23,859
Ricardo N. Jacinto
Preferred “B”
Common
Common
Mark Anthony N. Javier
Rufino F. Melo III
48,982
43,106
34,009
Common
Common
John Philip S. Orbeta
Luis Juan B. Oreta
57,008
55,051
Other Executive Officers (Group ManCom Members)
Common
Gerardo C. Ablaza, Jr.
84,716
Common
Common
Antonino T. Aquino
Jaime I. Ayala
Common
Common
Charles H. Cosgrove
Arthur R. Tan
All Directors and Officers as a group
Percent of
All Class
261,711
273,270
1
1
136,926
87,928
114,090
Ramon G. Opulencia
Preferred “B”
Common
Common
Common
Citizenship
50,863
21,105
0
164,836
1,987,918
&
Filipino
&
Filipino
Filipino
&
0.005298%
0.024178%
0.017181%
0.019740%
Filipino
&
Filipino
Filipino
Filipino
&
0.003178%
0.007947%
0.014568%
0.016581%
0.005056%
Filipino
&
Filipino
Filipino
0.010380%
0.009135%
0.007207%
&
Filipino
Filipino
0.012081%
0.011666%
Filipino
0.017953%
Filipino
Filipino
0.010779%
0.004473%
American
Filipino
N/A
0.034933%
(direct &
indirect)
(direct)
(direct &
indirect)
(direct &
indirect)
0.421286%
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
or similar agreement.
No change of control in the Corporation has occurred since the beginning of its last fiscal year.
87
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.
88
PART IV – CORPORATE GOVERNANCE
Item 13. Corporate Governance
Good governance is the cornerstone of Ayala’s sustained success over the past 174 years.
a. 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 Board Performance Assessment which is
accomplished by the Board of Directors indicating the compliance ratings. The above is
submitted to the Compliance Officer who issues the required certificate of compliance with
the Company’s Corporate Governance Manual to the Securities and Exchange Commission.
b. 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.
c. There were no deviations from the Company’s Manual of Corporate Governance. The
Company 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.
d. The Company is taking further steps to enhance adherence to principles and practices of
good corporate governance.
BOARD STRUCTURE AND PROCESS
Key Roles
Ayala Corporation is led by a Board which is the highest authority in matters of governance and in
managing the business of the company.
Composition
The Board consists of seven members who are each elected by stockholders entitled to vote at the
annual meeting. The Board members hold office for one year and until their successors are elected
and qualified in accordance with the By-laws of the Company.
The Board represents a mix of business, legal, and finance competencies, with each director
capable of adding value and rendering independent judgment in relation to the formulation of sound
corporate policies. Most of the Board members have participated in training on Corporate
Governance. The names and profiles of each individual director are found in item 9 of this Report.
Independent Directors
As a publicly listed company, Ayala Corporation conforms with the legal requirement to have at
least two (2) independent directors or at least twenty percent (20%) of its board size, whichever is
less. 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.
The Company defines an independent director as holding no interests or relationships with the
Corporation that may hinder their independence from the Corporation or Management or would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The company complies with the rules of the Securities & Exchange Commission with regard to the
nomination and election of the independent director.
Board Performance
Regular Board meetings are held at least once a quarter. The Board has separate and independent
access to the Corporate Secretary who, among other functions, 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.
89
In 2007, the Board had five meetings. The record of attendance of the Company’s directors during
the Board meetings held during the year met the Securities and Exchange Commission’s
requirement of more than 50% attendance.
Board Committees
Four committees support the Board in the performance of specific functions and to aid in good
governance.
Executive Committee. The Executive Committee acts in accordance with the authority granted by
the Board, or during the absence of the Board, on specific matters within the competence of the
Board of Directors, except with respect to approval of any action for which shareholders’ approval
is also required; distribution of cash dividends; filling of vacancies in the Board or in the Executive
Committee; amendment or repeal of By-Laws or the adoption of new By-Laws; amendment or
repeal of any resolution of the Board of Directors which by its express terms is not so amendable or
repealable; and the exercise of powers delegated by the Board exclusively to other committees.
Compensation Committee. The Compensation Committee establishes a formal and transparent
procedure for developing a policy on executive remuneration and for fixing the remuneration
packages of corporate officers and directors, and provides oversight over remuneration of senior
management and other key personnel.
Nomination Committee. The Nomination Committee’s main function is to install and maintain a
process to ensure that all directors to be nominated for election at the annual stockholders’ meeting
have all the qualifications and none of the disqualifications for directors as stated in the By-Laws,
the Manual of Corporate Governance of the Company and the pertinent rules of the Securities &
Exchange Commission. Also, the Committee is tasked to review and evaluate the qualifications of
all persons nominated to positions in the Company which require appointment by the Board.
Audit Committee. The Audit Committee oversees Ayala Corporation’s internal control, financial
reporting and risk management processes on behalf of the Board of Directors.
ACCOUNTABILITY AND AUDIT
The Audit Committee provides oversight to external and internal auditors. The role and
responsibilities of the Audit Committee are clearly defined in the Audit Committee Charter while
the internal audit function is governed by a separate Internal Audit Charter.
Chairman and Chief Executive Officer
The Chairman of the Board and Chief Executive Officer (CEO) is Jaime Augusto Zobel de Ayala II
who assumed the position in 2006. Fernando Zobel de Ayala holds the position of President and
Chief Operating Officer (COO). Both the Chairman of the Board/CEO and the President/COO
attend all Annual General Meetings of the shareholders. Decision-making at the board level
adheres to an objective process that does not undermine the independence and integrity of
judgment of each individual director.
MANAGEMENT
Management is primarily 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
these targets.
Director ‘s Executive Compensation
Non-executive directors, defined as members of the Board of Directors who are neither officers nor
consultants of the Company, receive remuneration consisting of a retainer fee and per diem for
each Board and Board committee meeting attended. The said remuneration of non-executive
directors was ratified during the 2003 Annual General Meeting.
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.
Senior Executive Compensation
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
90
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, as well as Officers, is disclosed annually
in the Definitive Information Statement sent to shareholders, together with the Notice of Regular
Annual General Meeting 15 business days prior. The total annual compensation includes the
basic salary and other variable pay (performance bonus and exercise of Stock Option Plan).
Enterprise Risk Management
In line with the corporate governance infrastructure of the Company, a group-wide enterprise risk
management framework was adopted in 2002. A Manual on Risk Management was approved by
the Audit Committee on February 16, 2005, designed primarily 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 identification and assessment of business
risks, development of risk management strategies, assessment/design/implementation of risk
management capabilities, monitoring risks and risk 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. 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 Committee. The Company’s internal auditors monitor the compliance with
Ayala’s risk management policies in order to ensure that an effective control environment exists
within the Ayala Group as a whole.
Independent Public Accountants
The principal accountants and external auditors of the Company is the accounting firm of SyCip,
Gorres, Velayo & Company (SGV & Co.).
The Audit Committee is empowered to independently review the integrity of the Company’s
financial reporting and oversee the independence of the external auditors. The Audit Committee
is given the responsibility for checking all financial reports against compliance with both the
internal financial management handbook and pertinent accounting standards, including regulatory
requirement. It also recommends to the Board and stockholders the appointment of the external
auditors and the fixing of audit fees.
Internal Audit
The Internal Audit Unit provides independent and objective assurance and advisory services to the
Company designed to add value and improve on the organization’s operations. It seeks to
provide reasonable assurance that the Company’s key organizational and procedural controls are
effective, appropriate, and complied with. It is headed by a Chief Audit Executive, who is a
Certified Public Accountant, and reports to the Audit 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 Committee. Special audits are also undertaken when and as necessary.
Compliance Officer
Renato O. Marzan, who is the Company’s General Counsel is the Compliance Officer designated
to ensure adherence to corporate principles and best practices.
The responsibilities of the Compliance Officer include identifying, monitoring, and controlling
compliance risks; operationalizing and monitoring compliance with the provisions and
requirements of the Manual on Corporate Governance; and issuing a yearly certification on the
extent of Ayala Corporation’s compliance with the said Manual.
91
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 is also made annually of the
security ownership of certain record and beneficial owners owning more than 5%, and of directors
and management. This information is contained in the Definitive Information Statement sent to
shareholders.
None of the Company’s directors and management owns 2.0% or more of the outstanding capital
stock of the Company.
There are no cross or pyramid shareholding.
92
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
7-02-2007
Particulars
Mr. Ariston Estrada, Jr., a member of the Management Committee retired from
the said position effective 30 June 2007.
7-27-2007
8-13-2007
Considers the outstanding Common and Preferred “B” shares in determining
the foreign ownership in accordance with existing law.
Reports consolidated net income for the first half of 2007.
8-14-2007
9-10-2007
Approves the early redemption of its 12.677% P7.0 Billion Bonds.
Approves the creation of a share buyback program.
9-20-2007
Declaration and payment of a special cash dividend to all shareholders of
Common shares.
Declaration and payment of the cash dividend of 9.4578% per annum to all
shareholders of Preferred Class B shares.
9-24-2007
IMI a subsidiary seeking to list its shares by way of introduction in the PSE.
9-28-2007
10-02-2007
Files the Registration Statement covering the offering of 5 year Peso Bonds.
The stated use of proceeds of the proposed P5.0Bn bond is to refinance peso
and USD denominated obligations.
10-23-2007
Amends the offering size of the 5 year peso Bonds of P5 Bn with an option to
increase of up to P8 Bn.
The base issue of P5Bn of the Peso Bonds has been subscribed and an
oversubscription of P1Bn has been exercised for a total of P6Bn.
Declaration and payment of the quarterly cash dividends to holders of
Preferred Class B shares.
11-23-2007
12-06-2007
Declaration of regular cash dividend of P2.00 per share corresponding to the
second semester of 2007 to all outstanding common shares.
Set the holding of the Regular Annual Stockholders’ Meeting on 04 April 2008.
93
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
2007 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, 2007 and 2006
Consolidated Statements of Income for the Years Ended December 31, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended
December 31, 2007 and 2006
Consolidated Statements of Cash Flow for the Years Ended December 31, 2007 and 2006
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.
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
2007 Audited Financial Statements
Bank of the Philippine Islands
Globe Telecom, Inc. and Subsidiaries
Manila Water Company, Inc.
95
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 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.
*SGVMC110254*
SGV & CO
SyCip Gorres Velayo & Co.
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
6760 Ayala Avenue
1226 Makati City
Philippines
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, 2007 and 2006, 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, 2007, 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
2007 and a 33.9% interest in 2006, 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
=30,852 million and P
=29,860 million as of
December 31, 2007 and 2006, respectively, and the Company’s equity in the net income of the Bank
of the Philippine Islands and Subsidiaries is stated at P
=3,291 million in 2007, P
=3,300 million in 2006
and P
=3,026 million in 2005.
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.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC110254*
-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, 2007 and 2006, and their financial performance and their cash flows
for each of the three years in the period ended December 31, 2007 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. 0017583, January 3, 2008, Makati City
February 20, 2008
*SGVMC110254*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
December 31
2006
2007
ASSETS
Current Assets
Cash and cash equivalents (Notes 4 and 29)
Short-term investments (Notes 5 and 29)
Accounts and notes receivable - net (Notes 6, 28 and 29)
Inventories (Note 7)
Other current assets (Notes 8 and 29)
Total Current Assets
Noncurrent assets held for sale (Note 14)
Noncurrent Assets
Noncurrent accounts and notes receivable (Notes 6 and 29)
Land and improvements
Investments in associates and jointly controlled entities - net
(Note 9)
Investment in bonds and other securities (Notes 10 and 29)
Investment properties - net (Note 11)
Property, plant and equipment - net (Notes 12 and 26)
Deferred tax assets - net (Note 22)
Pension assets (Note 24)
Intangible assets - net (Notes 13 and 21)
Other noncurrent assets
Total Noncurrent Assets
Total Assets
P
=36,835,549
3,687,606
17,295,926
8,842,535
3,097,620
69,759,236
–
69,759,236
=20,391,301
P
2,927,928
17,469,560
9,391,896
3,961,315
54,142,000
3,658,484
57,800,484
4,010,373
16,200,601
2,519,816
16,587,010
71,560,257
2,492,913
17,416,173
8,492,845
983,565
140,576
3,275,697
2,087,249
126,660,249
P
=196,419,485
68,568,683
3,462,435
16,794,662
9,057,075
1,123,912
202,598
4,429,855
1,785,374
124,531,420
=182,331,904
P
P
=22,261,167
2,634,148
286,050
9,512,760
1,550,482
36,244,607
=18,325,716
P
2,504,007
295,846
9,359,594
1,453,013
31,938,176
–
36,244,607
469,100
32,407,276
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses (Notes 15, 28 and 29)
Short-term debt (Notes 16 and 29)
Income tax payable
Current portion of long-term debt (Notes 16 and 29)
Other current liabilities
Total Current Liabilities
Liabilities directly associated with noncurrent assets
held for sale (Note 14)
(Forward)
*SGVMC110254*
-2December 31
2006
2007
Noncurrent Liabilities
Long-term debt - net of current portion (Notes 16 and 29)
Cumulative redeemable preferred shares (Notes 18 and 29)
Deferred tax liabilities - net (Note 22)
Pension liabilities (Note 24)
Other noncurrent liabilities (Note 17)
Total Noncurrent Liabilities
Total Liabilities
Equity
Equity attributable to equity holders of Ayala Corporation
Paid-up capital (Note 19)
Share-based payments (Note 25)
Cumulative translation adjustments (Note 19)
Retained earnings (Note 19)
Net unrealized gain on available-for-sale financial assets
(Note 10)
Treasury stock (Note 19)
Minority interests
Minority interests - net of interest attributable to
noncurrent assets held for sale
Minority interests attributable to noncurrent assets
held for sale
Total Equity
Total Liabilities and Equity
P
=37,884,705
–
155,756
531,552
6,817,643
45,389,656
81,634,263
=38,517,839
P
2,500,000
443,736
487,726
6,141,065
48,090,366
80,497,642
26,855,394
603,949
(2,297,077)
60,461,246
23,137,948
558,416
(298,310)
51,659,261
1,712,016
(159,693)
87,175,835
2,078,522
(310)
77,135,527
27,609,387
23,568,083
–
27,609,387
114,785,222
P
=196,419,485
1,130,652
24,698,735
101,834,262
=182,331,904
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC110254*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Earnings Per Share Figures)
Years Ended December 31
2006
2007
REVENUE
Sales and services (Notes 11 and 28)
Equity in net income of associates and jointly controlled
entities (Note 9)
Interest income
Other income (Note 20)
COSTS AND EXPENSES
Costs of sales and services (Notes 7, 11, 20 and 28)
General and administrative (Notes 20, 24, 25 and 28)
Interest expense and other financing charges
(Notes 16 and 20)
Other charges (Note 20)
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 22)
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 23)
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
2005
P
=56,578,214
=53,394,230
P
=34,638,421
P
9,708,178
1,693,045
10,728,375
78,707,812
8,252,898
1,520,858
6,998,009
70,165,995
8,202,301
1,753,654
5,948,459
50,542,835
43,169,110
9,498,306
40,857,337
7,708,161
26,170,055
6,011,324
4,120,160
1,569,944
58,357,520
20,350,292
5,024,052
386,919
53,976,469
16,189,526
5,343,433
2,219,300
39,744,112
10,798,723
1,764,984
112,175
1,877,159
1,696,400
(857,122)
839,278
18,378,297
14,312,367
9,959,445
624,788
P
=19,003,085
155,258
=14,467,625
P
130,679
=10,090,124
P
P
=16,197,557
2,805,528
P
=19,003,085
=12,176,771
P
2,290,854
=14,467,625
P
=8,198,004
P
1,892,120
=10,090,124
P
P
=36.63
=28.70
P
=19.80
P
37.80
28.82
19.90
P
=36.46
=28.56
P
=19.72
P
37.62
28.68
19.82
1,979,820
(7,825)
1,971,995
See accompanying Notes to Consolidated Financial Statements.
*SGVMC110254*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands)
Paid-up Capital
(Note 19)
At January 1, 2007
Effect of adoption of Pre-need Rule 31,
Pre-need Uniform Chart of
Accounts by an associate (Note 9)
Adjustments to foreign currency
translation
Changes in fair value of available-forsale financial assets
Transferred to profit and loss
Net income recognized directly in equity
Net income for the year
Total income for the year
Issuance 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 25)
=23,137,948
P
=558,416
P
–
–
–
–
–
–
–
–
–
364,129
(96,267)
–
–
–
–
–
(154,441)
–
–
165,159
–
–
–
3,449,584
–
–
P
=26,855,394
34,815
–
–
–
–
–
P
=603,949
Cumulative
Retained
Translation
Earnings
Adjustments
(Note 19)
(Note 19)
For the year ended December 31, 2007
(P
=298,310)
–
=51,659,261
P
(85,010)
(1,998,767)
–
–
–
(1,998,767)
–
(1,998,767)
–
–
–
–
–
16,197,557
16,197,557
–
–
–
–
–
–
–
–
–
(P
=2,297,077)
–
–
–
(3,860,978)
(3,449,584)
–
–
P
=60,461,246
Net Unrealized
Gain on
Available-forSale Financial
Assets
(Note 10)
Treasury Stock
(Note 19)
Minority
Interests
Total
Equity
=2,078,522
P
(P
=310)
=24,698,735
P
=101,834,262
P
–
–
–
–
–
(358,643)
(2,357,410)
–
–
–
–
–
–
–
34,900
–
(323,743)
2,805,528
2,481,785
–
–
(308,937)
(22,669)
(2,689,016)
19,003,085
16,314,069
209,688
(96,267)
(343,837)
(22,669)
(366,506)
–
(366,506)
–
–
–
–
–
–
–
–
–
–
P
=1,712,016
–
(159,383)
–
–
–
–
(P
=159,693)
–
201
–
–
–
962,291
(533,625)
P
=27,609,387
(85,010)
165,159
35,016
(159,383)
(3,860,978)
–
962,291
(533,625)
P
=114,785,222
*SGVMC110254*
-2-
Paid-up Capital
(Note 19)
At January 1, 2006
Adjustments to foreign currency
translation
Changes in fair value of available-forsale financial assets
Transferred to profit and loss
Net income recognized directly in equity
Net income for the year
Total income for the year
Issuance of shares
Collections of subscriptions receivable
Cost of share-based payments
of Ayala Corporation
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 25)
=16,959,696
P
=655,754
P
–
–
–
–
–
–
–
6,084,791
93,461
–
–
–
–
–
=23,137,948
P
–
–
–
–
–
(227,101)
–
137,427
(7,664)
–
–
–
=558,416
P
Cumulative
Retained
Translation
Earnings
Adjustments
(Note 19)
(Note 19)
For the year ended December 31, 2006
=587,350
P
Net Unrealized
Gain on
Available-forSale Financial
Assets
(Note 10)
Treasury Stock
(Note 19)
Minority
Interests
Total
Equity
=21,589,673
P
=82,783,386
P
=42,513,384
P
=477,839
P
(P
=310)
(885,660)
–
–
–
(146,104)
(1,031,764)
–
–
(885,660)
–
(885,660)
–
–
–
–
–
12,176,771
12,176,771
–
–
–
–
–
–
–
–
–
(24,199)
–
(170,303)
2,290,854
2,120,551
–
–
2,463,364
(886,880)
544,720
14,467,625
15,012,345
5,857,690
93,461
–
–
–
–
–
(P
=298,310)
–
–
(3,030,894)
–
–
=51,659,261
P
2,487,563
(886,880)
1,600,683
–
1,600,683
–
–
–
–
–
–
–
–
=2,078,522
P
–
–
–
–
(P
=310)
–
–
–
1,879,066
(890,555)
=24,698,735
P
137,427
(7,664)
(3,030,894)
1,879,066
(890,555)
=101,834,262
P
*SGVMC110254*
-3-
Paid-up Capital
(Note 19)
At January 1, 2005
Effect of adoption of Philippine
Accounting Standards No. 39
Adjustments to foreign currency
translation
Changes in fair value of available-forsale financial assets
Transferred to profit and loss
Net loss recognized directly in equity
Net income for the year
Total income for the year
Issuance 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
Increase in minority interests
Dividends paid to minority interests
At December 31, 2005
Share-based
Payments
(Note 25)
Cumulative
Translation
Retained
Adjustments
Earnings
(Note 19)
(Note 19)
For the year ended December 31, 2005
Net Unrealized
Gain on
Available-forSale Financial
Assets
(Note 10)
Treasury Stock
(Note 19)
Minority
Interests
Total
Equity
(P
=102)
=19,573,768
P
=72,693,406
P
=16,896,319
P
=397,252
P
=1,160,982
P
=34,665,187
P
=–
P
–
–
–
1,026,230
361,207
–
(59,054)
–
–
(573,632)
–
–
–
(67,674)
(641,306)
–
–
(573,632)
–
(573,632)
–
–
–
–
–
8,198,004
8,198,004
–
–
–
–
–
–
–
–
–
28,740
–
(38,934)
1,892,120
1,853,186
–
–
167,424
(22,052)
(495,934)
10,090,124
9,594,190
57,638
(32,438)
–
–
–
–
–
95,815
(32,438)
–
–
–
–
–
(38,177)
–
–
142,950
–
–
–
–
–
–
=16,959,696
P
153,729
–
–
–
–
=655,754
P
–
–
–
–
–
=587,350
P
–
–
–
(1,376,037)
–
–
=42,513,384
P
138,684
(22,052)
116,632
–
116,632
–
–
–
–
–
–
–
–
=477,839
P
–
–
(208)
–
–
–
(P
=310)
–
–
–
–
1,551,707
(1,329,934)
=21,589,673
P
1,328,383
142,950
153,729
(208)
(1,376,037)
1,551,707
(1,329,934)
=82,783,386
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC110254*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Years Ended December 31
2006
2005
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest and other financing charges - net of amount
capitalized (Notes 16 and 20)
Depreciation and amortization (Note 20)
Cost of share-based payments (Note 25)
Impairment loss on goodwill (Note 20)
Equity in net income of associates and jointly controlled
entities
Gain on sale of assets
Interest income
Other investment income
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
Additions to:
Short-term investments
Investments
Property, plant and equipment (Note 12)
Dividends received from associates and jointly controlled
entities
P
=20,350,292
=16,189,526
P
=10,798,723
P
4,120,160
2,988,879
288,050
662,591
5,024,052
2,590,358
285,431
–
5,343,433
1,714,677
413,815
–
(9,708,178)
(8,844,822)
(1,693,045)
(73,500)
8,090,427
(8,252,898)
(5,796,711)
(1,520,858)
(285,227)
8,233,673
(8,202,301)
(3,971,188)
(1,753,654)
(596,676)
3,746,829
(2,254,055)
1,981,833
863,696
(3,171,691)
(251,543)
(1,777,903)
(3,504,204)
747,372
(581,725)
4,318,671
97,469
105,848
13,203,889
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)
5,168,530
(346,614)
(723,008)
4,507,180
1,797,536
(4,343,896)
(1,649,142)
8,846,005
(388,559)
311,678
–
8,846,005
291,672
(96,887)
241,186
552,864
15,152,209
1,006,583
5,493,837
313,755
7,909,107
527,540
(759,678)
(6,258,142)
(4,368,019)
(2,399,978)
(5,950,008)
(3,450,654)
(527,950)
(2,898,110)
(1,853,821)
8,050,049
4,248,500
4,499,186
(Forward)
*SGVMC110254*
-2Years Ended December 31
2006
2007
Acquisitions through business combinations by a
subsidiary - net of cash acquired (Note 21)
Increase in other noncurrent assets
Cash balance of deconsolidated subsidiaries
Net cash provided by (used in) 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 (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Short-term and long-term debt
Issuance of common shares
Issuance of preferred shares
Proceeds from collections of (additions to)
subscriptions receivable
Payments of short-term and long-term debt
Dividends paid
Redemption of preferred shares (Note 18)
Acquisition of treasury shares (Note 19)
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
2005
(P
=1,641,092)
(10,076)
(81)
(P
=5,632,984)
(661,629)
–
11,865,544
(3,395,797)
1,361,339
624,788
12,490,332
(361,691)
(3,757,488)
2,071
1,363,410
21,742,528
209,687
–
11,532,591
57,690
5,800,000
12,556,123
–
–
(96,267)
(24,827,895)
(4,255,580)
(2,500,000)
(159,383)
93,461
(15,346,903)
(3,781,584)
(2,230,000)
–
(32,438)
(25,497,578)
(2,423,750)
(1,270,000)
–
676,578
4,318,243
589,672
4,234,992
398,984
3,171,745
(P
=326,030)
(631,428)
–
(4,892,089)
949,919
(13,096,914)
–
(4,892,089)
(187,120)
762,799
(271,572)
(13,368,486)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
16,444,248
(3,091,576)
(11,452,212)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR (Note 4)
20,391,301
23,482,877
34,935,089
CASH AND CASH EQUIVALENTS AT
END OF YEAR (Notes 4 and 29)
P
=36,835,549
=20,391,301
P
=23,482,877
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC110254*
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 and principal place of business is at Tower One, Ayala Triangle,
Ayala Avenue, Makati City. The Company is a publicly listed company which is 50.90% owned
by Mermac, Inc., 10.57% owned by Mitsubishi Corporation and the rest by the public.
The Company is the holding company of the Ayala Group (the Group), 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 as of December 31,
2007 and 2006 and for each of the three years in the period ended December 31, 2007 were
endorsed for approval by the Audit Committee on February 14, 2008 and authorized for issue by
the Executive Committee of the Board of Directors (BOD) on February 20, 2008.
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,
and all values are rounded to the nearest thousand pesos (P
=000) except when 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, 2007 and 2006 and for each of the three years in the period ended December 31,
2007. 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.
Subsidiaries 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.
*SGVMC110254*
-2The 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
2006
2007
Real Estate and Hotels:
Ayala Land, Inc. (ALI) and subsidiaries
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)
LiveIt Solutions, Inc. and subsidiaries (LiveIt)
HRMall, Inc.
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)
Ayala International Pte. Ltd. (AIPL)
(incorporated in Singapore) and subsidiaries
AC International Finance Limited (ACIFL)
(Cayman Island Company) and subsidiary
AYC Finance Ltd. (British Virgin Islands
Company)
Michigan Holdings, Inc. (MHI) and subsidiary
Ayala Aviation Corporation
Darong Agricultural and Development
Corporation
PFC Properties, Inc. and subsidiary
53.2*
76.6
57.8
78.9
100.0
100.0
100.0
100.0
100.0
78.8
–
100.0
100.0
78.8
67.9
70.4
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
100.0
99.9
*The Company owns 75.25% of the total common and preferred shares of ALI.
** A subsidiary of ACIFL through AYC Holdings, Ltd.
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). This resulted in the Company
having a direct ownership of 69% in AIVPL with Azalea Technology’s ownership interest in
AIVPL reduced to 31%.
*SGVMC110254*
-3Further, 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.
On June 20, 2007, 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.
On October 16, 2006, the Company entered into a Deed of Assignment with AYC Holdings, Ltd.,
a wholly owned subsidiary of ACIFL, where the Company assigned its 832,343,700 shares in IMI
(with original acquisition cost of P
=520.6 million representing approximately 74.4% of IMI's total
outstanding stock) in exchange for 104,112 shares of AYC Holdings (with par value of
US$100 per share). Further, the Company entered into a Deed of Assignment with ACIFL where
the Company assigned its 104,112 shares in AYC Holdings, Ltd. (at a transfer value of
US$10.4 million) in exchange for 10,411,200 additional shares of ACIFL with a par value of
US$1 per share.
Acquisitions of subsidiaries 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 acquired and liabilities and contingent liabilities assumed in a
business combination are measured initially at their fair value at the acquisition date, irrespective
of the extent of any minority interests.
Any excess of the cost of the business combination over the Group’s interest in the net fair value
of the identifiable assets, liabilities and contingent liabilities is recognized as goodwill.
Any excess of the Group’s interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities over the cost of business combination is recognized in the consolidated
statement of income on the date of acquisition.
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.
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year except as
follows:
Amendments to PFRSs and Philippine Interpretations effective in 2007
The Group has adopted the following new and amended PFRS and Philippine Interpretations
during the year.
·
·
·
PFRS 7, Financial Instruments: Disclosures
PAS 1 Amendment - Presentation of Financial Statements
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
*SGVMC110254*
-4The principal effects of these changes are as follows:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative information about exposure to risks arising from financial
instruments, including specified minimum disclosures about credit risk, liquidity risk and market
risk, including sensitivity analysis to market risk. It replaces disclosure requirements in PAS 32,
Financial Instruments: Disclosure and Presentation and PAS 30, Disclosure in the Financial
Statements of Banks and Similar Financial Institutions. It is applicable to all entities that report
under PFRS.
The Group adopted the amendment to the transitional provisions of PFRS 7, as approved by the
Financial Reporting Standards Council of the Philippines, which gives transitory relief with
respect to the presentation of comparative information for the new risk disclosures about the
nature and extent of risks arising from financial instruments. Accordingly, the Group does not
need to present comparative information for the disclosures required by paragraphs 31- 42 of
PFRS 7, unless the disclosure was previously required under PAS 32. Adoption of PFRS 7
resulted in additional disclosures, which are included throughout the consolidated financial
statements. These disclosures include presenting the different classes of loans and receivables
(see Note 6), rollforward of allowance for doubtful accounts (see Note 6), credit quality of
financial assets (see Note 29), aging of past due but not impaired financial assets (see Note 29),
and sensitivity analysis as to changes in interest and foreign exchange rates (see Note 29).
PAS 1 Amendment - Presentation of Financial Statements
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. The new disclosures are shown in Note 19 to the consolidated financial
statements.
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment (effective for
annual periods beginning on or after November 1, 2006)
The Group adopted the Interpretation beginning January 1, 2007, which prohibits the reversal of
impairment losses on goodwill and AFS equity investments recognized in the interim financial
reports even if impairment is no longer present at the annual balance sheet date. Adoption of the
Interpretation did not have any significant impact on the consolidated financial statements.
Future Changes in Accounting Policies
The Group has not applied the following new and amended PFRS and Philippine Interpretations
which are not yet effective for the year ended December 31, 2007:
PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1,
2009).
PFRS 8 requires a management approach to reporting segment information. PFRS 8 will replace
PAS 14, Segment Reporting, and is required to be adopted only by entities whose debt or equity
instruments are publicly traded, or are in the process of filing with the Securities and Exchange
Commission (SEC) for purposes of issuing any class of instruments in a public market. The
Group will apply PFRS 8 in 2009 and will assess the impact of this Standard on its current
manner of reporting segment information.
*SGVMC110254*
-5PAS 1, Presentation of Financial Statements (Revised) (effective for annual periods beginning on
or after January 1, 2009)
The revised Standard requires that the statement of changes in equity includes only transactions
with owners and all non-owner changes are presented in equity as a single line with details
included in a separate statement. Owners are defined as holders of instruments classified as
equity.
In addition, the amendment to PAS 1 provides for the introduction of a new statement of
comprehensive income that combines all items of income and expenses recognized in the
statement of income together with ‘other comprehensive income’. The revisions specify what is
included in other comprehensive income, such as gains and losses on available-for-sale assets,
actuarial gains and losses on defined benefit pension plans and changes in the asset revaluation
reserve. Entities can 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. The Group
will assess the impact of the Standard on its current manner of reporting all items of income and
expenses.
PAS 23 Amendment - Borrowing Costs (effective for annual periods beginning on or after
January 1, 2009)
The Standard has been amended to require capitalization of borrowing costs directly attributable
to the acquisition, construction or production of 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 amendment, this change in accounting for
borrowing costs shall be accounted for prospectively. 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. The Group does
not expect that the adoption of this Standard will have a significant impact on the consolidated
financial statements.
Philippine Interpretation IFRIC 11, PFRS 2, Group and Treasury Share Transactions (effective
for annual periods beginning on or after March 1, 2007).
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 the entity
chooses or is required to buy those equity instruments (e.g., treasury shares) from another party,
or 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. The Group does not
expect this Interpretation to have a significant impact on the consolidated financial statements.
Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual
periods beginning on or after January 1, 2008).
This Interpretation establishes the accounting to be applied for certain infrastructures that is
constructed, acquired or provided by the grantor for the purposes of meeting the concession.
*SGVMC110254*
-6IFRIC 12 prescribed 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, the Financial Asset Model is used to the extent
of such amount.
This Interpretation becomes applicable for financial years beginning on or after January 1, 2008.
Based on Manila Water Cormpany Inc.’s (MWCI) preliminary assessment, its service concession
agreement with the Metropolitan Waterworks and Sewerage System (MWSS) would qualify
under the Intangible asset model. The adoption of the Interpretation will require MWCI to
recognize the fair value of its right to charge its customers which will result in an increase in asset
and corresponding increase in liabilities. The present value of total estimated concession fee
payments determined at inception and subsequent infrastructure expenditures will form part of the
intangible assets. MWCI will use the straight-line method in amortizing its intangible assets.
Liabilities on concession agreement represent the present value of future payments to MWSS to
cover the latter’s payments of loans availed to fund the construction of such assets. The
Concessionaire’s obligation to pay arises as the debt is amortized by MWSS. Thus, concession
assets and related liabilities refer to the present value at inception of concession agreement of
future debt amortizations. The increase in intangible assets will give rise to a possible increase in
amortization expense.
Based on MWCI’s preliminary assessment, the adoption of IFRIC 12 on January 1, 2008 will
result in an increase in the total assets and total liabilities by P
=2.9 billion and P
=3.5 billion
respectively, and a decrease in the retained earnings as of January 1, 2008 by P
=0.2 billion (net of
tax effect of P
=0.1 billion). The estimated impact on the Company is a decrease in the retained
earnings balance as of January 1, 2008 by P
=0.1 billion.
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (effective for annual periods
beginning on or after July 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 part of the fair value of
the consideration received is allocated to the awards credits and deferred over the period that the
award credits are fulfilled. The Group does not expect this Interpretation to have a significant
impact on the consolidated financial statements as no such scheme currently exists.
*SGVMC110254*
-7Philippine Interpretation IFRIC 14, PAS 19 - Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction (effective for annual periods beginning on or after January 1,
2008).
This Interpretation provides guidance on how to assess the limit on the amount of surplus in a
defined benefit scheme that can be recognized as an asset under PAS 19, Employee Benefits. It
also explains how the pension asset or liability may be affected by a statutory or contractual
minimum funding requirement. The Group does not expect this Interpretation to have a
significant impact on the consolidated financial statements.
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
changes 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 FVPL and other liabilities. The classification depends on the
purpose for which the investments were acquired and whether they are quoted in an active market.
The Group determines the classification of its financial assets at initial recognition and, where
allowed and appropriate, re-evaluates such designation at every reporting date.
Financial instruments are classified as liabilities 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.
*SGVMC110254*
-8For 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, options
pricing models, and other relevant valuation models.
Day 1 profit
Where the transaction price in a non-active market is different to 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” 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.
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 the consolidated
statement of income under “Other income” or “Other charges” account. Interest earned or
incurred is recorded in “Interest income” or “Interest expense and other financing charges”
account while dividend income is recorded when the right of payments has been established.
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 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
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.
*SGVMC110254*
-9Derivative Financial Instruments
The Group uses derivative financial instruments to hedge its risks associated with interest rate and
foreign currency fluctuations. These derivative instruments provide economic hedges under the
Group’s policies but are not designated as accounting hedges. Any gains or losses arising from
changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to
net profit or loss for the year under “Interest income”, “Interest expense and other financing
charges” or “Other income” account. Derivatives are carried as assets when the fair value is
positive and as liabilities when the fair value is negative.
The fair value of forward currency contracts is calculated by reference to current forward
exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap
contracts is determined by reference to market values for similar instruments.
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 fair value through
profit or loss.
The Group’s derivative assets pertain to nondeliverable currency forward contracts and structured
currency options included under “Other current assets” account in the consolidated balance sheet.
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.
The Group’s HTM investments pertain to bonds included under the “Investments in bonds and
other securities” account in the consolidated balance sheet.
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).
*SGVMC110254*
- 10 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” account in the
consolidated statement of income.
The Group’s loans and receivables are included under the “Accounts and notes receivable”
account in the consolidated balance sheet. 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 as 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. AFS investments include equity investments.
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 on available-for-sale financial assets” (net of
tax where applicable) in the consolidated statement of changes in equity.
When the security is disposed of, the cumulative gain or loss previously recognized in equity is
recognized in the consolidated statement of income under the “Other income” or “Other charges”
account. 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 the AFS financial assets is
reported as interest income using the effective interest rate. Dividends earned are recognized
under “Other income” account 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” account 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 the “Investment in bonds and other securities” account 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
Other financial liabilities include short-term and long-term debts. All loans and borrowings are
initially recognized at cost, being the fair value of the consideration received less directly
attributable transaction costs.
*SGVMC110254*
- 11 After initial recognition, short-term and long-term debts are subsequently measured at amortized
cost using the effective interest method. Amortized cost is calculated by taking into account any
issue costs, and any discount or premium on settlement.
Gains and losses are recognized in the consolidated statement of income when the liabilities are
derecognized or impaired, as well as through the amortization process.
Deposits and Retention Payable
Deposits and retention payable are initially measured at fair value. After initial recognition,
deposits and retention 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” in the consolidated balance sheet) and amortized using the straight-line
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.
*SGVMC110254*
- 12 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 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 as industry, 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
*SGVMC110254*
- 13 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” account. 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. Interest continues to be accrued at the
original effective interest rate on the reduced carrying amount of the asset and is recorded as part
of “Interest income” account in the consolidated 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. This is not generally the case with master netting agreements, and the
related assets and liabilities are presented gross in the consolidated balance sheet.
Cumulative Redeemable Preferred Shares
Cumulative redeemable preferred shares that exhibit characteristics of a liability is recognized as
a liability in the consolidated balance sheet. The corresponding dividends on those shares are
charged as interest expense in the consolidated statement of income. Upon issuance, cumulative
redeemable preferred shares are carried as a long-term liability on the amortized cost basis until
extinguished on redemption.
*SGVMC110254*
- 14 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.
*SGVMC110254*
- 15 Investments in Associates and Jointly Controlled Entities
Investments in associates and jointly controlled entities 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 in an associate is accounted for using the equity method from the date on which it
becomes an associate. On acquisition of the investment, any difference between the cost of the
investment and the investor’s share of the net fair value of the associate’s identifiable assets,
liabilities and contingent liabilities is accounted for as goodwill or negative goodwill.
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. Goodwill relating to an associate is
included in the carrying amount of the investment and is not amortized. 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. Unrealized gains arising from intercompany transactions are eliminated to the
extent of the Group’s interest thereon. Unrealized losses are eliminated similarly but only to the
extent that there is no evidence of impairment of the asset transferred. Dividends received are
treated as a reduction of the carrying value of the investments.
The Group discontinues applying the equity method when their investments in investee
companies are reduced to zero. Accordingly, additional losses are not recognized unless the
Group has guaranteed certain obligations of the investee companies. When the investee
companies 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.
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 are as follows:
Land improvements
Buildings
5 years
20-40 years
*SGVMC110254*
- 16 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 gains or losses on the retirement or disposal of an investment
property are 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.
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 using the straight-line basis over the
estimated useful life 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
*SGVMC110254*
- 17 The assets residual values, useful life and depreciation and amortization methods are reviewed
periodically to ensure that the amounts, period and methods 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 life are assessed at the
individual asset level. Intangible assets with finite life are amortized over their useful life.
Periods and method of amortization for intangible assets with finite useful lives are reviewed
annually or earlier when an indicator of impairment exists.
The estimated useful life of intangible assets follows:
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 asset and is
recognized in the consolidated statement of income when the intangible asset is derecognized.
Impairment of Non-financial Assets
The Group assesses as at 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.
*SGVMC110254*
- 18 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
companies. 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.
Goodwill
Goodwill acquired in a business combination is initially measured at cost being the excess of the
cost of the business combination over the Group’s interest in the net fair value of the acquiree’s
identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is
measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment,
annually or more frequently if events or changes in circumstances indicate that the carrying value
may be impaired. Goodwill is included in the “Intangible assets” account in the consolidated
balance sheet.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the Group’s cash-generating units, or groups of cashgenerating units, that are expected to benefit from the combination’s synergies. Impairment is
determined by assessing the recoverable amount of the cash-generating unit (group of cashgenerating units), to which the goodwill relates. Where the recoverable amount of the cashgenerating unit is less than the carrying amount, an impairment loss is recognized. Where
goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed
of, the goodwill associated with the operation disposed of is included in the carrying amount of
the operation when determining the gain or loss on disposal of the operation. Goodwill disposed
of in this circumstance is measured on the basis of the relative values of the operation disposed of
and the portion of the cash-generating unit retained.
*SGVMC110254*
- 19 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 obligation 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 Shares
Own equity instruments which are reacquired 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 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.
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 in the “Accounts payable and accrued expenses” account 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.
Rent income from investment properties is recognized in the consolidated statement of income
either on a straight-line basis over the lease term, or based on a certain percentage of the gross
revenue of the tenants, as provided under the terms of the lease contract.
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.
*SGVMC110254*
- 20 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 internet operations are recognized when services are rendered and goods are
delivered.
Management fees from administrative services, property management and other fees are
recognized when services are rendered.
Interest is recognized as it accrues (using the effective interest method that is the rate that exactly
discounts estimated future cash receipts through the expected life of the financial instrument to
the net carrying amount of the financial asset).
Gain or loss is recognized in the 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.
Dividend income is recognized when the Group’s right to receive payment is established.
Leases
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.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset
are classified as operating leases. Fixed lease payments are recognized on a straight-line basis
over the lease term.
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).
*SGVMC110254*
- 21 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 in the “Cost of sales and services” account 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, land and
improvements, 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.
Interest expense on loans is recognized using the effective interest rate method over the term of
the loans.
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.
The liability recognized in the consolidated balance sheet in respect of the defined benefit 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 discounting the estimated future cash outflows using risk-free interest rates that
have terms to maturity approximating the terms of the related pension liability.
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.
*SGVMC110254*
- 22 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 or losses are recognized over the expected average remaining working lives of the
employees participating in the plans.
Income Taxes
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 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 non-taxable 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.
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 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 the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the
period when the asset is realized or the liability is settled, based on tax rates and tax laws that
have been enacted or substantially enacted at the balance sheet date.
Income tax relating to items recognized directly in equity is recognized in equity and not in the
consolidated statement of income.
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.
*SGVMC110254*
- 23 Foreign Currency Translation/Transactions
The functional and presentation currency of Ayala Corporation and its Philippine subsidiaries
(except 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. Non-monetary 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. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange rates at the date
when the fair value was determined.
The functional currency of BHL, IMI and AIPL 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 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.
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. The fair value is determined by using
the Black-Scholes model, further details of which are provided in Note 25 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 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 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.
*SGVMC110254*
- 24 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.
The dilutive effect of outstanding options is reflected as additional share dilution in the
computation of diluted earnings per share (see Note 23).
Employee share purchase plans
The Company and some of its subsidiaries have employee share purchase plan (ESOWN) which
allows the grantees to purchase the Company 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 applicable to common
stockholders 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 applicable to common stockholders by the
weighted average number of common shares issued and outstanding during the year after giving
effect to assumed conversion of dilutive potential common shares.
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 26 to the consolidated financial statements.
*SGVMC110254*
- 25 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.
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 financial statements are based upon management’s evaluation of relevant
facts and circumstances as of the date of the 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 which are leased out on operating leases.
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 appreciation 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.
*SGVMC110254*
- 26 Distinction between 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).
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the balance sheet
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 judgments may include considerations of liquidity and model
inputs such as correlation and volatility for longer dated derivatives.
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.
*SGVMC110254*
- 27 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.
Revenue and cost recognition
ALI’s revenue recognition policies require management to make use of estimates and assumptions
that may affect the reported amounts of revenues and costs. ALI’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 doubtful accounts
The Group maintains allowance for doubtful accounts at a level 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, 2007 and 2006, allowance for doubtful accounts amounted to P
=442.4 million
and P
=441.6 million, respectively (see Note 6). Accounts and notes receivables, net of allowance
for doubtful accounts, amounted to P
=21.3 billion and P
=20.0 billion as of December 31, 2007 and
2006, respectively (see Note 6).
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.
*SGVMC110254*
- 28 As described in the accounting policy, the Group estimates the recoverable amount as the higher
of the net selling price and value in use. For goodwill, this requires an estimation of the
recoverable amounts which is the net selling price or value in use of the cash-generating units to
which the goodwill is allocated. 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.
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
=100.7 billion and P
=98.9 billion as of
December 31, 2007 and 2006, 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.
Investment properties, property, plant and equipment and intangible assets amounted to
=29.2 billion and P
P
=30.3 billion as of December 31, 2007 and 2006, 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, 2007 and 2006, the Group has net deferred tax assets amounting to
=983.6 million and P
P
=1.1 billion, respectively. As of December 31, 2007 and 2006, the Group has
net deferred tax liabilities amounting to P
=155.8 million and P
=443.7 million, respectively.
*SGVMC110254*
- 29 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
=288.0 million in 2007, P
P
=285.4 million in 2006 and P
=413.8 million in 2005.
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 24 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 24 to the consolidated financial statements for the related balances.
4. Cash and Cash Equivalents
This account consists of the following:
Cash on hand and in banks
Cash equivalents
2006
2007
(In Thousands)
=3,283,299
P
P
=5,419,829
17,108,002
31,415,720
=20,391,301
P
P
=36,835,549
Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents are short-term
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 investment rates.
5. Short-term Investments
This account consists of the following:
2006
(In Thousands)
=2,927,928
P
P
=2,287,606
–
1,400,000
=2,927,928
P
P
=3,687,606
2007
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.
*SGVMC110254*
- 30 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:
2006
2007
(In Thousands)
Trade:
Real estate
Electronics manufacturing
Automotive
Information technology and business process
outsourcing
International and others
Advances to other companies
Related parties (see Note 28)
Advances to contractors
Dividends
Others
Less allowance for doubtful accounts
Less noncurrent portion
P
=9,412,522
2,972,599
779,768
=7,817,166
P
3,233,505
526,212
362,238
66,943
2,231,057
2,395,624
1,394,106
–
2,133,846
21,748,703
442,404
21,306,299
4,010,373
P
=17,295,926
253,064
64,151
2,280,965
1,935,112
675,504
1,262,538
2,382,796
20,431,013
441,637
19,989,376
2,519,816
=17,469,560
P
The classes of trade receivables of the Group are as follows:
Real estate
Real estate receivables are receivables relating to the sale of large-scale fully integrated
residential and commercial communities, residential and commercial lots and residential
condominiums and office buildings; and the development and leasing of retail and office space. It
also includes receivables from sale of industrial and business parks; development and sale of
upper middle-income and affordable housing; hotel, cinema and theater operations; and
construction and property management.
The sales contract receivables, 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 45 days from
invoice date.
*SGVMC110254*
- 31 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, on-line
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.
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 and advances to other companies are due and demandable.
Advances to contractors
Advances to contractors are recouped upon every progress billing payment depending on the
percentage of accomplishment.
*SGVMC110254*
- 32 Movements in the allowance for doubtful accounts are as follows (in thousands):
At January 1
Provisions during the year
Translation adjustments
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
Translation adjustments
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
Electronics
Real Estate Manufacturing
P
=106,976
P
=20,449
36,065
31,003
–
(6,167)
(22,818)
(13,308)
(715)
(797)
P
=119,508
P
=31,180
P
=32,119
P
=31,180
87,389
–
P
=119,508
P
=31,180
P
=32,119
Real Estate
=107,973
P
–
(997)
–
=106,976
P
=19,587
P
87,389
=106,976
P
=19,587
P
P
=31,180
Electronics
Manufacturing
=23,767
P
1,400
(1,705)
(3,013)
–
=20,449
P
=20,449
P
–
=20,449
P
=20,449
P
Automotive
P
=32,925
–
–
(6,818)
–
P
=26,107
P
=–
26,107
P
=26,107
P
=–
Automotive
=33,342
P
–
–
–
(417)
=32,925
P
=–
P
32,925
=32,925
P
=–
P
2007
Information
Technology
and BPO
P
=14,045
4,216
–
–
–
P
=18,261
P
=18,261
–
P
=18,261
International
and Others
P
=61,142
18
–
–
–
P
=61,160
P
=60,134
1,026
P
=61,160
P
=18,261
P
=60,134
2006
Information
Technology
and BPO
=10,560
P
3,485
–
–
–
=14,045
P
=14,045
P
–
=14,045
P
=14,045
P
International
and Others
=62,027
P
–
–
–
(885)
=61,142
P
=61,142
P
–
=61,142
P
=61,142
P
Others
P
=206,100
56,399
(543)
(75,411)
(357)
P
=186,188
P
=185,462
726
P
=186,188
Total
P
=441,637
127,701
(6,710)
(118,355)
(1,869)
P
=442,404
P
=327,156
115,248
P
=442,404
P
=232,256
P
=373,950
Others
=162,914
P
74,898
(220)
(13,987)
(17,505)
=206,100
P
=205,374
P
726
=206,100
P
Total
=400,583
P
79,783
(1,925)
(17,997)
(18,807)
=441,637
P
=320,597
P
121,040
=441,637
P
=205,374
P
=320,597
P
*SGVMC110254*
- 33 As of December 31, 2007 and 2006, certain real estate receivables with a nominal amount of
=5.7 billion and P
P
=4.7 billion, 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
=768.7 million and P
=695.9 million
as of December 31, 2007 and 2006, respectively.
7. Inventories
This account consists of the following:
2006
2007
(In Thousands)
Real estate inventories:
Subdivision land for sale
At cost
At NRV
Condominium, residential and commercial
units for sale - at cost
Materials, supplies and others - at NRV (cost of
=1,301,195 in 2007 and P
P
=1,142,846 in 2006)
Work-in-process - at cost
Vehicles - at cost
Finished goods - at cost
Parts and accessories - at NRV (cost of P
=146,468 in
2007 and P
=110,386 in 2006)
P
=3,487,850
455,100
=3,798,338
P
455,100
2,341,030
3,070,123
1,196,332
294,558
719,766
228,151
1,029,214
482,824
256,041
216,587
119,748
P
=8,842,535
83,669
=9,391,896
P
Inventories recognized as cost of sales amounted to P
=34.4 billion and P
=33.8 billion in 2007 and
2006, respectively, and were included under costs of sales and services in the consolidated
statement of income.
8. Other Current Assets
This account consists of the following:
2006
(In Thousands)
=534,398
P
P
=1,116,792
2,302,694
622,097
479,748
621,653
–
143,322
644,475
593,756
=3,961,315
P
P
=3,097,620
2007
Prepaid expenses
FVPL financial assets
Value-added input tax
Derivative assets
Others
*SGVMC110254*
- 34 FVPL financial assets consist of:
2006
(In Thousands)
=1,951,090
P
P
=318,018
351,604
304,079
=2,302,694
P
P
=622,097
2007
Government securities
Investment securities
Government securities pertain to treasury bonds and treasury bills that have a yield to maturity of
5.7% and 5.1% to 5.6% in 2007 and 2006, respectively. The Group recognized unrealized gain
on these government securities amounting to P
=18.0 million and P
=43.8 million in 2007 and 2006,
respectively.
As of December 31, 2007 and 2006, investment securities have a fair value of US$7.4 million and
US$7.3 million, respectively. Investment securities include the Company’s investment in The
Rohatyn Group (TRG) Allocation LP. TRG Allocation LP’s underlying asset is that of a fund
that invests primarily in emerging market securities, including debt, equities and currencies.
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 which
will mature on October 30, 2008. Fair value gains amounted to P
=59.02 million. IMI has an
outstanding structured currency option with a notional amount of US$11.1 which will mature by
December 31, 2008. Fair value gains amounted to P
=84.3 million.
Fair Value Changes on Derivatives
The net movements in fair value changes of the Group’s derivative instruments in 2007 are as
follows (amounts in thousands):
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
Gain
=–
P
227,841
227,841
84,519
=143,322
P
9. Investments in Associates and Jointly Controlled Entities
This account consists of the following:
Acquisition cost
Accumulated equity in net income
Cumulative translation adjustments
2006
2007
(In Thousands)
=49,424,793
P
P
=52,185,116
17,226,423
18,035,250
1,917,467
1,339,891
=68,568,683
P
P
=71,560,257
*SGVMC110254*
- 35 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
2006
2007
Domestic:
Bank of the Philippine Islands and subsidiaries (BPI)
Globe Telecom, Inc. and subsidiaries (Globe)*
Manila Water Company, Inc. (MWCI)*
eTelecare Global Solutions, Inc. (eTelecare)
Emerging City Holdings, Inc. (ECHI)*
Cebu Holdings, Inc. and subsidiaries (CHI)
North Triangle Depot Commercial Corporation
(NTDCC)
Philwater Holdings Company, Inc. (Philwater)*
Berkshires Holdings, Inc. (BHI)*
Bonifacio Land Corporation
Asiacom Philippines, Inc. (Asiacom)*
Alabang Commercial Corporation (ACC)*
ALI Property Partners Holdings Corporation
(APPHC)*
Foreign:
Arch Asian Partners L.P.
Glory High Investments Ltd. (Glory High)
Arch Capital Management Co. Ltd. (ARCH Capital)*
Others
Carrying Amounts
2006
2007
(In Millions)
=29,860
P
P
=30,852
22,606
21,461
2,576
2,921
–
2,753
2,233
2,485
1,724
1,810
33.5**
33.3
30.0**
22.2**
50.0
47.2
33.9**
34.3
30.0**
–
50.0
47.2
49.0
60.0
50.0
8.0
60.0
50.0
49.0
60.0
50.0
8.0
60.0
50.0
1,541
1,110
1,065
934
794
573
1,044
947
957
855
747
491
60.0
60.0
238
130
894
563
2
1,564
P
=71,560
–
–
3,271
1,128
=68,569
P
19.4**
40.0
42.1**
Various
–
–
55.7**
Various
* Jointly controlled entities.
** Effective ownership interest of the Company.
The fair value of investments in associates for which there are published price quotations
amounted to P
=61,587.9 million and P
=61,180.1 million as of December 31, 2007 and 2006,
respectively.
Financial information on significant investees (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
2007
P
=637,285
566,154
1,120
18,950
13,604
18,311
2006
=583,133
P
517,646
1,048
19,196
10,641
16,663
10,012
214
9,040
154
3.78
3.78
3.34
3.34
*SGVMC110254*
- 36 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
MWCI
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Redeemable preferred stock
Revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
2007
P
=18,740
97,880
116,621
27,600
33,604
61,204
68,042
47,991
13,277
2006
=24,215
P
100,365
124,580
25,758
41,874
67,632
62,955
45,357
11,755
100.07
99.58
88.56
88.32
2007
P
=4,122
20,313
24,435
3,708
7,363
11,071
–
7,825
4,515
2,419
2006
P7,496
=
16,766
24,263
4,399
7,990
12,389
200
6,785
4,559
2,394
1.06
1.06
1.05
1.05
The following significant transactions affected the Group’s investment in its investees:
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.
In 2006, the Company received 20% stock dividends from its investment in BPI.
*SGVMC110254*
- 37 Investment in Globe
In 2005, Globe offered to purchase one share for every fifteen shares (1:15) of its outstanding
common stock from all stockholders of record as of February 10, 2005 at P
=950.00 per share. The
buyback program allowed Globe to purchase up to 9,326,924 shares representing 6.67% of its
outstanding common shares. Each shareholder was entitled to tender a proportionate number of
shares at the 1:15 ratio for purchase by Globe upon and subject to the terms and conditions of the
tender offer. The Company participated in the buyback program up to the number of shares it was
allowed to tender. The Company also holds 60% of Asiacom Philippines, Inc., which owns
158,515,021 Globe preferred shares. The Company does not exercise control over Asiacom since
it is a joint venture with Singapore Telecom Inc.
Investment in eTelecare
In 2007, LiveIt acquired an additional 3.9 million common shares at a cost of P
=1.9 billion
increasing its ownership interest in eTelecare from 11.2% to 22.2%. LiveIt accounted for its
investment in eTelecare using the equity method from the date that eTelecare became an
associate. In prior years, the investment in eTelecare amounting to P
=827.2 million is presented as
part of “Investment in bonds and others securities” in the consolidated balance sheet (see Note
10).
Investment in NTDCC
In 2004, ALI acquired an additional 30.89% interest in NTDCC in exchange for ALI’s interest in
two companies valued at P
=320.1 million and cash amounting to P
=280.0 million. ALI infused
additional cash in NTDCC amounting to P
=112.0 million for an additional 1.85% equity interest in
the latter.
A series of capital calls were made by NTDCC amounting to P
=484.8 million in 2007.
NTDCC was granted development rights by MRT Development Co. to construct and operate a
commercial center under certain terms and conditions until the end of a 50-year lease term
renewable for another 25 years. NTDCC officially started the construction of the shopping center
in 2005 and became operational on May 16, 2007.
Investment in Philwater
On December 23, 2004, the Company entered into an agreement with Philwater to assign and
transfer its 200.0 million participating preferred shares of MWCI in exchange for 60% ownership
or 200.0 million common shares of Philwater. The assignment of shares became effective on
January 31, 2005 when the SEC approved the increase in the authorized capital stock of Philwater
and the assignment as payment by the Company of its subscription to such increase. The
Company does not exercise control over Philwater since it is a joint venture with United Utilities
Pacific Holdings BV.
Investment in APPHC
In 2006, ALI signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments
Ltd. (FIL) to jointly develop a BPO office building in Dela Rosa Street and to purchase the
existing PeopleSupport Building.
*SGVMC110254*
- 38 APPHC, the newly formed joint-venture company, is 60% owned by ALI. The remaining 40%
interest is split evenly between MIL and FIL. APPHC is jointly controlled by ALI, MIL, and FIL.
ALI has contributed a total capital of P
=232.7 million as of December 31, 2007.
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 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, 2007, the Company (through Fine State) and ALI
(through Green Horizon) owned a combined interest in ARCH Capital of 50%.
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.
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.
Investment in Glory High
In 2007, Fine State, a wholly owned subsidiary of Bestfull Holdings, Ltd., through Glory High
entered into a consortium with ARCH Fund and certain Macau/Hong Kong investors-developers
to develop an upper middle income residential community in Macau (Macau Project). As of
December 31, 2007, total investment made by Fine State (through Glory High) to the Macau
Project amounted to US$13.6 million.
The excess of cost of investments over the Group’s equity in the net assets of their investees
accounted for under the equity method amounted to P
=10.8 billion and P
=10.9 billion as of
December 31, 2007 and 2006, respectively.
*SGVMC110254*
- 39 -
10. Investments in Bonds and Other Securities
This account consists of investments in:
2006
2007
(In Thousands)
AFS equity investments
Quoted
Unquoted
HTM investments
Bonds
P
=2,166,168
258,798
2,424,966
=2,373,486
P
961,374
3,334,860
67,947
P
=2,492,913
127,575
=3,462,435
P
The quoted 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.
Unquoted equity investments classified as AFS are carried at cost less any accumulated
impairment losses, as their fair values cannot be reliably measured. As of December 31, 2006, the
unquoted equity investments include an 11% minority stake in eTelecare. In 2007, the 11% stake
in eTelecare, which has increased to a 22% stake, has been reclassified to “Investment in
associates and jointly controlled entities” account (see Note 9). Unquoted investments in shares
of stock 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.
As of December 31, 2006, the Company holds 124,137,930 MWCI preferred shares amounting to
=124.1 million. On September 28, 2007, MWCI redeemed all of the preferred shares.
P
As of December 31, 2007, HTM investments pertain to fixed rate treasury notes that will mature
on February 25, 2009 and bear effective interest rate of 11.4%. In prior years, HTM investments
include investment in Globe Telecom bonds that will mature in 2012 and bear effective interest
rate of 9.1%. Such investment was redeemed in 2007.
The rollforward of unrealized gain on AFS financial assets is as follows:
Balance at beginning of year
Gain (loss) recognized in equity
Gain removed from equity and recognized in profit
and loss
Balance at end of year
2006
2007
(In Thousands)
=477,839
P
P
=2,078,522
2,487,563
(343,837)
(22,669)
P
=1,712,016
(886,880)
=2,078,522
P
*SGVMC110254*
- 40 -
11. Investment Properties
The movements of investment properties follow:
Cost
At January 1
Additions
Transfers
Disposals
At December 31
Accumulated depreciation and amortization
and impairment losses
At January 1
Depreciation and amortization (see Note 20)
Reversal of impairment loss
Disposals
At December 31
Net book value
2007
2006
(In Thousands)
P
=21,523,096
929,835
1,149,756
(906,248)
22,696,439
=21,083,187
P
547,476
649,594
(757,161)
21,523,096
4,728,434
881,546
(120,717)
(208,997)
5,280,266
P
=17,416,173
4,071,348
734,332
(3,584)
(73,662)
4,728,434
=16,794,662
P
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 fair value of the investment properties has been determined based on valuations performed by
independent professional qualified appraisers. The fair value represents the amount at which the
assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing
seller in an arm’s length transaction at the date of valuation. The aggregate fair value of the
Group’s investment properties amounted to P
=123.8 billion in 2007 and P
=124.9 billion in 2006.
The value of the land and condominium units was arrived at using the Market Data Approach. In
this approach, the value of the land and condominium units is based on sales and listings of
comparable property registered within the vicinity. The technique of this approach requires the
establishment of comparable property by reducing reasonable comparative sales and listings to a
common denominator. This is done by adjusting the differences between the subject property and
those actual sales and listings regarded as comparable. The properties used as basis of comparison
are situated within the immediate vicinity of the subject property.
Consolidated rental income from investment properties amounted to P
=5.5 billion in 2007,
=5.3 billion in 2006 and P
P
=4.2 billion in 2005. Consolidated direct operating expenses arising
from the investment properties amounted to P
=2.4 billion in 2007, P
=2.1 billion in 2006 and P
=2.0
billion in 2005.
*SGVMC110254*
- 41 In 2007, ALI wrote-off investment properties (with net book value of P
=72.0 million) which were
damaged during the Glorietta 2 explosion and other investment properties connected to the Ayala
Center redevelopment amounting to P
=141.9 million.
12. Property, Plant and Equipment
The movements in property, plant and equipment follow:
2007
Cost
At January 1
Additions
Disposals
Transfers
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year
Disposals
At December 31
Net book value
Land,
Buildings and
Improvements
(see Note 16)
Machinery
and
Equipment
(see Note 27)
Hotel
Property and
Equipment
(see Note 16)
P
= 3,435,033
141,277
(190,745)
22,042
3,407,607
P
= 6,327,518
885,535
(156,141)
(381,473)
6,675,439
P
= 2,702,209
29,511
(38,651)
–
2,693,069
P
= 2,068,901
156,172
(119,797)
(119,468)
1,985,808
P
= 937,686
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
P
= 1,647,477
893,756
(305,283)
3,372,359
P
= 3,303,080
111,231
(37,952)
1,399,430
P
= 1,293,639
318,620
(83,395)
1,515,742
P
= 470,066
137,584
(68,312)
615,888
P
= 424,134
Land,
Buildings and
Improvements
(see Note 16)
Machinery
and
Equipment
(see Note 27)
Hotel
Property and
Equipment
(see Note 16)
=3,653,294
P
1,297,867
Furniture,
Fixtures and Transportation
Equipment
Equipment
(In Thousands)
Constructionin-Progress
P
= 952,377
1,904,972
(23,802)
(1,479,098)
1,354,449
–
–
–
–
P
= 1,354,449
Total
P
= 16,423,724
3,302,179
(610,924)
(1,958,585)
17,156,394
7,366,649
1,819,177
(522,277)
8,663,549
P
= 8,492,845
2006
Cost
At January 1
Additions
Addition through business
combination
Disposals
Transfers
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year
Disposals
Transfers
At December 31
Net book value
=2,807,882
P
185,800
Furniture,
Fixtures and
Equipment
(In Thousands)
Transportation
Equipment
Constructionin-Progress
Total
=4,824,337
P
264,260
=3,532,735
P
415,071
=824,329
P
227,115
=854,930
P
1,060,541
=16,497,507
P
3,450,654
–
(247,344)
688,695
3,435,033
–
(105,064)
1,481,421
6,327,518
–
(31,218)
(2,355,170)
2,702,209
1,120
(18,563)
(1,861,462)
2,068,901
1,353
(115,111)
–
937,686
1,257,544
1,933,196
1,850,516
1,026,467
512,230
205,222
(33,287)
–
1,429,479
=2,005,554
P
917,909
(67,219)
–
2,783,886
=3,543,632
P
177,105
(25,453)
(676,017)
1,326,151
=1,376,058
P
257,196
(3,146)
–
1,280,517
=788,384
P
123,989
(89,603)
–
546,616
=391,070
P
–
(4,846)
(958,248)
952,377
–
–
–
–
–
=952,377
P
2,473
(522,146)
(3,004,764)
16,423,724
6,579,953
1,681,421
(218,708)
(676,017)
7,366,649
=9,057,075
P
Depreciation and amortization expense on property, plant and equipment amounted to
=1,819.2 million in 2007, P
P
=1,681.4 million in 2006 and P
=1,127.7 million in 2005 (see Note 20).
*SGVMC110254*
- 42 As of December 31, 2007, the Group has commitments of P
=1.9 billion relating to the completion
of the construction-in-progress projects of ALI.
13. Intangible Assets
The movements in intangible assets follow:
Cost
At January 1
Addition through business
combination (see Note 21)
Additions during the year
Exchange differences
At December 31
Accumulated amortization
and impairment loss
At January 1
Amortization (see Note 20)
Impairment loss (see Note 20)
Exchange differences
At December 31
Net book value
Cost
At January 1
Addition through business
combination (see Note 21)
Exchange differences
At December 31
Accumulated amortization
and impairment loss
Amortization (see Note 20)
Exchange differences
At December 31
Net book value
Goodwill
Customer
Relationships
Order
Backlog
2007
Unpatented
Technology
(In Thousands)
Developed
Software
Licenses
Total
P
=3,493,437
P
=1,035,092
P
=4,928
P
=4,928
P
=24,526
P
=–
P
=4,562,911
317,100
278
(546,577)
3,264,238
–
–
662,591
–
662,591
P
=2,601,647
–
12,000
(110,738)
936,354
–
–
(800)
4,128
–
–
(800)
4,128
127,142
320,923
–
(33,578)
414,487
P
=521,867
4,928
–
–
(800)
4,128
P
=–
986
926
–
(260)
1,652
P
=2,476
2006
Order
Unpatented
Backlog
Technology
(In Thousands)
–
–
(4,214)
20,312
–
11,551
–
–
11,551
P
=8,761
–
140,946
–
140,946
317,100
153,224
(663,129)
4,370,106
–
–
–
–
–
P
=140,946
133,056
333,400
662,591
(34,638)
1,094,409
P
=3,275,697
Goodwill
Customer
Relationships
=2,300,742
P
=684,861
P
=5,309
P
1,192,695
–
3,493,437
399,380
(49,149)
1,035,092
–
(381)
4,928
–
(381)
4,928
24,526
–
24,526
1,616,601
(49,911)
4,562,911
–
–
–
=3,493,437
P
132,354
(5,212)
127,142
=907,950
P
5,130
(202)
4,928
=–
P
1,026
(40)
986
=3,942
P
–
–
–
=24,526
P
138,510
(5,454)
133,056
=4,429,855
P
=5,309
P
Developed
Software
Total
=–
P
=2,996,221
P
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.
*SGVMC110254*
- 43 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”).
The results of MPVI for 2006 and 2005 are presented below:
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
2006
2005
(In Thousands)
=733,261
P
=673,147
P
12,871
12,177
746,132
685,324
339,457
304,054
102,446
102,673
23,475
42,661
39,527
47,283
85,969
57,974
590,874
554,645
=155,258
P
=130,679
P
The major classes of assets and liabilities of MPVI and Hermill classified as held for sale as of
December 31, 2006 are as follows:
At Carrying
Amounts
(In Thousands)
ASSETS
Cash
Accounts and notes receivable - net
Inventories
Other current assets
Investment in joint venture
Property and equipment
Deferred tax assets
Other noncurrent assets
Noncurrent assets held for sale
=324,362
P
44,382
4,407
5,446
1,574,167
1,679,153
22,672
3,895
=3,658,484
P
*SGVMC110254*
- 44 At Carrying
Amounts
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
=145,269
P
45,167
139,821
138,843
=469,100
P
Long-term debt comprises a fixed rate $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:
2006
2005
2007
(In Thousands, except EPS figures)
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
P
=624,788
=155,258
P
=130,679
P
139,982
484,806
108,681
46,577
91,475
39,204
413,990
1,978
413,045
2,029
412,057
1,668
415,968
P
=1.17
P
=1.17
415,074
=0.11
P
=0.11
P
413,725
=0.10
P
=0.09
P
15. Accounts Payable and Accrued Expenses
This account consists of the following:
Accounts payable
Accrued expenses
Dividends payable
Interest payable
Related parties (see Note 28)
Accrued personnel costs
Taxes payable
Retention payable
Accrued utilities
2006
2007
(In Thousands)
=11,505,755
P
P
=13,289,481
4,654,567
6,558,775
964,931
1,213,727
824,086
579,886
132,204
297,786
118,906
223,887
29,697
38,682
75,985
32,577
19,585
26,366
=18,325,716
P
P
=22,261,167
*SGVMC110254*
- 45 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.
16. Short-term and Long-term Debt
Short-term debt consists of:
Philippine peso debt - with interest rates ranging
from 3.4% to 9.0% per annum in 2007 and 6.1%
to 7.8% per annum in 2006
Foreign currency debt - with interest rates ranging
from 3.1% to 6.4% per annum in 2007 and 4.1%
to 6.4% per annum in 2006
2007
2006
(In Thousands)
P
=2,243,900
=1,688,220
P
390,248
P
=2,634,148
815,787
=2,504,007
P
The Philippine peso debt consists mainly of ALI and its subsidiaries’ bank loans of
=1,613.0 million and P
P
=1,556.0 million as of December 31, 2007 and 2006, respectively. These
are unsecured peso-denominated short-term borrowings with interest rates ranging from 5.5% to
7.9% per annum in 2007 and 6.1% to 7.6% per annum in 2006.
The foreign currency debt consists mainly of IMI’s loans from various banks with interest rates
ranging from 3.13% to 3.42% in 2007 and 4.15% to 4.45% in 2006 and have maturity dates of 7
to 30 days from date if issue.
In 2005, IMI obtained an US$80.0 million syndicated bridge loan facility from a foreign bank to
finance the acquisition of the shares of Speedy-tech Electronics Ltd. (STEL). The loan is due
within one year, with an interest rate per annum equal to the aggregate of 1.25% plus US$
LIBOR, extendable by another year subject to the agreement between IMI and the foreign bank.
IMI paid the loan when it matured in 2006.
Long-term debt consists of:
2006
2007
(In Thousands)
The Company:
Bank loans - with interest rates ranging from
4.5% to 5.6% per annum in 2007 and 5.3% to
11.0% per annum in 2006 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
P
=7,129,091
=6,294,697
P
10,680,000
7,190,000
(Forward)
*SGVMC110254*
- 46 2006
2007
(In Thousands)
Bonds
Due 2012
Due 2009
Syndicated term loans with interest rates ranging
from 10.6% to 12.0% per annum and varying
maturity dates up to 2007
Subsidiaries:
Loans from banks and other institutions:
Foreign currency - with interest rates ranging
from 6.0% to 15% per annum in 2007 and
5.9% to 12.8% per annum in 2006
Philippine peso - with interest rates ranging
from 5.0% to 20% per annum in 2007 and
7.8% to 12.0% per annum in 2006
Bonds
Due 2007
Due 2008
Due 2009
FXCNs
8.125% Guaranteed Euro Notes
Less current portion
P
=6,000,000
–
P–
=
7,000,000
–
23,809,091
1,250,000
21,734,697
9,639,934
8,154,932
2,866,532
2,658,451
–
2,000,000
80,470
3,580,000
5,421,438
23,588,374
47,397,465
9,512,760
P
=37,884,705
3,000,000
2,000,000
42,960
3,580,000
6,706,393
26,142,736
47,877,433
9,359,594
=38,517,839
P
The Company
While the Company’s long-term loans are generally 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
=1,809.9 million and P
=2,794.2 million as
of December 31, 2007 and 2006, respectively, in accordance with BSP regulations.
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.
As of December 31, 2007, the Company has undrawn borrowing facilities from local banks
amounting to P
=1.5 billion.
In 2007 and 2005, the Company issued FXCNs consisting of 5- and 7-year notes to various
financial institutions with fixed interest rates of 6.7% per annum in 2007 and 8.1% to 10.4% per
annum in 2005.
*SGVMC110254*
- 47 On November 22, 2007, the Company issued 6.8% Fixed Rate Bonds with an aggregate principal
amount of P
=6.0 billion to mature in 2012. Prior to maturity, the Company may redeem in whole
the 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 2004, the Company issued 12.7% Fixed Rate Bonds with an aggregate principal amount of
=7.0 billion to mature in 2009. Prior to maturity, the Company may redeem outstanding bonds on
P
any coupon payment date beginning in 2007. The bonds have been rated “PRS Aaa” by
PhilRatings. On October 7, 2007, the Company fully redeemed the bonds due in 2009 at a
premium of 1.0075%.
Subsidiaries
Foreign Currency Debt
In 2003, the Company, through a wholly owned subsidiary, entered into 5-year loan with a
commercial bank, with the Company as guarantor, for up to US$120 million at a rate of 240
points over the 1-, 3- or 6-month LIBOR at the Company’s option, drawable in various tranches
over a period of 12 months. The loan was prepaid in 2007.
In 2006, the Company, through a wholly owned subsidiary, extended for 3 years a loan with a
foreign bank, with the Company as guarantor, for US$20 million at a rate of 105 bps over 1-, 3- or
6-month US$ LIBOR at the Company’s option.
In October 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 points over the 1-, 3- 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. The interest is repriced quarterly at the rate of
3-months LIBOR plus margin of 0.80% and is payable quarterly.
In 2006, IMI Singapore 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
May 29, 2012. The interest is repriced semi-annually at the LIBOR rate plus 0.75% quoted by the
bank and is payable semi-annually.
Philippine Peso Debt
The Philippine Peso loans pertain to ALI subsidiaries’ loans that will mature on various dates up
to 2014 with floating interest rates at 100 bps to 150 bps spread over benchmark 91-day, PDST-F
or PDST-R1 and fixed interest rates of 7.8% to 12.7% per annum. Certain subsidiaries loans are
secured by mortgages on real estate properties, hotel properties and equipment and leasehold
rights with a total carrying value of P
=612.2 million and P
=653.0 million as of December 31, 2007
and 2006, respectively.
ALI pledged its investment in shares of stock of Station Square East Commercial Corporation
(SSECC), ALI’s subsidiary, with a carrying value of P
=1.5 billion as of December 31, 2007 and
2006, as collateral to secure the latter’s bank loans.
*SGVMC110254*
- 48 5-Year Bonds due 2007
In 2002, ALI issued P
=3.0 billion bonds due in 2007, with interest at 200 bps over benchmark
91-day T-Bills based on secondary market bids (PDST-F). These bonds were fully paid when it
matured in April 2007.
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 bps over
benchmark 91-day PDST-F and are repriced quarterly. These bonds have been rated “PRS Aaa”
by Philratings.
Home Starter Bonds due 2009
In 2006, ALI launched 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. As of end of 2007 and 2006, outstanding Homestarter Bonds amounted to P
=80.5
million and
=43.0 million, respectively.
P
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
In 2002, ALI issued 10-year FXCNs with fixed interest rate of 14.9% per annum due 2012. ALI
may redeem all (but not in part) of the FXCNs on the 7th anniversary. As of December 31, 2007,
=580.0 million of these bonds are outstanding.
P
Guaranteed Euro Notes
In 2003, the Company through a wholly owned subsidiary, issued an 8.1% Guaranteed Euro
Notes, due 2008, amounting to US$200 million at 99.5% of its face value.
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, 2007
and 2006.
Total interest paid amounted to P
=3.8 billion in 2007, P
=5.4 billion in 2006 and P
=4.3 billion in 2005.
Interest capitalized by subsidiaries amounted to P
=3.4 million in 2007 and P
=186.5 million in 2006.
The average capitalization rate is 0.14% and 8.19% in 2007 and 2006, respectively.
*SGVMC110254*
- 49 -
*SGVMC110254*
- 50 -
17. Other Noncurrent Liabilities
This account consists of the following:
2006
2007
(In Thousands)
=3,809,082
P
P
=4,070,262
794,810
1,117,079
1,537,173
1,630,302
=6,141,065
P
P
=6,817,643
Deposits and deferred credits
Retentions payable
Other liabilities
Deposits are 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 included in “Deferred credits”.
18. Cumulative Redeemable Preferred Shares
The details as to the number of preferred shares of the Company follow:
No. of Shares
Issued and Outstanding
2006
2006
2007
(In Thousands)
Authorized
2007
Preferred - P
=1 par value
A
AA
900,000
300,000
1,200,000
900,000
300,000
1,200,000
–
–
–
500,000
–
500,000
The preferred shares are nonvoting, nonparticipating, cumulative and redeemable. Such shares
enjoy preference in case of liquidation but are excluded from the preemptive rights in the issuance
of preferred and common shares. The preferred shares are identical in all respects, except that
Preferred AA are redeemable on the fifth year from issue date while the Preferred A shares are
redeemable at such time as may be determined by the BOD.
In 2004, the Company issued the equivalent of P
=1,500 million and P
=1,000 million Preferred A
shares at an amount of P
=5 per share with a dividend rate of 10.4% and 10.5% per annum,
respectively. These Preferred A shares were fully redeemed in 2007.
In 2003, the Company issued the equivalent of P
=2,000 million Preferred A shares at an amount of
=5 per share. These Preferred A shares bear dividends at the rate of 10.6% per annum and were
P
redeemed in 2006 at the end of three years from issue date.
In 2001, the Company issued an equivalent of P
=1,745 million and P
=1,000 million Preferred AA
shares, respectively, at an amount of P
=5 per share. These Preferred AA issues bear dividends at a
rate of the average 91-day T-Bill Rate payable quarterly and redeemable at the issue price. These
preferred shares were redeemed in 2004 and 2006.
*SGVMC110254*
- 51 -
19. Equity
The details of the Company’s common and equity preferred shares follow:
Common shares
Preferred B shares
2006
2005
2006
2007
(In Thousands, except par value figures)
380,000
380,000
58,000
600,000
58,000
=50
P
=50
P
=100
P
P
=50
P
=100
344,854
343,493
58,000
414,687
58,000
4
4
–
324
–
2007
Authorized shares
Par value per share
Issued and subscribed shares
Treasury shares
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 new preferred
shares, to be known as 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 nonparticipating in any other further dividends; (d) non-convertible 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) non-voting 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. 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 (see Note 18) 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.
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.
On April 30, 2007, the Company’s application for increase in authorized common stock and stock
dividends were approved by the SEC.
*SGVMC110254*
- 52 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:
As of January 1, 2007
Exercise of ESOP/ESOWN
Stock dividend
As of December 31, 2007
As of January 1, 2006
Exercise of ESOP/ESOWN
Issuance of shares
As of December 31, 2006
As of January 1, 2005
Exercise of ESOP/ESOWN
As of December 31, 2005
Preferred
Stock - B
Common
Stock
P
=5,800,000
–
–
P
=5,800,000
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
Total
Additional
Paid-up
Paid-in Subscriptions
Receivable
Capital
Subscribed
Capital
(In Thousands)
=23,137,948
P
=75,754
P
=335,343
(P
=240,113) P
24,931
322,079
(96,267)
267,862
–
–
–
3,449,584
P
=100,685
P
=657,422
(P
=336,380) P
=26,855,394
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
=23,137,948
=75,754
P
=335,343
P
(P
=240,113) P
Common
Stock
Subscribed
=17,124,360
P
12,723
=17,137,083
P
=37,544
P
–
=37,544
P
Additional
Total
Paid-in Subscriptions
Paid-up
Capital
Receivable
Capital
(In Thousands)
=35,551
P
(P
=301,136) =
P16,896,319
83,092
(32,438)
63,377
=118,643
P
(P
=333,574) P
=16,959,696
The movements in the Company’s outstanding number of common shares follow:
2007
At January 1
Stock dividends
Exercise of options
Treasury stock
344,850
68,992
841
(320)
414,363
2006
(In Thousands)
343,488
–
1,362
–
344,850
2005
343,238
–
254
(4)
343,488
On September 10, 2007, the BOD approved the creation of a share buyback program involving
=2.5 billion worth of common capital stock. As of December 31, 2007, the Company acquired
P
319,243 common shares at a total cost of P
=159.4 million.
*SGVMC110254*
- 53 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
=29,824.0 million, P
=24,858.9 million and P
=18,487.9 million as of December 31,
2007, 2006 and 2005, respectively. These amounts are not available for dividend declaration until
received in the form of dividends from the subsidiaries, associates and jointly controlled entities.
Retained earnings are further restricted for the payment of dividends to the extent of the cost of
the common shares held in treasury consisting of 323,622 common shares as of December 31,
2007 and 4,379 common shares as of December 31, 2006 and 2005.
Dividends consist of the following:
2006
2005
2007
(In Thousands, except dividends per share)
Dividends to common shares
Cash dividends declared during the year
Cash dividends per share
Stock dividends
Proposed for approval at annual
stockholders’ meeting
Dividends to equity preferred shares
declared during the year
=3,312,426
P
=8.00
P
=3,449,584
P
20% stock
dividend
=2,756,618
P
=8.00
P
–
20% stock
dividend
=1,376,037
P
=4.00
P
–
=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.
Cumulative translation adjustments are used to record exchange differences arising from the
translation of the financial statements of foreign subsidiaries. It is also used to record the Group’s
share of the associates’ equity reserve on fluctuation in value of investments.
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, 2007 and 2006.
The Company is not subject to externally imposed capital requirements.
*SGVMC110254*
- 54 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 and redeemable preferred shares. Net debt includes
short-term and long-term debt and redeemable preferred shares less cash and cash equivalents and
short-term investments. The Company considers as capital the equity attributable to equity
holders of the Company.
2006
2007
(In Thousands)
=2,504,007
P
P
=2,634,148
47,877,433
47,397,465
2,500,000
–
52,881,440
50,031,613
Short-term debt
Long-term debt
Redeemable preferred shares
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
36,835,549
3,687,606
9,508,458
20,391,301
2,927,928
29,562,211
87,175,835
57%
11%
77,135,527
69%
38%
20. Other Income and Costs and Expenses
Other income consists of:
2007
Gain on sale of investments
Foreign exchange gain (loss)
Management and marketing fees
Dividend income
Others
P
=8,844,822
795,581
485,802
73,500
528,670
P
=10,728,375
2006
2005
(In Thousands)
=5,542,090
P
P4,585,890
=
72,424
(4,662)
590,066
382,050
180,250
95,774
613,179
889,407
=6,998,009
P
=5,948,459
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 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.
*SGVMC110254*
- 55 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”
account.
Depreciation and amortization expense included in the consolidated statement of income are as
follows:
2007
Included in:
Cost of sales and services
General and administrative expenses
P
=1,971,932
1,016,947
P
=2,988,879
2006
(In Thousands)
=1,960,042
P
630,316
=2,590,358
P
2005
=1,243,495
P
471,182
=1,714,677
P
Personnel costs included in the consolidated statement of income are as follows:
2007
Included in:
Cost of sales and services
General and administrative expenses
P
=4,495,767
4,168,554
P
=8,664,321
2006
(In Thousands)
=3,432,411
P
3,959,265
=7,391,676
P
2005
=2,759,998
P
3,110,135
=5,870,133
P
General and administrative expenses included in the consolidated statement of income are as
follows:
2007
Personnel costs (see Notes 24, 25 and 28)
Depreciation and amortization
Professional fees
Taxes and licenses
Transportation and travel
Rental and utilities
Advertising and promotions
Research and development
Supplies
Postal and communication
Entertainment, amusement and recreation
Repairs and maintenance
Provision for doubtful accounts (see Note 6)
Donations and contributions
Dues and fees
Insurance
Contract labor
Others
P
=4,168,554
1,016,947
796,979
530,583
376,087
357,666
234,330
189,693
161,459
153,649
141,782
132,257
127,701
126,541
61,033
59,703
36,952
826,390
P
=9,498,306
2006
2005
(In Thousands)
=3,959,265
P
P3,110,135
=
630,316
471,182
574,881
375,825
349,229
240,930
347,977
246,878
253,519
157,090
158,455
129,398
48,561
49
111,509
58,515
126,733
93,234
188,911
123,474
81,239
79,487
79,783
101,418
106,969
99,927
65,381
64,819
45,088
39,319
23,051
20,405
557,294
599,239
=7,708,161
P
=6,011,324
P
*SGVMC110254*
- 56 Interest expense and other financing charges consist of:
P
=3,506,030
321,891
154,335
2006
2005
(In Thousands)
=4,160,169
P
P3,630,831
=
512,997
845,377
291,681
556,351
38,458
–
99,446
P
=4,120,160
59,205
–
–
=5,024,052
P
2007
Long-term debt
Short-term debt
Dividends on preferred shares
Amortization of discount on long-term debt net of accretion of premium
Swap costs
Others
134,571
176,303
–
=5,343,433
P
Other charges consists of:
2007
Write-offs and other charges
Impairment loss on goodwill
Provision for decline/writedown of assets
Others
P
=669,949
662,591
–
237,404
P
=1,569,944
2006
2005
(In Thousands)
=–
P
=–
P
–
–
217,580
1,915,740
169,339
303,560
=386,919
P
P2,219,300
=
Write-offs and other charges include the write-down of investment properties damaged by the
Glorietta 2 explosion and related expenses incurred and the demolition and relocation costs as
part of ALI’s redevelopment programs amounting to P
=213.7 million.
21. Business Combination
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.
*SGVMC110254*
- 57 2007 Acquisitions
In February 2007, Integreon Managed Solutions, Inc. (Integreon), a wholly owned subsidiary of
Integreon Inc. which in turn is a subsidiary of LiveIt, 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.
2006 Acquisitions
On October 7, 2006, Conoda, Inc. (now Integreon, Inc.), a subsidiary of LiveIt, entered into an
Agreement and Plan of Merger with Integreon for the purchase of all Integreon shares. The
amount of US$18.0 million was put in Integreon.
On December 15, 2006, Next Life, Inc. (now Affinity Holdings, Inc.), a subsidiary of LiveIt,
entered into an Agreement and Plan of Merger with Affinity, Inc. (Affinity) for the purchase of all
Affinity shares. The amount of U$28.3 million was put in Affinity.
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, plant and equipment - net
Intangible asset
Other noncurrent assets
Accounts payable and accrued expenses
Other current liabilities
Other noncurrent liabilities
Net assets
Minority interests
Goodwill arising on acquisition (see Note 13)
Total consideration, satisfied by cash
Fair Value
Recognized
on Acquisition
(In Thousands)
=83,719
P
202,485
5,189
222,380
95,239
692
609,704
181,028
152,104
71,065
404,197
205,507
(97,297)
1,616,601
=1,724,811
P
Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
=83,719
P
1,724,811
=1,641,092
P
*SGVMC110254*
- 58 From the date of acquisition, Integreon has contributed P
=188.2 million loss 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 decreased by P
=169.9 million and revenue would have increased by
=522.5 million in 2006. No income was recorded from Affinity since the business combination
P
was completed in December 2006.
In 2007, LiveIt completed the valuation of the intangible assets which were part of the business
combination. The fair values of the intangible assets are as follows (in thousands):
Intangible Assets
Customer relationships
Technology developed software
Integreon
=88,510
P
24,526
=113,036
P
Affinity
=310,870
P
–
=310,870
P
Accordingly, the 2006 comparative information has been restated to reflect this adjustment. The
value of customer relationships and developed software increase by P
=399.4 million and
=24.5 million, respectively. There was also a corresponding reduction in goodwill by
P
=423.9 million.
P
22. Income Taxes
The components of the Group’s deferred taxes as of December 31, 2007 and 2006 are as follows:
Net Deferred Tax Assets
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 customs duties, interest and other
expenses
Others
Net deferred tax assets
2007
2006
(In Thousands)
P
=686,007
=687,949
P
391,709
188,718
47,541
19,007
7,670
386,976
1,727,628
518,619
192,177
174,679
51,242
17,780
168,082
1,810,528
(723,404)
(20,659)
(744,063)
P
=983,565
(686,616)
–
(686,616)
=1,123,912
P
*SGVMC110254*
- 59 Net Deferred Tax Liabilities
Deferred tax assets on:
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
NOLCO
Others
Deferred tax liabilities on:
Excess of financial realized gross profit over
taxable realized gross profit
Capitalized customs duties, interest and other
expenses
Others
Net deferred tax liabilities
2007
2006
(In Thousands)
P
=59,756
49,026
9,232
118,014
=58,070
P
47,967
25,835
131,872
(123,808)
(244,113)
(122,673)
(27,289)
(273,770)
(P
=155,756)
(290,728)
(40,767)
(575,608)
(P
=443,736)
The Group has NOLCO amounting to P
=8.0 billion and P
=8.8 billion in 2007 and 2006,
respectively, which were not recognized. Further, deferred tax assets from the excess MCIT over
regular corporate income tax amounting to P
=37.1 million in 2007 and P
=28.8 million in 2006 and
from unrealized gain on real estate sales amounting to P
=4.8 million and P
=143.3 million as of
December 31, 2007 and 2006, respectively, were 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, 2007, 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
2005
2006
2007
2008
2009
2010
NOLCO
MCIT
(In Thousands)
=3,120,245
P
=16,620
P
3,004,989
15,449
2,095,519
20,248
=8,220,753
P
=52,317
P
At December 31, 2007 and 2006, 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
=1,338.6 million and P
=1,417.2 million as of December 31, 2007 and
2006, respectively.
There are no income tax consequences attaching to the payment of dividends by the domestic
subsidiaries, associates and jointly controlled entities to the Group.
*SGVMC110254*
- 60 Republic Act (RA) No. 9337
RA No. 9337 was recently enacted into law amending various provisions in the existing 1997
National Internal Revenue Code. Among the reforms introduced by the said RA, which became
effective on November 1, 2005, are as follows:
·
·
·
·
Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Increase in value added tax (VAT) rate from 10% to 12%, effective February 1, 2006 as
authorized by the Philippine president pursuant to the recommendation of the Secretary of
Finance;
Revised invoicing and reporting requirements for VAT; and
Expanded scope of transactions subject to VAT.
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 joint ventures
Interest income subjected to final tax
at lower rates
Income under income tax holiday
Others
Effective income tax rate
2007
35.00%
2006
35.00%
2005
32.50%
(17.56)
(13.98)
(14.41)
(16.70)
(17.84)
(24.69)
(1.82)
(0.04)
10.81
9.69%
(1.15)
0.16
9.40
11.59%
(0.64)
(4.23)
20.28
7.77%
23. Earnings Per Share
The following table presents information necessary to calculate EPS on net income attributable to
equity holders to the Company:
Net income
Less dividends on preferred stock
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
2006
2005
2007
(In Thousands, except EPS figures)
=12,176,771
P
=8,198,004
P
P
=16,197,557
274,276
548,552
–
=11,902,495
P
=8,198,004
P
P
=15,649,005
413,045
412,057
413,990
2,029
1,668
1,978
415,968
P
=37.80
P
=37.62
415,074
=28.82
P
=28.68
P
413,725
=19.90
P
=19.82
P
*SGVMC110254*
- 61 EPS on income before income associated with noncurrent assets held for sale attributable to
equity holders of the Company follows:
2006
2005
2007
(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
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
=18,378,297
=14,312,367
P
=9,959,445
P
2,665,546
548,552
P
=15,164,199
2,182,173
274,276
=11,855,918
P
1,800,645
–
=8,158,800
P
413,990
1,978
413,045
2,029
412,057
1,668
415,968
P
=36.63
P
=36.46
415,074
=28.70
P
=28.56
P
413,725
=19.80
P
=19.72
P
24. 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
=331.5 million in 2007, P
P
=319.5 million in 2006 and P
=447.2 million in 2005.
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:
2007
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial loss (gain)
Past service cost
Effect of ceiling limit
Total retirement expense
Actual return on plan assets
P
=260,685
158,528
(167,940)
(18,715)
98,539
357
P
=331,454
P
=244,109
2006
(In Thousands)
=239,923
P
240,125
(163,718)
4,362
1,466
(2,642)
=319,516
P
=295,694
P
2005
=356,998
P
180,617
(84,858)
(8,264)
2,706
–
=447,199
P
=110,636
P
*SGVMC110254*
- 62 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, 2007 and 2006 are as
follows:
Benefit obligation
Plan assets
Unrecognized net actuarial loss
Unrecognized past service cost
Effect of ceiling limit
Assets recognized in the consolidated balance sheet
2006
2007
(In Thousands)
(P
=778,671)
(P
=683,176)
782,711
817,507
4,040
134,331
198,614
6,657
–
(412)
(56)
–
=202,598
P
P
=140,576
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,
2007 and 2006 are as follows:
Benefit obligation
Plan assets
Unrecognized net actuarial losses (gains)
Unrecognized past service cost
Liabilities recognized in the consolidated
balance sheet
2006
2007
(In Thousands)
(P
=3,233,979)
(P
=3,025,722)
2,484,639
2,916,832
(749,340)
(108,890)
261,614
(460,983)
–
38,321
(P
=531,552)
(P
=487,726)
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
Actuarial losses (gains) on obligations
Past service cost
Balance at December 31
2006
2007
(In Thousands)
=3,026,065
P
P
=4,012,650
240,125
158,528
239,923
260,685
(170,833)
(291,372)
675,904
(569,821)
1,466
138,228
=4,012,650
P
P
=3,708,898
*SGVMC110254*
- 63 Changes in the fair value of the combined plan assets are as follows:
2006
2007
(In Thousands)
=2,910,036
P
P
=3,267,350
163,718
167,940
234,321
273,039
(170,833)
(291,372)
130,108
317,382
=3,267,350
P
P
=3,734,339
Balance at January 1
Expected return
Contributions by employer
Benefits paid
Actuarial gains on plan assets
Balance at December 31
The assumptions used to determine pension benefits for the Group are as follows:
2007
7.0 to 12.0%
5.0 to 10.0%
3.3 to 10.0%
Discount rates
Salary increase rates
Expected rates of return on plan assets
2006
7.0 to 11.9%
5.0 to 10.0%
7.0 to 10.0%
The allocation of the fair value of plan assets of the Group follows:
2007
63.6%
29.0%
7.4%
Investments in debt securities
Investments in equity securities
Others
2006
61.0%
35.0%
4.0%
Amounts for the current and previous annual periods are as follows:
2007
Defined benefit obligation
Plan assets
Excess (deficit)
(P
=3,708,898)
3,734,339
P
=25,441
2006
2005
(In Thousands)
(P
=4,012,650)
(P
=3,026,065)
3,267,350
2,910,036
(P
=116,029)
(P
=745,300)
Experience adjustments on plan liabilities amounted to P
=136.6 million gain in 2007 and
=41.8 million loss in 2006. Experience adjustment on plan assets amounted to P
P
=30.7 million gain
in 2007 and P
=131.8 million gain in 2006.
The Company expects to contribute P
=58.3 million to its defined benefit pension plan in 2008.
As of December 31, 2007 and 2006, the plan assets include shares of stock of the Company with
total fair value of P
=614.0 million and P
=764.6 million, respectively.
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date.
*SGVMC110254*
- 64 -
25. Stock Option Purchase Plans
The Company has stock option plans for the 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 grantee is 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, 2007, 2006 and 2005 follows:
2006
2007
Outstanding, at beginning of year
Granted
Exercised
Cancelled
Adjustment due to 20% stock
dividends (see Note 19)
Outstanding, at end of year
2005
Number
of Shares
2,533,908
–
(169,656)
–
Weighted
Average
Exercise Price
P
= 205.13
–
203.37
–
Number
Of Shares
3,785,816
–
(1,251,908)
–
Weighted
Average
Exercise Price
=202.56
P
–
(197.35)
–
472,850
2,837,102
–
P
= 170.30
–
2,533,908
–
=205.13
P
Weighted
Number
Average
of Shares Exercise Price
4,400,110
=203.90
P
31,530
295.00
(645,819)
(212.14)
(5)
–
–
3,785,816
–
=202.56
P
The options have a contractual term of 10 years. As of December 31, 2007 and 2006, the
weighted average remaining contractual life of options outstanding is 5.2 years and 6.3 years,
respectively, and the range of exercise prices amounted from P
=128.75 to P
=245.83.
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.
*SGVMC110254*
- 65 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 under the ESOWN follows:
Granted
Subscribed
Exercise price
2007
623,335
619,912
P
=400.00
2006
772,227
767,955
=320.00
P
Subscriptions receivable from the stock option plans covering the Company’s shares are presented
under equity.
Total expense arising from share-based payments recognized by the Group in the consolidated
statement of income amounted to P
=288.0 million in 2007, P
=285.4 million in 2006 and
=413.8 million in 2005.
P
26. 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.
*SGVMC110254*
- 66 ·
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.
·
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; provision of value-added content for wireless services,
on-line business-to-business and business-to-consumer services; electronic commerce; and
technology infrastructure hardware and software sales and technology services; and onshoreand 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.
*SGVMC110254*
- 67 Business Segments
The following tables regarding business segments present assets and liabilities as of December
31, 2007 and 2006 and revenue and profit information for each of the three years in the period
ended December 31, 2007 (in millions).
2007
Revenue
Sales to external customers
Equity in net earnings of
investees*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense
Other expenses
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
Parent Company
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
P
=–
P
= 22,962
P
= 21,655
(28)
77
186
21,890
20,798
1,092
(234)
(685)
(166)
International
Automotive
and Others
Consolidated
P
=–
P
= 11,961
P
= 56,578
8,638
903
8,670
18,211
1,819
16,392
(2,993)
(2)
(140)
804
597
1,464
25,827
17,970
7,857
(868)
(874)
(1,579)
13,257
4,536
7
209
369
18,378
–
P
= 13,257
599
P
= 5,135
–
P
=7
26
P
= 235
–
P
= 369
625
P
= 19,003
P
= 13,259
(2)
P
= 13,257
P
= 2,815
2,320
P
= 5,135
P
= 230
5
P
= 235
P
= 367
2
P
= 369
P
= 16,198
2,805
P
= 19,003
P
= 26,419
P
= 75,361
P
= 16,359
P
= 3,127
P
= 2,610
P
= 123,876
56,143
–
P
= 82,562
9,034
929
P
= 85,324
3,142
31
P
= 19,532
435
24
P
= 3,586
2,806
–
P
= 5,416
71,560
984
P
= 196,420
P
= 41,522
–
P
= 41,522
P
= 31,899
114
P
= 32,013
P
= 6,572
26
P
= 6,598
P
= 1,334
7
P
= 1,341
P
= 151
9
P
= 160
P
= 81,478
156
P
= 81,634
172
3,283
1,456
–
104
5,015
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
226
114
143
483
242
241
(9)
–
(23)
68
2
265
12,296
11,838
458
(16)
(10)
(63)
9,708
1,693
10,728
78,707
52,667
26,040
(4,120)
(1,571)
(1,971)
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P3,291 million, =
P4,546 million and
=
P741 million, respectively.
*SGVMC110254*
- 68 2006
Revenue
Sales to external customers
Equity in net earnings of
investees*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense
Other expenses
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
Parent Company
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
=–
P
=23,805
P
=20,557
P
7,930
771
5,040
13,741
1,700
12,041
(3,895)
(49)
(54)
291
659
1,054
25,809
18,952
6,857
(813)
(281)
(1,633)
8,043
4,130
–
=8,043
P
155
=4,285
P
=8,044
P
(1)
=8,043
P
(25)
55
337
20,924
18,806
2,118
(286)
(49)
(116)
International
Automotive
and Others
Consolidated
=–
P
=9,032
P
=53,394
P
48
31
390
469
174
295
(21)
–
(23)
9
5
177
9,223
8,933
290
(9)
(8)
(51)
8,253
1,521
6,998
70,166
48,565
21,601
(5,024)
(387)
(1,877)
251
222
14,313
–
=1,667
P
–
=251
P
–
=222
P
155
=14,468
P
=2,466
P
1,819
=4,285
P
=1,195
P
472
=1,667
P
250
1
=251
P
=222
P
–
=222
P
=12,177
P
2,291
=14,468
P
=17,164
P
=70,686
P
=19,390
P
=3,761
P
=1,638
P
=112,639
P
55,598
–
=72,762
P
8,791
1,053
=80,530
P
200
30
=19,620
P
3,614
–
=7,375
P
366
41
=2,045
P
68,569
1,124
=182,332
P
=40,386
P
–
=40,386
P
=30,410
P
416
=30,826
P
=8,180
P
21
=8,201
P
=471
P
2
=473
P
=607
P
5
=612
P
=80,054
P
444
=80,498
P
68
2,263
1,523
3
144
4,001
92
1,402
1,013
4
79
2,590
=311
P
=236
P
=72
P
=–
P
=–
P
=619
P
1,667
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P3,300 million, =
P4,109 million and
=
P588 million, respectively.
*SGVMC110254*
- 69 2005
Parent Company
Real Estate
and Hotels
Electronics,
Information
Technology and
Business Process
Outsourcing
Services
=–
P
=16,522
P
=10,297
P
Revenue
Sales to external customers
Equity in net earnings of
investees*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense
Other expenses
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
International
Automotive
and Others
Consolidated
=–
P
=7,819
P
=34,638
P
8,043
566
1,691
10,300
1,518
8,782
(4,548)
(51)
(79)
176
1,112
3,559
21,369
13,675
7,694
(781)
(2,136)
(721)
(62)
45
119
10,399
9,293
1,106
(3)
(26)
(10)
45
22
433
500
220
280
(6)
(1)
(7)
–
9
146
7,974
7,475
499
(5)
(6)
(22)
8,202
1,754
5,948
50,542
32,181
18,361
(5,343)
(2,220)
(839)
4,104
4,056
1,067
266
466
9,959
–
=4,104
P
131
=4,187
P
–
=1,067
P
–
=266
P
–
=466
P
131
=10,090
P
=4,105
P
(1)
=4,104
P
P2,606
=
1,581
=4,187
P
P755
=
312
=1,067
P
=266
P
–
=266
P
=466
P
–
=466
P
P8,198
=
1,892
=10,090
P
*Equity in net earnings of financial services, telecommunications and water utilities amounted to =
P3,026 million, =
P3,616 million and
=
P1,438 million, respectively.
Geographical Segments
Revenue
Philippines
Japan
USA
Europe
Others (Mostly Asia)
2007
2006
P
=56,872,624
9,400,556
6,081,976
3,525,576
2,827,080
P
=78,707,812
=49,122,467
P
10,649,162
4,801,189
3,149,512
2,443,665
=70,165,995
P
Segment Assets
2006
2007
(In Thousands)
=160,794,635
P
P
=179,723,801
–
5,470
9,088,035
6,477,017
–
–
12,449,234
10,213,197
=182,331,904
P
P
=196,419,485
Investment Properties and
Property and
Equipment Additions
2006
2007
P
=4,156,480
1,946
329
–
856,628
P
=5,015,383
=3,228,580
P
–
271,789
–
499,924
=4,000,293
P
Summarized financial information of BPI, Globe and MWCI are presented in Note 9 to the
consolidated financial statements.
*SGVMC110254*
- 70 -
27. 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 2007 and 2006. Future
minimum lease payments under the finance leases together with the present value of the net
minimum lease payments are as follows:
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
2006
2007
Minimum Present values
Minimum Present values
payments
of payments
payments
of payments
(In Thousands)
=6,054
P
=6,021
P
P
=2,541
P
=2,359
2,207
2,183
483
470
8,261
8,204
3,024
2,829
57
–
195
–
=8,204
P
=8,204
P
P
=2,829
P
=2,829
Operating lease commitments - as lessee
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
2006
2007
(In Thousands)
=105,956
P
P
=146,620
523,576
483,373
1,516,421
1,577,925
=2,145,953
P
P
=2,207,918
Operating leases - as lessor
Certain subsidiaries have 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.
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
2006
2007
(In Thousands)
=586,617
P
P
=653,150
2,083,551
1,485,316
300,048
245,132
=2,970,216
P
P
=2,383,598
*SGVMC110254*
- 71 -
28. 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:
2007
Income
Associates and joint ventures
Key management personnel
Other related parties
P
=343,267
–
80,881
P
=424,148
Amounts
Owed by
Related
Costs and
Expenses
Parties
(In Thousands)
P
=2,202,909
P
=1,307,627
668,885
285,514
113,793
802,483
P
=2,985,587
P
=2,395,624
Amounts
Owed to
Related
Parties
P
=286,000
–
11,786
P
=297,786
2006
Income
Associates and joint ventures
Key management personnel
Other related parties
=619,858
P
–
12,567
=632,425
P
Amounts
Owed by
Related
Costs and
Parties
Expenses
(In Thousands)
=6,374,376
P
=1,391,917
P
767,588
254,288
61,956
1,551,445
=7,203,920
P
=3,197,650
P
Amounts
Owed to
Related
Parties
=47,187
P
–
85,017
=132,204
P
2005
Income
Associates and joint ventures
Key management personnel
Other related parties
=575,676
P
–
205,863
=781,539
P
Amounts
Owed by
Costs and
Related
Expenses
Parties
(In Thousands)
=3,980,618
P
=774,680
P
583,174
212,444
147,800
1,166,086
=4,711,592
P
=2,153,210
P
Amounts
Owed to
Related
Parties
=55,174
P
–
142,238
=197,412
P
*SGVMC110254*
- 72 Amounts owed by related parties include 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.
Allowance for doubtful accounts to related parties amounted to P
=105.5 million and P
=111.4 million
as of December 31, 2007 and 2006, respectively. Provision for doubtful accounts amounted to
=1.7 million in 2007, P
P
=6.5 million in 2006 and P
=3.1 million in 2005.
Compensation of key management personnel by benefit type follows:
2007
Short-term employee benefits
Share-based payments (see Note 25)
Post-employment benefits
P
=449,419
144,511
74,955
P
=668,885
2006
(In Thousands)
=500,413
P
182,877
84,298
=767,588
P
2005
=327,584
P
148,033
107,557
=583,174
P
29. 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):
2006
2007
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
Information technology and
business process outsourcing
Automotive
International and others
Total trade receivables
Carrying Value
Fair Value
Carrying Value
Fair Value
P
=622,097
143,322
765,419
P
=622,097
143,322
765,419
=2,302,694
P
–
2,302,694
=2,302,694
P
–
2,302,694
36,835,549
3,687,606
36,835,549
3,687,606
20,391,301
2,927,928
20,391,301
2,927,928
9,293,014
2,941,419
9,532,729
2,941,419
7,710,190
3,213,056
8,172,583
3,213,056
343,977
753,661
5,783
13,337,854
343,977
753,661
5,783
13,577,569
239,018
493,287
3,010
11,658,561
239,018
493,287
3,010
12,120,954
(Forward)
*SGVMC110254*
- 73 2006
2007
Nontrade receivables
Advances to other companies
Receivable from related parties
Dividend receivables
Other receivables
Total nontrade receivables
Total loans and receivables
AFS FINANCIAL ASSETS
Quoted shares of stocks
Unquoted shares of stocks
Total AFS investments
HTM INVESTMENTS
Quoted debt investments
Total financial assets
OTHER FINANCIAL LIABILITIES
Current Other Financial Liabilities
Accounts payable and accrued
expenses
Accounts payable
Accrued expenses
Dividends payable
Interest payable
Related parties
Accrued personnel costs
Retentions payable
Accrued utilities
Short-term debt
Current portion of long-term debt
Noncurrent Other Financial Liabilities
Other noncurrent liabilities
Long-term debt
Cumulative redeemable preferred
shares
Total other financial liabilities
Carrying Value
Fair Value
Carrying Value
Fair Value
P
=2,231,057
2,395,624
–
1,947,658
6,574,339
60,435,348
P
=2,216,427
2,395,624
–
1,927,833
6,539,884
60,640,608
=2,280,965
P
1,935,112
1,262,538
2,176,696
7,655,311
42,633,101
=2,280,965
P
1,935,112
1,262,538
2,176,696
7,655,311
43,095,494
2,166,168
258,798
2,424,966
2,166,168
258,798
2,424,966
2,373,486
961,374
3,334,860
2,373,486
961,374
3,334,860
67,947
P
=63,693,680
72,685
P
=63,903,678
127,575
=48,398,230
P
140,995
=48,874,043
P
P
=13,289,481
6,558,775
1,213,727
579,886
297,786
223,887
32,577
26,366
2,634,148
9,512,760
P
=13,289,481
6,558,775
1,213,727
579,886
297,786
223,887
32,577
26,366
2,634,148
9,512,760
=11,505,755
P
4,654,567
964,931
824,086
132,204
118,906
75,985
19,585
2,504,007
9,359,594
=11,505,755
P
4,654,567
964,931
824,086
132,204
118,906
75,985
19,585
2,504,007
9,359,594
6,817,643
37,884,705
6,823,734
42,089,076
6,141,065
38,517,839
5,744,879
42,613,956
–
–
P
=79,071,741
P
=83,282,203
2,500,000
=77,318,524
P
2,790,743
=81,309,198
P
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 - These are investments in government securities and TRG fund
(see Note 8). Fair value is based on quoted prices.
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 4.19% to 6.04% in 2007 and 5.0% to 6.7% in 2006.
AFS quoted equity shares - Fair values are based on quoted prices published in markets.
*SGVMC110254*
- 74 AFS unquoted shares - The fair value of unquoted shares are not reasonably determinable due to
the unpredictable nature or future cash flows and the lack of suitable methods of arriving at a
reliable fair value.
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 4.19% to 6.04% in 2007 and 5.0% to 6.7% in 2006.
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 option was derived from the mark-to-market valuations as
provided by counterparty banks.
Risk Management and Financial Instruments
General
In line with the corporate governance infrastructure of the Company, the Company has adopted a
group-wide enterprise risk management framework in 2002. An Enterprise Risk Management
Policy was approved by the Audit Committee (the Committee) in 2003 and 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 risks, the Company provides greater
certainty and confidence to its shareholders, employees, customers and for the communities where
the Company operates.
The risk management framework encompasses the following:
·
·
·
·
·
identification and assessment of business risks;
development of risk management strategies;
assessment, design and implementation of risk management capabilities;
monitoring and evaluating the effectiveness of risk mitigation strategies and management
performance; and,
identification of areas and opportunities for improvement in the risk management process.
*SGVMC110254*
- 75 A Chief Risk Officer is the ultimate champion of enterprise wide risk management and oversees
the entire risk management function and is responsible for overall continuity. Beginning 2008,
under its expanded charter, the Committee will provide a more focused oversight role over the
risk management function. A quarterly report on the risk portfolio of the Group and the related
risk mitigation efforts and initiatives are provided to the Committee. The Company’s internal
audit monitors the compliance with the Group’s risk management policies in order to ensure that
an effective control environment exists within the Group as a whole.
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.
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 on December 31, 2007, with all variables held
constant.
FVPL financial assets
Parent Company - floating rate borrowings
Subsidiaries - floating rate borrowings
Change in basis points
+100 basis points
Effect on income
before income tax
Effect on equity
(In Thousands)
(P
=9,975)
(P
=9,975)
(57,817)
(37,581)
(63,620)
(41,353)
(P
=131,412)
(P
=88,909)
*SGVMC110254*
- 76 -
FVPL financial assets
Parent Company - floating rate borrowings
Subsidiaries - floating rate borrowings
Change in basis points
-100 basis points
Effect on income
before income tax
Effect on equity
(In Thousands)
=10,348
P
=10,348
P
57,817
37,581
63,620
41,353
=131,785
P
=89,282
P
*SGVMC110254*
- 77 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:
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
Accounts and notes
Fixed at the date of sale
receivable
HTM investments
Fixed at 16.50%
Company
Long-term debt
Fixed
Fixed at 6.70%
Fixed at 6.73% to 10.00%
Fixed at 10.38%
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
13,656,785
10,181,479
3,475,306
–
13,656,785
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
–
10,000
–
11,000,000
4,170,000
1,492,500
–
–
1,500,000
11,000,000
4,180,000
3 months
7,129,091
665,606
973,485
5,490,000
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
9,639,933
2,288,840
331,943
1,209,140
9,307,990
879,412
–
196,072
9,639,933
2,284,624
Floating
Variable at 6.00% to 15.00%
Variable at 1.00% to 1.50% over
91-day PDST-F or PDST-R1
*SGVMC110254*
- 78 2006
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
Accounts and notes
Fixed at the date of sale
receivable
HTM investments
Fixed at 16.50%
Company
Long-term debt
Fixed
Fixed at 10.00%
Fixed at 10.375% to 10.60%
Fixed at 10.60% to 12.00%
Fixed at 11%
Fixed at 12.68%
Floating
Variable ranging from 1.0% to 1.5% over
91-day PDST-F (formerly MART 1)
Subsidiaries
Short-term debt
Variable ranging from 4.1% to 6.4%
Variable ranging from 6.1% to 7.8%
Long-term debt
Fixed
Fixed at 8.125%
Fixed at 5.0% to 14.88%
Floating
Variable at 0.77% to 2.40% over
91-day PDST-F or PDST-R1
Variable at 1.25% to 2.50% over
91-day PDST-F or PDST-R1
Rate Fixing
Period
Nominal
Amount
< 1 year
1 to 5 years
> 5 years
Carrying Value
Various
=20,391,301
P
=20,391,301
P
=–
P
=–
P
=20,391,301
P
Balance date
2,927,928
2,927,928
–
–
2,927,928
Balance date
2,302,694
2,302,694
–
–
2,302,694
Date of sale
12,711,196
10,644,524
2,126,672
–
12,771,196
6 months
120,421
57,369
70,206
–
127,575
3 years
5 years
5 years
3 years
5 years
3,000,000
4,690,000
1,250,000
1,000,000
7,000,000
–
10,000
–
1,000,000
–
3,000,000
500,000
1,250,000
–
–
–
4,180,000
–
–
7,000,000
3,000,000
4,690,000
1,250,000
1,000,000
7,000,000
3 months
4,794,697
1,161,856
1,714,091
1,918,750
4,794,697
Monthly
Monthly
815,787
1,688,220
815,787
1,688,220
–
–
–
–
815,787
1,688,220
5 years
3 to 10 years
6,706,393
5,942,568
–
175,100
6,706,393
4,010,846
–
1,750,000
6,706,393
5,935,946
3 months
8,154,932
3,624,145
4,530,787
–
8,154,932
3 months
5,352,333
3,388,493
1,956,972
–
5,345,465
*SGVMC110254*
- 79 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, 2007 and 2006. Included in the table are the Group’s assets and liabilities at
carrying amounts, categorized by currency.
2007
USD Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Investment in bonds and other
securities
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Short-term debt
Long-term debt
Other noncurrent liabilities
Total liabilities
Net foreign currency denominated
assets
2006
USD Php Equivalent
$347,032
227,460
9,546
P
=14,332,164
9,390,012
394,072
$148,272
127,402
16,447
=7,276,454
P
6,264,312
810,372
91,135
23,541
698,714
3,899,746
990,947
29,006,941
21,785
72,868
386,774
1,068,397
3,558,460
18,977,995
87,947
5,887
9,454
233,526
159
336,973
3,631,016
243,024
390,248
9,639,934
6,599
13,910,821
54,521
80,842
10,016
236,227
1,696
383,302
2,686,122
3,966,758
493,571
11,602,661
83,212
18,832,324
$361,741
P
=15,096,120
$3,472
=145,671
P
The following table demonstrates the sensitivity to a reasonably possible change in the US dollar
rate, with all variables held constant, of the Group’s profit before tax (due to changes in the fair
value of monetary assets and liabilities) and the Group’s equity (in thousands).
2007
US$ depreciates Effect on profit
(appreciates)
before tax
=1.00
P
(361,741)
(P
=1.00)
361,741
Effect on
equity
(235,132)
235,132
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.
*SGVMC110254*
- 80 The table summarizes the maturity profile of the Group’s financial liabilities as of
December 31, 2007 and 2006 based on contractual undiscounted payments.
Accounts payable and
accrued expenses
Accounts payable
Accrued expenses
Dividends payable
Interest payable
Related parties
Accrued personnel
costs
Retentions payable
Accrued utilities
Short-term debt
Long-term debt
Other noncurrent
liabilities
Interest payable
Accounts payable and
accrued expenses
Accounts payable
Accrued expenses
Dividends payable
Interest payable
Related parties
Accrued personnel
costs
Retentions payable
Accrued utilities
Short-term debt
Long-term debt
Cumulative redeemable
preferred shares
Other noncurrent
liabilities
< 1 year
1 to < 2 years
2007
2 to < 3 years
(In Thousands)
> 3 years
Total
=13,289,481
P
6,558,775
1,213,727
579,886
297,786
=–
P
–
–
–
–
=–
P
–
–
–
–
=–
P
–
–
–
–
=13,289,481
P
6,558,775
1,213,727
579,886
297,786
223,887
32,577
26,366
2,634,148
9,512,760
–
–
–
–
2,286,464
–
–
–
–
4,600,754
–
–
–
–
30,997,487
223,887
32,577
26,366
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
=1,856,769
P
1 to < 2 years
=1,646,875
P
2 to < 3 years
=1,518,916
P
> 3 years
= 2,894,524
P
Total
=7,917,084
P
< 1 year
1 to < 2 years
2006
2 to < 3 years
(In Thousands)
> 3 years
Total
=11,505,755
P
4,654,567
964,931
824,086
132,204
=–
P
–
–
–
–
=–
P
–
–
–
–
=–
P
–
–
–
–
=11,505,755
P
4,654,567
964,931
824,086
132,204
118,906
75,985
19,585
2,504,007
9,359,594
–
–
–
–
11,988,994
–
–
–
–
10,340,704
–
–
–
–
16,188,141
118,906
75,985
19,585
2,504,007
47,877,433
2,500,000
–
–
–
2,500,000
–
=32,659,620
P
4,796,938
=16,785,932
P
1,214,741
=11,555,445
P
129,386
=16,317,527
P
6,141,065
=77,318,524
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.
*SGVMC110254*
- 81 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
Information technology and business
process outsourcing
Automotive
International and others
Advances
Related parties
Dividends
Others
AFS investments
Quoted shares of stocks
Unquoted shares of stocks
Held-to-maturity investments
Bonds
Total credit risk exposure
2006
2007
(In Thousands)
=20,391,301
P
P
=36,835,549
2,927,928
3,687,606
622,097
143,322
2,302,694
–
9,293,014
2,941,419
7,710,190
3,213,056
343,977
753,661
5,783
2,231,057
2,395,624
–
1,947,658
239,018
493,287
3,010
2,280,965
1,935,112
1,262,538
2,176,696
2,166,168
258,798
2,373,486
961,374
67,947
P
=63,693,680
127,575
=48,398,230
P
*SGVMC110254*
- 82 The analysis of accounts and notes receivables that were past due but not impaired follows:
December 31, 2007
Trade:
Real estate
Electronics manufacturing
Automotive
Information technology and
business process outsourcing
International and others
Advances
Related parties
Others
Total
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
2,060,190
1,596,634
=16,864,873
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
=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
18,261
362,238
60,134
66,943
–
2,231,057
–
2,395,624
232,256
2,133,846
=373,950 P
P
=20,354,597
*SGVMC110254*
- 83 The table below shows the credit quality of the Group’s financial assets as of December 31, 2007 (in thousands):
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
2,056,364
1,106,199
275,986
200,000
–
79,688
3,826
241,517
–
–
–
–
–
248,918
275,986
529,296
–
1,823,158
2,060,190
1,596,634
67,991
250,472
6,809
407,899
335,434
304,956
18,261
–
60,134
–
–
232,256
362,238
779,768
66,943
2,231,057
2,395,624
2,133,846
2,033,594
–
132,574
258,798
–
–
2,166,168
258,798
–
–
–
–
2,166,168
258,798
67,947
=55,227,180
P
–
=3,966,632
P
–
=1,452,548
P
67,947
=60,646,360
P
–
=3,115,774
P
–
=373,950
P
67,947
=64,136,084
P
Total
=36,835,549
P
3,687,606
Impaired
=–
P
–
–
–
–
Total
=36,835,549
P
3,687,606
622,097
143,322
*SGVMC110254*
- 84 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.
30. 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.
31. Note to Consolidated Statements of Cash Flows
Noncash investing activities are as follows:
2007
Property/liquidating dividend
Acquisitions through issuance of shares
of stock of a subsidiary
P
=–
–
2006
(In Thousands)
=16,573
P
–
2005
=–
P
776,985
*SGVMC110254*
- 85 -
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.
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, ALI obtained surety bonds to guarantee the payment of the fixed
and variable rent as prescribed in the lease agreement. The surety bonds are secured by a
mortgage on a property of a certain subsidiary with a carrying value of P
=48.6 million in 2004.
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).
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.
Avida Land Corp. (Avida), a wholly owned subsidiary of ALI, is involved in a patent
infringement suit brought by plaintiffs Edgardo Vasquez and Vasquez Building Systems
Corporation against Avida. The Plaintiff alleged that Avida infringed on Vasquez’s modular
housing unit patent. Avida had raised a number of defenses, including (a) it makes use of
patented technology licensed from UK and French Companies, and not Vasquez’s modular
housing unit patent; (b) the Vasquez patent claim is overboard, since the patent does not protect
the H-shaped column and the wall panel installation system; and (c) the H-shaped column and the
wall panel installation system cannot be covered by the Vasquez patent, because these are not
patentable as they do not qualify on “novelty.”
*SGVMC110254*
- 86 In a decision dated December 18, 2007, the Regional Trial Court of Quezon City found in favor of
the plaintiffs and rendered the following awards against Avida: (a) P
=90.0 million as temperate
damages or reasonable royalty with interest at the rate of six percent (6%) per annum reckoned
from the date of filing of the verified Complaint, December 19, 1999, until the same is fully paid:
(b) =
P5.0 million as moral damages; (c) P
=1.0 million as exemplary damages; (d) P
=0.5 million as
reasonable attorney’s fees and expenses of litigation; and (e) costs of suit.
Although the decision was against Avida, the overwhelming strength of Avida’s defenses which
were arbitrarily disregarded by the Trial Court has prompted Avida’s management to seek relief
from a higher court. Hence, on January 4, 2008, Avida filed an appeal to contest this decision,
intending to elevate this case to the Court of Appeals.
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. No provisions were made during the year. The information usually
required by PAS 37/IAS 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.
33. Subsequent Event
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 recommended to the Department
of Justice (DOJ), in its report dated January 11, 2008, the prosecution of certain
officers/employees of Makati Supermarket Corporation, the owner of the building, as well as
some officers/employees of ALI’s subsidiary, Ayala Property Management Corp. (APMC),
among other individuals, for criminal negligence. No criminal case has been filed by the DOJ at
this time. No civil case has likewise been filed by any of the victims. In the event that the DOJ
decides to file a criminal case against certain officers/employees of APMC as recommended by
the PNP, the accused, if convicted after final judgment, can be held not only criminally but also
civilly liable. In the event the accused will not be able to pay for the civil award, APMC will be
held subsidiarily liable for such sums (the amount of which cannot be estimated). ALI and
APMC believe, however, that the facts surrounding the incident do not show any negligence.
*SGVMC110254*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
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
ON SUPPLEMENTARY SCHEDULES
The Stockholders and the Board of Directors
Ayala Corporation
Tower One, Ayala Triangle
Ayala Avenue, Makati City
We have audited, in accordance with Philippine Standards on Auditing, the consolidated financial
statements of Ayala Corporation and Subsidiaries included in this Form 17-A and have issued our
report thereon dated February 20, 2008. Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The schedules listed in the Index to
Financial Statements and Supplementary Schedules are the responsibility of the Company’s
management and are presented for purposes of complying with the Securities Regulation Code Rules
68.1 and are not part of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly state in all material respects the financial data required to be set forth therein
in relation to the basic consolidated financial statements taken as a whole.
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. 0017583, January 3, 2008, Makati City
February 20, 2008
SGV & Co is a member practice of Ernst & Young Global
*SGVMC100000*
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE A - MARKETABLE SECURITIES (CURRENT MARKETABLE EQUITY SECURITIES AND
OTHER SHORT-TERM CASH INVESTMENTS)
As of December 31, 2007
(in thousand Pesos)
A. OTHER SHORT-TERM CASH INVESTMENTS 1/
Name of Issuing entity &
association of each issue
Number of shares or principal amount of
bonds & interest
Amount shown in the Valued based on market quotation at
balance sheet
balance sheet date
Income received &
accrued
Special Savings Account
BPI
Other Banks
Sub-Total
5,037,227
1,252,231
6,289,458
138,585
83,112
221,697
Time Deposits (Peso)
BPI
Citibank
Standard Chartered Bank
Unionbank
Other Banks
Sub-Total
1,073,519
123,500
35,425
15,000
848,626
2,096,070
49,403
152
3
23
47,629
97,210
Time Deposits (FX)
Duetsche Bank
Standard Chartered Bank
RCBC
Metrobank
BOTM-UFJ
BPI
Citibank
FX Fluctuation
Sub-Total
92,289
11,146
17,131
453,255
2,683
20,640
13,829
(795)
610,178
Others
BPI
Others
Sub-Total
10,098
351,954
362,052
Money Market Placements (FX)
ABN Amro
BDO
Banque Paribas
BPI
Citibank
HSBC
Metro Bank
PCI-Equitable Bank
Sub-Total
Money Market Placements (Peso)
ANZ
BPI
BPI-Family
BDO
Chase
Chinabank
Citibank
HSBC
ING
Metrobank
Security Bank
Sub-Total
Total
94,570
9,042,591
61,434
149,277
757,921
10,105,793
0
2,547,380
5,682,583
1,501,150
61
5
6
617
1
19
5
714
24
14,547
14,571
2,137
6,719
2,553
226,899
1,896
12,391
6,577
2,522
261,694
2,020,000
1,056
11,952,169
470
59,071
294,017
5,293
17,787
2,972
15,443
57
249
10,567
21
405,947
31,415,720
1,001,833
200,000
1/ Short-term investments with varying periods up to three months shown as part of the Cash and Cash Equivalents account in the Balance Sheet.
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, 2007
(in thousand Pesos)
BEGINNING BALANCE
ADDITIONS
NOTES
ACCOUNTS
NOTES
ACCOUNTS
RECEIVABLE * RECEIVABLE RECEIVABLE* RECEIVABLE
Various Employees of the ff:
Ayala Corporation
Ayala Land, Inc. and subsidiaries
Integrated Microelectronics, Inc.
and subsidiaries
Ayala Automotive Holdings Corp. and subsidiaries
Azalea International Venture Partners, Ltd.
Ayala Aviation Corporation
Azalea Technology Investments, Inc.
and subisidiaries
400,581
197,180
4,591
278,510
160,483
225,880
1,857
39,219
8,844
892
425
268
840
1,202
600,820
215
332,696
385
387,856
DEDUCTIONS
ENDING BALANCE
NOTES
ACCOUNTS ACCOUNTS RECEIVABLE
NON-CURRENT
RECEIVABLE* RECEIVABLE
CURRENT
949
195,212
135,885
158,944
1,473
324,667
4,067
18,665
747
203
124
929
308,606
545
348
261
17,674
8,299
1,291
367
793
484,965
1,085
296,967
248
636,148
760
51,123
287,061
* Notes receivables includes interest bearing notes with various maturity dates and interest rates.
130,390
ENDING BALANCE
NOTES RECEIVABLE *
CURRENT
NON-CURRENT
54,705
61,762
370,474
202,354
429,246
413,171
-
-
-
226
144
1,542
17,674
8,299
1,435
2,135
464
117,157
38
574,552
1,262
873,222
130,390
-
TOTALS
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE C - NON-CURRENT MARKETABLE EQUITY SECURITIES,
OTHER LONG-TERM INVESTMENT IN STOCKS AND OTHER INVESTMENTS
As of December 31, 2006
(in thousand Pesos except number of shares)
BEGINNING BALANCE
NAME OF COMPANY
Number of
Shares
Amount in
Pesos
ADDITIONS
Equity in
Earnings
(Losses) of
Investees for
the period
DEDUCTIONS
Others (Cost &
Equity Adj )
Distribution of
Earnings by
Investees
ENDING BALANCE
Others-Cost ( &
equity adj)
Effective %
of
Ownership
Number of
Shares
Amount in
Pesos
INVESTMENTS IN ASSOCIATES & JOINT VENTURES
Domestic:
Bank of the Philippine Islands
Globe Telecom, Inc.
Manila Water Co., Inc.
eTelecare Global Solutions, Inc.
Emerging City Holdings, Inc.
Cebu Holdings, Inc.and subsidiaries
North Triangle Depot Commercial Corp.
Philwater Holdings Company, Inc.
Berkshires Holdings, Inc.
Bonifacio Land Corporation
Asiacom Philippines, Inc.
Alabang Commercial Corporation
ALI Property Partners Holdings Corp.
Foreign:
Arch Asian Partners L.P.
Glory High Investments Ltd.
Arch Capital Management Co. Ltd.
Others
917,741,721
45,332,257
524,975,503
29,860,344
22,606,216
2,576,352
70,034
36,724
414
2,741,169
2,233,446
1,724,035
1,044,048
947,072
957,160
854,802
746,885
490,502
129,771
3,341,240
4,507,524
501,864
12,252
252,009
138,297
12,563
223,114
108,001
78,790
37,658
110,205
(379)
50,000
907,350,948
1,826,640
200,030,000
1,250
4,664,629
10,269,000
158,504
25,223,328
-
3,270,903
298,558
-
1,127,147
68,568,683
86,483
9,708,179
381,142
563,317
17,407
472,674
4,885,084
-
481,494
768,435
14,526
2,051
490,492
36,773
579,715
2,373,486
-
2,449,674
124,138
827,236
-
-
10,000
961,374
-
Sub-total AFS equity investments
Bonds
3,334,860
127,575
-
623,392
TOTAL-INVESTMENTS IN BONDS & OTHER SECURITIES
3,462,435
-
623,392
TOTAL-INVESTMENTS IN ASSOCIATES & JOINT VENTURES
(1,322,734)
(5,147,713)
(157,493)
(1,096,917)
(541,339)
380
906,739,921
44,112,267
524,975,503
6,392,550
50,000
907,350,948
1,826,640
200,030,000
1,250
4,664,629
10,269,000
158,504
46,830,528
33.5%
33.3%
30.0%
22.2%
50.0%
47.2%
49.0%
60.0%
50.0%
8.0%
60.0%
50.0%
60.0%
30,851,967
21,461,412
2,921,517
2,753,421
2,485,455
1,809,630
1,541,375
1,110,258
1,065,161
933,592
793,543
573,052
237,831
(15,298)
(93,441)
(4,803,026)
-
19.4%
40.0%
42.1%
894,192
563,317
2,109
1,562,425
71,560,257
(481,494)
-
-
1,076,546
406,651
39,381
643,590
2,166,168
-
-
-
-
202,489
56,309
258,798
-
-
484,764
-
(52,702)
(59,928)
-
-
9,000
108,439
(27,655)
-
(3,056,411)
(30,438)
(6,798,663)
INVESTMENTS IN BONDS & OTHER SECURITIES
AFS equity investments:
Quoted:
GTHI
Rohatyn Group
Medicall, USA
ASJ Limited
Sirf Technologies, Inc.
Tech Ventures
Others
Unquoted:
Manila Water redeemable preferred shares
eTelecare Global Solutions, Inc.
Anvaya shares
Others
308,111
2,608
63,875
374,594
202,489
46,309
248,798
-
(14,526)
(2,051)
(83,841)
(581,912)
-
(124,138)
(827,236)
-
(951,374)
-
(1,533,286)
(59,628)
-
(1,592,914)
2,424,966
67,947
2,492,913
Dividends
received/accrued fr
investments not
accounted for by the
equity method
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE D - INDEBTEDNESS OF UNCONSOLIDATED SUBSIDIARIES & RELATED PARTIES
As of December 31, 2007
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 P2,395,624k (page 61 of the 2006 audited financial statements) is only 1% of the total
assets of P196,419,485k
AYALA CORPORATION AND SUBSIDIARIES
Schedule E - INTANGIBLE ASSETS
As of December 31, 2007
(In Thousand Pesos)
DESCRIPTION
Goodwill
Customer relationship
Order backlog
Unpatented technology
Developed software
Licenses
BEGINNING
BALANCE
3,493,437
1,035,092
4,928
4,928
24,526
4,562,911
ADDITIONS AT
COST
317,378
12,000
140,946
470,324
CHARGED TO
COSTS AND
EXPENSES
CHARGED TO
OTHER
ACCOUNTS
OTHER CHANGES ENDING
ADD/(DED)
BALANCE
(662,591)
(320,923)
(926)
(11,551)
(93,564)
(4,128)
(726)
(546,577)
(110,738)
(800)
(800)
(4,214)
(995,991)
(98,418)
(663,129)
2,601,647
521,867
2,476
8,761
140,946
3,275,697
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE F - LONG-TERM DEBT
As of December 31, 2007
(in thousand pesos)
TITLE OF ISSUE & TYPE OF OBLIGATION
PARENT COMPANY:
Bank loans - with interest rates ranging from 4.5% to 5.6%
per annum in 2007 and 5.3% to 11.0% per annum in 2006
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
CURRENT PORTION
OF LONG-TERM
LONG-TERM DEBT
DEBT
TOTAL
1,305,758
5,823,333
7,129,091
15,750
0
10,664,250
6,000,000
10,680,000
6,000,000
393,214
9,246,720
9,639,934
376,600
769,814
2,489,932
11,736,652
2,866,532
12,506,466
Bonds, due 2008
2,000,000
0
2,000,000
Bonds, due 2009
0
80,470
80,470
3,580,000
3,580,000
0
37,884,705
5,421,438
47,397,465
SUBSIDIARIES:
Loans from banks and other institutions:
Foreign Currency - with interest rates ranging from 6.0% to 15%
per annum due in 2007 and 5.9% to 12.8% per annum in 2006
Philippine peso - with interest rates ranging from 5% to 20%
per annum in 2007 and 7.8% to 12% per annum in 2006
Fixed Rate Corporate Notes (FXCNs)
8.125 % Guaranteed Euro Term Notes
TOTAL
5,421,438
9,512,760
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE G - INDEBTEDNESS TO RELATED PARTIES
(LONG-TERM LOANS FROM RELATED COMPANIES)
As of December 31, 2007
(in thousand Pesos)
Name of Related Parties
BPI
Balance at Beginning of Period
241,825
Balance at End of Period
3,650,000
Above amount is net of current portion of long-term debt to BPI amounting to P200,000K and P1,147,937k in 2007 and 2006, respectively.
The P3,408,175K or 1,409% 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, 2007
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$200M 8.125% Guaranteed Euro Notes US$200M (Guaranteed)
due 2008
US$131.4M or P5,421M
(Outstanding as of 12/31/07)
Unconditional & irrevocable guarantee
for the punctual payment of
indebtedness. The guaranty likewise
includes compliance with certain
restrictions involving mergers,
maintenance of required percentage of
ownership in Ayala Land, Inc. & AC
International Finance Limited.
AYC Finance Limited
US$150M Transferable Term Loan Facility US$150M (Guaranteed and
Agreement
Outstanding as of 12/31/07)
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.
AYALA CORPORATION
SCHEDULE I - CAPITAL STOCK
As of December 31, 2007
TITLE OF ISSUE
Common Stock issued & subscribed
Less: Treasury Shares
Common shares outstanding
Preferred B shares
NUMBER OF
SHARES
AUTHORIZED
# OF SHARES
ISSUED/
SUBSCRIBED
600,000,000
600,000,000
414,687,045
(323,622)
414,363,423
58,000,000
58,000,000
# OF SHARES RESERVED
FOR OPTIONS, WARRANTS,
CONVERSION & RIGHTS
# OF SHARES DIRECTORS,
HELD BY
OFFICERS &
AFFILIATES EMPLOYEES
1,987,918
OTHERS
COVER SHEET
1 1 7 7
SEC Registration Number
G L O B E
T E L E C OM ,
I N C .
A N D
S U B S I D I A R
I E S
(Company’s Full Name)
5 t h
F l o o r ,
i o n e e r
M a d i s o n
G l o b e
T e l e c o m
H i g h l a n d s ,
S t r e e t s ,
P l a z a ,
P i o n e e r
P
c o r n e r
M a n d a l u y o n g
C i t y
(Business Address: No. Street City/Town/Province)
Delfin C. Gonzalez, Jr.
730-2000
(Contact Person)
(Company Telephone Number)
1 2
3 1
Month
Day
A A F S
(Form Type)
Month
(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.
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
Investments in an associate and a joint venture
Deferred income tax - net
Derivative assets
Other noncurrent assets - net
Total Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses
Provisions
Derivative liabilities
Income taxes 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
2006
(In Thousand Pesos)
Notes
2007
28, 30
28
28
28
4, 28
5
28
6, 28
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
P
= 10,910,961
–
1,220,318
33,441
6,764,130
1,372,459
1,477,257
1,115,469
22,894,035
7
8
9
10
24
28
11
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
97,692,207
259,538
1,963,190
43,263
1,163,943
71,634
1,014,580
102,208,355
P
= 125,102,390
12, 28
13
28
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
–
P
= 13,972,222
231,455
308,688
291,348
1,301,684
–
14, 28
15, 28
4,803,341
86,416
27,599,569
6,271,601
93,422
25,758,141
7,858,150
269,737
24,233,284
24
14, 28
28
15, 28
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
4,432,867
41,835,238
423,058
2,559,133
49,250,296
73,483,580
17
16, 18
28
17
33,720,380
306,358
184,408
21,205,664
55,416,810
P
=116,620,852
28
See accompanying Notes to Consolidated Financial Statements.
33,484,361
340,743
(193,790)
23,316,837
56,948,151
P
= 124,579,833
2005
33,315,408
312,644
(235,892)
18,226,650
51,618,810
P
= 125,102,390
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
Financing costs
Cost of sales
Impairment losses and others
Equity in net losses of an associate and a joint
venture
16
Years Ended December 31
2007
2006
2005
(In Thousand Pesos, Except Per Share Figures)
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
P
= 54,896,813
3,850,788
620,089
2,880,803
62,248,493
21
7, 8, 9
22
5
23
21,304,473
17,188,998
5,224,939
3,322,777
941,260
18,080,931
17,137,553
4,978,749
4,618,735
534,948
19,142,262
15,733,959
5,443,920
6,024,711
1,608,856
10
9,023
47,991,470
5,834
45,356,750
13,334
47,967,042
20,050,348
17,598,693
14,281,451
4,391,427
1,452,593
5,844,020
1,847,690
2,119,253
3,966,943
P
= 13,277,019
P
= 11,754,673
P
= 10,314,508
P
= 100.07
P
= 99.58
P
= 88.56
P
= 88.32
P
= 76.74
P
= 76.60
P
= 116.00
P
= 50.00
P
= 40.00
19
20, 25
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM)
INCOME TAX
Current
Deferred
24
6,841,240
(67,911)
6,773,329
NET INCOME
Earnings Per Share
Basic
Diluted
27
Cash dividends declared per common share
17
See accompanying Notes to Consolidated Financial Statements.
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Notes
As of January 1, 2007
Fair value changes to derivatives
accounted 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 equity investments
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
As of January 1, 2006
Fair value changes to derivatives
accounted 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 equity investments
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
(Forward)
Additional
Cost of Cumulative
Capital
Retained
Paid-in Share-Based Translation
Stock
Earnings
Total
Capital Payments Adjustment
For the Year Ended December 31, 2007 (In Thousand Pesos)
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
–
–
–
– (15,338,743) (15,338,743)
–
–
–
–
(49,449)
(49,449)
–
–
129,914
–
–
129,914
18
4,660
–
–
–
–
4,660
12,688
218,671
(164,299)
–
–
67,060
17
P
= 7,367,002 P
= 26,353,378
P
= 306,358
P
= 184,408 P
= 21,205,664 P
= 55,416,810
For the Year Ended December 31, 2006 (In Thousand Pesos)
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
–
11,239
–
–
–
–
–
–
–
–
–
42,102
–
42,102
–
11,754,673
11,754,673
42,102
11,754,673
11,796,775
17
–
–
–
–
18
–
–
6,946
–
17
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
Notes
As of January 1, 2005
Fair value changes to
derivatives accounted
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-for-sale equity
investments
Net loss recognized
directly in equity
Net income for the period
Total income (expense) for
the period
Acquisition of treasury
stock for the period
Retirement of treasury
shares
Dividends on:
Common stock
Preferred stock
Cost of share-based
payments
Collection of subscriptions
receivable
Exercise of stock options
As of December 31, 2005
Capital
Stock
Cost of
Additional
ShareTreasury Cumulative
Paid-in
Based
Stock - Translation
Retained
Capital Payments
Common Adjustment
Earnings
For the Year Ended December 31, 2005 (In Thousand Pesos)
P
= 8,323,023 P
= 31,112,554 P
= 193,096 (P
= 8,192,770)
28
17
17
(P
= 151,008) P
= 23,102,289 P
= 54,387,184
–
–
–
–
(429,336)
–
(429,336)
–
–
–
–
237,619
–
237,619
–
–
–
–
114,167
–
114,167
–
–
–
–
(7,334)
–
(7,334)
–
–
–
–
–
–
–
–
(84,884)
–
–
10,314,508
(84,884)
10,314,508
–
–
–
–
(84,884)
10,314,508
10,229,624
–
–
–
17 (1,003,283) (5,179,349)
17
–
–
–
–
18
Total
–
–
–
–
– 15,868,428
–
(9,685,796)
–
–
–
–
–
–
(5,436,017)
(68,334)
161,731
–
–
10,968
–
–
3,033
48,462
(42,183)
P
= 7,333,741 P
= 25,981,667 P
= 312,644
See accompanying Notes to Consolidated Financial Statements.
(7,675,658)
–
–
P
=–
–
(7,675,658)
–
(5,436,017)
(68,334)
161,731
–
–
10,968
–
–
9,312
(P
= 235,892) P
= 18,226,650 P
= 51,618,810
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
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 an associate and 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
Capitalized borrowing costs
Proceeds from sale of property and equipment
Decrease (increase) in:
Short-term investments
Available-for-sale investments
Held-to-maturity investments
Other noncurrent assets
Interest received
Dividends received
Net cash flows used in investing activities
(Forward)
2007
P
=20,050,348
2006
(In Thousand Pesos)
P
= 17,598,693
P
= 14,281,451
7, 8, 9
22
14, 22
16, 18
7
17,188,998
2,996,347
614,697
129,914
(13,780)
10
23
22
9,023
3,179
(61,463)
23
19
(71,431)
(728,621)
–
40,117,211
88,673
(854,865)
–
38,737,810
925,772
(620,089)
(105)
35,377,144
(855,636)
(118,652)
(669,283)
2,165,694
378,964
(299,287)
(1,792,779)
(233,421)
128,480
2,817,187
596,456
(94,271)
41,793,012
(3,231,924)
(6,193,383)
32,367,705
(342,264)
(31,609)
(192,634)
40,416,674
(4,140,041)
(3,711,866)
32,564,767
2,078,805
(431,063)
(25,373)
35,101,793
(4,646,042)
(1,503,556)
28,952,195
(13,824,879)
(191,738)
(99,163)
35,849
(11,998,065)
(587,883)
(48,080)
68,520
(15,117,080)
(804,472)
(139,663)
183,434
5,655,349
293,567
(1,492,469)
(936,486)
696,015
–
(9,863,955)
(6,155,349)
937,942
(824,122)
(993,432)
692,636
–
(18,907,833)
–
(512,113)
(33,441)
(12,524)
492,828
105
(15,942,926)
7
9
7
17,137,553
4,213,976
–
161,628
(22,597)
2005
5,834
84,833
324,082
15,733,959
4,657,748
–
161,731
(28,398)
13,334
(12,694)
264,435
Years Ended December 31
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
Purchase of treasury stock - common
Net cash flows used in financing activities
2007
P
=13,121,044
500,000
2006
(In Thousand Pesos)
P
=–
–
2005
P
= 9,992,181
21,000
14
(22,107,813)
–
(10,429,453)
–
(12,505,808)
(21,000)
(15,338,743)
(64,669)
(6,599,817)
(68,334)
(5,436,017)
(75,128)
71,720
–
(23,818,461)
35,424
–
(17,062,180)
20,280
(7,675,658)
(15,680,150)
(1,314,711)
(3,405,246)
(2,670,881)
28, 30
7,505,715
10,910,961
13,581,842
28, 30
P
=6,191,004
P
= 7,505,715
P
= 10,910,961
17
17
17
NET DECREASE IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
CASH AND CASH EQUIVALENTS AT END
OF YEAR
See accompanying Notes to Consolidated Financial Statements.
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 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, Singapore Telecom, Inc. 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. Innove currently offers cellular service under the Touch Mobile (TM)
prepaid cellular brand. The TM brand is supported by the integrated cellular networks of Globe Telecom and
Innove. Innove also offers a broad range of wireline voice communication services, as well as domestic and
international long distance communication services or carrier services. On June 17, 2005, Innove was granted a
Provisional Authority (PA) from the National Telecommunications Commission (NTC) for a nationwide local
exchange carrier (LEC) service, allowing Innove to expand the reach of its network. A motion for a Certificate of
Public Convenience Necessity (CPCN) and/or extension of the PA was filed in November 2006. A motion for
extension of PA or issuance of CPCN was filed on July 12, 2007 and the same was granted by the NTC on
December 10, 2007. Innove now has a permanent license (CPCN) to establish, install telephone, operate and
maintain a LEC service, particularly integrated local telephone service with public payphone facilities and public
calling stations, and to render and provide international and domestic leased line services within the territorial
jurisdiction of the Subic Bay Metropolitan Authority, subject to certain conditions. 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 started commercial operations on October 16, 2004. GXI’s
principal executive office is located at 6th 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 wholly-owned subsidiaries,
Innove and GXI, 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 4, 2008, 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 year ended December 31, 2007,
2006 and 2005.
2.2 Statement of Compliance
The consolidated financial statements of the Globe Group have been prepared in compliance with Philippine
Financial Reporting Standards (PFRS).
2.3 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, 2007, 2006 and 2005. The subsidiaries, which are
both incorporated in the Philippines, are as follows:
Name of Subsidiary
Innove
GXI
Principal Activity
Wireless and wireline voice and data
communication services
Software development for telecommunications
applications
Percentage of
Ownership
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 in the preparation of the consolidated financial statements are consistent with
those followed in the preparation of the Globe Group’s annual financial statements for the years ended
December 31, 2006 and 2005, except for the adoption of new and amended Standards and International
Financial Reporting Interpretations Committee (IFRIC) enumerated below.
·
PFRS 7, Financial Instruments: Disclosures, introduces new disclosures to improve the information about
financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to
risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, as well as sensitivity analysis of market risk. It replaces the disclosure requirements in
PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under
PFRS. Adoption of this standard resulted in the inclusion of additional disclosures on the consolidated
financial statements (see Note 28).
The Globe Group adopted the amendment to the transitional provisions of PFRS 7 as approved by the
Financial Reporting Standards Council of the Philippines, which gives transitory relief with respect to the
presentation of comparative information for the new risk disclosures about the nature and extent of risks
arising from financial instruments. Accordingly, the Globe Group did not present comparative information
for the disclosures required by PFRS 7, unless the disclosure was previously required under PAS 32.
·
Amendments to PAS 1, Presentation of Financial Statements, introduce disclosures about the level of an
entity’s capital and how it manages capital. Adoption of the Amendments resulted in inclusion of additional
disclosures on the consolidated financial statements (see Note 31).
·
Philippine Interpretation IFRIC 8, Scope of PFRS 2, requires PFRS 2 to be applied to any arrangements
where equity instruments are issued for consideration which appears to be less than fair value. As equity
instruments are only issued to employees in accordance with the employee stock option scheme, adoption
of this Interpretation did not have any significant impact on the consolidated financial statements.
·
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, establishes that the date to
assess the existence of an embedded derivative is the date an entity first becomes a party to the contract,
with reassessment only if there is a change to the contract that significantly modifies the cash flows.
Adoption of this Interpretation did not have any significant impact on the consolidated financial statements.
·
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment, provides that the frequency
of financial reporting does not affect the amount of impairment charge to be recognized in the annual
financial reporting with respect to goodwill and AFS investments. It prohibits the reversal of impairment
losses on goodwill and AFS equity investments recognized in the interim financial reports even if impairment
is no longer present at the annual balance sheet date. Adoption of this Interpretation did not have any
significant impact on the consolidated financial statements.
2.5 Future Changes in Accounting Policies
The Globe Group has not yet applied the following new and amended PFRS and Philippine Interpretations
which are not yet effective for the year ended December 31, 2007.
·
Philippine Interpretation IFRIC 11, PFRS 2 Group and Treasury Share Transactions
This Interpretation will be effective January 1, 2008 for the Globe Group. 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. The Globe Group does not expect this Interpretation to have a significant impact on the
consolidated financial statements.
·
Philippine Interpretation IFRIC 12, Service Concession Arrangement
This Interpretation will become effective January 1, 2008. This Interpretation covers contractual
arrangements arising from public-to-private service concession arrangements if control of the assets remain
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 will have no impact on the
consolidated financial statements as this is not relevant to the Globe Group’s current operations.
·
Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction.
This Interpretation will become effective January 1, 2008. 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. The Globe Group will assess the impact of this Interpretation on its current
manner of accounting for its net pension asset.
·
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
This Interpretation will become effective January 1, 2009. The Interpretation addresses accounting by the
entity that grants award credits to its customers. This Interpretation applies to customer loyalty award
credits that: (a) an entity grants to its customers as part of a sales transaction, i.e. sale of goods, rendering
of services or use by a customer of entity assets; and (b) subject to meeting any further qualifying
conditions, the customers can redeem in the future for free or discounted goods or services. The Globe
Group will assess the impact of this Interpretation on its current manner of accounting for customer loyalty
awards.
·
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 management approach to reporting segment information. 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 balance sheet and statement of income and companies will need to provide explanations
and reconciliations of the differences. The Globe Group will assess the impact of this standard on its
current manner of reporting segment information.
·
Amendment to PAS 1, Amendment on Statement of Comprehensive Income
This Amendment will become effective January 1, 2009. In accordance with the amendment to PAS 1, the
statements 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.
In addition, the amendment to PAS 1 provides for the introduction of a new statement of comprehensive
income that combines all items of income and expense recognized in the statements of income together
with ‘other comprehensive income’. The revisions specify what is included in other comprehensive income,
such as gains and losses on available-for-sale assets, actuarial gains and losses on defined benefit pension
plans and changes in the asset revaluation reserve. Entities can 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. The Globe Group does not expect this amendment to have a significant impact on
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 change should be accounted for prospectively. 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. The Globe Group does not
expect this amendment to have a significant impact on the consolidated financial statements.
2.6 Significant Accounting Policies
2.6.1
Revenue Recognition
The Globe Group provides wireless 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 valueadded 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 value added services (VAS) such as SMS in excess of consumable fixed
monthly service fees (for postpaid) and free SMS allocations (for prepaid),
multimedia messaging services (MMS), content downloading 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 pro-rata 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 services 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.
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, 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 to customers or when there is a
constructive obligation to deliver. 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.
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 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. 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.
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, reevaluates 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.
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:
2.6.4.1.3
·
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.
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 income when the HTM investments
are derecognized and impaired, as well as through the amortization process.
The effects of restatement of foreign currency-denominated HTM investments
are recognized in the consolidated statements of income.
As of December 31, 2007, 2006 and 2005, the Globe Group has classified
certain special deposits as HTM investments.
2.6.4.1.4
Loans and receivables
Loans and receivables are 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 both to the balance sheet caption “Receivables”,
which arise primarily from subscriber and traffic revenues and other types of
receivables, and “Short-term investments”, which arise primarily from unquoted
debt securities.
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 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 are recognized initially at fair value, which normally
pertains to the consideration paid. Similar to receivables, subsequent to initial
recognition, short-term investments 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.
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. 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.
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 Parent Company 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.
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 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, 2007, 2006 and 2005, 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 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 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.
2.6.4.1.7.4
2.6.4.1.8
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.
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.
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.
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.
For receivables from active subscriber accounts, prior to the third quarter of
2006, full allowance for impairment losses is generally provided for those
that are past due by 90 days for individual wireless accounts and 120 days
for corporate wireless accounts.
Starting September 2006, 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.
2.6.4.2.1.2
Traffic
For receivable balances that appear doubtful of collection, allowance is
provided after review of the status of settlement with each carrier and
roaming partners, taking into consideration normal payment cycles and the
credit history of the parties.
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;
·
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
2.6.5
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.
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.
Supplies of SIM packs are consumed upon activation of the services.
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.
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 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.
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.
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
Intangible assets acquired separately are capitalized at cost. Subsequently, 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 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.
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. In 2007, costs of telecommunications
equipment software licenses were reclassified to intangible assets from property and equipment.
Accordingly, the prior years’ comparative figures have been reclassified to conform to the current
year’s presentation.
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
Investments in an Associate and a Joint Venture
Investments in an associate and a joint venture (JV) are accounted for under the equity method, less
any impairment losses. An associate is an entity in which the Globe Group has a significant influence
and which is neither a subsidiary nor a JV.
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 investments in an associate and 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
associate and JV, less any allowance for impairment losses. The consolidated statements of income
include Globe Group’s share in the results of operations of its associate and JV. Where there has
been a change recognized directly in the associate’s and 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.
2.6.11
Impairment of Nonfinancial Assets
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 cash generating unit 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
cash-generating unit to which the asset belongs. For impairment loss on specific assets or
investments, the recoverable amount represents the net selling price.
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.
2.6.12
Income Taxes
2.6.12.1
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.
2.6.12.2
Deferred 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.
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.
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 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 substantially enacted as at the balance
sheet date.
2.6.13
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 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 interest expense under “Financing costs” in the consolidated statements of income.
2.6.14
Share-based Payment Transactions
Certain employees (including directors) of the Globe Group receive remuneration in the form of sharebased payment transactions, whereby employees render services in exchange for shares or rights over
shares (“equity-settled transactions”) (see Note 18).
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 (see Note 27).
2.6.15
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 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.
2.6.16
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 discounting the estimated future cash outflows
using risk-free interest rates of government bonds that have terms to maturity approximating the terms
of the related pension liabilities.
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.
2.6.17
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. Premiums on long-term debt are included under the “Longterm 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.
2.6.18
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.
2.6.18.1
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.
2.6.18.2
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.
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.
2.6.19
Selling, Advertising and Promotions Expenses
Selling, advertising and promotions expenses are charged against current operations as incurred.
2.6.20
Foreign Currency Transactions
The functional and presentation currency of the Globe Group is the Philippine Peso. Transactions
denominated in foreign currencies are recorded in Philippine Peso based on the exchange rates
prevailing at the transaction dates. Foreign currency-denominated monetary assets and liabilities are
translated to Philippine Peso at the exchange rate prevailing at the balance sheet date. Foreign
exchange differentials between rate at transaction date and rate at settlement date or balance sheet
date of foreign currency-denominated monetary assets or liabilities are credited to or charged against
current operations.
2.6.21
Earnings Per Share (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 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.
2.6.22
Segment Reporting
The Globe Group’s major operating business units are the basis upon which the Globe Group reports
its primary segment information. In 2005, the Globe Group started monitoring its wireline voice and
data businesses as one major converged service with similar risks and returns. The Globe Group’s
business segments consist of: (1) wireless communication services and (2) wireline communication
services. The Globe Group generally accounts for intersegment revenues and expenses at agreed
transfer prices.
2.6.23
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.
2.6.24
3.
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 notes to the consolidated financial statements when
material.
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.
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 sheets 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.
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.
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.
Starting fourth quarter of 2006, based on the established historical pattern of discount
availments of the carriers, the Globe Group recorded inbound revenues net of the estimated
prompt payment discount amounting to P
= 468.24 million and P
= 170.01 million as of
December 31, 2007 and 2006, respectively.
Total unsettled net inbound traffic revenues from local and foreign traffic carriers as of
December 31, 2007, 2006 and 2005 (included under “Receivables”) amounted to
P
= 2,605.91 million, P
= 1,959.17million and P
= 3,120.37 million, respectively (see Note 4). Total
unsettled net outbound traffic to local and foreign carriers as of December 31, 2007, 2006 and
2005 (included under “Accounts payable and accrued expenses”) amounted to
P
= 2,085.88 million, P
= 1,501.93 million and P
= 1,544.66 million, respectively (see Note 12).
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, 2007, 2006 and 2005
amounted to P
= 711.40 million, P
= 422.83 million and P
= 615.73 million, respectively (see Note
23). Receivables, net of allowance for impairment losses, amounted to P
= 6,383.54 million,
P
= 5,527.91 million and P
= 6,764.13 million as of December 31, 2007, 2006 and 2005,
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 for more than one year.
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, 2007 and 2005
amounted to P
= 298.12 million and P
= 80.05 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
= 1,112.15 million, P
= 993.50 million
and P
= 1,372.46 million as of December 31, 2007, 2006 and 2005, respectively (see Note 5).
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 useful life 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 6.96%, 7.50% and 14.62% in 2007, 2006 and 2005,
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.
As of December 31, 2007, 2006 and 2005, ARO amounted to P
= 1,623.83 million,
P
= 1,316.61 million and P
= 907.05 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.
The EUL of property and equipment of the Globe Group are as follows:
Years
Telecommunications equipment:
Tower
Switch
Outside plant
Distribution dropwires and other
wireline assets
Cellular facilities and others
Buildings
Leasehold improvements
Investments in cable systems
Furniture, fixtures and equipment
Transportation and work
equipment
20
10 and 15
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 5 years or life of the telecommunications equipment where it is assigned.
In the fourth quarter of 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 the first quarter of 2007, Globe changed the EUL of certain wireless network elements
resulting from new information affecting usability 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 higher depreciation of P
= 105.31 million for the year ended December 31, 2007.
As of December 31, 2007, 2006 and 2005, property and equipment, investment property and
intangible assets amounted to P
= 94,253.65 million, P
= 97,517.54 million and P
= 99,914.94 million,
respectively (see Notes 7, 8 and 9).
3.1.2.6 Asset impairment
The Globe Group assesses impairment of assets (property and equipment, investment
property, intangible assets and investments in an associate and 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 cash-generating unit to which the asset belongs.
For impairment loss on specific assets or investments, the recoverable amount represents the
net selling price.
In 2005, the Globe Group recognized impairment losses on certain network assets amounting
to P
= 925.77 million as a result of impairment reviews (see Note 23).
In the first quarter of 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 cash-generating unit is the combined wireless 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.
Property and equipment, investment property, intangible assets and investment in an
associate and a joint venture amounted to P
= 94,336.91 million, P
= 97,554.87 million and
P
= 99,958.20 million as of December 31, 2007, 2006 and 2005, respectively (see Notes 7, 8, 9
and 10).
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 Notes 24).
As of December 31, 2007, 2006 and 2005, Innove and GXI have net deferred income tax
assets P
= 637.72 million, P
= 801.86 million and P
= 1,163.94 million, respectively. As of December
31, 2007, 2006 and 2005, Globe Telecom has net deferred income tax liabilities of
P
= 5,502.89 million, P
= 5,540.00 million and P
= 4,432.87 million, respectively (see Note 24). Globe
Telecom and Innove have no unrecognized deferred income tax assets as of
December 31, 2007, 2006 and 2005. 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, 2007, 2006 and 2005, amounted to P
= 528.65 million,
P
= 1,920.28 million and P
= 2,769.21 million, respectively, and financial liabilities comprising of
derivative liabilities carried at fair values as of December 31, 2007, 2006 and 2005, amounted
to P
= 340.83 million, P
= 1,086.12 million and P
= 731.75 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, 2007 and 2006, Globe Group has unrecognized actuarial losses of
P
= 511.80 million and P
= 259.74 million, respectively, while unrecognized actuarial gain as of
December 31, 2005 amounted to P
= 153.59 million (see Note 18.2).
The Globe Group also determines the cost of equity-settled transactions using assumptions
on the appropriate pricing model. Significant assumptions include, among others, share
price, exercise price, option life, risk-free interest rate, expected dividend and expected
volatility rate for the cost of share-based payments.
Cost of share-based payments for the years ended December 31, 2007, 2006 and 2005
amounted to P
= 129.91 million, P
= 161.63 million and P
= 161.73 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 long-term liabilities” account in the consolidated
balance sheets) as of December 31, 2007, 2006 and 2005 amounted to P
= 294.35 million,
P
= 246.98 million and P
= 217.26 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.
3.1.2.10
4.
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).
Receivables
This account consists of receivables from:
Notes
Subscribers
Traffic settlements - net
Others
Less allowance for impairment losses
Subscribers
Traffic settlements and others
16
2007
P
= 4,759,249
2,605,913
401,854
7,767,016
1,097,423
286,052
1,383,475
P
= 6,383,541
2006
2005
(In Thousand Pesos)
P
= 5,947,904
P
= 8,022,307
1,959,169
3,120,374
305,615
305,076
8,212,688
11,447,757
2,485,188
199,595
2,684,783
P
= 5,527,905
4,468,009
215,618
4,683,627
P
= 6,764,130
Traffic settlements receivable are presented net of traffic settlements payable of P
= 7,297.75 million,
P
= 3,675.43 million and P
= 1,979.29 million as of December 31, 2007, 2006 and 2005, respectively.
5.
Inventories and Supplies
This account consists of:
2007
At cost:
Wireline telephone sets
SIM packs, spare parts and supplies
Call cards and others
At NRV:
Handsets and accessories
SIM packs, spare parts and supplies
Wireline telephone sets
2006
(In Thousand Pesos)
2005
P
= 264,404
42,876
13,105
320,385
P
=–
97,692
21,390
119,082
P
=–
203,818
10,601
214,419
382,192
346,093
63,476
791,761
P
= 1,112,146
520,352
288,102
65,959
874,413
P
= 993,495
840,244
265,517
52,279
1,158,040
P
= 1,372,459
Inventories recognized as expense during the year amounting to P
= 3,620.89 million, P
= 4,557.34 million and
P
= 6,104.76 million in 2007, 2006 and 2005, respectively, is included as part of “Cost of Sales” and “Provision for
Inventory Losses, Obsolescence and Market Decline” (see Note 23) account 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 (see Note 21).
6.
Prepayments and Other Current Assets
This account consists of:
Notes
Prepayments
Miscellaneous receivables - net
Input VAT - net
Other current assets - net
2007
P
= 534,959
245,985
8,521
16, 25.1d
28.2.3
2006
2005
(In Thousand Pesos)
P
= 392,840
P
= 297,109
188,263
349,824
43,000
286,784
885,539
630,579
181,752
P
= 1,675,004
P
= 1,254,682
P
= 1,115,469
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. Innove and GXI’s net input VAT amounting to P
= 43.00 million and P
= 286.78 million as of
December 31, 2006 and 2005, respectively, is presented net of output VAT of P
= 85.26 million and P
= 102.74 million,
respectively.
7.
Property and Equipment
The rollforward analysis of this account follows:
2007
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
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
Buildings and
Leasehold
Improvements
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
Investments in
Cable Systems
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
Land
Assets Under
Construction*
P
= 1,478,232
316,667
(147,596)
(3,942)
1,643,361
P
= 897,914
–
–
50,401
948,315
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
Total
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
79,498,970
16,544,478
(275,969)
95,767,479
P
= 91,527,820
*Assets under construction include intangible components which are reclassified to depreciable intangible assets only when assets become available for use.
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
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*
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
*Assets under construction include intangible components which are reclassified to depreciable intangible assets only when assets become available for use.
63,734,882
16,527,912
(763,824)
79,498,970
P
= 95,052,719
2005
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
At December 31
Net Book Value at
December 31
Buildings and
Leasehold
Improvements
Furniture, Transportation
Fixtures and
and Work
Equipment
Equipment
(In Thousand Pesos)
Investments in
Cable Systems
P
= 117,295,781
984,848
(3,549,702)
9,509,197
124,240,124
P
= 15,689,565
107,372
(19,819)
3,159,490
18,936,608
P
= 10,145,676**
33,350
(1,126,800)
10,313
9,062,539
P
= 3,436,885
442,238
(446,965)
649,188
4,081,346
P
= 1,191,319
222,534
(85,181)
4,153
1,332,825
42,798,727
11,996,778
(1,991,274)
52,804,231
3,792,009
1,582,670
(15,347)
5,359,332
1,625,453**
618,345
(182,970)
2,060,828
2,182,048
811,403
(377,632)
2,615,819
760,902
193,740
(59,970)
894,672
P
= 71,435,893
P
= 13,577,276
P
= 7,001,711
P
= 1,465,527
P
= 438,153
Land
P
= 928,222
36
(30,344)
–
897,914
Assets Under
Construction*
Total
P
= 4,142,164 P
= 152,829,612
12,527,692
14,318,070
–
(5,258,811)
(13,794,123)
(461,782)
2,875,733
161,427,089
–
–
–
–
–
–
–
–
P
= 897,914
P
= 2,875,733
51,159,139
15,202,936
(2,627,193)
63,734,882
P
= 97,692,207
*Assets under construction include intangible components which are reclassified to depreciable intangible assets only when assets become available for use.
**Includes PAS 39 adjustment (see Note 25).
Fully depreciated property and equipment still in use amounted to P
= 15,268.34 million, P
= 10,833.65 million and
P
= 5,899.79 million in 2007, 2006 and 2005, respectively.
The carrying values of property and equipment held under finance leases where the Globe Group is the lessee are
as follows (see Note 25.1c):
2007
Furniture, fixtures and equipment
Transportation and work equipment
Less accumulated depreciation
Net book value at end of period
P
= 125,169
–
125,169
125,169
P
=–
2006
2005
(In Thousand Pesos)
P
= 144,372
P
= 138,978
4,043
3,850
148,415
142,828
147,793
136,481
P
= 622
P
= 6,347
The Globe Group’s information about borrowing costs follows:
2007
Capitalized interest
Other capitalized borrowing costs
P
= 78,679
20,484
P
= 99,163
2006
2005
(In Thousand Pesos)
P
= 45,530
P
= 111,340
2,550
28,323
P
= 48,080
P
= 139,663
The Globe Group uses its borrowed funds to finance the acquisition of property and equipment and bring it to its
intended location and in working condition. Borrowing costs incurred relating to these acquisitions were included in
the cost of property and equipment using 2.80%, 1.13% and 2.47% capitalization rates in 2007, 2006 and 2005,
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
= 13.78 million, P
= 22.60 million and P
= 28.40 million in 2007,
2006 and 2005, respectively.
8.
Investment Property
The rollforward analysis of this account follows:
2007
Cost
At January 1
Additions
At December 31
Accumulated Depreciation
At January 1
Depreciation
Reclassifications/adjustments
At December 31
Net Book Value at December 31
2006
(In Thousand Pesos)
2005
P
= 403,687
–
403,687
P
= 308,455
95,232
403,687
P
= 290,834
17,621
308,455
89,184
23,296
–
112,480
P
= 291,207
48,917
19,197
21,070
89,184
P
= 314,503
29,318
19,599
–
48,917
P
= 259,538
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:
2007
Lease income
Direct expenses
P
= 40,570
23,564
2006
(In Thousand Pesos)
P
= 33,445
40,788
2005
P
= 29,011
20,091
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 December 19, 2007.
9.
Intangible Assets
The rollforward analysis of this account follows:
2007
Cost
At January 1
Additions
Disposals
Reclassifications
At December 31
Accumulated Amortization
At January 1
Amortization
Disposals
Reclassifications
At December 31
Net Book Value at December 31
2006
(In Thousand Pesos)
2005
P
= 4,626,740
191,738
(249)
730,281
5,548,510
P
= 3,848,130
587,883
(742)
191,469
4,626,740
P
= 2,718,524
804,472
(91,012)
416,146
3,848,130
2,476,422
621,224
(11)
16,252
3,113,887
P
= 2,434,623
1,884,940
590,444
(6)
1,044
2,476,422
P
= 2,150,318
1,436,722
511,424
(63,097)
(109)
1,884,940
P
= 1,963,190
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. Investments in an Associate and a Joint Venture
This account consists of:
2007
Acquisition cost:
Bridge Mobile Pte. Ltd. (BMPL)
Globe Telecom Holdings, Inc. (GTHI)
Accumulated equity in net earnings (losses):
At January 1
BMPL
GTHI
Add equity in net losses:
BMPL
GTHI
At December 31
BMPL
GTHI
P
= 111,280
–
111,280
2006
(In Thousand Pesos)
P
= 56,332
–
56,332
(19,000)
–
(19,000)
(13,166)
–
(13,166)
(9,023)
–
(9,023)
(5,834)
–
(5,834)
83,257
–
P
= 83,257
37,332
–
P
= 37,332
2005
P
= 56,332
98
56,430
–
167
167
(13,311)
(23)
(13,334)
43,021
242
P
= 43,263
10.1 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, 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 (India),
Maxis Communications Berhad (Malaysia), Optus Mobile Pty. Limited (Australia), Singapore Telecom Mobile
Pte. Ltd. (Singapore), Taiwan Cellular Corporation (Taiwan), PT Telekomunikasi Selular (Indonesia) and
Hongkong CSL Ltd. (Hongkong).
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, 2007, Globe Telecom has paid USD2.20 million (P
= 111.28 million) broken down into
USD1.00 million (P
= 56.33 million) as initial subscription and additional investment totaling USD1.20 million
(P
= 54.95 million) made last April 24, 2007 and October 26, 2007.
The Globe Group’s interest in the JV is accounted for as follows:
2007
Assets:
Current
Noncurrent
Liabilities:
Current
Noncurrent
Income
Expenses
2006
(In Thousand Pesos)
2005
P
= 93,088
13,319
P
= 46,160
9,423
P
= 56,008
9,771
(10,927)
(3,344)
21,465
(30,344)
P
= 83,257
(11,262)
(1,300)
15,180
(20,869)
P
= 37,332
(9,447)
–
9,749
(23,060)
P
= 43,021
10.2 Investment in GTHI
GTHI is a special purpose vehicle incorporated in the Philippines, owned 32.67% each by Globe Telecom and
Ayala Corporation (AC), 33% by Singapore Telecom International Pte. Ltd. (STI) [a wholly owned subsidiary
of Singapore Telecom (SingTel)], and 1.66% by its directors and officers. On December 26, 2002, GTHI,
having completed and concluded its only business activity related to issuance of Philippine Deposit Receipts
(PDR), filed with the Philippine Securities and Exchange Commission (SEC) a request for the revocation of its
permit to sell PDRs. On December 8, 2003, the Philippine SEC approved the revocation of the Order of
Registration and Certificate of Permit to Sell Securities to the Public issued to GTHI. On December 15, 2004,
the BOD of GTHI approved the dissolution of GTHI, which was subsequently approved by the Philippine SEC
on December 13, 2005. The remaining assets of GTHI have been fully liquidated as of August 14, 2006.
11. Other Noncurrent Assets
This account consists of:
Notes
Deferred input VAT
Advance payments to suppliers and
contractors
Miscellaneous deposits
Prepaid pension
AFS investment in equity securities
at cost - net
Others - net
18
28.2.3
2007
2006
(In Thousand Pesos)
P
= 1,112,370
P
= 938,513
2005
P
= 92,264
992,212
364,628
162,754
355,959
340,134
247,437
279,206
342,492
264,024
–
273,887
P
= 2,905,851
–
126,065
P
= 2,008,108
–
36,594
P
= 1,014,580
AFS Investment in Equity Securities at Cost
Innove had a 4.25% ownership in C2C Holdings, Pte. Ltd. (C2C Holdings) consisting of 20 million Class A common
shares at an acquisition cost of P
= 894.55 million. C2C Holdings is the holding company for the equity investments of
all the cable landing parties in C2C Pte. Ltd. (C2C). C2C, a related party of STI, is a private cable company with a
network reaching 17,000 kilometers that links China, Hong Kong, Japan, Singapore, South Korea, Taiwan,
Philippines and the US. A full provision was recorded on this investment in 2003 based on the increased potential
risk to the restructuring of C2C’s debt.
The creditors of C2C appointed receivers in October 2005 and in January 2006, manifested their intention to take
over the management of C2C. C2C’s creditors subsequently served notice to C2C Holdings that it was taking
ownership of the shares of C2C Holdings in C2C due to the failure to achieve agreement on the restructuring of
C2C’s debt. On August 7, 2006, the C2C shares were formally transferred to C2C Group Limited, the company
formed by the creditors to take ownership of the C2C shares (see Note 25.4).
12. Accounts Payable and Accrued Expenses
This account consists of:
Notes
Accounts payable
Accrued expenses
Accrued project costs
Traffic settlements - net
Output VAT
Dividends payable
16
16
25.3
17.4
2007
2006
2005
(In Thousand Pesos)
P
= 6,747,779
P
= 5,855,423
P
= 5,744,393
4,893,285
4,378,534
4,101,400
4,448,646
4,548,838
2,444,114
2,085,881
1,501,931
1,544,657
210,413
135,870
69,324
49,449
64,669
68,334
P
= 18,435,453
P
= 16,485,265
P
= 13,972,222
Traffic settlements payable are presented net of traffic settlements receivable amounting to P
= 7,011.72 million,
P
= 5,135.88 million and P
= 7,478.60 million as of December 31, 2007, 2006 and 2005, respectively.
As of December 31, 2007, Globe Telecom and Innove reported a net output VAT amounting to P
= 210.41 million, net
of input VAT of P
= 384.49 million. As of December 31, 2006 and 2005, Globe Telecom reported a net output VAT
amounting to P
= 135.87 million and P
= 69.32 million, net of input VAT of P
= 156.16 million and P
= 207.07 million,
respectively.
13. Provisions
The rollforward analysis of this account follows:
Notes
At beginning of year
Provisions
Reversals
At end of year
23
2007
2006
2005
(In Thousand Pesos)
P
= 248,310
P
= 231,455
P
= 282,308
3,179
84,833
(12,694)
(31,802)
(67,978)
(38,159)
P
= 219,687
P
= 248,310
P
= 231,455
Provisions relate to various pending regulatory claims and assessments. 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. The provisions pertain to Globe Group’s
wireless and wireline business amounting to P
= 219.69 million, P
= 248.31 million and P
= 231.46 million as of
December 31, 2007, 2006 and 2005, respectively. As of February 4, 2008, 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. Long-term Debt
This account consists of:
2007
Corporate notes
Banks:
Local
Foreign
Retail bonds
2012 Senior Notes
Suppliers’ credits
Less current portion
P
= 14,407,000
6,534,518
6,193,028
2,738,306
–
–
29,872,852
4,803,341
P
= 25,069,511
2006
(In Thousand Pesos)
P
= 3,607,000
8,475,367
9,365,119
2,990,741
14,768,630
–
39,206,857
6,271,601
P
= 32,935,256
2005
P
= 4,109,000
10,137,664
15,973,138
2,983,743
16,386,579
103,264
49,693,388
7,858,150
P
= 41,835,238
The maturities of long-term debt at nominal values excluding unamortized debt issuance costs as of
December 31, 2007 follow (in thousand pesos):
Due in:
2008
2009
2010
2011
2012 and thereafter
P
= 4,820,108
7,595,226
3,831,278
1,601,287
12,094,055
P
= 29,941,954
Unamortized debt issuance costs on retail bonds included in the above long-term debt as of December 31, 2007
amounted to P
= 69.10 million.
The interest rates and maturities of the above loans are as follows:
Maturities
Interest Rates
2008-2012
5.65% to 8.61% in 2007
4.20% to 8.62% in 2006
2.17% to 12.45% in 2005
2008-2010
5.09% to 11.02% in 2007
6.22% to 11.02% in 2006
7.36% to 11.73% in 2005
Corporate notes
2010-2012
5.15% to 16.00% in 2007
6.22% to 16.00% in 2006
7.36% to 16.00% in 2005
Retail bonds
2008-2009
5.16% to 11.70% in 2007
6.57% to 11.83% in 2006
7.26% to 11.70% in 2005
Banks:
Foreign
Local
14.1 Senior Notes
Globe Telecom’s 2012 Senior Notes was issued on April 4, 2002 and has a maturity date of April 12, 2012.
It bears interest at the rate of 9.75% p.a.
The 2012 Senior Notes are redeemable in whole or in part at the option of Globe Telecom on or after
April 15, 2007 at the redemption dates set forth below:
2007
2008
2009
2010 and thereafter
Redemption price
104.875%
103.250%
101.625%
100.000%
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. 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-tomarket losses of 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 profit and loss in
April 2007 (see Note 22).
14.2 Bank Loans and Corporate Notes
Globe Telecom’s unsecured corporate notes, which consist of fixed and floating rate notes and pesodenominated 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 long-term indebtedness or guarantees and creation of property
encumbrances.
14.3 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.
The agreements covering the retail bonds provide restrictions with respect to, among others, maintenance of
certain financial ratios, sale, transfer, assignment or disposal of assets and creation of property
encumbrances.
As of February 4, 2008, Globe Telecom is not in breach of any loan covenants.
15. Other Long-term Liabilities
This account consists of:
Notes
ARO
Noninterest bearing liabilities
Accrued lease obligations and others
Advance lease
25.4, 28.2.5
25
25.4
Less current portion
2007
2006
2005
(In Thousand Pesos)
P
= 1,623,830
P
= 1,316,612
P
= 907,053
830,637
1,062,635
1,235,810
564,881
470,331
548,082
85,030
114,094
137,925
3,104,378
2,963,672
2,828,870
86,416
93,422
269,737
P
= 3,017,962
P
= 2,870,250
P
= 2,559,133
The maturities of other long-term liabilities at nominal amounts as of December 31, 2007 follow (in thousand
pesos):
Due in:
2008
2009
2010
2011
2012 and thereafter
P
= 83,928
90,501
97,669
105,486
2,726,794
P
= 3,104,378
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
At end of year
2007
P
= 1,316,612
30
22
150,051
157,167
P
= 1,623,830
2006
2005
(In Thousand Pesos)
P
= 769,795
P
= 907,053
281,557
128,002
P
= 1,316,612
44,433
92,825
P
= 907,053
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 SingTel. 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:
2007
Traffic settlements receivable - net
Interconnection revenues
(b)
P
= 63,391
1,573,686
2006
2005
(In Thousand Pesos)
P
= 61,061
P
= 335,766
1,028,552
1,422,249
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:
2007
Maintenance and restoration costs
and other transactions
Software development, supply,
license and support
Technical assistance fee
2006
(In Thousand Pesos)
2005
P
= 201,576
P
= 240,542
P
= 266,793
2,074
86,935
29,467
78,872
143,450
35,652
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:
2007
Maintenance and restoration costs
and other transactions
Software development, supply,
license and support
Technical assistance fee
(c)
2006
(In Thousand Pesos)
2005
P
= 54,047
P
= 24,203
P
= 13,738
14,218
25,080
31,004
25,606
11,940
81,019
Globe Telecom reimburses AC for certain operating expenses. The net outstanding liabilities to AC
related to these transactions as of December 31, 2007 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, 2007, 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
2007
2006
(In Thousand Pesos)
2005
4
6
P
= 63,391
1,925
P
= 61,061
1,651
P
= 335,766
927
12
121,820
100,413
129,420
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
2007
18
18
P
= 1,419,490
129,914
50,940
P
= 1,600,344
2006
2005
(In Thousand Pesos)
P
= 1,155,899
P
= 1,073,820
161,628
161,731
21,682
32,938
P
= 1,339,209 P
= 1,268,489
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:
2007
2006
2005
Shares
Amount
Shares
Amount
Shares
Amount
(In Thousand Pesos and Number of Shares)
Preferred stock - Series “A” P
= 5 per share
Common stock - P
= 50 per
share
250,000 P
= 1,250,000
250,000 P
= 1,250,000
250,000 P
= 1,250,000
179,934
179,934
179,934
8,996,719
8,996,719
8,996,719
Globe Telecom’s issued and subscribed capital stock consists of:
2007
2006
2005
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
132,334 6,616,677
132,080 6,603,989
131,900 6,595,022
(42,250)
(46,910)
(53,856)
P
= 7,367,002
P
= 7,349,654
P
= 7,333,741
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, 2007, 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
Acquisition of treasury
shares
Exercise of stock options
At end of year
2007
2006
2005
Amount
Shares
Amount
Shares
Amount
(In Thousand Pesos and Number of Shares)
132,080 P
= 6,603,989
131,900 P
= 6,595,022
139,904 P
= 6,995,200
–
–
254
12,688
132,334 P
= 6,616,677
–
–
180
8,967
132,080 P
= 6,603,989
(8,064) (403,211)
60
3,033
131,900 P
= 6,595,022
17.3 Treasury Stock
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 Philippine 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.
17.4 Cash Dividends
Information on Globe Telecom’s BOD declaration of cash dividends follows:
Per share
Preferred stock dividends declared on:
December 13, 2005
December 11, 2006
December 7, 2007
Common stock dividends declared on:
February 1, 2005
August 2, 2005
February 7, 2006
July 31, 2006
February 5, 2007
August 10, 2007
November 6, 2007
Date
Amount
Record
Payable
(In Thousand Pesos, Except Per Share Figures)
P
= 0.43
0.41
0.31
P
= 68,334
64,669
49,449
December 31, 2005
December 31, 2006
December 18, 2007
March 15, 2006
March 15, 2007
March 17, 2008
P
= 20.00
20.00
20.00
30.00
33.00
33.00
50.00
P
= 2,798,077
2,637,940
2,638,072
3,961,745
4,359,650
4,362,385
6,616,708
February 18, 2005
August 19, 2005
February 21, 2006
August 17, 2006
February 19, 2007
August 29, 2007
November 20, 2007
March 15, 2005
September 14, 2005
March 15, 2006
September 12, 2006
March 15, 2007
September 14, 2007
December 17, 2007
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 P50 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.
Cash Dividends Declared After Balance Sheet Date
On February 4, 2008, the BOD approved the declaration of the first semi-annual cash dividend in 2008 of
P
= 4,962.51 million (P
= 37.50 per common share) to common stockholders of record as of February 18, 2008
payable on March 13, 2008.
17.5 Restrictions on Retained Earnings
The retained earnings include the undistributed net earnings of consolidated subsidiaries and the accumulated
equity in net earnings of an associate and a joint venture accounted for under the equity method totaling
P
= 4,986.09 million as of December 31, 2007. This amount is not available for dividend declaration until
received in the form of dividends from subsidiaries and the joint venture. 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 various stock-based compensation plans. The number of shares allocated under the
plans shall not exceed the aggregate equivalent of 6% of the authorized capital stock.
The Employees Stock Ownership Plan (ESOWN) for all regular employees (granted in 1998 and 1999) and
the Executive Stock Option Plan 1 (ESOP1) for key senior executives (granted in 1998 and 2000) provide for
an initial subscription price for shares covered by each grant equivalent to 85% of the initial offer price. Any
subsequent subscription for the ESOP1 shall be for a price equivalent to 85% of the average closing price for
the month prior to the month of eligibility. These options are settled in equity once exercised. The qualified
officers and employees shall pay for the shares subscribed under the ESOWN and ESOP1 through
installments over maximum periods of 5 years and 10 years, respectively. The shares of stock have a
holding period of five years and the employees must remain with Globe Telecom or its affiliates over such
period. The plans also provide restrictions on sale or assignment of shares for five years from date of
subscription. The number of exercised shares under ESOP1 totaled 1.71 million shares with a weighted
average exercise price of P
= 196.75 per share. The remaining unexercised stock options under ESOWN and
ESOP1 expired in 2004.
Following are the additional stock option grants to key executives and senior management personnel of the
Globe Group under Executive Stock Option Plan 2 (ESOP2) from 2003 to 2007:
Date of
Grant
April 4, 2003
Number of
Options
Granted
680,200
Exercise
Price
P
= 547.00 per share
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
= 854.74 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 share
50% of the options become
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
Exercise Dates
50% of options
exercisable from April 4, 2005 to
April 14, 2013; the remaining
50% exercisable from April 4,
2006 to April 4, 2013
Fair Value
of each
Option
P
= 283.11
Fair Value
Measurement
Black-Scholes
option pricing
model
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.
ESOP2 required the grantees to pay a nonrefundable option purchase price of P
= 1,000.00. 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.
A summary of the Globe Group’s stock option activity and related information follows:
Outstanding, at beginning of year
Granted
Exercised
Expired/forfeited/cancelled
Outstanding, at end of year
Exercisable, at end of year
2007
2006
2005
Weighted
Weighted
Weighted
Average
Average
Average
Number of
Exercise
Number of Exercise
Number of
Exercise
Shares
Price
Shares
Price
Shares
Price
(In Thousands and Per Share Figures)
1,590,940
P
=811.62
1,281,350
P
= 730.01
1,450,600
P
= 709.77
604,000
1,270.50
749,500
854.75
8,000
547.00
547.00
(465,776)
782.32
(435,810)
647.80
(149,000)
604.19
(112,050)
766.69
(4,100)
604.32
(28,250)
1,617,114
P
=994.57
1,590,940
P
= 811.62
1,281,350
P
= 730.01
309,614
P
=785.65
447,540
P
= 712.80
172,350
P
= 547.00
The average share price at date of exercise of stock options as of December 31, 2007, 2006 and 2005
amounted to P
= 1,242.57, P
= 989.03 and P
= 807.08, respectively.
As of December 31, 2007, 2006 and 2005, the weighted average remaining contractual life of options
outstanding is 8.29 years, 8.17 years and 8.03 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
May 17, 2007
June 30, 2006
July 1, 2004
April 4, 2003
P
= 1,340.00
P
= 1,270.50
38.14%
10 years
4.93%
7.04%
P
= 930.00
P
= 854.75
29.51%
10 years
5.38%
10.30%
P
= 835.00
P
= 840.75
39.50%
10 years
4.31%
12.91%
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, 2007, 2006 and 2005 amounted to
P
= 129.91 million, P
= 161.63 million and P
= 161.73 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.
The components of pension expense (included in staff costs under “General, selling and administrative
expenses”) in the consolidated statements of income are as follows:
2007
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial losses (gains)
Total pension expense
Actual return on plan assets
P
= 168,374
80,224
(127,872)
11,157
P
= 131,883
P
= 120,701
2006
(In Thousand Pesos)
P
= 92,191
67,443
(108,839)
(2,605)
P
= 48,190
P
= 191,848
2005
P
= 93,305
81,207
(112,833)
(2,454)
P
= 59,225
P
= 80,456
The funded status included under “Other noncurrent assets” account for the pension plan of Globe Group is
as follows:
2007
Benefit obligation
Plan assets
Unrecognized net actuarial gains (losses)
Asset recognized in the consolidated balance
sheets
P
= 1,690,615
(1,341,568)
349,047
(511,801)
(P
= 162,754)
2006
2005
(In Thousand Pesos)
P
= 1,267,209
P
= 648,825
(1,254,906)
(1,066,441)
12,303
(417,616)
(259,740)
153,592
(P
= 247,437)
(P
= 264,024)
The following tables present the changes in the present value of defined benefit obligation and fair value of
plan assets:
Defined benefit obligation
2007
Balance at beginning of year
Interest cost
Current service cost
Benefits paid
Actuarial losses (gains)
Balance at end of year
P
= 1,267,209
80,224
168,374
(58,635)
233,443
P
= 1,690,615
2006
2005
(In Thousand Pesos)
P
= 648,825
P
= 603,622
67,443
81,207
92,191
93,305
(62,354)
(69,980)
521,104
(59,329)
P
= 1,267,209
P
= 648,825
Fair value of plan assets
2007
Balance at beginning of year
Expected return
Contributions
Benefits paid
Actuarial gains (losses)
Balance at end of year
P
= 1,254,906
127,872
47,200
(58,635)
(29,775)
P
= 1,341,568
2006
2005
(In Thousand Pesos)
P
= 1,066,441
P
= 1,018,309
108,839
112,833
31,603
14,023
(62,354)
(69,980)
110,377
(8,744)
P
= 1,254,906
P
= 1,066,441
The Globe Group expects to make additional contributions to its defined benefit pension plan amounting to
P
= 163.50 million in 2008.
The allocation of the fair value of the plan assets of Globe Telecom follows:
2007
68.00%
30.00%
2.00%
Investments in debt securities
Investments in equity securities
Others
2006
72.00%
25.00%
3.00%
2005
84.00%
15.00%
1.00%
2006
74.00%
17.00%
9.00%
2005
89.00%
7.00%
4.00%
The allocation of the fair value of the plan assets of Innove follows:
2007
66.00%
32.00%
2.00%
Investments in debt securities
Investments in equity securities
Others
As of December 31, 2007, the pension plan assets of Globe Telecom and Innove include shares of stock of
Globe Telecom with total fair value of P
= 41.55 million, and shares of stock of other related parties with total fair
value of P
= 147.50 million.
The assumptions used to determine pension benefits of Globe Telecom and Innove are as follows:
2007
8.25%
10.00%
7.00%
Discount rate
Expected rate of return on plan assets
Salary rate increase
2006
6.25% - 7.00%
10.30%
6.50%
2005
13.75%
10.50%
8.50%
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.
Amounts for the current and previous four years are as follows:
2007
Defined benefit
obligation
Plan assets
Deficit (surplus)
P
= 1,690,615
1,341,568
349,047
2006
2005
(In Thousand Pesos)
P
= 1,267,209
1,254,906
12,303
P
= 648,825
1,066,441
(417,616)
2004
603,622
1,018,309
(414,687)
2003
622,508
920,989
(298,481)
As of December 31, 2007 and 2006, experience adjustments on plan liabilities amounted to P
= 170.82 million
loss and P
= 72.59 million loss, respectively, while experience adjustments on plan assets amounted to
P
= 29.78 million loss and P
= 102.01 million gain, respectively.
19. Interest Income
Interest income is earned from the following sources:
2007
2006
(In Thousand Pesos)
P
= 566,358
P
= 640,545
161,630
212,755
633
1,565
P
= 728,621
P
= 854,865
Short-term placements
Cash in banks
Others
2005
P
= 548,348
61,153
10,588
P
= 620,089
20. Other Income
This account consists of:
Notes
2007
28
8, 25
P
= 1,431,214
220,258
153,009
P
= 1,804,481
Foreign exchange gain
Rent
Miscellaneous
2006
2005
(In Thousand Pesos)
P
= 1,706,387
P
= 2,303,327
229,488
241,299
215,695
336,177
P
= 2,151,570
P
= 2,880,803
The peso to US dollar exchange rates amounted to P
= 41.411, P
= 49.045 and P
= 53.062 as of December 31, 2007, 2006
and 2005, respectively.
The Globe Group’s net foreign currency-denominated liabilities amounted to USD188.16 million, USD408.88 million
and USD556.61 million as of December 31, 2007, 2006 and 2005, respectively.
These combinations of net liability movements and peso rate appreciation resulted to foreign exchange gain over
these periods.
21. General, Selling and Administrative Expenses
This account consists of:
Notes
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
18
25
16
2006
2005
(In Thousand Pesos)
P
= 4,536,508
P
= 3,564,239
P
= 3,518,910
4,469,486
3,524,546
4,697,406
2,569,773
2,080,746
1,839,999
2007
2,243,308
2,205,476
1,831,121
1,578,296
1,870,505
P
= 21,304,473
2,121,369
2,122,192
1,394,191
1,441,091
1,832,557
P
= 18,080,931
1,982,396
1,877,425
1,495,634
1,477,739
2,252,753
P
= 19,142,262
22. Financing Costs
This account consists of:
Interest expense
Loss on derivative instruments
Swap and other financing costs - net
Notes
2007
14, 28
14.1
P
= 2,996,347
801,617
1,426,975
P
= 5,224,939
Notes
2007
14
15, 25.4
P
= 2,726,466
268,390
–
1,491
P
= 2,996,347
2006
2005
(In Thousand Pesos)
P
= 4,213,976
P
= 4,657,748
338,061
104,301
426,712
681,871
P
= 4,978,749
P
= 5,443,920
Interest expense is incurred on the following:
Long-term debt
Accretion expense
Suppliers’ credit
Others
2006
2005
(In Thousand Pesos)
P
= 3,982,743
P
= 4,389,733
228,768
216,437
1,993
47,512
472
4,066
P
= 4,213,976
P
= 4,657,748
23. Impairment Losses and Others
This account consists of:
2007
Impairment loss (reversal of impairment loss) on:
Receivables
Property and equipment
Provisions for (reversal of):
Inventory obsolescence and market decline
Other probable losses
2006
(In Thousand Pesos)
2005
P
= 711,396
(71,431)
P
= 422,834
88,673
P
= 615,729
925,772
298,116
3,179
P
= 941,260
(61,392)
84,833
P
= 534,948
80,049
(12,694)
P
= 1,608,856
24. Income Taxes
The significant components of the deferred income tax assets and liabilities of the Globe Group represent the
deferred income tax effects of the following:
2007
Deferred income tax assets on:
Unearned revenues and advances already
subjected to income tax
Allowance for impairment losses on receivables
Cost of share-based payments
ARO
Accumulated impairment losses on property
and equipment
Provision for other probable losses
Accrued rent expense
Inventory obsolescence and market decline
Accrued vacation leave
Prepaid pension
Deferred charges
Unrealized foreign exchange losses
Deferred income tax liabilities on:
Excess of accumulated depreciation and
amortization of Globe Telecom equipment for
tax purposes (a) over financial reporting
purposes (b)
Capitalized borrowing costs already claimed as
deduction for tax purposes
Unrealized foreign exchange gain
Unamortized discount on noninterest bearing
liability
Gains on derivative transactions
Prepaid pension
Gain on sale of land
Net deferred income tax liabilities
(a)
Sum-of-the-years digit method
(b)
Straight-line method
2006
(In Thousand Pesos)
2005
P
= 686,740
496,717
300,714
291,520
P
= 484,780
954,927
155,520
212,967
P
= 518,293
1,664,166
31,370
154,956
285,106
165,149
110,959
73,017
16,841
1,835
489
–
2,429,087
144,164
94,973
91,212
47,374
57,591
–
14,525
–
2,258,033
223,562
42,984
70,328
101,345
47,583
–
51,868
400,440
3,306,895
5,435,482
5,077,030
4,815,995
1,404,139
264,485
1,369,788
241,894
1,352,303
–
133,822
56,328
–
–
7,294,256
P
= 4,865,169
164,094
74,072
69,291
–
6,996,169
P
= 4,738,136
194,060
136,650
70,554
6,257
6,575,819
P
= 3,268,924
Net deferred tax assets and liabilities presented in the consolidated balance sheets on a net basis by entity are as
follows:
2007
Net deferred tax assets (Innove and GXI)
Net deferred tax liabilities (Globe Telecom)
P
= 637,721
5,502,890
2006
2005
(In Thousand Pesos)
P
= 801,863
P
= 1,163,943
5,539,999
4,432,867
The details of GXI’s NOLCO are as follows (in thousands):
Inception Year
2005
2006
2007
Amount
P
= 18,176
36,720
47,589
P
= 102,485
Expiry Year
2008
2009
2010
The remaining balance of unexpired NOLCO relates to 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:
2007
Provision at statutory income tax rate
Add (deduct) tax effects of:
Tax rate difference arising from the change
in expected timing of deferred tax
assets’/liabilities’ reversal
Income subjected to lower tax rates
Equity in net losses of an associate and a
joint venture
Unearned revenues under income tax
holiday (ITH)
Income under ITH
Others
Actual provision for income tax
P
= 7,017,622
(71,599)
(107,310)
3,158
–
–
(68,542)
P
= 6,773,329
2006
2005
(In Thousand Pesos)
P
= 6,159,543
P
= 4,641,472
(263,414)
(96,045)
2,042
–
–
41,894
P
= 5,844,020
(222,142)
(36,087)
4,334
(365,344)
(254,486)
199,196
P
= 3,966,943
The current provision for income tax includes the following:
2007
Regular corporate income tax
Final tax
P
= 6,723,422
117,818
P
= 6,841,240
2006
2005
(In Thousand Pesos)
P
= 4,251,899
P
= 1,747,249
139,528
100,441
P
= 4,391,427
P
= 1,847,690
Globe Telecom is enfranchised under RA No. 7229 and its related laws to render any and all types of domestic and
international telecommunications services. Globe Telecom is 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
= 2,569.77 million, P
= 2,080.75 million and P
= 1,840.00 million for the years ended December 31, 2007,
2006 and 2005, respectively (see Note 21).
As of December 31, 2007, 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
= 1,998,509
9,841,286
2,608,838
P
= 14,448,633
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 (see related discussion on Agreements with
C2C).
Total lease income amounted to P
= 163.73 million, P
= 182.02 million and P
= 194.01 million for the years
ended December 31, 2007, 2006 and 2005, respectively.
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
P
= 146,744
586,975
476,917
P
= 1,210,636
Innove entered into a lease agreement covering the lease of office space at the Innove IT Plaza to a
third party. The lease has a remaining term of less than one year and renewable under certain terms
and conditions. As of December 31, 2007, the future minimum lease receivables under this operating
lease amounted to P
= 31.27 million.
(c)
Finance lease commitments - Globe Group as lessee
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, 2007, the consolidated present value of the net minimum lease payments due
within a year amounted to P
= 0.21 million. The present value of the minimum lease payments under
finance leases is included under the “Other long-term liabilities” account in the consolidated balance
sheets.
(d)
Finance lease commitments - Globe Group as lessor
Innove has existing finance lease arrangements with a lessee for Innove’s office equipment. As of
December 31, 2006 and 2005, the present value of the net minimum lease payments receivable
included under “Prepayments and other current assets” account in the consolidated balance sheets
amounted to P
= 5.13 million and P
= 2.02 million, respectively. As of December 31, 2007, Innove does not
have existing finance lease arrangements for its office equipment.
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, 2007, 2006 and 2005 included in the “Accounts payable and accrued expenses” account in the
consolidated balance sheets amounted to P
= 4,448.65 million, P
= 4,548.84 million and P
= 2,444.11 million,
respectively (see Note 12). As of December 31, 2007, the consolidated expected future payments amounted
to P
= 9,840.37 million. The settlement of these liabilities is dependent on the payment terms agreed with the
suppliers and contractors.
25.4 Agreements with C2C
In 2001, Globe Telecom signed a cable equipment supply agreement with C2C, a related party of STI. 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
= 830.63 million, P
= 1,062.64 million and P
= 1,235.81 million as
of December 31, 2007, 2006 and 2005, respectively (see Note 15).
Globe Telecom entered into agreements with C2C for the purchase of IRUs in its network. The aggregate
cost of capacity purchased from C2C amounted to P
= 1,133.79 million.
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
= 12.53 million, P
= 13.97 million
and P
= 15.06 million for the years ended December 31, 2007, 2006 and 2005, 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):
2007
Current
Noncurrent
P
= 11,305
73,725
P
= 85,030
2006
(In Thousand Pesos)
P
= 13,389
100,705
P
= 114,094
2005
P
= 14,759
123,166
P
= 137,925
As of December 31, 2005, C2C was still a related party of Globe Group until the transfer of Innove’s shares in
C2C to C2C Group Limited on August 7, 2006 (see Note 11). As of December 31, 2006, C2C ceased to be a
related party.
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 and no developments on previously disclosed legal cases for
the year.
NTC Memorandum Circular No.13-6-2000
The Globe Group is a party to Civil Case No.Q-00-42221 entitled “Isla Communications Co., Inc. et.al. versus NTC,
et.al.” before the Regional Trial Court (RTC) of Quezon City by virtue of which Globe Telecom and Innove, together
with other cellular operators, sought and obtained a preliminary injunction against the implementation of NTC
Memorandum Circular No.13-6-2000. NTC Memorandum Circular No.13-6-2000 sought, among others, to extend
the expiration of prepaid call cards to two years. The NTC appealed the grant of the injunction to the Court of
Appeals (CA) which subsequently dismissed the case before the RTC for lack of jurisdiction. The SC subsequently
reversed the decision of the CA and declared the RTC as having jurisdiction over the case. The SC remanded the
case to the RTC for further hearing. Hearings on this case are now ongoing with the RTC.
In the event, however, that the Globe Group is not eventually sustained in its position and NTC Memorandum
Circular No.13-6-2000 is implemented in its current form, the Globe Group would probably incur additional costs for
carrying and maintaining prepaid subscribers in their networks.
27. Earnings Per Share
The Globe Group’s earnings per share amounts were computed as follows:
2007
2006
2005
(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 common
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
= 13,227,570
49,449
P
= 11,690,004
64,669
P
= 10,246,174
68,334
13,277,019
11,754,673
10,314,508
132,184
131,998
133,520
564
576
800
301
982
146
133,324
P
= 100.07
P
= 99.58
133,099
P
= 88.56
P
= 88.32
134,648
P
= 76.74
P
= 76.60
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.
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.
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.
As of December 31, 2007, after taking into account the effect of currency and interest rate swaps,
38% and 56% of the Globe Group’s USD and PHP borrowings, respectively, are at a fixed rate of
interest.
The following table demonstrates the sensitivity of income before tax as of December 31, 2007 to a
reasonably possible change in interest rates, with all other variables held constant.
Increase/decrease
in basis points
USD
PHP
28.2.2
+5 bps
-5 bps
+100 bps
-100 bps
Effect on income
before tax
Effect on equity
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
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, 20% of debt as of December 31, 2007 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:
2007
Peso
US
Dollar Equivalent
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
2006
Peso
US
Dollar
Equivalent
(In Thousands)
US
Dollar
2005
Peso
Equivalent
$24,081
–
59,324
P
=997,203
–
2,456,648
$140,430
88
53,849
P
= 6,887,362
4,326
2,641,048
$78,901
–
50,162
P
= 4,186,627
–
2,661,691
9
83,414
389
3,454,240
750
195,117
36,774
9,569,510
5,238
134,301
277,948
7,126,266
99,873 4,135,830
149,586 6,194,516
22,112
915,667
271,571 11,246,013
88,118
492,199
23,679
603,996
4,321,763
24,139,882
1,161,337
29,622,982
53,534
611,487
25,889
690,910
2,840,690
32,446,723
1,373,734
36,661,147
Net foreign currencydenominated liabilities
$188,157 P
=7,791,773
$408,879 P
= 20,053,472
*This table excludes derivative transactions disclosed in Note 28.3.
$556,609 P
= 29,534,881
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).
Increase/decrease
in Peso to
US Dollar 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, as of December 31, 2007, the consolidated expected future payments on foreign
currency-denominated purchase orders related to capital projects amounted to USD225.00 million.
The settlement of these liabilities is dependent on the achievement of project milestones and
payment terms agreed with the suppliers and contractors. Foreign exchange exposure assuming a
+/- 12.50 centavos movement in PHP to USD rate on commitments amounted to P
= 28.13 million gain
or loss.
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.
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.
The table below shows the aging analysis of the Globe Group’s receivables as of
December 31, 2007. Comparative amounts for 2006 and 2005 are not presented since efforts
required to present the information shown below will be impracticable.
Wireless receivables:
Consumer
Corporate
Small and Medium
Enterprises (SME)
Wireline receivables:
Consumer
Corporate
SME
Traffic receivables:
Foreign
Local
Other receivables
Total
Past Due But Not Impaired
Impaired
Financial
Assets
Total
P
=155,202
181,610
P
=266,268
191,683
P
=1,377,247
645,874
16,763
134,134
73,691
410,503
216,574
674,525
465,580
2,488,701
71,227
13,728
205,634
290,589
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
=566,914
–
–
–
–
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
Neither Past
Due Nor
Impaired
Less than
30 days
P
=383,776
13,950
P
=349,596
116,406
P
=151,452
95,807
P
=70,953
46,418
67,501
465,227
61,985
527,987
29,066
276,325
234,259
314,822
110,065
659,146
129,635
35,681
336,910
502,226
1,644,169
–
689,189
–
2,333,358
–
385,331
–
P
=3,843,062 P
=1,030,213
31 to 60
61 to 90
More than
days
days
90 days
(In Thousands Pesos)
Total allowance for impairment losses amounting to P
= 1,383.48 million as of December 31, 2007
includes allowance from impairment arising from collective assessment amounting to P
= 48.99 million.
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, 2007. The Globe Group’s credit rating is based on individual borrower characteristics
and their relationship to credit event experiences.
Neither Past Due Nor Impaired
High Quality Medium 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 midrange 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):
2007
At beginning of year
Charges for the year
Reversals/write-offs/adjustments
At end of year
Subscribers
P
= 2,485,188
621,885
(2,009,650)
P
= 1,097,423
Traffic
Settlements
Non-trade
and Others (Note 6 and 11)
P
= 199,595
P
= 43,581
90,507
(996)
(4,050)
(6,865)
P
= 286,052
P
= 35,720
Total
P
= 2,728,364
711,396
(2,020,565)
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
and Others
P
= 215,618
42,559
(58,582)
P
= 199,595
Non-trade
(Note 6 and 11)
P
= 71,134
(16,312)
(11,241)
P
= 43,581
Total
P
= 4,754,761
422,834
(2,449,231)
P
= 2,728,364
Subscribers
P
= 4,787,070
660,307
(979,368)
P
= 4,468,009
Traffic
Settlements
and Others
P
= 301,721
(43,573)
(42,530)
P
= 215,618
Non-trade
(Note 6 and 11)
P
= 73,510
(1,005)
(1,371)
P
= 71,134
Total
P
= 5,162,301
615,729
(1,023,269)
P
= 4,754,761
2005
At beginning of year
Charges for the year
Reversals/write-offs/adjustments
At end of year
28.2.4 Impairment assessment
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.
For wireless postpaid subscribers, the allowance for impairment losses 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 accounts and each delinquency
bracket.
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.
For traffic receivables, impairment losses are made for accounts specifically identified to be doubtful
of collection regardless of the age of the account. Full allowance is generally provided after review of
the status of settlement with the carriers for net receivables not settled within industry observed
settlement periods.
Other receivables from dealers and credit card companies are provided with allowance for
impairment losses if specifically identified to be doubtful of collection regardless of the age of the
account.
Specific tests of impairment are performed on the Globe Group’s other financial assets such as cash
and cash equivalents, short-term investments, AFS financial assets and HTM investments.
28.2.5 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, 2007, Globe Group has available uncommitted short-term credit facilities of
USD39.00 million and P
= 4,520.00 million. The Globe Group currently has no committed long-term
facilities.
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.
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, 2007 figures (in thousands).
Long-term Liabilities:
2007
Total
(in USD)
Total
(in PHP)
Debt
Issuance Carrying Value
Costs
(in PHP)
Fair Value
(in PHP)
<1 year
>1-<2 years
>2-<3 years
>3-<4 years
>4-<5 years
$11,116
6.44%
$6,140
6.44%
$–
–
$–
–
$–
–
$17,256
P
= 714,596
P
=–
P
= 714,596
P
= 731,506
P
= 2,208,550
P
= 4,700,000
10.72%-11.70% 11.70% fixed; 3 mo
fixed; 3 mo
MART + 1.38%
MART+ 1.375%
P
=–
–
P
= 520,000
16% fixed
P
= 6,087,000
13.79%, 5.97%
fixed; MART
+1.50%
–
13,515,550
–
13,515,550
14,700,078
$33,822
LIBOR+1.20%,
LIBOR+.85%,
3 mo/6 mo
LIBOR+.43%
$32,222
LIBOR+.85%
3 mo/6 mo
LIBOR+.43%
$26,111
Libor+.85%,
3 mo/6 mo,
LIBOR+.43%
$5,000
3 mo/6 mo
LIBOR+.43%
132,576
5,490,089
11,657
5,478,432
5,579,271
P
= 684,423
P
= 1,240,373
Mart 1+1%
3 mo Mart 1+
margin
1.38%
Mart 1+1.30% Mart 1+1% margin
margin
Mart 1+1.30%
margin
P
= 2,496,923
Mart 1+1%
margin 3 mo
Mart 1+1.30%,
Mart 1+1.10%
margin
P
=–
P
= 5,800,000
13.79%,
5.97% fixed; Mart
1+ 1.50% margin
3 mo Mart 1+
1.30% , Mart 1+
1.10% margin
–
10,221,719
57,445
10,164,274
10,221,719
Interest Expense*
P
=2,087,837
P
=1,587,623
P
=1,138,130
P
=877,264
*Used month-end Libor and Philippine Dealing and Exchange Corporation (PDEX) rates.
P
=315,008
$149,832
P
=–
P
=29,941,954
P
=6,005,862
P
=69,102
P
=–
P
=29,872,852
P
=–
P
=31,232,574
P
=–
Liabilities:
Long-term debt
Fixed rate
USD notes
Interest rate
Philippine peso
Interest rate
Floating rate
USD notes
Interest rate
Philippine peso
Interest rate
$35,421
LIBOR+1.2%,
LIBOR+.85%,
3 mo/6 mo
LIBOR+.43%
2006
<1 year
Liabilities:
Long-term debt
Fixed rate
USD notes
Interest rate
Philippine peso
Interest rate
Floating rate
USD notes
Interest rate
Philippine peso
Interest rate
(Forward)
$18,383
6.55%
>1-<2 years
>2-<3 years
>3-<4 years
>4-<5 years
>5 years
Total
(in USD)
Total
(in PHP)
Premium and
Issuance Carrying Value
Costs
(in PHP)
Fair Value
(in PHP)
$11,116
6.44%
$6,140
6.44%
$–
–
$–
–
$293,540
10.83%
$329,179
P
= 16,144,584
P
= 371,961
P
= 16,516,545 P
= 18,829,694
P
= 1,306,400
P
= 2,249,800
10.18%-10.47% 10.18%-10.47%
P
= 4,700,000
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
$69,902
Libor+.45%
Libor+1%
Libor+1.20%
Libor+1.375%
Libor+2%
Libor+2.05%
Libor+3.2%
Libor only; Libor +
.85%
$28,254
Libor + 3.20%
Libor+1.75%
Libor+1.20%
Libor + .85%
$23,822
Libor+1.20%
Libor + .85%
$22,222
Libor + .85%
$11,111
Libor +.85%
$–
155,311
7,617,204
–
7,617,204
5,220,964
P
= 797,447
Mart 1 + 1.3%
margin;
Mart 1 + 1%
margin
P
= 684,423
Mart 1 + 1.3%
margin;
Mart 1 + 1%
margin
P
= 1,240,373
Mart 1 + 1.3%
margin;
Mart 1 + 1%
margin
P
= 2,496,923
Mart 1 + 1%
3 mo Mart +
1.30%
P
=–
3 mo Mart1 +
1.75%
Mart 1 + 1%
margin
P
=–
–
5,219,166
–
5,219,166
5,219,166
$484,490
P
= 38,844,154
P
= 362,703
P
= 39,206,857 P
= 40,758,312
2005
<1 year
Liabilities:
Long-term debt
Fixed rate
USD notes
Interest rate
$20,329
4.81% -6.55%
>1-<2 years
$18,383
4.81% -6.55%
Philippine peso
P
= 876,400
P
= 1,347,650
Interest rate
10.37% - 10.72% 10.37% - 10.72%
Floating rate
USD notes
$91,695
$69,902
Interest rate
Libor only; Libor + Libor only; Libor +
.45% - Libor +
.45% - Libor +
3.20%
3.20%
Philippine peso
Interest rate
P
= 985,898
Mart 1 + 1.3%
margin;
Mart 1 + 1.5%
margin;
Mart 1 + 1%
margin
3 mo Mart + 1%
margin
3 mo Mart +
1.38% margin
P
= 797,447
Mart 1 + 1.3%
margin;
Mart 1 + 1.5%
margin;
Mart 1 + 1%
margin
3 mo Mart + 1%
margin
3 mo Mart +
1.38% margin
>2-<3 years
$11,116
6.44%
>3-<4 years
$6,140
6.44%
P
= 2,208,550
P
= 5,002,000
10.37% - 10.72% 10.47% - 13.79%
$28,254
Libor + .6755% Libor +1.63%
$23,822
Libor +1.20% Libor + 1.63%
P
= 684,423
Mart 1 + 1.3%
margin;
Mart 1 + 1.5%
margin;
Mart 1 + 1%
margin
P
= 1,240,373
Mart 1 + 1%
3 mo Mart +
1.375%
3 mo Mart + 1%
>4-<5 years
$–
–
>5 years
$300,000
10.83%
Total
(in PHP)
Premium and
Issuance
Costs
$355,968 P
= 18,888,369
P
= 467,979
Total
(in USD)
Carrying
Value
(in PHP)
Fair Value
(in PHP)
P
= 19,356,348 P
= 21,870,614
P
=–
P
= 1,607,000
– 13.49% - 16%
–
11,041,600
(16,256)
11,025,344
12,201,003
$22,222
$11,111
Libor +1.63% Libor +1.63%
247,006
13,106,632
−
13,106,632
13,273,951
–
6,205,064
−
6,205,064
6,205,064
$602,974 P
= 49,241,665
P
= 451,723
P
= 2,496,923
3 mo Mart 1 +
1.75%
Mart 1 + 1%
margin
P
=–
P
= 49,693,388 P
= 53,550,632
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, 2007 (in thousands):
Other Liabilities:
Accounts payable and accrued
expenses
Derivative liabilities
Notes payable*
On demand
Less than
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
218,772
500,000
P
=–
6,689
–
P
=–
–
–
P
=–
19,035
–
P
=–
96,335
–
P
=–
–
–
P
= 18,435,453
340,831
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
= 18,075,101
P
= 85,885
P
= 86,364
P
= 113,216
P
= 199,040
P
= 395,568
P
= 20,106,921
*On December 11, 2007, the Globe Group obtained a short-term promissory note from a local bank for working capital requirements. This note bears interest at 5.25% annually and will mature on
January 10, 2008.
Derivative Instruments:
2008
2009
Receive
Pay
P
=–
50,058
2010
Receive
Pay
P
= 21,447
P
=–
–
22,902
2011
Receive
Pay
P
= 13,259
P
=–
–
756
2012 and beyond
Receive
Pay
Receive
Pay
P
= 13,259
P
=–
–
1,680
P
= 13,259
P
=–
P
= 6,648
–
956
–
Projected Swap Coupons*:
Principal Only Swaps
Interest Rate Swaps
*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.
28.2.6
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:
2007
Notional
Amount
Derivative instruments designated as
hedges:
Cash flow hedges:
Nondeliverable forwards*
Interest rate swaps
Derivative instruments not designated
as hedges:
Freestanding:
Nondeliverable forwards**
Interest rate swaps
Currency swaps and cross
currency swaps
Embedded:
Currency forwards***
Currency options****
Net
Derivative
Liability
$120,000
35,000
P
=–
–
P
= 267,865
–
P
=–
15,026
46,000
15,000
–
2,000,000
115,064
58,922
97,027
11,613
10,000
–
–
172,194
34,305
430
–
–
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.
Notional
Derivative
Asset
Amount
(In Thousands)
2006
Notional
Amount
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 14.1)
Currency forwards**
Currency options***
Net
Notional
Derivative
Amount
Asset
(In Thousands)
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
Notional
Derivative
Assets
Amount
(In Thousands)
Derivative
Liabilities
*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
2005
Notional
Amount
Derivative instruments designated as
hedges:
Cash flow hedges:
Currency and cross currency
swaps
Interest rate swaps
Derivative instruments not
designated as hedges:
Freestanding:
Currency swaps and crosscurrency swaps
Interest rate swaps
Sold currency call options
(including premiums
receivable)
Embedded:
Interest call option on 2012
Senior Notes(see Note 14.1)
Currency forwards*
Currency options**
Net
$91,944
56,162
P
=–
–
P
= 16,657
57,491
P
= 431,320
–
83,061
5,000
–
1,000,000
19,863
69,112
249,007
18,763
27,700
–
15,013
2,330
300,000
–
1,268,712
–
11,720
1,080
–
–
101,808
235
P
= 1,548,891
30,326
–
P
= 731,746
* The embedded currency forwards are at a net sell position.
**All embedded options are long call positions
The table below also sets out information about the Globe Group’s derivative instruments that were entered
into to manage interest and foreign exchange risks related to the long-term liabilities shown under liquidity risk
as of December 31 (in thousands).
2007
<1 year
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
>1-<2 years
>2-<3 years
>3-<4 years
>4-<5 years
Total
$5,000
$10,000
P
=56.25
4.62% - 5.89%
$5,000
–
–
P
=1,000,000
–
–
–
–
–
–
$5,000
$24,148
$5,000
LIBOR+4.23% Mart +1.38%
9.75% - 11.70%
–
$11,667
P
=1,000,000
$13,333
–
$13,333
–
$6,667
–
–
$24,148
$45,000
4.84% - 7.09%
USD LIBOR Mart +1.38%
2006
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
<1 year
>1-<2 years
>2-<3 years >3-<4 years
$13,879
$10,000
$10,000
$6,094
$417
–
>4-<5 years
>5 years
Total
$5,000
$15,000
$65,000
$118,879
P
= 53.524
4.62%-10.25%
–
–
–
$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%
2005
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 USD
Pay-fixed rate
Receive-floating
rate
<1 year
>1-<2 years
>2-<3 years >3-<4 years
$21,548
$13,880
$10,000
$10,000
$13,755
$6,094
$417
–
>4-<5 years
>5 years
Total
$5,000
$80,000
$140,428
P
= 53.16
4.62% - 10.25%
–
–
$20,266
11.00% - 15.23%
USD Libor
P
= 51.64
$10,152
$3,742
$417
–
–
–
$14,311
Mart + 1.25% - 2.85%
USD Libor
P
= 51.34
–
–
–
–
–
–
P
= 1,000,000
–
–
–
–
$5,000
$18,846
$5,000
Libor+ 4.23% Mart+1.38%
9.75% - 11.70%
$32,065
$24,098
–
–
–
–
$56,163
USD 2.30% - 4.20%
USD Libor
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, 2007 the Globe Group has USD35.00 million 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 4.835% over the duration of the agreement, which involves semiannual payment intervals up to January 2011.
As of December 31, 2007, the fair value of the outstanding swap amounted to P
= 15.03 million loss, of
which P
= 9.77 million (net of tax) is reported as “Cumulative translation adjustment” in the equity section
of the consolidated balance sheets. Accumulated swap income for the year ended December 31, 2007
amounted to P
= 7.36 million.
·
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 USD120.00 million have maturities until
January 2009. The fair value of the outstanding short-term nondeliverable currency forwards as of
December 31, 2007 amounted to P
= 267.86 million gain of which P
= 174.11 million (net of tax) is reported in
the equity section of the consolidated balance sheets.
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 USD10.00 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.
·
Nondeliverable Forwards
The Globe Group entered into short-term nondeliverable currency forward contracts. These currency
forward contracts with a notional amount of USD46.00 million with maturities extending to
December 2008. The unrealized gain amounted to P
= 18.04 million in 2007.
·
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 semi-annual payments interval up to April 2012.
The swaps have outstanding notional of USD15.00 million as of December 31, 2007.
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, 2007 amounted to a net gain of
P
= 58.92 million and loss of P
= 11.61 million.
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, 2007, the total outstanding notional amount of currency forwards embedded in
nonfinancial contracts amounted to USD34.30 million. 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, 2007 amounted to P
= 41.81 million.
·
Embedded Currency Options
As of December 31, 2007, the total outstanding notional amount of currency options embedded in
nonfinancial contracts amounted to USD0.43 million. The fair value of the embedded currency options
as of December 31, 2007 amounted to P
= 0.01 million.
28.8 Fair Value Changes on Derivatives
The net movements in fair value changes of all derivative instruments are as follows:
2007
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
= 540,544
193,165
(1,512,636)
(778,927)
(966,742)
P
= 187,815
2006
2005
(In Thousand Pesos)
P
= 817,145
P
= 1,266,411
(254,589)
45,462
608,018
67,474
P
= 540,544
(429,336)
27,006
864,081
46,936
P
= 817,145
28.9 Hedge Effectiveness Results
As of December 31, 2007, the effective fair value changes on the Globe Group’s cash flow hedges that were
deferred in equity amounted to P
= 164.34 million, net of tax. Total ineffectiveness recognized immediately in
the consolidated statements of income for the year ended December 31, 2007 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:
2007
Financial assets:
Financial assets at FVPL:
Derivative assets designated
as cash flow hedges
Derivative assets not designated as
hedges
AFS financial assets
HTM investments
Loans and receivables - net
Financial liabilities:
Financial liabilities at FVPL:
Derivative liabilities designated
as cash flow hedges
Derivative liabilities not designated
as hedges
Financial liabilities at amortized cost
2006
(In Thousand Pesos)
2005
P
= 267,865
P
= 8,644
P
= 74,148
260,781
–
2,350,032
13,074,545
1,618,023
293,614
857,563
19,188,969
1,474,743
1,220,318
33,441
17,675,091
P
= 15,026
P
= 574,654
P
= 431,320
325,805
48,160,525
511,469
55,880,129
300,426
64,183,705
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:
2005
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
(Forward)
P
= 6,191,004
500,000
–
2,350,032
6,383,541
528,646
P
= 6,191,004
500,000
–
2,350,032
6,383,541
528,646
P
= 7,505,715 P
= 7,505,715
6,155,349
6,155,349
293,614
293,614
857,563
857,825
5,527,905
5,527,905
1,626,667
1,626,667
P
= 10,910,961 P
= 10,910,961
–
–
1,220,318
1,220,318
33,441
33,404
6,764,130
6,764,130
1,548,891
1,548,891
2005
2007
2006
Carrying Value Fair Value Carrying Value Fair Value Carrying Value
Fair Value
(In Thousand Pesos)
Financial liabilities:
Accounts payable and
accrued expenses
Derivative liabilities
(including current
portion)
Notes payable
Long-term debt
(including current
portion)
Other long-term
liabilities (including
current portion)
P
= 16,392,155
P
= 16,392,155
P
= 15,140,306 P
= 15,140,306 P
= 12,706,425 P
= 12,706,425
340,831
500,000
340,831
500,000
1,086,123
–
1,086,123
–
731,746
–
731,746
–
29,872,852
31,232,574
39,206,857
40,758,312
49,693,388
53,550,632
1,395,518
1,486,606
1,532,966
1,561,973
1,783,892
2,219,844
Traffic settlements receivable, included in the “Receivables” account and traffic settlements payable, included
as part of the “Accounts payable and accrued expenses” account, in the above tables, are presented net of
any related payable or receivable balances with the same telecommunications carrier only when there is a
legal right of offset under the traffic settlement agreements and that the accounts are settled on a net basis.
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, 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 3.23% to 4.59% (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.
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 assumptions that are based on market conditions
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. The fair values of structured swaps transactions are determined based
on quotes obtained from counterparty banks.
Embedded currency options are valued using the simple option pricing model of Bloomberg.
29. Segment Reporting
The Globe Group’s reportable segments consist of:
Wireless Communications Services - represents cellular telecommunications services that allow subscribers to make
and receive local, domestic long distance and international long distance calls to and from any place within the
coverage area. Revenues principally consist of one-time registration fees, fixed monthly service fees for postpaid,
subscription fees for prepaid, revenues from value-added services such as text messaging, content downloads and
web browsing, proceeds from sale of phonekits, handsets and other phone accessories, one-time allocation of
upfront fees for the excess of selling price of SIM packs over the preloaded airtime and per minute airtime, toll fees
for intranetwork, domestic and international outbound calls and text messaging services used by subscribers 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 and inbound toll fees from local and
foreign carriers and partners.
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 value-added services in various areas covered by the 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, value-added service 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.
The Globe Group’s segment information is as follows (in thousand pesos):
2007
Wireless
Communications
Services
Wireline
Communications
Services
Eliminations
Consolidated
P
=56,410,341
P
=6,798,311
P
=–
P
=63,208,652
Nonservice revenues
2,263,186
36,878
–
2,300,064
Intersegment revenues
1,008,887
135,890
565,101
163,520
Service revenues
Interest income
Other income - net
Total revenue
(Forward)
(1,144,777)
–
–
728,621
7,228,846
124,638
(5,549,003)
1,804,481
67,476,361
7,259,237
(6,693,780)
68,041,818
Wireless
Communications
Services
Wireline
Communications
Services
Eliminations
Consolidated
(P
=18,055,871)
(P
=4,877,421)
P
=1,628,819
(P
=21,304,473)
(13,938,120)
(2,938,844)
Financing costs
(5,122,657)
(102,282)
–
(5,224,939)
Cost of sales
(3,798,189)
(90,917)
566,329
(3,322,777)
(572,189)
(369,071)
–
(941,260)
General, selling and administrative
Depreciation and amortization
Impairment losses and others
(312,034)
(17,188,998)
Equity in net losses of an associate and a
joint venture
Income (loss) before income tax
Benefit from (provision for) income tax
Net income (loss)
(9,023)
25,980,312
(7,112,783)
–
(1,119,298)
339,454
–
(4,810,666)
–
(P
=4,810,666)
(9,023)
20,050,348
(6,773,329)
P
=13,277,019
P
=18,867,529
(P
=779,844)
P
=10,151,435
P
=3,770,522
P
=–
P
=13,921,957
Wireless
Communications
Services
Wireline
Communications
Services
Eliminations
Consolidated
P
= 50,671,825
P
= 6,361,794
P
=–
P
= 57,033,619
2,888,850
26,539
–
2,915,389
Intersegment revenues
385,475
117,467
Interest income
730,291
124,574
4,203,917
3,492
(2,055,839)
Other segment information:
Capital expenditure
2006
Service revenues
Nonservice revenues
Other income - net
Total revenue
(502,942)
–
–
854,865
2,151,570
58,880,358
6,633,866
(2,558,781)
62,955,443
General, selling and administrative
(15,653,285)
(3,670,489)
1,242,843
(18,080,931)
Depreciation and amortization
(14,211,642)
(2,574,042)
Financing costs
(4,887,283)
(91,466)
–
(4,978,749)
Cost of sales
(4,535,197)
(84,479)
941
(4,618,735)
(243,778)
(291,170)
–
(534,948)
Impairment losses and others
(351,869)
(17,137,553)
Equity in net losses of an associate and a joint
venture
Income (loss) before income tax
Benefit from (provision for) income tax
Net income (loss)
(5,834)
19,343,339
(5,856,503)
–
(77,780)
12,483
P
= 13,486,836
(P
= 65,297)
P
= 12,598,829
P
= 2,281,624
–
(1,666,866)
–
(P
= 1,666,866)
(5,834)
17,598,693
(5,844,020)
P
= 11,754,673
Other segment information:
Capital expenditure
P
=–
P
= 14,880,453
2005
Wireless
Wireline
Communications
Communications
Services
Services
Eliminations
Consolidated
P
= 48,481,323
P
= 6,415,490
P
=–
P
= 54,896,813
3,747,553
103,235
–
3,850,788
Intersegment revenues
645,090
361,265
Interest income
566,302
53,787
Service revenues
Nonservice revenues
Other income - net
Total revenue
(Forward)
(1,006,355)
–
–
620,089
5,648,872
(3,611)
(2,764,458)
2,880,803
59,089,140
6,930,166
(3,770,813)
62,248,493
Wireless
Wireline
Communications
Communications
Services
General, selling and administrative
Depreciation and amortization
Services
Eliminations
Consolidated
(P
= 17,542,682)
(P
= 3,578,904)
P
= 1,979,324
(P
= 19,142,262)
(12,920,623)
(2,449,546)
Financing costs
(5,341,139)
(102,781)
–
(5,443,920)
Cost of sales
(5,927,286)
(142,936)
45,511
(6,024,711)
Impairment losses and others
Equity in net losses of an associate and a joint
venture
(1,455,431)
(153,425)
–
(1,608,856)
Income (loss) before income tax
15,888,645
Provision for income tax
–
(13,334)
502,574
(3,809,377)
Net income (loss)
(157,566)
P
= 12,079,268
P
= 345,008
P
= 13,855,569
P
= 1,266,973
(363,790)
–
(2,109,768)
–
(P
= 2,109,768)
(15,733,959)
(13,334)
14,281,451
(3,966,943)
P
= 10,314,508
Other segment information:
Capital expenditure
P
=–
P
= 15,122,542
The segment assets and liabilities as of December 31, 2007, 2006 and 2005 are as follows (in thousand pesos):
2007
Segment assets
Investments in a joint venture under equity
method
[1]
Consolidated total assets
Consolidated total liabilities
[1]
[1]
Wireless
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
=20,727,496
–
(P
=19,992,148)
83,257
P
=115,983,132
P
=56,764,134
P
=2,593,317
(P
=3,656,299)
P
=55,701,152
Wireless
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
= 17,463,845
–
(P
= 18,965,502)
37,332
P
= 123,777,970
P
= 63,070,580
P
= 1,974,920
(P
= 2,953,817)
P
= 62,091,683
Wireless
Communications
Services
P
= 122,852,929
Wireline
Communications
Services
P
= 18,921,175
Eliminations
(P
= 17,878,920)
Consolidated
P
= 123,895,184
43,263
P
= 122,896,192
–
P
= 18,921,175
–
(P
= 17,878,920)
43,263
P
= 123,938,447
P
= 64,854,937
P
= 6,416,199
(P
= 2,220,423)
P
= 69,050,713
Consolidated total assets and liabilities do not include deferred income taxes.
2006
Segment assets
Investments in a joint venture under equity
method
[1]
Consolidated total assets
Consolidated total liabilities
[1]
[1]
Consolidated total assets and liabilities do not include deferred income taxes.
2005
Segment assets
Investments in an associate and a joint
venture under equity method
[1]
Consolidated total assets
Consolidated total liabilities
[1]
[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:
2007
Increase (decrease) in liabilities related to the
acquisition of property and equipment
Capitalized ARO
Dividends on preferred shares
(P
= 193,823)
150,051
49,449
2006
(In Thousand Pesos)
P
= 2,246,425
281,557
64,669
2005
(P
= 938,673)
44,433
68,334
The cash and cash equivalents account consists of:
2007
Cash on hand and in banks
Short-term placements
P
= 1,679,081
4,511,923
P
= 6,191,004
2006
2005
(In Thousand Pesos)
P
= 2,861,698
P
= 736,200
4,644,017
10,174,761
P
= 7,505,715
P
= 10,910,961
Cash in banks earn interest at respective bank deposit rates. Short-term placements are made for varying periods
of up to three months depending on the immediate cash requirements of the Globe Group and earn interest at the
respective short-term placement rates.
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. The management, upon
review of its dividend policy, recommended an increase in the dividend payment to stockholders. On July 31, 2006,
Globe Telecom’s BOD approved an amendment to its dividend policy, increasing the pay-out from 50% to 75% of
prior year’s income.
Further on November 6, 2007, the BOD approved a special cash dividend totaling P
= 6,616.71 million partly to
optimize its capital structure (see Note 17.4).
The Globe Group is not subject to externally imposed capital requirements. The ratio of debt to total capitalization
for the years ended December 31, 2007, 2006 and 2005 was at 35%, 41% and 49%, respectively.
COVER SHEET
A 1 9 9 6 - 1 1 5 9 3
SEC Registration Number
M A N I L A
WA T E R
C OM P A N Y ,
I N C .
(Company’s Full Name)
MW S S
B u i l d i n g ,
l a r a ,
Q u e z o n
K a t i p u n a n
R o a d ,
B a
C i t y
(Business Address: No. Street City/Town/Province)
Ms. Sherisa P. Nuesa
926-7999
(Contact Person)
(Company Telephone Number)
1 2
3 1
Month
Day
A A F S
(Form Type)
Month
(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.
*SGVMC110470*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
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
Manila Water Company, Inc.
MWSS Building, Katipunan Road
Balara, Quezon City
We have audited the accompanying financial statements of Manila Water Company, Inc., which
comprise the balance sheets as at December 31, 2007 and 2006, and the statements of income,
statements of changes in stockholders’ equity and statements of cash flows for each of the three years
in the period ended December 31, 2007 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.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC110470*
*SGVMC110470*
MANILA WATER COMPANY, INC.
BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents (Notes 4, 12 and 24)
Short-term cash investments (Note 24)
Receivables - net (Notes 5, 12, 16, 17, 19 and 24)
Materials and supplies - net (Notes 6 and 17)
Other current assets (Notes 7 and 24)
Total Current Assets
Noncurrent Assets
Property, plant and equipment - net (Notes 8, 12, 20 and 26)
Concession assets - net (Notes 1, 9 and 20)
Deferred tax assets - net (Note 17)
Available-for-sale financial assets (Notes 16, 23 and 24)
Other noncurrent assets - net (Note 10)
Total Noncurrent Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts and other payables (Notes 11, 14 and 24)
Current portion of long-term debt (Notes 12 and 24)
Income tax payable
Payables to stockholders (Note 16)
Total Current Liabilities
Noncurrent Liabilities
Long-term debt - net of current portion (Notes 12, 17 and 23)
Customers’ guaranty and other deposits (Note 24)
Pension liabilities
Deferred credits (Note 2)
Total Noncurrent Liabilities
Total Liabilities
Stockholders’ Equity (Note 13)
Preferred stock
Common stock (Note 1)
Subscribed common stock
Additional paid-in capital (Note 1)
Subscriptions receivable
Common stock options outstanding
Retained earnings
Appropriated for capital expenditure
Unappropriated (Note 13)
Unrealized gain on available-for-sale financial assets
Treasury shares - at cost (Note 1)
Total Stockholders’ Equity
December 31
2007
2006
P
=1,536,620,847
1,387,910,704
371,588,131
41,334,362
784,632,729
4,122,086,773
=6,455,206,527
P
177,000,000
231,033,038
71,822,609
561,266,082
7,496,328,256
15,917,500,756 12,599,444,643
3,524,683,626
3,587,054,318
223,152,921
246,883,421
597,675,980
297,739,188
49,754,389
35,236,293
20,312,767,672 16,766,357,863
P
=24,434,854,445 =
P24,262,686,119
P
=3,118,499,624
241,318,202
222,744,167
125,426,433
3,707,988,426
=3,353,191,424
P
927,513,369
–
117,960,673
4,398,665,466
5,995,255,579
796,182,281
205,115,742
366,325,114
7,362,878,716
11,070,867,142
7,130,025,054
364,136,705
225,954,432
270,044,465
7,990,160,656
12,388,826,122
900,000,000
2,005,443,965
12,741,345
3,234,454,456
(55,940,286)
7,969,056
900,000,000
2,005,443,965
11,330,000
3,177,058,289
(41,699,920)
6,091,424
2,000,000,000
–
5,758,369,350
6,115,908,683
7,758,369,350
6,115,908,683
4,710,168
3,850,107
13,867,748,054 12,177,982,548
(503,760,751)
(304,122,551)
13,363,987,303 11,873,859,997
P
=24,434,854,445 P
=24,262,686,119
See accompanying Notes to Financial Statements.
*SGVMC110470*
MANILA WATER COMPANY, INC.
STATEMENTS OF INCOME
2007
REVENUE
Water (Notes 1 and 16)
Environmental charges (Notes 1 and 16)
Sewer (Notes 1 and 16)
Interest income (Note 18)
Other income (Notes 1, 18 and 23)
COSTS AND EXPENSES
Depreciation and amortization (Notes 8 and 9)
Salaries, wages and employee benefits (Notes 13, 14 and 16)
Power, light and water
Foreign currency differentials (Notes 1 and 18)
Management, technical and professional fees (Note 16)
Interest expense (Notes 12 and 18)
Regulatory costs (Note 20c)
Repairs and maintenance
Provision for probable losses (Notes 5 and 10)
Collection fees
Business meetings and representation
Taxes and licenses
Occupancy costs (Note 21)
Transportation and travel
Water treatment chemicals
Wastewater costs
Advertising
Postage, telephone and supplies
Insurance
Premium on performance bond (Notes 12 and 20b)
Other expense
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM) INCOME
TAX (Notes 3 and 17)
NET INCOME
Earnings Per Share (Note 15)
Basic
Diluted
Years Ended December 31
2006
2005
P
=6,241,051,038
637,258,409
348,718,965
152,745,791
445,601,471
7,825,375,674
=5,250,230,137
P
532,079,975
308,139,512
294,978,672
399,296,568
6,784,724,864
=
P4,538,406,588
464,866,629
279,796,521
218,913,874
261,118,093
5,763,101,705
1,382,838,537
888,015,909
446,558,592
368,037,568
247,918,896
234,561,959
176,263,265
135,571,565
130,161,196
91,231,669
58,764,671
57,173,375
42,724,394
40,749,284
39,812,351
39,434,407
25,531,700
25,254,047
24,413,526
21,659,421
38,119,027
4,514,795,359
1,134,778,396
1,054,589,970
395,943,450
312,461,296
268,529,522
289,643,411
165,660,962
87,020,696
394,252,040
73,125,854
47,149,799
52,454,788
45,541,677
40,539,923
48,884,748
26,118,435
22,616,031
20,369,962
27,272,019
25,127,429
26,683,595
4,558,764,003
952,738,254
796,106,650
444,210,657
226,636,340
267,388,249
281,770,580
154,109,200
49,344,702
195,228,005
62,538,104
23,601,966
48,867,373
36,889,275
45,766,513
57,951,867
30,257,223
20,175,652
17,087,378
28,453,133
20,349,719
63,892,130
3,823,362,970
3,310,580,315
2,225,960,861
1,939,738,735
891,544,958
(168,209,216)
(71,782,724)
P
=2,419,035,357
=2,394,170,077
P
=
P2,011,521,459
P
=1.06
P
=1.06
P1.05
=
=1.05
P
P0.94
=
=0.93
P
See accompanying Notes to Financial Statements.
*SGVMC110470*
MANILA WATER COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
2007
CAPITAL STOCK (Note 13)
Preferred stock - =
P0.10 par value, 10% cumulative, voting
participating, nonredeemable and nonconvertible
Authorized, issued and outstanding - 4,000,000,000
shares
Preferred stock - =
P1 par value, 8% cumulative, nonvoting,
nonparticipating, nonconvertible, redeemable at the
Company’s option
Authorized and issued - 500,000,000 shares
Balance at beginning and end of year
Common stock - =
P1 par value (Note 1)
Authorized - 3,100,000,000 shares
Issued - 2,005,443,965 shares in 2007, 2006 and 2005
Balance at beginning of year
Issuances during the year (Note 13)
Balance at end of year
Subscribed common stock - 12,741,345 shares (Note 13)
Balance at beginning of year
Additions during the year
Balance at end of year
ADDITIONAL PAID-IN CAPITAL (Note 1)
Balance at beginning of year
Additions during the year
Balance at end of year
Years Ended December 31
2006
2005
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
–
2,005,443,965
1,760,843,965
244,600,000
2,005,443,965
11,330,000
1,411,345
12,741,345
2,918,185,310
–
11,330,000
11,330,000
2,916,773,965
–
–
–
2,905,443,965
3,177,058,289
57,396,167
3,234,454,456
3,074,583,093
102,475,196
3,177,058,289
767,845,493
2,306,737,600
3,074,583,093
SUBSCRIPTIONS RECEIVABLE
Balance at beginning of year
Additions during the year
Collections during the year
Balance at end of year
(41,699,920)
(24,241,314)
10,000,948
(55,940,286)
–
(48,422,963)
6,723,043
(41,699,920)
–
–
–
–
COMMON STOCK OPTIONS OUTSTANDING
(Note 13)
Balance at beginning of year
Grants of stock options
Exercise of stock options
Balance at end of year
6,091,424
36,443,830
(34,566,198)
7,969,056
52,113,307
20,716,388
(66,738,271)
6,091,424
–
52,113,307
–
52,113,307
(Forward)
*SGVMC110470*
-2-
2007
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
Effect of adoption of accounting standards on financial
instruments as of January 1, 2005
Net income
Appropriation for capital expenditures
Dividends declared
Balance at end of year (Note 13)
UNREALIZED GAIN ON AVAILABLE-FOR-SALE
FINANCIAL ASSETS (Note 23)
Balance at beginning of year
Effect of adoption of accounting standards on financial
instruments as of January 1, 2005
Changes in fair value of available-for-sale investments
Transferred to income and expense for the year
Balance at end of year
TREASURY SHARES - AT COST (Notes 1 and 13)
Balance at beginning of year
Issuance of treasury shares
Redemption of preferred shares
Balance at end of year
TOTAL STOCKHOLDERS’ EQUITY
Total recognized income for the year
Net income for the year
Recognized directly in equity
Years Ended December 31
2006
2005
P
=–
2,000,000,000
2,000,000,000
P
=–
–
–
P
=–
–
–
6,115,908,683
4,289,433,364
2,681,056,901
–
2,419,035,357
(2,000,000,000)
(776,574,690)
5,758,369,350
–
2,394,170,077
–
(567,694,758)
6,115,908,683
(1,630,931)
2,011,521,459
–
(401,514,065)
4,289,433,364
3,850,107
65,687,988
–
–
2,012,461
(1,152,400)
4,710,168
–
8,955,954
(70,793,835)
3,850,107
19,242,145
57,582,019
(11,136,176)
65,687,988
(304,122,551)
361,800
(200,000,000)
(503,760,751)
(263,786,861)
59,664,310
(100,000,000)
(304,122,551)
(988,829,458)
825,042,597
(100,000,000)
(263,786,861)
=11,873,859,997 =
P10,123,474,856
P
=13,363,987,303 P
P
=2,419,035,357
2,012,461
P
=2,421,047,818
=2,394,170,077
P
8,955,954
=2,403,126,031
P
=
P2,011,521,459
57,582,019
=
P2,069,103,478
See accompanying Notes to Financial Statements.
*SGVMC110470*
MANILA WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization (Notes 8 and 9)
Interest expense - net of amount capitalized
(Notes 12 and 18)
Provision for probable losses (Note 10)
Share-based payments (Note 13)
Gain on sale of property and equipment
Gain on termination of investments
Interest income (Note 18)
Operating income before changes in working capital
Decrease (increase) in:
Receivables
Materials and supplies
Other current assets
Increase (decrease) in:
Accounts and other payables
Payables to stockholders
Net cash provided by operations
Income taxes paid
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received
Proceeds from sale of:
Termination of available-for-sale financial assets
Sale of property, plant and equipment
Additions to:
Available-for-sale financial assets
Property, plant and equipment (Note 8)
Decrease (increase) in:
Short-term cash investments
Other noncurrent assets
Concession fee payments (Note 9)
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in customers’ guaranty and other deposits
Long-term debt:
Availments
Payments
Payment of dividends (Note 13)
Proceeds from issuances of:
Common shares
Treasury shares
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)
Years Ended December 31
2006
2005
P
=3,310,580,315
=2,225,960,861
P
=
P1,939,738,735
1,382,838,537
1,134,778,396
952,738,254
234,561,959
130,161,196
36,443,830
(1,127,644)
(1,152,400)
(152,745,791)
4,939,560,002
289,643,411
151,583,540
71,638,473
(605,350)
(70,793,835)
(294,978,672)
3,507,226,824
281,770,580
–
52,113,307
(906,566)
(11,136,176)
(218,913,874)
2,995,404,260
(281,264,798)
30,488,247
(287,492,821)
347,290
8,447,850
(331,969,437)
5,469,557
(13,888,439)
77,449,872
(277,323,384)
7,465,760
4,131,433,006
(645,070,291)
3,486,362,715
1,012,684,493
(7,268,037)
4,189,468,983
–
4,189,468,983
163,294,300
322,082,806
202,769,758
222,453,653
1,193,921
942,983,278
605,350
–
1,428,725
702,931,548
27,306,558
3,794,673,356
–
3,794,673,356
(520,377,983)
(4,360,824,908)
–
(4,163,636,723)
(226,403,457)
(3,830,960,125)
(1,210,910,704)
(14,518,096)
(336,533,692)
(6,056,223,509)
(177,000,000)
(164,640,153)
(611,502,677)
(3,851,108,119)
–
(185,835,517)
(486,772,214)
(4,525,772,830)
528,326,225
132,914,364
117,347,015
1,252,984,067
(2,633,831,329)
(775,364,216)
4,939,504,216
(995,651,945)
(566,714,852)
–
(536,674,399)
(401,867,792)
10,000,948
361,801
(200,000,000)
(531,202,382)
(2,348,724,886)
6,723,043
7,386,187
(100,000,000)
(320,958,781)
3,103,202,232
1,391,280,197
1,985,100,000
(100,000,000)
(281,783,700)
2,173,401,321
(4,918,585,680)
3,441,563,096
1,442,301,847
6,455,206,527
3,013,643,431
1,571,341,584
P
=1,536,620,847
=6,455,206,527
P
=
P3,013,643,431
See accompanying Notes to Financial Statements.
*SGVMC110470*
MANILA WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Manila Water Company, Inc. (the Company) was incorporated on January 6, 1997 and started
commercial operations on January 1, 2000. The 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).
AC held part of its shares in the Company through MWC Holdings, Inc. (MWCHI) until MWCHI
was merged into the Company on October 12, 2004. On May 31, 2004, International Finance
Corporation (IFC) became one of the principal shareholders of the Company.
On December 23, 2004, AC and United Utilities assigned and transferred their participating
preferred shares in the 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, 2006 and 2005, Philwater owns 333.33 million
participating preferred shares of the Company.
On March 18, 2005, the 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 Company’s
unissued capital stock; 305.40 million common shares were from the Company’s treasury stock;
and 195.33 million common shares were from the Company’s existing shareholders.
The Company’s principal place of business is MWSS Building, Katipunan Road, Balara, Quezon
City.
On February 21, 1997, the Company entered into a concession agreement (the Agreement) with
the 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 Company and
the West Zone Concessionaire - Maynilad Water Services, Inc. (Maynilad)] under its Concession
Agreement with MWSS.
Under the Agreement, MWSS grants the 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 for 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.
*SGVMC110470*
-2While the 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 Company during the Concession
remains with the 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 Company officially took over the operations of the East Zone.
Rehabilitation work for the service area commenced immediately thereafter. As provided in the
Company’s project plans, operational commercial capacity will be attained upon substantial
completion of the rehabilitation work.
Under the Agreement, the Company is entitled to the following rate adjustments:
a. Annual standard rates adjustment to compensate for increases in the consumer price index
(CPI);
b. Extraordinary price adjustments (EPAs) to account for the financial consequences of the
occurrence of certain unforeseen events stipulated in the Agreement; and
c. Foreign Currency Differential Adjustments (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 as defined in the Concession
Agreement.
The Company is also allowed a fixed currency exchange rate adjustment (CERA) of P
=1.00 per
cubic meter (cu.m.).
The MWSS exercised its option to implement general Rate Rebasing starting January 1, 2003, and
approved through Regulatory Office (RO) Resolution No. 02-007 and Board of Trustees
Resolution No. 329-2002, both dated December 13, 2002. The Company’s new tariff to be
implemented gradually follows:
a. =
P10.06/cu.m. out of the P
=12.22/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 a resolution No. 2007-278 adopting and approving the
MWSS-RO's resolutions that contain the final evaluation and determination of the Company's
Rate Rebasing Proposal. Under the said resolution, the MWSS approved a one-time tariff
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.
*SGVMC110470*
-3The said staggered implementation is premised on certain conditions, such as the adoption of
additional Key Performance Indicators and Business Efficiency Measures, minimum NRW level
of 25%, rationalization of Sewerage and Environmental Charges, re-classification of some
government accounts, exclusion of CERA from the water bill, among others. The first of a series
of annual adjustments will be implemented effective January 1, 2008 amounting to an increase of
=5.00 per cubic meter based on the all-in weighted average tariff.
P
The 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 Company’s Board of Directors (BOD), in its meeting held on November 15, 2007, delegated
to the Company’s Audit and Governance Committee the authority to approve the issuance of 2007
financial statements. The Audit and Governance Committee authorized the issue of the financial
statements for the years ended 2005, 2006 and 2007 on February 5, 2008.
2. Summary of Significant Accounting Policies
Basis of Preparation
The financial statements have been prepared using the historical cost basis, except for availablefor-sale (AFS) financial assets and derivative financial instruments that have been measured at fair
value. The Company’s functional and presentation currency is the Philippine Peso.
Statement of Compliance
The accompanying financial statements of the Company have been prepared in accordance with
Philippine Financial Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year except as
follows:
New PFRS, Amendment to PAS and Philippine Interpretations effective in 2007
The Company has adopted the following new PFRS, amendment to PAS and Philippine
Interpretations during the period. Adoption of these revised standards and interpretations did not
have any effect on the Company. They did, however, give rise to additional disclosures in the
financial statements.
·
·
PFRS 7, Financial Instruments: Disclosures
Philippine Accounting Standards (PAS) 1 Amendment - Presentation of Financial Statements
*SGVMC110470*
-4The principal effects of these changes, if any, are as follows:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative and quantitative information about exposure to risks arising
from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, including sensitivity analysis to market risk. It replaces PAS 30, Disclosures
in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure
requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to
all entities that report under PFRS.
The Company adopted the amendment to the transition provisions of PFRS 7, as approved by the
Financial Reporting Standards Council, which gives transitory relief with respect to the
presentation of comparative information for the new risk disclosures about the nature and extent of
risks arising from financial instruments. Accordingly, the Company does not need to present
comparative information for the disclosures required by paragraphs 31 - 42 of PFRS 7, unless the
disclosure was previously required under PAS 30 or PAS 32. Adoption of PFRS 7 and the
amendment to PAS 1 resulted in additional disclosures, which are included throughout the
financial statements. Adoption of this standard resulted in the inclusion of additional disclosures
such as market risk sensitivity analysis, contractual maturity analysis of financial liabilities and
aging analysis of financial assets that are past due but not impaired. See Note 25.
Amendment to PAS 1, Presentation Financial Instruments
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. Adoption of the Amendments resulted to the inclusion of additional disclosures
on capital management (see Note 25).
The other standards that became effective January 1, 2007 but were not applicable to the Company
are as follows:
· Philippine Interpretation IFRIC 7, Applying the Restatement Approach Under
PAS 29, Financial reporting in Hyperinflationary Economies
· Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
· Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
Amendments to PFRSs early adopted in 2007
The Company has also early adopted PAS 23, Borrowing Costs (effective for annual periods
beginning on or after January 1, 2009) which requires 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 of the Standard, the Company will adopt this as a prospective change.
Accordingly, borrowing costs will be capitalized on qualifying assets with a commencement date
after January 1, 2009. The adoption of this standard has no impact on the Company’s financial
statements.
*SGVMC110470*
-5Future Changes in Accounting Policies
The Company has not applied the following PFRS and Philippine Interpretations which are not yet
effective for the year ended December 31, 2007:
Philippine Interpretation IFRIC - 11, PFRS 2, Group and Treasury Share Transactions (effective
for annual periods beginning on or after March 1, 2007)
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 the entity
chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or
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. The Company does not expect
this interpretation to have a significant impact on its financial statements.
PAS 1, Presentation of Financial Statements (Revised) (effective for annual periods beginning on
or after January 1, 2009). The revised standard requires that the statement of changes in
stockholders’ equity includes only transactions with owners and all non-owner changes are
presented in equity as a single line with details included in a separate statement. The revised
standard introduced a new statement of comprehensive income that combines all items of income
and expense recognized in profit or loss together with ‘other comprehensive income’. The
revisions specify what is included in other comprehensive income. The Company will comply
with the new requirement.
PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1, 2009)
This PFRS adopts a management approach to reporting segment information. PFRS 8, will
replace PAS 14, Segment Reporting and is required to be adopted only by entities whose debt or
equity instruments are publicly traded, or are in the process of filing with the SEC for purposes of
issuing any class of instruments in a public market. The adoption of this Standard will have no
impact on the Company’s financial statements as the Company has no operating segments.
Philippine Interpretation IFRIC - 12, Service Concession Arrangements, (effective for annual
periods beginning on or after January 1, 2008).
This Interpretation establishes the accounting to be applied for certain infrastructure that is
constructed, acquired or provided by the grantor for the purposes of meeting the concession.
IFRIC 12 prescribed 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;
*SGVMC110470*
-6·
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, the Financial Asset Model is used to the extent of
such amount.
The Interpretation becomes applicable for financial years beginning on or after January 1, 2008.
Based on the Company’s preliminary estimates, its service concession arrangement with MWSS
would qualify under the Intangible asset model. The adoption of the Interpretation will require
the Company to recognize the fair value of its right to charge its customers which would result in
the increase in total assets with a corresponding increase in total liabilities. The present value of
total estimated concession fee payments, determined at inception, and subsequent infrastructure
expenditures will form part of the intangible assets. The Company will use the straight-line
method in amortizing its intangible assets.
Liabilities on Concession Agreement represent the present value of future payments to MWSS to
cover the latter’s payments of loans previously availed to fund the construction of such assets.
The Concessionaire’s obligation to pay arises as the debt is amortized by MWSS. Thus,
concession assets and related liabilities refer to the present value at inception of concession
agreement of future debt amortizations. The increase in intangible assets will give rise to a
possible increase in amortization expense.
Based on the Company’s preliminary assessment, the adoption of IFRIC 12 on January 1, 2008
will result in an increase in the total assets and total liabilities of about P
=2.91 billion and
=3.52 billion, respectively, and a decrease in the retained earnings in January 1, 2008 of about
P
=0.24 billion (net of tax effect of P
P
=0.13 billion).
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (effective for annual periods
beginning on or after July 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 part of the fair value of
the consideration received is allocated to the award credits and deferred over the period that the
award credits are fulfilled. The Company expects that this Interpretation will have no impact on
the Company’s financial statements as no such schemes currently exist.
Philippine Interpretation IFRIC 14 PAS 19, The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction (effective for annual periods beginning on or after
January 1, 2008)
This Interpretation provides guidance on how to assess the limit on the amount of surplus in a
defined benefit scheme that can be recognized as an asset under PAS 19 Employee Benefits. The
Company expects that this Interpretation will have no impact on the financial position or
performance of the Company as all defined benefit schemes are currently in deficit.
*SGVMC110470*
-7Cash 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 changes in
value. Other short-term cash placements are classified as short-term cash investments.
Short-term Investments
Short term investments are short-term placements with maturities of more than three months but
less than one (1) year from date of acquisition. These earn interest at its respective investment
rates.
Materials and Supplies
Materials and supplies are valued at the lower of cost or net realizable value (fair value less
cost to sell). Cost is determined by the moving average method.
Property, Plant and Equipment
Property, plant 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, plant and equipment comprises its purchase price, including import
duties, taxes and any directly attributable costs of bringing the property, plant 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, plant 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, plant and equipment beyond
its originally assessed standard of performance, the expenditures are capitalized as additional cost
of the related property, plant and equipment.
Depreciation and amortization of property, plant and equipment commences once the property,
plant and equipment are available for use and are calculated on a straight-line basis over the
estimated useful lives (EUL) of the property, plant and equipment or the remaining term of the 25year concession, whichever is shorter, as follows:
Plant equipment and transmission lines
Office furniture and equipment
Transportation equipment
Leasehold improvements
5 to 16 years
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, plant and equipment.
*SGVMC110470*
-8When property, plant and equipment is 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 to or charged against
current operations.
Construction in progress is stated at cost. This represents costs incurred for technical services and
capital works program contracted by the Company to facilitate the implementation of the
concession. While the construction is in progress, project costs are accrued based on the
contractors’ accomplishment reports. Construction in progress are transferred to the related
property, plant and equipment account when the construction or installation and related activities
necessary to prepare the property, plant and equipment for their intended use have been
completed, and the property, plant and equipment are ready for service.
Financial Assets and Liabilities
Date of recognition
The Company recognizes a financial asset or a financial liability on the 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 securities at fair value through
profit or loss (FVPL), the initial measurement of financial assets includes transaction costs. The
Company classifies its financial assets in the following categories: securities at FVPL, held-tomaturity (HTM) investments, available-for-sale (AFS) investments, and loans and receivables.
The Company 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, re-evaluates such designation at every
reporting date.
Financial instruments are classified as liabilities 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.
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.
*SGVMC110470*
-9For 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 to 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 Company recognizes the difference between the
transaction price and fair value (a Day 1 profit) in the 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 statement of income when the inputs become observable or when the
instrument is derecognized. For each transaction, the Company determines the appropriate
method of recognizing the ‘Day 1’ profit amount.
Derivatives recorded at FVPL
The Company has certain derivatives that are embedded in host financial (such as loans payable)
and nonfinancial (such as purchase orders) contracts. These embedded derivatives include foreign
currency derivatives in purchase orders (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 fair value through
profit or loss. 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
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
*SGVMC110470*
- 10 ·
·
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.
As of December 31, 2007 and 2006, no financial assets have been designated as at FVPL.
HTM investments
HTM investments are quoted non-derivative financial assets with fixed or determinable payments
and fixed maturities for which the Company’s management has the positive intention and ability
to hold to maturity. Where the Company sells other than an insignificant amount of HTM
investments, the entire category would be tainted and reclassified as AFS securities. 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 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 and 2006, 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 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 balance
sheet captions “Short-term investments”,” Receivables” and “Guaranty deposits and others”.
After initial measurement, the 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
statement of income. The losses arising from impairment of such loans and receivables are
recognized in “Provision for probable losses” in the statement of income.
AFS investments
AFS investments 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.
*SGVMC110470*
- 11 After initial measurement, AFS investments 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 investments are excluded net of tax from reported
earnings and are reported as ‘Unrealized gain on AFS financial assets’ in the equity section of the
balance sheet.
When the investment is disposed of, the cumulative gain or loss previously recognized in equity is
recognized as other income in the statement of income. Where the Company 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 investments are reported as interest income using the effective
interest rate. Dividends earned on holding AFS investments are recognized in the 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
statement of income.
AFS investments that are expected to be realized within 12 months from the balance sheet date are
classified as current and are presented as “Short-term cash investments” in the balance sheet. The
details of the Company’s AFS investments are disclosed in Note 24.
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
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
income” in the income statement. The difference between the cash received and 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 in the
“Other income” in the statement of income.
*SGVMC110470*
- 12 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 Company 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 Company 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 Company 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 Company’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 Company 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 Company 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.
Loans and receivables
For loans and receivables carried at amortized cost, the Company 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 Company 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.
*SGVMC110470*
- 13 Evidence of impairment may include non-collection of the Company’s receivables, which remain
unpaid for a period of 60 days after its due date. The Company 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 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 has been realized.
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 Company to reduce any differences
between loss estimates and actual loss experience.
AFS Investments
For AFS investments, the Company assesses at each balance sheet date whether there is objective
evidence that a financial asset or group of financial assets is impaired.
In case of equity investments classified as AFS, 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 statement of
income - is removed from equity and recognized in the statement of income. Impairment losses
on equity investments are not reversed through the statement of income. Increases in fair value
after impairment are recognized directly 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. Interest continues to be accrued at the original
effective interest rate on the reduced carrying amount of the asset and 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 statement of income, the impairment loss is reversed
through the statement of income.
*SGVMC110470*
- 14 Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the 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 balance sheet.
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. The Company accounts for the concession agreement with
MWSS as an operating lease. Concession fee payments are recognized as an expense (using the
amortization expense account, included under the “Depreciation and amortization” in the
statement of income) 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
multiplied by the total billed volume for the year, which management considers as more
representative of the time pattern of the users’ benefit. Concession fees include costs incurred in
obtaining the exclusive right to provide water delivery and sewerage services to the East Zone
Area, fees charged by MWSS and engineering costs.
Impairment of Non-financial Assets (Property, plant and equipment and Concession asset)
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.
*SGVMC110470*
- 15 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.
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. Ten percent of the water and sewer revenue are recognized as environmental
charges as provided for in the Agreement.
Interconnection revenue is recognized when the related services are rendered based on the agreed
rates with the West Zone Concessionaire.
Interest income is recognized as it accrues taking into account the effective yield of the assets.
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 currency-denominated monetary assets and liabilities are translated to Philippine Pesos
using the Philippine Dealing System closing rate at balance sheet date. Foreign exchange losses
are charged to foreign currency differentials under cost and expenses, while foreign exchange
gains are included in the other revenue in the statement of income. A corresponding charge
(credit) to Deferred FCDA is recognized in the balance sheet equivalent to the amount of foreign
exchange losses (gains) arising from the difference of the following transactions:
a. Actual loan repayments over the loan amortization amounts translated at drawdown rates;
b. Actual concession fee payments over the amounts of concession fees translated using
bid/rebasing rates; and
c. Actual interest payments over the amount of interest translated at drawdown rates.
As discussed in Note 1, the Company is entitled to recover under the FCDA provision of the
Amendment No. 1 of the Agreement, the foreign exchange losses related to MWSS and certain
concessionaire loans. Foreign currency losses (gains) allowed to be recovered (refunded) from
(to) customers under the FCDA are charged (credited) to “Deferred FCDA” account under “Other
noncurrent assets” (“Accounts and other payables”) section in the balance sheets.
*SGVMC110470*
- 16 “Foreign currency differentials” presented under “Costs and expenses” in the statement of income
include FCDA reversals and unrealized foreign exchange losses to be billed in the future.
Provisions
Provisions are recognized when the Company 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 Company 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.
Subsequent Events
Any post year-end event up to the date of the auditor’s report that provide additional information
about the Company’s position at the balance sheet date (adjusting events) are reflected in the
financial statements. Any post year-end event that is not an adjusting event is disclosed in the
notes to the financial statements when material.
Contingencies
Contingent liabilities are not recognized in the 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 financial statements but disclosed when an inflow of economic benefits
is probable.
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 Company 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 Company’s balance sheet and are amortized using the effective interest rate
method.
*SGVMC110470*
- 17 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 Company 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 liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial
assumptions are immediately credited to or charged against income in the period of its occurrence.
Share-based payment transactions
Certain employees and officers of the Company 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 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 Company 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.
*SGVMC110470*
- 18 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.
Income Tax
Deferred income tax is provided, using the 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 asset 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 the deferred income tax asset 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.
*SGVMC110470*
- 19 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.
Assets Held in Trust
Assets which are owned by MWSS but are operated by the Company under the Agreement are not
reflected in the balance sheet but are considered as Assets Held in Trust (see Note 21).
3. Management’s Judgments and Use of Estimates
The preparation of the accompanying financial statements in conformity with PFRS requires
management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The estimates and assumptions used in the accompanying
financial statements are based upon management’s evaluation of relevant facts and circumstances
as of the date of the financial statements. Actual results could differ from such estimates.
Management believes the following represent a summary of these significant estimates and
judgments:
Operating lease
The Company entered into a Concession Agreement with MWSS (see Note 1) with respect to the
Metropolitan Manila East Zone Service Area (East Zone Service Area). This agreement is
accounted for as a lease as this involves the conveyance by MWSS to the Company in return for a
series of payments the right to use the MWSS facilities over the concession period.
The Company has determined that MWSS retains all the significant risks and rewards of
ownership of the MWSS facilities. In determining significant risks and rewards, the Company
considered, among others, the significance of the concession period as compared with the
estimated life of the assets.
Impairment of AFS
The Company treats AFS 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 Company treats
‘significant’ generally as 20% or more and ‘prolonged’ as greater than 6 months for quoted
securities. In addition, the Company evaluates other factors, including the future cash flows and
the discount factors of these securities.
*SGVMC110470*
- 20 Redeemable Preferred Shares
In 2007, the Company 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 balance sheet as management concluded that these are not
mandatory redeemable since the redemption of the redeemable preferred shares is at the
Company’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 Company maintains allowance for doubtful accounts based on the result of the individual and
collective assessment under PAS 39. Under the individual assessment, the Company 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 Company 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 assessment 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.
Estimated billable water volume
The Company estimated the billable water volume, where the amortization of concession assets is
derived from, based on the period over which the Company’s concession agreement with MWSS
is in force. The future billable volume is based on the ongoing and planned capital expenditures
of the Company. The Company reviews annually the billable water volume based on factors that
include the status of the Company’s projects and its impact on nonrevenue water. It is possible
that future results of operations could be materially affected by changes in the Company’s
estimates brought about by changes in the factors mentioned. A reduction in the estimated billable
water volume would increase amortization and decrease noncurrent assets. See Note 9 for the
related balances.
Estimated useful lives of property, plant and equipment
The Company estimates the useful lives of its property, plant and equipment based on the period
over which the assets are expected to be available for use. The Company reviews annually the
estimated useful lives of property, plant 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 Company’s estimates brought about
*SGVMC110470*
- 21 by changes in the factors mentioned. A reduction in the estimated useful lives of property, plant
and equipment would increase depreciation and amortization and decrease noncurrent assets. See
Note 8 for the related balances.
Asset impairment
The Company 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
Company 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
Company’s overall business; and
significant negative industry or economic trends.
As described in the accounting policy, the Company 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 Company is required to make estimates and assumptions regarding
the expected future cash generation of the assets (property, plant 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 Company 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 Company will generate sufficient taxable income to allow all or part
of our deferred tax assets to be utilized. See Note 17 for the related balances.
Also, the Company 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 Company. 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 rates, expected returns on plan assets and
salary increase rates. Actual results that differ from these assumptions are recognized
immediately.
*SGVMC110470*
- 22 Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the balance sheet
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 23).
Contingencies
The Company 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 Company currently does not believe these proceedings will have a material adverse
affect on the Company’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
This account consists of:
Cash on hand and in banks
Cash equivalents
2007
P
=250,549,453
1,286,071,394
P
=1,536,620,847
2006
P878,759,839
=
5,576,446,688
=6,455,206,527
P
Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are made for
varying periods of up to three months depending on the immediate cash requirements of the
Company, and earn interest at the respective investment rates.
5. Receivables
This account consists of receivables from:
Customers (see Note 16a)
Residential
Commercial
Semi-business
Industrial
Receivables from employees
Interest receivable from banks
West Zone Concessionaire (see Note 19a)
Others
Less allowance for doubtful accounts (see Note 17)
2007
2006
P
=549,996,210
239,536,257
42,411,193
24,729,381
43,449,540
12,916,881
–
20,923,119
933,962,581
562,374,450
P
=371,588,131
=705,697,769
P
247,995,485
61,640,303
18,406,820
41,077,810
23,465,390
44,289,648
20,673,067
1,163,246,292
932,213,254
=231,033,038
P
*SGVMC110470*
- 23 The classes of the Company’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.
Movement in the Company’s allowance for doubtful accounts follows:
2007
Receivable from Customers
At January 1
Charge for the year
Write-offs
At December 31
Residential
P
=585,942,770
59,016,004
(342,151,996)
302,806,778
Collective
impairment
P
=302,806,778
Commercial
217,859,006
12,862,462
(59,072,850)
171,648,618
Semi Business
P
=52,532,726
3,026,463
(20,970,987)
34,588,202
Industrial
P
=15,939,338
756,615
(6,828,765)
9,867,188
P
=34,588,202
P
=9,867,188
P
=171,648,618
Receivable
from West Zone
Concessionaire
P
=48,810,272
–
(48,810,272)
–
P
=–
Other
Receivables
P
=11,129,142
54,499,652
(22,165,130)
43,463,664
Total
P
=932,213,254
130,161,196
(500,000,000)
562,374,450
P
=43,463,664
P
=562,374,450
Other
Receivables
=35,316,731
P
(24,187,589)
11,129,142
–
=11,129,142
P
Total
P689,544,754
=
242,668,500
932,213,254
48,810,272
=883,402,982
P
2006
At January 1
Charge for the year
At December 31
Individual impairment
Collective impairment
Residential
=393,509,713
P
192,433,057
585,942,770
–
=585,942,770
P
Receivable from Customers
Commercial
Semi Business
=160,937,014
P
=37,809,933
P
56,921,992
14,722,793
217,859,006
52,532,726
–
–
=217,859,006
P
=52,532,726
P
Industrial
=13,161,091
P
2,778,247
15,939,338
–
=15,939,338
P
Receivable
from West Zone
Concessionaire
=48,810,272
P
–
48,810,272
48,810,272
=–
P
As of December 31, 2006, the gross amount of receivables that were individually impaired, before
deducting any individual assessed impairment allowance, amounted to P
=48.81 million. There
were no receivables that were individually impaired in 2007.
6. Materials and Supplies
This account consists of:
Water meters, at cost
Water treatment chemicals, at NRV
Maintenance materials, at NRV
2007
P
=17,511,456
12,458,800
11,364,106
P
=41,334,362
2006
=17,511,456
P
42,947,047
11,364,106
=71,822,609
P
*SGVMC110470*
- 24 The cost of maintenance materials amounted to P
=54.78 million as of December 31, 2007 and
2006, while the cost of water treatment chemicals amounted to P
=12.62 million and P
=43.10 million
as of December 31, 2007 and 2006, respectively.
7. Other Current Assets
This account consists of:
2007
P
=384,923,277
378,571,385
18,941,817
2,196,250
P
=784,632,729
Advances to contractors
Value-added input tax
Prepaid expenses
Others
2006
=167,068,088
P
382,519,785
9,153,525
2,524,684
=561,266,082
P
Value-added input tax fully realizable and will be applied against future output tax.
8. Property, Plant and Equipment
The rollforward analysis of this account follows:
2007
Plant Equipment
Land and
and
Leasehold
Transmission Office Furniture Transportation
Lines and Equipment
Equipment Improvements
Cost
At January 1
Additions
Transfers
Disposals
At December 31
Accumulated
Depreciation
and Amortization
At January 1
Depreciation and
amortization
Disposals
At December 31
Net Book Value at
December 31
P
=112,925,601 P
=185,234,372
161,769,526
59,097,843
–
–
(8,177,060)
–
266,518,067
244,332,215
Construction
in Progress
Total
P
=10,988,653,591
–
4,704,295,053
–
15,692,948,644
P
=383,464,301
82,489,893
–
–
465,954,194
2,075,351,442
218,725,531
40,612,615
44,888,596
–
2,379,578,184
861,216,858
–
2,936,568,300
88,220,424
–
306,945,955
20,098,384
(8,110,783)
52,600,216
14,398,487
–
59,287,083
–
–
–
983,934,153
(8,110,783)
3,355,401,554
P
=12,756,380,344
P
=159,008,239
P
=185,045,132
P
=2,603,149,190
P
=213,917,851
P
=3,308,744,962 P
=14,979,022,827
3,998,699,281
4,302,056,543
(4,704,295,053)
–
–
(8,177,060)
2,603,149,190
19,272,902,310
P
=15,917,500,756
*SGVMC110470*
- 25 2006
Cost
At January 1
Additions
Transfers
Disposals
At December 31
Accumulated
Depreciation
and Amortization
At January 1
Depreciation and
amortization
Disposals
At December 31
Net Book Value at
December 31
Plant Equipment
and
Transmission
Lines
Office Furniture
and Equipment
=8,389,014,818
P
317,197,479
2,282,441,294
–
10,988,653,591
=248,223,011
P
135,241,290
–
–
383,464,301
1,391,190,382
170,427,057
32,883,478
33,448,083
–
1,627,949,000
684,161,060
–
2,075,351,442
48,298,474
–
218,725,531
10,669,750
(2,940,613)
40,612,615
11,440,513
–
44,888,596
–
–
–
754,569,797
(2,940,613)
2,379,578,184
=8,913,302,149
P
=164,738,770
P
=140,345,776
P
=3,308,744,962
P
Transportation
Equipment
Land and
Leasehold
Improvements
=63,437,385 =
P
P164,787,212
52,428,829
20,447,160
–
–
(2,940,613)
–
112,925,601
185,234,372
=72,312,986
P
Construction
in Progress
Total
=2,253,414,905 =
P
P11,118,877,331
3,337,771,351
3,863,086,109
(2,282,441,294)
–
–
(2,940,613)
3,308,744,962
14,979,022,827
=12,599,444,643
P
Total interest and other borrowing costs capitalized as part of property, plant and equipment
amounted to P
=227.96 million and P
=93.45 million in 2007 and 2006, respectively. The
capitalization rate used in 2007 and 2006 ranged from 4.96% to 3.72%.
9. Concession Assets
This account consists of concession fee payments, engineering and development costs and
commencement fee. The movements in this account follow:
Balance at beginning of year
Concession fee payments
Amounts recognized as expense*
Balance at end of year
2006
2007
P3,437,991,503
P
=3,587,054,318 =
529,271,414
336,533,692
(380,208,599)
(398,904,384)
=3,587,054,318
P
=3,524,683,626 P
* Included under “Depreciation and amortization” in the statements of income.
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;
*SGVMC110470*
- 26 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 Company for continuation; and
e. 100% of the local component costs and cost overruns related to existing projects.
The required future payments relative to the items above are as follows (in millions):
Within one year
After one year but not more than five years
After more than five years
U.S. Dollar
Loans
$3.55
53.24
39.61
$96.40
Peso Loans
and Project
Local Support
=1.34
P
–
–
=1.34
P
A re-appraisal of all MWSS leased properties to the Company as of December 31, 2004 was
conducted by Cuervo Appraisers. The final appraisal report was submitted last November 2006
showing a total reproduction cost of P
=27.0 billion with a sound value of P
=17.2 billion.
10. Other Noncurrent Assets
This account consists of:
Deposits and others
Less allowance for impairment losses
2007
P
=49,754,389
–
P
=49,754,389
2006
=186,819,834
P
151,583,541
=35,236,293
P
Deposit and others include deposits for the installation of utilities with a nominal amount of
=30.96 million and P
P
=19.67 million as of December 31, 2007 and 2006, respectively, which were
recorded initially at fair value. The fair value of these deposits was obtained by discounting future
cash flows using the applicable rates of similar types of instruments. The difference between the
nominal amount and the fair value is treated as “Other asset” in the balance sheet. The
unamortized discount amounted to P
=24.52 million and P
=16.75 million as of December 31, 2007
and 2006, respectively. The effective interest rates used in 2007 and 2006 ranged from 8.5% to
11.55%.
The rollforward analysis of impairment loss follows:
Balance at beginning of the year
Provision for probable losses
Less: Writeoff during the year
Recovery
Balance at end of the year
2007
P
=151,583,541
–
(144,792,926)
(6,790,615)
P
=–
2006
=–
P
151,583,541
–
–
=151,583,541
P
*SGVMC110470*
- 27 11. Accounts and Other Payables
This account consists of:
Trade payables
Accrued expenses (Notes 14 and 17)
Deferred FCDA (Notes 1 and 2)
Contracts payable
Interest payable
Others
2007
P
=1,472,396,091
797,010,764
584,824,964
155,120,409
78,159,582
30,987,814
P
=3,118,499,624
2006
=1,666,675,556
P
791,070,611
341,813,942
366,967,678
146,839,987
39,823,650
=3,353,191,424
P
2007
2006
P
=499,230,395
-
=724,189,409
P
1,541,150,010
1,081,916,507
420,172,732
734,922,490
33,679,390
1,344,022,421
770,973,225
105,787,949
1,981,100,763
1,485,551,504
6,236,573,781
241,318,202
P
=5,995,255,579
1,977,038,030
1,483,538,883
58,391,363
8,057,538,423
927,513,369
=7,130,025,054
P
12. Long-term Debt
This account consists of:
US Dollar loans
US$20.00 million loan facility
US$65.00 million loan facility
Yen loans
IFC loan facility
US$65.00 million loan facility
LBP loan facility
EIB loan facility
Euro loan
Peso loans
1.5 Billion loan facility
2.0 Billion loan facility
MACEA loan
Less current portion
52,447,133
Unamortized debt discount and issuance costs included in the following long-term debts as of
December 31, 2007 and 2006 follow:
Peso loans
Yen loans
US Dollar loans
Euro loan
2007
P
=33,347,733
33,317,298
5,004,805
1,910,629
P
=73,580,465
2006
=51,031,724
P
21,178,673
11,074,451
3,918,155
=87,203,003
P
*SGVMC110470*
- 28 The rollforward analysis of unamortized transaction costs of long-term debt follows:
Balance at beginning of the year
Availments
Amortization of transaction costs
Balance at end of the year
2007
P
=87,203,003
18,748,674
(32,371,212)
P
=73,580,465
2006
=42,185,328
P
60,318,721
(15,301,046)
=87,203,003
P
The US$65.00 million loan facility was entered into by the Company with six local banks
(Philippine Lenders) to partially finance the projects of the Company. This 7-year term loan was
made available in US Dollars and Japanese Yen in the aggregate principal amount equivalent to
US$65.00 million. It bears interest at rates ranging from 7.48% to 8.31% in 2006, and is payable
in 9 semi-annual installments starting January 23, 2005 up to January 23, 2009. On January 25,
2007, the Company has prepaid the said loan facility in full.
On July 1, 2002, the Company 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 Company. 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,
2007 and 2006, outstanding loans amounted to US$12.22 million and US$14.93 million,
respectively.
On March 28, 2003, the Company entered into a loan agreement with IFC (the “First IFC Loan”)
to partially finance the Company’s investment program from 2002-2005 to expand water supply
and sanitation services, improvement on the existing facilities of the Company, 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, 2007
and 2006, outstanding loans amounted to JPY¥3,016.94 million and JPY¥3,304.27 million,
respectively.
On May 31, 2004, the Company 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 Company, 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 Company 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.
As of December 31, 2007 and 2006, no drawdown has been made against such loan facility.
*SGVMC110470*
- 29 On November 22, 2006, the Company 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 Company’s option, be disbursed in part or in whole as a US Dollar Loan or as a
Philippine Peso Loan. As of December 31, 2007, 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 Company 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 Company’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 Company is further
required to maintain a debt-equity ratio which should not exceed 2.0 times.
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 Concession Agreement, all
receivables and bank accounts, interest over all fixed assets (subject to the limitations under the
Concession 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 October 20, 2005, the Company 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, 2007 and
2006, drawdown on the said facility amounted to JPYY1,468.41 million and JPYY385.24 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 Company. The loan agreement also provides,
among others, that for as long as the loan remains outstanding, the Company 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 loan also requires the Company 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.
*SGVMC110470*
- 30 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 Company 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
Company 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 Company 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
Company pursuant to the Concession Agreement. This seven (7)-year term loan with an aggregate
principal amount of P
=1.5 billion consists of the following:
·
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
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%.
*SGVMC110470*
- 31 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 Company 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 Company’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
Company is further required to maintain a certain debt-equity ratio.
The EUR€2.22 million 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, 2007 and 2006, outstanding loans amounted to US$0.86 million and
US$1.14 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 Company’s present or future assets or revenues as to materially affect its
ability to perform its obligations under the DANIDA loan.
The other peso loan, with an interest rate fixed at 8.50% per annum, represents unsecured
borrowings from Makati Commercial Estate Association, Inc. (MACEA). This loan was used to
finance the planning, design and construction of water and sewerage distribution lines in the
Makati Central Business District (MCBD). The loan is payable in 36 equal successive monthly
amortizations commencing on January 30, 2008. The Company committed in this agreement to
complete the planning, design and construction of the water and sewerage distribution lines for the
MCBD by not later than December 31, 2001.
In July 25, 2007, the Company has prepaid the said loan facility in full.
On June 20, 2007, the Company entered into a Finance Contract (the “EIB Loan”) with the
European Investment Bank (EIB) to partially finance the capital expenditures of the Company
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
*SGVMC110470*
- 32 ·
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.
Disbursements under the 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 Company 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 Company 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.
As of December 31, 2007, drawdown on the said facility amounted to JPYY2,050.00 million.
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.
As of December 31, 2007 and 2006, the Company was in compliance with the loan covenants
required by the creditors.
13. Stockholders’ Equity
The Company’s capital stock consists of:
2006
2007
Shares
Participating preferred stock =0.10 per share
P
Authorized, issued and outstanding
Redeemable preferred stock =1 per share
P
Authorized and issued
Outstanding
Common stock - P
=1 per share
Authorized
Issued and subscribed
Outstanding
Shares
Amount
(In Thousand Except Per Share Figures)
Amount
4,000,000
=400,000
P
4,000,000
=400,000
P
500,000
–
500,000
–
500,000
200,000
500,000
200,000
3,100,000
2,018,185
2,016,794
3,100,000
2,018,185
2,014,425
3,100,000
2,016,774
2,015,249
3,100,000
2,016,774
2,012,651
*SGVMC110470*
- 33 A reconciliation of the movement in treasury shares follow:
2006
2007
Redeemable
Preferred
Number of shares at beginning of year
Exercise of stock options
Acquisitions/redemptions
Number of shares at end of year
=300,000
P
–
200,000
500,000
Redeemable
Preferred
Common
(In Thousands)
=1,525
P
=200,000
P
–
(134)
100,000
–
300,000
1,391
Common
P23,600
=
(22,075)
–
1,525
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 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 Company’s BOD, based on retained earnings availability.
On November 15, 2005, the BOD approved the redemption of P
=100.00 million redeemable
preferred shares on December 29, 2005. The shares were redeemed at par value.
On November 29, 2006, the 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 BOD approved the full redemption of the outstanding P
=200.00 million
redeemable preferred shares on September 30, 2007. The shares were redeemed at par value.
Dividends
On January 18, 2005, the Company’s BOD declared cash dividend of P
=0.091 per share on the
outstanding common shares and the 400 million participating preferred shares, payable to
stockholders of record as of said date. The said dividends were distributed on March 1, 2005.
On August 25, 2005, the Company’s BOD declared cash dividend of P
=0.07 per share on the
outstanding common shares and P
=0.007 per share on the outstanding 4 billion participating
preferred shares of the Company’s capital stock, payable to stockholders of record as of
September 8, 2005. The said dividend was distributed on September 30, 2005.
On November 15, 2005, the Company’s BOD declared 10% per annum cash dividend on the
4 billion participating preferred shares and P
=0.08 per share on the 400 million redeemable
preferred shares of the Company’s capital stock, payable to stockholders of record as of
November 15, 2005. The said dividends were distributed on December 29, 2005.
*SGVMC110470*
- 34 On February 2, 2006, the 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 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 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 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 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 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 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
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 BOD declared cash dividend of P
=0.06 per share on the outstanding
200 million redeemable preferred shares paid on September 24, 2007.
On November 15, 2007, the BOD declared cash dividend of P
=0.010 per share on the outstanding
participating preferred shares of the Company’s capital stock, payable to stockholders of record as
of November 15, 2007. The said dividends were paid on December 26, 2007.
There are no dividends in arrears for the Company’s participating preferred shares and redeemable
preferred shares as of December 31, 2007.
Retained earnings are restricted for the payment of dividends to the extent of the cost of the shares
held in treasury consisting of 1.39 million and 1.53 million common shares, and 500 million and
300 million redeemable preferred shares as of December 31, 2007 and 2006, respectively.
Appropriation for Capital Expenditures
On February 15, 2007, the 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 5, 2008, the Audit and Governance Committee approved the additional appropriation
of a portion of its retained earnings amounting to P2.0 billion for future expansion projects. This
appropriation will bring cumulative appropriations to P4.0 billion, and will be ratified in the next
BOD meeting.
*SGVMC110470*
- 35 Executive Stock Option Plan (Executive SOP), Expanded Executive SOP and Employee Stock
Ownership Plan (ESOWN)
On February 26, 2004, the 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 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 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.
On the same date, the BOD approved the allocation of 136.40 million common shares for the
subsequent phases of the 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 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 Company executives (Expanded Executive SOP) and employees (ESOWN) as
may be authorized by the Chairman.
In March 2005, the 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 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 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
Company with rank of Manager 1 and above, under an Executive Stock Ownership Plan
(ESOWN).
*SGVMC110470*
- 36 On February 2, 2006, the Board of Directors 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 P
=2.71 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.
On May 2, 2006, the 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 Company at the time the Holding Period expires. The
Holding Period of the option follows:
Year
2007
2008
2009
Holding Period
40%
30%
30%
On May 21, 2007, the 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 Company at the time the Holding Period expires. The
Holding Period of the option follows:
Year
2008
2009
2010
Holding Period
40%
30%
30%
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:
2007
At January 1
Granted
Exercised
At December 31
3,820,000
2,130,000
(1,610,000)
4,340,000
Weighted average
exercise price
2006
Weighted average
exercise price
P
=3.72
8.08
8.08
23,600,000
13,625,000
(33,405,000)
=2.71
P
5.47
3.72
3,820,000
*SGVMC110470*
- 37 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
=36.44 million
in 2007 and P
=71.64 million in 2006.
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
May 2006
3.40%
24.65%
6.90%
7 years
=6.80
P
May 2007
2.58%
27.29%
6.34%
7 years
=12.00
P
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 was based on the
average historical price volatility of several water utility companies within the Asian region. The
expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also not necessarily be the actual outcome.
No other features of the options granted were incorporated into the measurement of fair value.
14. Retirement Plan
The Company 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
statements of income for the three years in the period ended December 31, 2007 are as follow:
2007
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Actuarial losses (gains) immediately
recognized - net
Total pension expense
Actual return on plan assets
P
=38,564
22,798
(7,262)
(23,271)
P
=30,829
P
=9,792
2006
(In Thousand Pesos)
=17,744
P
14,426
–
148,298
=180,468
P
=3,068
P
2005
=11,318
P
12,050
–
21,706
=45,074
P
=–
P
*SGVMC110470*
- 38 The funded status and amounts recognized in the balance sheets for the pension plan as of
December 31, 2007 and 2006 are as follows:
Benefit obligations
Plan assets
Pension liabilities
2006
2007
(In Thousand Pesos)
=312,301
P
P
=348,321
(80,687)
(137,878)
=231,614
P
P
=210,443
As of December 31, 2007 and 2006, pension liability pertaining to qualified retirees in the next
year amounted to P
= 5.33 million and P
=5.66 million, respectively. These are included in the
accrued expenses under “Accounts and Other Payables” (see Note 11).
Changes in the present value of the defined benefit obligation are as follows
Balance at beginning of year
Current service cost
Interest cost
Actuarial losses/(gains)
Benefits paid
Balance at end of year
2006
2007
(In Thousand Pesos)
=131,146
P
P
=312,301
17,744
38,564
14,426
22,798
151,366
(20,741)
(2,381)
(4,601)
=312,301
P
P
=348,321
Changes in the fair values of plan assets are as follows:
Balance at beginning of year
Expected return
Contributions
Actuarial gain
Benefits paid
Balance at end of year
2006
2007
(In Thousand Pesos)
=–
P
P
=80,687
–
7,262
80,000
52,000
3,068
2,530
(2,381)
(4,601)
=80,687
P
P
=137,878
The Company expects to contribute P
=44 million to its benefit pension plan in 2008
The allocation of the fair value of plan assets is as follows:
Investments in:
Unit trust funds
Government securities
Equity securities
Debt securities
Others
2007
2006
57.80%
22.60%
17.60%
–
1.90%
46.67%
22.05%
18.88%
8.79%
3.61%
*SGVMC110470*
- 39 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 Company for the years ended
December 31, 2007, 2006 and 2005 are as follows:
2007
7.80%
9.00%
9.00%
Discount rate
Salary increase rate
Expected rate of return on plan assets
2006
7.00%
7.00%
9.00%
2005
11.00%
7.00%
–
Amounts for the current and the previous periods are as follows:
2006
(In Thousand Pesos)
=312,301
P
P
=348,321
(80,687)
(137,878)
P
=210,443
=231,614
P
=1,567
P
P
=15,798
3,069
2,530
2007
Defined benefit obligation
Plan assets
Deficiency
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2005
=131,146
P
–
=131,146
P
=–
P
–
15. Earnings Per Share
The Company’s earnings per share amounts for the years ended December 31, 2007 and 2006
were computed as follows:
Net income
Less dividends on preferred shares*
Net income attributable to common shareholders
for basic and diluted earnings per share
2006
2005
2007
(In Thousands, Except Per Share Figures)
=2,394,170
P
=2,011,521
P
P
=2,419,035
289,817
258,752
288,704
P
=2,130,331
=2,104,353
P
=1,752,769
P
2,016,054
2,582
2,005,009
1,644
1,867,261
10,747
2,018,636
P
=1.06
2,006,653
=1.05
P
1,878,008
=0.94
P
P
=1.06
=1.05
P
=0.93
P
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
Diluted earnings per share
*Including participating preferred stocks’ participation in earnings.
*SGVMC110470*
- 40 16. Related Party Disclosures
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 payables. As of 2007 and 2006, 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.
Significant transactions with related parties follow:
a. Sales to related parties amounted to P
=77.40 million in 2007 and P
=63.29 million in 2006. The
outstanding receivables amounted to P
=1.62 million and P
=0.62 million as of December 31,
2007 and 2006, respectively.
b. The Company 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 company 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 Company shall pay to each one
of them an annual base fee of US$1.00 million and adjusted for the effect of CPI. 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. Total management fees charged to operations amounted to
=206.62 million and P
P
=228.49 million in 2007 and 2006, respectively. Total outstanding
payables amounted to P
=125.43 million and P
=117.96 million as of December 31, 2007 and
2006, respectively.
c. The Company has investments in debt securities of a principal stockholder’s subsidiary and
associate, which are included in the “Short-term cash investments” and in the “available-forsale financial assets” section of the balance sheets, amounting to P
=300.00 million and
=102.50 million as of December 31, 2007 and 2006, respectively.
P
d. Compensation of key management personnel of the Company by benefit type follows:
Short-term employee benefits
Share-based payment (see Note 13)
Post-employment benefits
2007
P
=99,601,893
7,110,000
41,354,775
P
=148,066,668
2006
=90,345,683
P
32,820,000
24,754,655
=147,920,338
P
*SGVMC110470*
- 41 17. Income Taxes
Provision for income tax consists of:
Current
Deferred
2006
=–
P
168,209,216
=168,209,216
P
2007
P
=867,814,458
23,730,500
P
=891,544,958
2005
=–
P
71,782,724
=71,782,724
P
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, 2007, 2006 and 2005 follows
Statutory income tax rate
Tax effects of:
Interest income subjected to final tax
Nondeductible interest expense
Change in unrecognized deferred tax
Income tax holiday
Others - net
Effective income tax rate
2007
35.00%
2006
35.00%
2005
32.50%
(1.61)
0.84
(0.41)
–
(6.89)
26.93%
(5.11)
2.68
(7.56)
(27.20)
(5.37)
7.56%
(3.65)
1.77
4.62
(38.94)
–
(3.7%)
The Company 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 Company 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 Company’s income
tax holiday status up to December 31, 2006.
The components of the deferred income tax assets (liabilities) of the Company represent the
deferred income tax effects of the following:
Provision for probable losses (see Notes 5 and10)
Pension liabilities (see Notes 11 and 14)
Allowance for inventory write down (see Note 6)
Common stock options outstanding
Unamortized costs on financial instruments
Unamortized discount on financial liabilities
Capitalized borrowing cost
2007
P
=196,831,058
95,318,963
15,252,233
11,402,610
9,887,222
(25,753,159)
(79,786,006)
P
=223,152,921
2006
=137,988,214
P
100,675,489
15,252,233
3,415,678
20,072,858
(30,521,051)
–
=246,883,421
P
*SGVMC110470*
- 42 In 2006, the Company 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.
Republic Act (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, which became effective
on November 1, 2005, are as follows:
·
Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
·
Increase in value-added tax (VAT) rate from 10% to 12% effective February 1, 2006 as
authorized by the Philippine President pursuant to the recommendation of the Secretary of
Finance;
Revised invoicing and reporting requirements for VAT; and
Expanded scope of transactions subject to VAT.
·
·
18. Interest Income, Interest Expense and Other Revenue
Interest income consists of:
Interest income on:
Investments
Others
2007
2006
2005
P
=151,063,380
1,682,411
P
=152,745,791
=292,935,055
P
2,043,617
=294,978,672
P
=217,961,236
P
952,638
=218,913,874
P
2007
2006
2005
P
=211,279,853
=268,840,051
P
=266,455,353
P
23,282,106
P
=234,561,959
20,803,360
=289,643,411
P
15,315,227
=281,770,580
P
Interest expense consists of:
Interest expense on:
Long-term debt
Amortization of transaction costs and
guaranty and other deposits
Other revenue substantially consists of unrealized foreign exchange gains amounting to
=326.37 million, P
P
=279.50 million and P
=200.89 in 2007, 2006 and 2005, respectively.
Foreign currency differentials (under costs and expenses) consist of FCDA reversals in 2007,
2006 and 2005.
*SGVMC110470*
- 43 19. Significant Contracts with the West Zone Concessionaire
In relation to the Agreement, the Company entered into the following contracts with Maynilad:
a. Interconnection Agreement wherein the two Concessionaires shall form an unincorporated
joint venture that will manage, operate, and maintain interconnection facilities. The terms of
the agreement provide, among others, the cost and the volume of water to be transferred
between zones (see Note 5). As of December 31, 2007 and 2006, total receivables from
Maynilad as a result of this agreement amounted to P
=44.30 million; and
b. Joint Venture Arrangement that will operate, maintain, renew, and as appropriate,
decommission common purpose facilities, and perform other functions pursuant to and in
accordance with the provisions of the Agreement and perform such other functions relating to
the concession (and the concession of the West Zone Concessionaire) as the Concessionaires
may choose to delegate to the joint venture, subject to the approval of MWSS.
20. Commitments
The significant commitments of the Company under the Agreement are as follows:
a. To pay MWSS concession fees (see Note 9);
b. To post a performance bond, bank guarantee or other security acceptable to MWSS amounting
to US$70.00 million in favor of MWSS as a bond for the full and prompt performance of the
Company’s obligations under the Agreement. The aggregate amounts drawable in one or
more installments under such performance bond during the Rate Rebasing Period to which it
relates are set out below.
Rate Rebasing Period
First (August 1, 1997 - December 31, 2002)
Second (January 1, 2003 - December 31, 2007)
Third (January 1, 2008 - December 31, 2012)
Fourth (January 1, 2013 - December 31, 2017)
Fifth (January 1, 2018 - May 6, 2022)
Aggregate Amount Drawable
under Performance Bond
(in US$ Millions)
US$70
70
60
60
50
Within 30 days from the commencement of each renewal date, the Company shall cause the
performance bond to be reinstated in the full amount set forth above as applicable for that
year.
Upon not less than 10 days written notice to the Company, MWSS may make one or more
drawings under the performance bond relating to a Rate Rebasing Period to cover amounts due
to MWSS during that period; provided, however, that no such drawing shall be made in
respect of any claim that has been submitted to the Appeals Panel for adjudication until the
Appeals Panel has handed down its decision on the matter.
*SGVMC110470*
- 44 In the event that any amount payable to MWSS by the Company is not paid when due, such
amount shall accrue interest at a rate equal to that of a 364-day Treasury Bill for each day it
remains unpaid;
c. To pay MWSS an annual amount (accounted for as regulatory costs in the statements of
income) equal to one-half of the annual MWSS budget, provided that such annual budget shall
not, for any year, exceed P
=200.00 million, subject to annual CPI adjustments;
d. To meet certain specific commitments in respect of the provision of water and sewerage
services in the East Zone, unless deferred by the Regulatory Office due to unforeseen
circumstances or modified as a result of rate rebasing exercise;
e. To operate, maintain, renew and, as appropriate, decommission facilities in a manner
consistent with the National Building Standards and best industrial practices so that, at all
times, the water and sewerage system in the East Zone is capable of meeting the service
obligations (as such obligations may be revised from time to time by the Regulatory Office
following consultation with the Company);
f.
To repair and correct, on a priority basis, any defect in the facilities that could adversely affect
public health or welfare, or cause damage to persons or third party property;
g. To ensure that at all times, the Company has sufficient financial, material and personnel
resources available to meet its obligations under this Agreement; and
h. To ensure that no debt or liability that would mature after the life of the Agreement will be
incurred unless with the approval of MWSS (see Note 1).
Failure of the Company to perform any of its obligations that is deemed material by the
Regulatory Office may cause the Agreement to be terminated.
The Agreement also provides a general rate setting policy for rates chargeable by the Company for
water and sewerage services as follows:
1. For the period through the second Rate Rebasing date (January 1, 2008), the maximum rates
chargeable by the Company (subject to interim adjustments) are set out in the Agreement; and
2. From and after the second Rate Rebasing date, the rates for water and sewerage services shall
be set at a level that will permit the Company to recover, over the 25-year term of the
concession, its investment including operating, capital maintenance and investment incurred,
Philippine business taxes and payments corresponding to debt service on the MWSS loans and
the Company’s loans incurred to finance such expenditures, and to earn a rate of return on
these expenditures for the remaining term of the concession in line with the rates of return
being allowed from time to time to operators of long-term infrastructure concession
arrangements in other countries having a credit standing similar to that of the Philippines.
*SGVMC110470*
- 45 The maximum rates chargeable for such water and sewerage services shall be subject to
general adjustment at five-year intervals commencing on the second Rate Rebasing date;
provided that the Regulatory Office may exercise its discretion to make a general adjustment
of such rates on the first Rate Rebasing date (January 1, 2003).
MWSS exercised its option to implement general Rate Rebasing starting January 1, 2003 through
Regulatory Office Resolution No. 02-007 and Board of Trustees Resolution No. 329-2002, both
dated December 13, 2002 (see Note 1).
On December 14, 2007, MWSS Board of Trustees approved and confirmed, through MWSS
Resolution No.2007-278, a staggered implementation of the Rate Rebasing adjustment effective
January 1, 2008 (see Note 1).
21. Assets Held in Trust
Movable Properties, Water and Wastewater
The Company is granted the right to operate, maintain in good working order, repair,
decommission and refurbish the movable property required to provide the water and sewerage
services under the Agreement. The legal title to all movable property in existence at the
Commencement Date, however, shall be retained by MWSS and upon expiration of the useful life
of any such movable property as may be determined by the Company, such movable property
shall be returned to MWSS in its then-current condition at no charge to MWSS or the Company.
The Agreement also provides for the Concessionaires to have equal access to MWSS facilities
involved in the provision of water supply and sewerage services in both East and West Zones
including, but not limited to, the MWSS management information system, billing system,
telemetry system, central control room and central records.
The net book value of the facilities transferred to the Company on Commencement Date based on
MWSS’ closing audit report amounted to P
=4.60 billion with a sound value of P
=10.40 billion.
MWSS’ corporate headquarters is made available to the Concessionaires for a one-year period
starting August 1, 1997, subject to a yearly renewal by mutual agreement of the parties.
As of December 31, 2007, the Company has renewed the lease for another year. Rent expense
amounted to P
=14.09 million and P
=13.92 million in 2007 and 2006, respectively. These are
included in the “Occupancy costs” account in the statements of income.
22. Contingencies
The Company is contingently liable for lawsuits or claims filed by third parties (substantially
labor-related and civil cases) which are either pending decision by the courts or are under
negotiation, the outcomes of which are not presently determinable. The Company has been
advised by its internal and outside counsels that it is possible, but not probable, the action will
succeed and accordingly, no provision for probable losses on these cases was recognized.
*SGVMC110470*
- 46 23. Available-for-sale Financial Assets
This account consists of investments in:
Quoted debt securities
Unquoted investments
Bonds
Equities
Time deposits
2007
2006
P
=246,157,700
=215,536,841
P
300,000,000
10,637,000
40,881,280
P
=597,675,980
–
10,637,000
71,565,347
=297,739,188
P
Quoted investments in debt securities consist mainly of government securities such as fixed rate
treasury notes, retail treasury bonds and treasury bills. These bonds earn interest ranging from 5%
to 11% in 2007 and 9% to 13% in 2006 with maturity dates of up to three (3) years.
Unquoted debt securities include the Company’s investments in corporate bonds, with interest
rates ranging from 6% to 7% with varying maturity dates of up to five (5) years.
Unquoted investments in equities pertain to unlisted preferred shares in a public utility company.
These are carried at cost less impairment, if any.
The Company’s time deposits earn interest ranging from 4% to 6% with varying maturity dates of
up to three (3) years.
As of December 31, 2007 and 2006 the rollforward of unrealized gain on available-for-sale
financial assets is as follows:
Balance at beginning of year
Gain recognized in equity
Loss removed from equity and recognized
in profit and loss
Balance at end of year
2007
P
=3,850,107
2,012,461
2006
=65,687,988
P
8,955,954
(1,152,400)
P
=4,710,168
(70,793,835)
=3,850,107
P
*SGVMC110470*
- 47 24. Fair Value Measurement
The following tables summarize the carrying amounts and fair values of the Company’s financial
assets and liabilities as of December 31, 2007 and 2006:
2006
2007
Carrying Value
Loans and receivables
Cash and cash equivalents
Short-term cash investments
Trade and other receivables
Customers
Residential
Commercial
Semi-business
Industrial
Interest receivable from banks
Others
Deposits and others
Available-for-sale
Quoted investments
Unquoted investments
Other Liabilities
Accounts and other payables
Trade payables
Accrued expenses
Contracts payable
Interest payable
Others
Payables to stockholders
Long-term debt
Customers’ guaranty and other deposits
Total financial liabilities
Carrying Value
Fair Value
(In Thousand Pesos)
Fair value
P
=1,536,621
1,387,910
P
=1,536,621
1,387,910
=6,455,207
P
177,000
=6,455,207
P
177,000
247,189
67,888
7,823
14,862
12,917
20,909
49,754
3,345,873
247,189
67,888
7,823
14,862
12,917
20,909
49,754
3,345,873
119,755
30,136
9,108
2,467
23,465
46,101
35,236
6,898,475
119,755
30,136
9,108
2,467
23,465
46,101
35,236
6,898,475
246,158
351,518
597,676
P
=3,943,549
246,158
351,518
597,676
P
=3,943,549
215,537
82,202
297,739
=7,196,214
P
215,537
82,202
297,739
P
=7,196,214
P
=1,695,140
797,011
155,120
78,160
30,988
125,426
6,236,574
98,473
P
=9,216,892
P
=1,695,140
797,011
155,120
78,160
30,988
125,426
7,311,483
77,855
P
=10,271,183
P
=1,666,676
791,071
366,968
146,840
39,824
117,961
8,057,538
76,205
=11,263,083
P
P
=1,666,676
791,071
366,968
146,840
39,824
117,961
8,878,855
101,685
=12,109,880
P
The methods and assumptions used by the Company in estimating the fair value of the financial
instruments are:
Cash and cash equivalents, short-term cash investments and trade and other receivables - Carrying
amounts approximate fair values due to the relatively short-term maturities of these investments.
Short-term investments pertain to the Company’s time deposits with maturities of more than three
months up to one (1) year. These investments earn interest ranging from 4.70% to 7.13%.
AFS quoted debt securities - Fair values are based on quoted market prices.
AFS unquoted equity securities - Carrying amounts (cost less allowance for impairment losses)
approximate fair value due to the unpredictable nature of future cash flows and the lack of suitable
methods of arriving at a reliable fair value.
*SGVMC110470*
- 48 AFS unquoted debt and other securities - 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 3.6% to 5.6%.
Liabilities - The fair value of unquoted instruments, including customers’ guaranty and other
deposits are estimated using the discounted cash flow methodology using the Company’s current
incremental borrowing rates for similar borrowings with maturities consistent with those
remaining for the liability being valued. The discount rates used for Peso-denominated loans
ranged from about 4% to 6% while the discount rates used for foreign currency-denominated loans
ranged from about 1% to 6%. The fair values of accounts and other payables and payables to
stockholders approximate the carrying amounts due to the short-term nature of these transactions.
Embedded Derivatives
Embedded Prepayment Option
The Company has two 7-year loans with an aggregate amount of P
=3.5 billion (see Note 12) where
it has the option to prepay the whole loan or any part of the loan. For each Tranche, the Company
will pay the amount calculated as the greater of the present value of the remaining cash flows of
the relevant Tranche discounted at the yield of the “comparable benchmark tenor” as shown on the
Bloomberg MART1 page or one hundred percent (100%) of the principal amount of the relevant
Tranche being prepaid.
The prepayment option of the Company effectively has two components: a long call option and a
short put option. The long call option entitles the Company to buy back the issued loan at the face
amount while the short put option enables the counterparty bank to sell back the loan to the
Company at the market price (present value of future cash flows discounted at prevailing market
rates).
The long call option has a strike price equal to the face amount. Most likely, the Company will
exercise the long call option if the market value of the loan is higher than the face amount (in the
money). However, if the market value of the loan is lower than the face amount (out of the
money), the option will not be exercised.
On the other hand, the put option enables the counterparty bank to demand payment based on the
market value of the loan. Therefore, the strike price of the option is identified as the market value
of the loan. Based on analysis, the put option is not the usual option availed to protect the holder
from future decline of an asset’s market value. By setting the strike price at market value, the put
option provides protection to the holder, as a writer of the call option, from possible losses
resulting from the exercise of the call option.
Based on the payoff analysis, the value of the long call and the short put options are offsetting
resulting to a net payoff of zero. Consequently, no value for the embedded derivatives is
recognized.
Embedded Put Option
The lenders of the =
P2.0-billion and P
=1.5-billion loans (see Note 12) also has the option to require
the Company to pay in full its respective portion of the Tranche 2 Loan (put option) at the end of
the fifth year from the date of the Tranche 2 Loan’s initial disbursement. The option is considered
clearly and closely related to the host contract because the strike price approximates the amortized
cost. Therefore, the embedded derivative was not bifurcated.
*SGVMC110470*
- 49 Embedded Foreign Currency Derivatives
Bifurcated embedded derivative transactions pertain to purchase contracts that are denominated in
a currency that is neither the functional currency of a substantial party to the contract nor the
routine currency for the transaction. The Company’s embedded derivatives refer to forward
contract to sell US dollars. Net gain recognized on bifurcated embedded derivatives in 2007 and
2006 amounted to P
=3.55 million and P
=6.36 million, respectively. There are no outstanding
embedded derivative transactions as of December 31, 2007 and 2006.
25. Financial Risk Management Objectives and Policies
The Company’s principal financial instruments comprise of AFS financial assets and bank loans.
The financial debt instruments were issued primarily to raise financing for the Company’s
operations. The Company has various financial assets such as cash and cash equivalents, shortterm investments, AFS financial assets, trade receivables and payables which arise directly from
the conduct of its operations.
The main purpose of the Company’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.
The Company’s BOD reviews and approves the policies for managing each of these risks. The
Company monitors market price risk arising from all financial instruments and regularly report
financial management activities and the results of these activities to the BOD.
The Company’s risk management policies are summarized below:
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the
Company’s long-term debt obligations.
The Company’s policy is to manage its interest cost using a mix of fixed and variable rate debts.
As of December 31, 2007, approximately 64% of the Company’s borrowings are at a fixed rate of
interest.
*SGVMC110470*
- 50 The following tables show information about the Company’s financial instruments that are
exposed to cash flow and fair value interest rate risks and presented by maturity profile.
2007
Short-term cash investments
Interest Rates (Range)
4.70% to 6.13%
AFS Financial Assets
Bonds
Government Securities
RTBN
Interest Rates (Range)
6.875%
FXTN
Interest Rates (Range)
5.50 %-10.72%
Corporate Bonds
Interest Rates (Range)
6.13%-6.83%
Other Liabilities
Fixed Rate
DEG Loan
Interest Rates (Range)
6.5 – 7.5%
DANIDA Loan
Interest Rates (Range)
0%
=
P2.0 Billion Loan
Interest Rates (Range)
8.0 - 8.5%
=
P1.5 Billion Loan
Interest Rates (Range)
6.5 - 7.0%
IFC Loan
Interest rate
6m JPY Libor plus margin
Floating Rate
LBP Loan
Interest rate
6m JPY Libor plus margin
EIB Loan
Interest rate
6m Libor plus margin
Within
1 year
1-2 years
More than
4 years
Fair Value
P
=1,387,911
P
=–
P
=–
P
=–
P
=–
P
=1,387,911
–
–
–
102,509
–
102,509
–
–
85,980
57,669
–
143,649
–
–
–
–
300,000
300,000
–
P
=1,387,911
–
P
=–
85,980
P
=171,960
160,178
P
=320,356
300,000
P
=600,000
546,158
P
=2,480,227
P
=145,350
P
=137,138
P
=129,434
P
=121,729
P
=112,075
P
=645,726
11,866
11,866
11,858
–
–
35,590
168,081
168,081
168,081
184,849
2,312,486
3,001,578
102,353
102,353
102,634
110,885
1,687,464
2,105,689
155,462
150,375
145,431
140,487
792,770
1,384,525
9,552
9,726
32,027
53,748
515,013
620,066
9,098
55,737
101,548
100,414
532,026
798,823
P
=601,762
P
=635,276
P
=691,013
P
=712,112
P
=5,951,834
P
=8,591,997
2-3 years
3-4 years
(In Thousands)
*SGVMC110470*
- 51 2006
Within
1 year
1-2 years
2-3 years
3-4 years
More than
4 years
Fair Value
(In Thousands)
Short-term cash investments
Interest Rates (Range)
5.80% to 9.95%
AFS Financial Assets
Bonds
Government Securities
RTBN
Interest Rates (Range)
9.65%-11.00%
FXTN
Interest Rates (Range)
9.36%-10.72%
Others
Interest Rates (Range)
8.00%-10.31%
Corporate Bonds
Interest Rates (Range)
8.59%-12.68%
Time Deposits
Interest Rates (Range)
10.97%-11.08%
Other Liabilities
Fixed Rate
DEG Loan
Interest Rates (Range)
6.5 – 7.5%
DANIDA Loan
Interest Rate
0%
MACEA Loan
Interest Rate
8.5%
P2.0 Billion Loan
Interest Rates (Range)
8.0 - 8.5%
P1.5 Billion Loan
Interest Rates (Range)
6.5 - 7.0%
IFC Loan
Interest rate
4.66%
Floating Rate
$65M Loan (USD)
Interest rate
6-month US LIBOR plus
margin
$65M Loan (JPY)
Interest rate
Yen Funding Cost plus
margin
LBP Loan
Interest rate
6m JPY Libor plus margin
=177,000
P
=–
P
=–
P
=–
P
=–
P
=177,000
P
–
55,041
–
–
–
55,041
–
121
–
29,375
–
29,496
–
–
50,000
25,000
–
75,000
–
–
56,000
–
–
56,000
–
–
71,565
–
–
71,565
–
=177,000
P
55,162
=55,162
P
177,565
=177,565
P
54,375
=54,375
P
–
=–
P
287,102
=464,102
P
=182,521
P
=172,639
P
=162,884
P
=153,734
P
=213,441
P
=885,219
P
14,094
14,094
14,094
14,085
–
56,367
6,033
26,668
26,600
24,589
1,959
85,849
165,080
168,081
168,081
168,081
2,497,335
3,166,658
100,232
102,353
102,353
102,634
1,798,350
2,205,922
181,782
176,335
170,566
164,958
1,058,562
1,752,203
559,545
751,053
484,373
20,643
13,766
1,829,380
242,348
345,510
224,403
–
–
812,261
6,023
9,558
9,532
16,168
156,350
197,631
=1,457,658
P
=1,766,291
P
=1,362,886
P
=664,892
P
=5,739,763
P
=10,991,490
P
*SGVMC110470*
- 52 Total - Gross
(In USD)
Total - Gross
(In PHP)
-
$15,642,591
=645,726,156
P
-
-
$862,161
=35,590,006
P
=2,126,083,118
P
-
-
=3,001,578,234
P
=1,570,856,731
P
-
-
=2,105,688,703
P
Y372,407,018
Y 1,804,336,116
Y3,801,549,213
$33,438,427
=1,380,338,267
P
Y147,579,421
Y145,416,349
Y1,268,677,095
Y1,702,544,952
$14,975,585
=618,192,149
P
Y275,711,672
Y272,644,390
Y1,188,161,983
Y2,193,364,525
$19,292,834
=796,408,188
P
Y7,697,458,690
$84,211,598
=8,583,521,703
P
2-3 years
3-4 years
$3,521,086
6.5 – 7.5%
$3,322,134
$3,135,519
$2,948,852
$2,715,000
-
$287,447
0%
$287,447
$287,267
-
-
P2.0 Billion Loan
Interest rate
=168,081,044
P
8.0 - 8.5%
=168,081,044
P
=168,081,044
P
=184,848,717
P
=186,403,267
P
P1.5 Billion Loan
Interest rate
=102,352,654
P
6.5 - 7.0%
=102,352,654
P
=102,633,843
P
=110,885,316
P
IFC Loan
Interest rate
Y426,857,590
6m JPY Libor
plus margin
Y412,891,613
Y399,316,163
Y385,740,713
Y26,226,701
6m JPY Libor
plus margin
Y26,706,280
Y 87,939,106.00
Y24,981,928
6m Libor plus
margin
Y153,038,671
Y278,825,881
DANIDA Loan
Interest rate
Floating Rate (exposed to
cash flow risk)
LBP Loan
Interest rate
EIB Loan
Interest rate
Within 1 year
4-5 years
More than
5 years
1-2 years
2007
Liabilities:
Long-Term Debt
Fixed Rate (exposed to fair
value risk)
DEG Loan
Interest rate
=116,607,505
P
Total
(In JPY)
Interest on financial instruments classified as floating rate is repriced on a semi-annual basis. Interest on financial instruments classified as fixed rate is fixed until the maturity of the
instrument. DANIDA loan is a non-interest bearing loan, and is therefore not subject to interest rate risk.
*SGVMC110470*
- 53 Total - Gross
(In USD)
Total - Gross
(In PHP)
–
$18,054,656
=885,219,784
P
–
–
$1,149,608
=56,365,288
P
Y385,740,713
Y 2,176,743,134
Y 4,241,591,726
$35,663,303
=1,748,571,746
P
=24,588,985
P
=1,958,677
P
–
–
–
=85,848,303
P
=168,081,044
P
=168,081,044
P
=184,848,717
P
=2,312,486,385
P
–
–
=3,166,657,831
P
102,352,654
102,352,654
102,633,843
=1,687,464,236
P
–
–
=2,205,920,614
P
$11,412,301
6-month US
LIBOR plus
margin
$15,318,236
$9,879,124
$421,019
$233,852
$46,924
–
$37,311,456
=1,829,380,688
P
Y586,656,718
Yen Funding
Cost plus margin
Y836,382,641
Y543,218,214
–
–
–
Y 1,966,257,573
$16,532,294
=810,578,375
P
14,578,863
6 month US
LIBOR plus
1.25% spread
23,137,073
23,073,857
39,138,554
53,838,157
324,641,746
Y 478,408,250
$4,022,457
=197,221,067
P
$112,733,774
=10,985,763,696
P
1-2 years
2-3 years
3-4 years
$3,722,641
7.11%
$3,521,086
$3,322,134
$3,135,519
$2,948,852
$1,404,424
$287,447
0%
$287,447
$287,447
$287,267
–
Y440,042,513
4.66%
Y426,857,590
Y412,891,613
Y399,316,163
=6,032,639
P
8.50%
=26,668,137
P
=26,599,865
P
P2.0 Billion Loan
Interest rate
=165,079,597
P
8.28%
=168,081,044
P
P1.5 Billion Loan
Interest rate
100,231,911
6.77%
DANIDA Loan
Interest rate
IFC Loan
Interest rate
MACEA Loan
Interest rate
Floating Rate (exposed to
cash flow risk)
$65M Loan (USD)
Interest rate
$65M Loan (JPY)
Interest rate
LBP Loan
Interest rate
4-5 years
More than
5 years
Within 1 year
2006
Liabilities:
Long-Term Debt
Fixed Rate (exposed to fair
value risk)
DEG Loan
Interest rate
=110,885,316
P
Total
(In JPY)
Y6,686,257,549
Interest on financial instruments classified as floating rate is repriced on as semi-annual basis. Interest on financial instruments classified as fixed rate is fixed until the maturity of the
instrument. DANIDA loan and other financial instruments that are not included in the above table, are non-interest bearing and are therefore not subject to interest rate risk.
*SGVMC110470*
- 54 The following table demonstrates the sensitivity of the Company’s profit before tax and equity to a
reasonably possible change in interest rates on December 31, 2007, with all variables held
constant, (through the impact on floating rate borrowings).
Company - floating rate borrowings
Change in basis points
+ 50 basis points
Effect on income
before income tax
Effect on equity
(In thousands)
(P
=21,479)
(P
=13,692)
Company - floating rate borrowings
Change in basis points
- 50 basis points
Effect on income
before income tax
Effect on equity
(In thousands)
=5,062
P
=3,291
P
The following table demonstrates the sensitivity of the Company’s equity due to a reasonably
possible change in market price of government bonds (through change in interest rate) on
December 31, 2007, with all variables held constant:
AFS investments - quoted debt securities
Change in basis
points
+50
(50)
Effect on equity
(In thousands)
(2,197)
2,225
Foreign Exchange Risk
The Company’s foreign exchange risk results primarily from movements of the Philippine Peso
(PHP) against the United States Dollar (USD). Majority of revenues are generated in PHP, and
substantially all of capital expenditures are also in PHP. Approximately 45% of debt as of
December 31, 2007 was denominated in foreign currency. Under Amendment 1 of the Agreement
(see Note 1), however, the Company has a natural hedge on its foreign exchange risks on its loans
and concession fee payments through a recovery mechanism in the tariff.
*SGVMC110470*
- 55 Information on the Company’s foreign currency-denominated monetary assets and liabilities and
its Philippine peso equivalents are as follows:
December 31, 2007
Original
Peso
Currency
Equivalent
(Amounts in Thousands)
Assets
Cash and cash equivalents
Available-for-sale investments
Liabilities
Long-term debt (including
current portion) - gross
YEN loan
USD loan
Net foreign currencydenominated liabilities
December 31, 2006
Original
Peso
Currency
Equivalent
(Amounts in Thousands)
$1,104
953
2,057
P
=45,573
39,340
84,913
$6,001
970
6,971
=294,229
P
47,559
341,788
Y4,487,407
$13,077
2,270,329
538,825
2,809,154
Y5,438,407
$47,579
2,241,962
2,332,779
4,574,741
=4,232,953
P
P
=2,724,241
The spot exchange rates used in 2007 and 2006 were P
=41.28 to US$1 and P
=49.03 to US$1, respectively.
The following table demonstrates the sensitivity to a reasonably possible change in foreign
exchange rates, with all variables held constant, of the Company’s profit before tax (due to
changes in the fair value of monetary assets and liabilities) and equity on December 31, 2007.
Increase/decrease in
foreign exchange
rates
Dollar
P1.00
=
(P
=1.00)
Effect on profit
before tax
(P
=11,020)
11,020
Effect on equity
(P
=7,163)
7,163
Yen
=0.77
P
(P
=0.77)
(12,558)
12,558
(8,163)
8,163
The Company recognized P
=41.67 million and P
=32.51 million foreign exchange gain (loss) for the
years ended December 31, 2007 and 2006, respectively, arising from the translation of the
Company’s cash and cash equivalents and available-for sale investments.
Credit Risk
The Company trades only with recognized, creditworthy third parties. It is company policy that
except for connection fees and other highly meritorious cases, the Company does not offer credit
terms to its customers.
With respect to credit risk arising from the other financial assets of the Company, which comprise
cash and cash equivalents, short-term cash investments and available-for-sale financial assets, the
Company’s exposure to credit risk arises from default of the counterparty, with a maximum
exposure equal to the carrying amount of these instruments. The Company transacts only with
institutions or banks which have demonstrated financial soundness for the past 5 years.
*SGVMC110470*
- 56 In respect of receivables from customers, credit risk is managed primarily through credit reviews
and an analysis of receivables on a continuous basis. Customer payments are facilitated through
various collection modes including the use of postdated checks and auto-debit arrangements.
The Company has no significant concentrations of credit risk.
The table below shows the maximum exposure to credit risk for the components of the balance
sheet.
Gross maximum Gross maximum
exposure
exposure
2007
2006
Balance sheet items
Cash and cash equivalents
Short-term investments
Receivables
Customers
Residential
Commercial
Semi-industrial
Industrial
Interest receivable from banks
Others
Advances to contractors
Available-for-sale financial assets
Total credit risk exposure
P
=1,536,620,847
1,387,910,704
=6,455,206,527
P
177,000,000
247,189,432
67,887,638
7,822,992
14,862,193
12,916,881
20,908,994
384,923,277
597,675,980
P
=4,278,718,938
119,754,999
30,136,479
9,107,577
2,467,482
23,465,390
46,101,111
167,068,088
297,739,188
=7,328,046,841
P
As of December 31, 2007, the credit quality per class of financial assets that were neither past due
nor impaired is as follows:
Neither past due nor impaired
High grade
Standard
Sub-standard
Cash and cash equivalents
Short-term investments
Receivables
Customers
Residential
Commercial
Semi-business
Industrial
Interest receivable from
banks
Others
AFS investments
Quoted
Unquoted
Total
Past due or
Individually
impaired
Total
P
=1,536,620,847
1,387,910,704
P
=–
–
P
=–
–
P
=–
–
P
=1,536,620,847
1,387,910,704
191,045,838
54,965,928
4,452,210
13,799,575
–
–
–
–
–
–
–
–
358,950,372
184,570,329
37,958,983
10,929,806
549,996,210
239,536,257
42,411,193
24,729,381
12,916,881
–
–
20,908,995
–
–
–
43,463,664
12,916,881
64,372,659
246,157,700
351,518,280
P
=3,799,387,963
–
–
P
=20,908,995
–
–
P
=–
–
–
P
=635,873,154
246,157,700
351,518,280
P
=4,456,170,112
*SGVMC110470*
- 57 As of December 31, 2007, the aging analysis of the Company’s receivables presented per class is
as follows:
Neither
Past
Due nor
Impaired
Customers
Residential
Commercial
Semi-business
Industrial
Interest receivable
from banks
Others
Total
Past due but not impaired
90-120
<30 days 30-60 days 60-90 days
days
(In Thousands)
>120 days
Impaired
Financial
Assets
Total
P
=191,046
54,965
4,452
13,800
P
=56,144
12,922
3,371
1,063
P
=–
–
–
–
P
=–
–
–
–
P
=–
–
–
–
P
=–
–
–
–
P
=302,806
171,649
34,588
9,867
P
=549,996
239,536
42,411
24,730
–
–
P
=264,263
12,917
20,908
P
=107,325
–
–
P
=–
–
–
P
=–
–
–
P
=–
–
–
P
=–
–
43,464
P
=562,374
12,917
64,372
P
=933,962
Liquidity Risk
The Company’s objective is to maintain a balance between continuity of funding and flexibility
through the use of bank overdrafts, bank loans, debentures, preference shares, leases and hire
purchase contracts. The Company’s policy is to maintain a level of cash that is sufficient to fund
its monthly cash requirements, at least for the next four to six months. Capital expenditures are
funded through long-term debt, while operating expenses and working capital requirements are
sufficiently funded through cash collections.
Capital Management
The primary objective of the Company’s capital management strategy is to ensure that it maintains
a healthy capital structure, in order to maintain a strong credit standing while it maximizes
shareholder value.
The company closely manages its capital structure vis-à-vis a certain target gearing ratio, which is
net debt divided by total capital plus net debt. The Company’s target gearing ratio is 50%. This
target is to be achieved over the next 5 years, by managing the Company’s level of borrowings
and dividend payments to shareholders.
For purposes of computing its net debt, the company includes the outstanding balance of its LongTerm Debt (including current portion), Accounts and Other Payables, less Cash and Cash
Equivalents, Short-term Cash Investments and Available-for-sale financial assets. To compute
its total Capital, the company uses the Total Stockholders’ Equity (excluding the unrealized gain
reserves).
2006
2007
Interest bearing loans and borrowings
=8,057,538,423
P
=6,236,573,781 P
Trade and other payables
3,353,191,424
3,341,243,791
Less cash and short-term investment and AFS
6,929,945,715
3,522,207,531
Net debt
4,480,784,132
6,055,610,041
Equity
13,363,987,303 11,873,859,997
Less net unrealized gains reserve
3,850,107
4,710,168
Total capital
13,359,277,135 11,870,009,890
Capital and Net Debt
=16,350,794,022
P
=19,414,887,176 P
Gearing ratio
27%
31%
*SGVMC110470*
- 58 26. Notes to Cash Flow Statements
The Company’s noncash investing activities pertain to the accrual of project costs amounting to
=366.97 million and P
P
=760.97 million for the years ended December 31, 2006 and 2005,
respectively.
*SGVMC110470*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
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
ON SUPPLEMENTARY SCHEDULES
The Stockholders and the Board of Directors
Manila Water Company, Inc.
MWSS Building, Katipunan Road
Balara, Quezon City
We have audited in accordance with Philippine Standards on Auditing, the consolidated financial
statements of Manila Water Company, Inc. included in this Form 17-A and have issued our report
thereon dated February 5, 2008. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements
and Supplementary Schedules are the responsibility of the Company’s management and are presented
for purposes of complying with the Securities Regulation Code Rules 68 and 68.1 and are not part of
the basic financial statements. These schedules have been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, present fairly in all material respects
the financial data required to be set forth therein in relation to the basic financial statements taken as a
whole.
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. 0017583, January 3, 2008, Makati City
February 5, 2008
SGV & Co is a member practice of Ernst & Young Global
*SGVMC100000*