San Miguel Brewery Inc.
(A corporation organized and existing under Philippine laws)
P 38,800,000,000.00 Fixed Rate Bonds consisting of Series A Bonds, Series B Bonds and Series C Bonds
Due April 3, 2012 for Series A Bonds, April 4, 2014 for Series B Bonds and April 3, 2019 for Series C
Bonds
Issue Price of 100% Face Value
Interest Rate of 8.250% p.a. for Series A Bonds, 8.875% p.a. for Series B Bonds and 10.500% for Series C
Bonds
San Miguel Brewery Inc. (the ‘‘Company’’ or the ‘‘Issuer’’) intends to offer for subscription and issue bonds (the ‘‘Bonds’’) with an
aggregate principal amount of P38,800,000,000, (the ‘‘Offer’’). The Bonds will be issued in three series: Series A, Series B and Series C.
The Series A Bonds shall have a term beginning on the Issue Date and ending three years from the Issue Date or on April 3, 2012, with a
fixed interest rate equivalent to 8.250% per annum. The Series B Bonds shall have a term beginning on the Issue Date and ending five years
and one day from the Issue Date or on April 4, 2014, with a fixed interest rate equivalent to 8.875% per annum. The Series C Bonds shall
have a term beginning on the Issue Date and ending ten years from the Issue Date or on April 3, 2019, with a fixed interest rate equivalent to
10.500% per annum. Interest on the Series A Bonds, Series B Bonds and Series C Bonds shall be payable semi-annually in arrears on
October 3 and April 3 of each year while the Bonds are outstanding. (see ‘‘Description and Terms and Conditions of the Bonds’’ —
‘‘Interest’’)
Subject to the consequences of default as may be contained in the Trust Agreement, and unless otherwise redeemed or purchased prior to the
relevant Maturity Date, the Bonds will be redeemed at par or 100% of the face value thereof on the relevant Maturity Date, as set out in
‘‘Description and Terms and Conditions of the Bonds’’ — ‘‘Redemption and Purchase’’.
Upon issue, the Bonds shall constitute direct, unconditional, unsubordinated, and unsecured obligations of the Company and shall at all
times rank pari passu and without preference among themselves and among any present and future unsubordinated and unsecured
obligations of the Company, except for any statutory preference or priority established under Philippine law. The Bonds will effectively be
subordinated in right of payment to all of the Company’s secured debts, as allowed under the Trust Agreement, to the extent of the value of
the assets securing such debt and all of its debts evidenced by a public instrument under Article 2244(14) of the Civil Code of the
Philippines. As of the date of this prospectus, the Company has no existing secured debt or debts evidenced by a public instrument under
Article 2244(14) of the Civil Code of the Philippines.
The Bonds have been rated PRS Aaa by the Philippine Rating Services Corporation (‘‘PhilRatings’’) as of February 19, 2009. The rating is
not a recommendation to buy, sell, or hold securities and may be subject to revision, suspension, or withdrawal at any time by the rating
agency concerned.
The Bonds shall be offered to the public at par through the Joint Lead Managers and Underwriters named below with Philippine Depository
and Trust Corp. (“PDTC”) as the Registrar of the Bonds. It is intended that upon issuance, the Bonds shall be issued in scripless form, with
PDTC maintaining the scripless Register of Bondholders, and, as soon as reasonably practicable, listed in the Philippine Dealing and
Exchange Corp. (“PDEx”). The Bonds shall be issued in denominations of P50,000.00 each, as a minimum, and in multiples of P10,000.00
in excess thereof, and traded in amounts of P10,000.00, as a minimum, and in multiples of P10,000.00 in excess thereof. (see ‘‘Description
and Terms and Conditions of the Bonds’’ — ‘‘Form, Denomination and Title’’ and “Description and Terms and Conditions of the Bonds” –
“Transfer of Bonds”)
This Prospectus is dated as of March 16, 2009.
Joint Issue Managers
DEVELOPMENT BANK OF THE PHILIPPINES
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
Joint Lead Managers and Underwriters
BDO CAPITAL & INVESTMENT CORPORATION
BPI CAPITAL CORPORATION
CHINA BANKING CORPORATION
DEVELOPMENT BANK OF THE PHILIPPINES
FIRST METRO INVESTMENT CORPORATION
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
ING BANK, N.V.
LAND BANK OF THE PHILIPPINES
PHILIPPINE COMMERCIAL CAPITAL, INC.
RCBC CAPITAL CORPORATION
STANDARD CHARTERED BANK
UNION BANK OF THE PHILIPPINES
Participating Underwriter
SB CAPITAL INVESTMENT CORPORATION
i
SAN MIGUEL BREWERY INC.
40 San Miguel Avenue
Mandaluyong City
Philippines
Telephone Number: +632 632 3000
Offer for Subscription of P 38,800,000,000 Fixed Rate Bonds, consisting of Series A Bonds, Series B Bonds
and Series C Bonds, due April 3, 2012 for Series A Bonds, April 4, 2014 for Series B Bonds and April 3,
2019 for Series C Bonds, at the Issue Price of 100% Face Value.
This prospectus relates to the Offer of P38,800,000,000 Bonds of San Miguel Brewery Inc., consisting of Series
A Bonds, Series B Bonds and Series C Bonds. The Series A Bonds shall have a term beginning on the Issue
Date and ending three years from the Issue Date or on April 3, 2012, with a fixed interest rate equivalent to
8.250% per annum. The Series B Bonds shall have a term beginning on the Issue Date and ending five years and
one day from the Issue Date or on April 4, 2014, with a fixed interest rate equivalent to 8.875% per annum. The
Series C Bonds shall have a term beginning on the Issue Date and ending ten years from the Issue Date or on
April 3, 2019, with a fixed interest rate equivalent to 10.500% per annum. The Bonds will be issued at the issue
price (the “Issue Price”) of 100.00% of face value.
The Company expects to raise gross proceeds amounting to P38,800,000,000 from the Offer. After
deducting expenses relating to the issuance of the Bonds, the net proceeds are estimated to be
P38,400,152,939.52 for gross proceeds of P38,800,000,000. Proceeds of the Offer will be used by the
Company to fund the Proposed Acquisitions relating to the proposed purchase from San Miguel
Corporation (“SMC”) of SMB Brands and SMB Land (see ‘‘Use of Proceeds” on page 28 and “Proposed
Acquisitions” on pages 29-36).
The Issuer shall pay each Joint Lead Manager and Underwriter a fee of 0.45% flat based on its Underwriting
Commitment as defined in the Issue Management and Underwriting Agreement, as Joint Lead Manager and
Underwriter’s fee (the “Joint Lead Manager and Underwriter’s Fee”).
The Joint Lead Managers and Underwriters’ Fee shall be grossed up for gross receipts tax of 7%. The fees due
to the Joint Lead Managers and Underwriters together with any applicable gross receipts tax or its equivalent
and net of any applicable withholding tax arising in respect of such fee, shall be due and payable by the Issuer to
the Joint Lead Managers and Underwriters on the date that the Issuer receives confirmation from the Issuer’s
bank that cleared funds representing payments for all accepted Applications to Purchase have been credited to
the account designated by the Issuer. The Joint Lead Managers and Underwriters are authorized to organize a
syndicate of Participating Underwriters for the purpose of the Offer. However, the Company has no obligation
to any member of such syndicate for the payment of any fee, underwriting or participating commissions (see
“Plan of Distribution” on pages 38-41).
The information contained in this prospectus relating to the Company, its operations and those of its affiliates
has been supplied by the Company, unless otherwise stated herein. To the best of its knowledge and belief, the
Company (which has taken all reasonable care to ensure that such is the case) confirms that the information
contained in this prospectus relating to it, its operations and those of its affiliates is correct, and that there is no
material misstatement or omission of fact which would make any statement in this prospectus misleading in any
material respect and that the Company hereby accepts full and sole responsibility for the information contained
in this prospectus. The Joint Lead Managers and Underwriters assume no liability for any information
contained in this prospectus. Unless otherwise indicated, all information in this prospectus is as of the date of
this prospectus. Neither the delivery of this prospectus nor any sale made pursuant to this prospectus shall, under
any circumstances, create any implication that the information contained herein is correct as of any date
subsequent to the date hereof or that there has been no change in the affairs of the Company since such date.
No person has been authorized to give any information or to make any representation not contained in this
prospectus. If given or made, any such information or representation must not be relied upon as having been
authorized by the Company or any of the Joint Lead Managers and Underwriters. This prospectus does not
constitute an offer of any securities, or any offer to sell, or a solicitation of any offer to buy any of the
Company’s securities in any jurisdiction, to or from any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
ii
In making an investment decision, investors must rely on their own examination of the Company and the terms
of the Offer, including the risks involved. The Offer is being made on the basis of this prospectus only.
Market data and certain industry forecasts used throughout this prospectus were obtained from internal surveys,
market research, publicly available information and industry publications. Industry publications generally state
that the information contained therein has been obtained from sources believed to be reliable, but that the
accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts
and market research, while believed to be reliable, have not been independently verified, and neither the
Company nor the Joint Lead Managers and Underwriters make any representation as to the accuracy of such
information.
The Bonds are offered subject to receipt and acceptance of any order by the Company and subject to the
Company’s right to reject any order in whole or in part.
Each investor in the Bonds must comply with all laws applicable to it and must obtain the necessary consent,
approvals or permission for its purchase, offer or sale under the laws and regulations in force in any jurisdiction
to which it is subject, and neither the Company nor the Joint Lead Managers and Underwriters shall have any
responsibility therefor.
The Company is organized under Philippine laws. The cash dividend policy of the Company entitles the holders
of its Common Shares to receive annual cash dividends equivalent to 100% of the prior year’s recurring net
income, which is net income calculated without respect to extraordinary events that are not expected to recur,
based on the recommendation of the Board of Directors. Such recommendation will take into consideration
factors such as the implementation of business plans, debt service requirements, operating expenses, budgets,
funding for new investments and acquisitions, appropriate reserves and working capital, among others. The cash
dividend policy is subject to review and may be changed by the Company’s Board of Directors at any time (see
“Related Stockholder Matters” – “Dividends and Dividend Policy” on page 113).
This prospectus includes forward-looking statements. The Company has based these forward-looking statements
largely on its current expectations and projections about future events and financial trends affecting its business.
Words including, but not limited to, “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,”
“intends,” “expects” and similar words are intended to identify forward-looking statements. In light of the risks
and uncertainties associated with forward-looking statements, investors should be aware that the forwardlooking events and circumstances discussed in this prospectus might not occur. The Company’s actual results
could differ substantially from those anticipated in the Company’s forward-looking statements.
Application has been made to the Philippine Securities and Exchange Commission to register the Bonds under
the provisions of the Securities Regulation Code of the Philippines (Republic Act No. 8799) (the “SRC”).
Any inquiries regarding this prospectus should be forwarded to the Company. Its principal office is at 40 San
Miguel Avenue, Mandaluyong City, Philippines, with telephone number +632 632 3000.
iii
ALL REGISTRATION REQUIREMENTS HAVE BEEN MET
INFORMATION CONTAINED HEREIN IS TRUE AND CURRENT.
AND
ALL
REPUBLIC OF THE PHILIPPINES)
CITY OF MANDALUYONG
)SS.
Before me, a notary public in and for the city named above, personally appeared:
Name
Ramon S. Ang
Passport No.
ZZ202387
Date and Place of Issue
December 20, 2006/Manila
who is personally known to me and to me known to be the same person who presented the foregoing instrument
and signed the same in my presence and who took an oath before me as to such instrument.
Witness my hand and seal this 16th day of March, 2009.
NOTARY PUBLIC
Doc. No. 480;
Page No. 97;
Book No.
I;
Series of 2009.
iv
TABLE OF CONTENTS
GLOSSARY OF TERMS...........................................................................................................................1
SUMMARY ...............................................................................................................................................7
SUMMARY FINANCIAL AND OPERATING INFORMATION .................................................14
SUMMARY OF THE OFFER .................................................................................................................16
RISK FACTORS ......................................................................................................................................17
USE OF PROCEEDS ............................................................................................................................28
PROPOSED ACQUISITIONS................................................................................................................. 29
DETERMINATION OF ISSUE PRICE .............................................................................................37
PLAN OF DISTRIBUTION.....................................................................................................................38
DESCRIPTION OF TERMS AND CONDITIONS OF THE BONDS....................................................42
CAPITALIZATION AND INDEBTEDNESS ......................................................................................... 52
SELECTED FINANCIAL INFORMATION .....................................................................................53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
FINANCIAL PERFORMANCE .......................................................................................................55
CAPITAL EXPENDITURES...................................................................................................................70
THE BEER INDUSTRY IN THE PHILIPPINES....................................................................................71
BUSINESS OVERVIEW .........................................................................................................................76
BOARD OF DIRECTORS AND MANAGEMENT................................................................................93
RELATED PARTY TRANSACTIONS...................................................................................................99
DESCRIPTION OF PROPERTIES........................................................................................................104
MATERIAL CONTRACTS...................................................................................................................110
RELATED STOCKHOLDER MATTERS ............................................................................................111
REGULATORY FRAMEWORK ..........................................................................................................116
PHILIPPINE TAXATION .....................................................................................................................118
LEGAL MATTERS ...............................................................................................................................121
EXPERTS...............................................................................................................................................122
INDEPENDENT PUBLIC ACCOUNTANTS.......................................................................................123
INDEX TO FINANCIAL STATEMENTS ............................................................................................126
v
GLOSSARY OF TERMS
In this prospectus, unless
meanings set out below.
the
context
otherwise
requires, the
following
terms
shall
have
the
ABI . . . . . . . . . . . . . . . . . . . . . . .
Asia Brewery, Inc.
ABV . . . . . . . . . . . . . . . . . . . . . .
Alcohol-by-volume, expressed as a percentage.
AIBC . . . . . . . . . . . . . . . . . . . . .
Anchor Insurance Brokerage Corporation.
Allocation Report . . . . . . . . . . . .
The report to be prepared by the Joint Issue Managers and sent to the
Issuer, the Joint Lead Managers and Underwriters and the
Participating Underwriters no later than three Business Days before
the Issue Date, allocating the Bonds among the Joint Lead Managers
and Underwriters and the Participating Underwriters, for issuance to
their respective clients.
Application to Purchase . . . . . . .
The application form accomplished and submitted by an applicant for
the purchase of a specified amount of the Series A Bonds, Series B
Bonds and Series C Bonds, together with all the other requirements set
forth in such application form.
Average Selling Price . . . . . . . . .
Average selling prices of products, net of VAT and trade discounts.
Business Day . . . . . . . . . . . . . . . .
A day other than Saturday or Sunday on which banks are open for
business in Metro Manila, Philippines.
BIR . . . . . . . . . . . . . . . . . . . . . . .
The Philippine Bureau of Internal Revenue.
Bonds . . . . . . . . . . . . . . . . . . . . .
The Philippine Peso denominated fixed rate bonds with terms of three
years, five years and one day and ten years to be issued by the Issuer
with an aggregate principal amount of Thirty Eight Billion Eight
Hundred Million Pesos (P38,800,000,000.00) consisting of Series A
Bonds, Series B Bonds and Series C Bonds, which the Joint Lead
Managers and Underwriters and the Participating Underwriters have
agreed to distribute and sell on the Issue Date, and underwrite on a
firm commitment basis, with features as set out in the Terms and
Conditions.
Bondholders . . . . . . . . . . . . . . . .
The holders of the Series A Bonds, Series B Bonds and Series C
Bonds who, at any relevant time, appear in the Register of
Bondholders as the registered owner of the Bonds, with each holder
being a “Bondholder”.
Board of Directors . . . . . . . . . . .
The Board of Directors of the Company.
Brewery Landholdings . . . . . . . .
Brewery Landholdings, Inc.
Brewery Properties . . . . . . . . . . .
Brewery Properties Inc.
BSP . . . . . . . . . . . . . . . . . . . . . . .
Bangko Sentral ng Pilipinas, the central bank of the Philippines.
Canadean . . . . . . . . . . . . . . . . . .
Canadean Limited, a leading global beverage research company.
Canadean Report . . . . . . . . . . . . .
The report on the Philippine beer industry prepared by Canadean for
inclusion in this prospectus.
1
CAGR . . . . . . . . . . . . . . . . . . . .
Compound annual growth rate.
CBA . . . . . . . . . . . . . . . . . . . . . .
Collective Bargaining Agreement.
CESBD………………………….
SMC’s Corporate Export Sales & Business Development.
Change in Law………………….
The enactment, passing, revoking, overturning, modification,
amendment or abrogation, change in interpretation of any decree,
statute, law, regulation, license, permit, authorization, concession,
approval or other administrative act of the Government which comes
into force after the Issue Date, or any change in the interpretation or
application of any of the foregoing by the Government.
CKAG . . . . . . . . . . . . . . . . . . . .
SMC’s Corporate Key Accounts Group.
Common Shares . . . . . . . . . . . . .
The Company’s shares of common stock, par value of P1.00 per share.
Company . . . . . . . . . . . . . . . . . .
San Miguel Brewery Inc.
Corporation Code . . . . . . . . . . . .
Batas Pambansa Blg. 68, otherwise known as “The Corporation Code
of the Philippines.”
DENR . . . . . . . . . . . . . . . . . . . . .
The Philippine Department of Environment and Natural Resources.
ECC . . . . . . . . . . . . . . . . . . . . . .
Environmental Compliance Certificate.
Economy . . . . . . . . . . . . . . . . . .
In respect of the market for beer, used to describe a market segment,
meaning the bottom tier of socio-economic groups.
EIS Law . . . . . . . . . . . . . . . . . . .
The Philippine Environmental Impact Statement System.
Eligible Bondholders . . . . . . . . . .
Institutional and retail investors other than Prohibited Bondholders
determined by the Issuer and Joint Lead Managers and Underwriters
and Participating Underwriters to be eligible holders of the Bonds.
Equivalent Case . . . . . . . . . . . . .
A measure of volume for beer, equal to a 24-bottle case of 320 ml
bottles, the standard size for San Miguel Pale Pilsen, equivalent to 7.68
liters.
Excise Taxes . . . . . . . . . . . . . .
Taxes levied on beer products based on removals from the plant where
the products are produced.
Food Development Center . . . .
An agency of the National Food Authority of the Philippines.
Government . . . . . . . . . . . . . . .
Any government agency, authority, bureau, department, court, tribunal,
legislative body, public official, statutory or legal entity (whether
autonomous or not), commission, corporation, or instrumentality,
whether national or local, of the Republic of the Philippines.
GSMI . . . . . . . . . . . . . . . . . . . .
Ginebra San Miguel, Inc.
Hectoliter or hl . . . . . . . . . . . .
100 liters or 13.02 Equivalent Cases.
High-Alcohol Beer . . . . . . . . . .
Any beer with ABV of more than 5%.
Iconic . . . . . . . . . . . . . . . . . . . . .
Iconic Beverages, Inc.
IFRS . . . . . . . . . . . . . . . . . . . . .
International Financial Reporting Standards.
Issue Date . . . . . . . . . . . . . . . . .
April 3, 2009 or such other date as the Issuer and the Joint Issue
2
Managers may agree in writing, provided that such date shall be a date,
which is within the validity of the SEC Permit to Sell Securities.
Issue Management and
Underwriting Agreement . . .
The agreement dated as of March 16, 2009 executed by and among the
Issuer, the Joint Issue Managers, and the Joint Lead Managers and
Underwriters for the issuance, placement, distribution and sale of the
Bonds in the Philippines.
Issue Price . . . . . . . . . . . . . . . .
100% of the face value for Series A Bonds, Series B Bonds and Series
C Bonds.
Issuer . . . . . . . . . . . . . . . . . . . .
San Miguel Brewery Inc., a corporation duly organized and existing
under Philippine law.
Joint Issue Managers . . . . . . . . .
The Development Bank of the Philippines and The Hongkong and
Shanghai Banking Corporation Limited, each a “Joint Issue Manager”.
Joint Lead Managers and
Underwriters . . . . . . . . . . . . . . .
BDO Capital & Investment Corporation, BPI Capital Corporation,
China Banking Corporation, Development Bank of the Philippines,
First Metro Investment Corporation, The Hongkong and Shanghai
Banking Corporation Limited, ING Bank N.V., Land Bank of the
Philippines, Philippine Commercial Capital, Inc., RCBC Capital
Corporation, Standard Chartered Bank and Union Bank of the
Philippines, each a “Joint Lead Manager and Underwriter”.
JWM . . . . . . . . . . . . . . . . . . . .
Joe White Maltings Pty. Ltd.
Kirin . . . . . . . . . . . . . . . . . . . . .
Kirin Holdings Company, Limited.
Low-Calorie Beer . . . . . . . . . .
Any beer with caloric content at least 33% lower than ordinary beer.
Majority Bondholders . . . . . . .
Bondholders holding 51% of the outstanding Bonds.
Master Bond Certificate . . . . . .
For each of the Series A Bonds, Series B Bonds and Series C Bonds,
the bond certificate issued by the Issuer in the name of the Trustee for
the benefit of the Bondholders covering the entire principal amount of
the Bonds purchased during the Offer Period and to be issued by the
Issuer on the Issue Date, which shall be substantially in the form
attached as Annex “B” of the Trust Agreement.
Manual . . . . . . . . . . . . . . . . . .
The Company’s Manual on Corporate Governance, approved by the
Board of Directors on October 25, 2007, and as amended on April 10,
2008.
Maturity Date . . . . . . . . . . . . . .
Three (3) years from Issue Date or on April 3, 2012 for Series A
Bonds, five (5) years and one (1) day from Issue Date or on April 4,
2014 for Series B Bonds and ten (10) years from Issue Date or on April
3, 2019 for Series C Bonds.
MCIT . . . . . . . . . . . . . . . . . . . .
The minimum corporate income tax under the National Internal
Revenue Code of the Philippines, as amended, which is currently fixed
at 2.0%.
Offer . . . . . . . . . . . . . . . . . . . . .
The offer for sale, distribution and issuance of the Bonds by the Issuer
to Eligible Bondholders.
Offer Period . . . . . . . . . . . . . . .
The period when the Bonds are offered for sale, distribution and
issuance by the Issuer to Eligible Bondholders, commencing at 9:00
a.m. on March 18, 2009 and ending at 12:00 p.m. on March 27, 2009 or
such other dates as may be determined by the Issuer and the Joint Issue
3
Managers.
Off-premise . . . . . . . . . . . . . . .
With respect to beer sales, means sales at grocery stores, convenience
stores, sari-sari stores and other outlets other than on-premise outlets.
On-premise . . . . . . . . . . . . . . . .
With respect to beer sales, means sales at consumer outlets where
consumers purchase and immediately consume beer, such as bars,
restaurants, hotels and food stalls.
PAB . . . . . . . . . . . . . . . . . . . . .
The Philippine Pollution Adjudication Board.
Participating Underwriters . . . .
Other underwriters engaged by the Joint Lead Managers and
Underwriters for the sale and distribution of the Bonds pursuant to their
authority to enter into sub-underwriting agreements in accordance with
the terms of the Issue Management and Underwriting Agreement.
PAS . . . . . . . . . . . . . . . . . . . . .
Philippine Accounting Standards.
PDEx . . . . . . . . . . . . . . . . . . . .
Philippine Dealing & Exchange Corporation.
PDTC . . . . . . . . . . . . . . . . . . . .
Philippine Depository & Trust Corporation.
Permit to Sell Securities . . . . . .
The permit to be issued by the SEC authorizing the Issuer to sell,
distribute and issue the Bonds to the public.
Philippine Peso or P . . . . . . . .
The lawful currency of the Republic of the Philippines.
PFRS . . . . . . . . . . . . . . . . . . . .
Philippine Financial Reporting Standards.
PhilRatings . . . . . . . . . . . . . . . .
Philippine Rating Services Corporation.
Polo Brewery . . . . . . . . . . . . . .
The Company’s operating brewery located in Valenzuela City, Metro
Manila which primarily serves the Luzon market.
Popular . . . . . . . . . . . . . . . . . . .
In respect of the market for beer, used to describe a market segment by
the Company under its internal segmentation, meaning the middle tier
of socio-economic groups covering San Miguel Pale Pilsen, Red
Horse, Colt 45 and Coors Regular brands.
Premium / Super Premium . . . .
In respect of the market for beer, used to describe a market segment by
Canadean under the Canadean Report, meaning the upper tier of socioeconomic groups covering San Miguel Pale Pilsen, San Mig Light, San
Miguel Super Dry, San Mig Strong Ice, Cerveza Negra and imported
beers.
Premium / Upper Premium . . . .
In respect of the market for beer, used to describe a market segment by
the Company under its internal segmentation, meaning the upper tier
of socio-economic groups covering San Miguel Super Dry,
Oktoberfest Brew, Cerveza Negra, San Miguel Premium All-Malt and
imported beers.
Prohibited Bondholders . . . . . .
The Issuer, its subsidiaries and affiliates, and wholly or majorityowned or controlled entities of such subsidiaries and affiliates. For
purposes of this definition, an “affiliate” of the Issuer is an entity at
least 20 but not more than 50% of the outstanding voting stock of
which is owned by the Issuer.
PSE . . . . . . . . . . . . . . . . . . . . .
The Philippine Stock Exchange, Inc.
Register of Bondholders . . . . . .
The electronic records of the Registrar bearing the official information
4
on the names and addresses of the Bondholders and the number of
Bonds they respectively hold, including all transfers of the Bonds and
the names of subsequent transferee Bondholders.
Registrar . . . . . . . . . . . . . . . . . .
The Philippine Depository & Trust Corp., a corporation with a quasibanking license duly organized and existing under and by virtue of the
laws of the Republic of the Philippines, with principal office at the 37th
Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati
City, whose principal obligation is to maintain the Register of
Bondholders and record the initial issuance and subsequent transfers of
the Bonds.
RTGS . . . . . . . . . . . . . . . . . . . .
Real Time Gross Settlement.
Sandiganbayan . . . . . . . . . . . . .
A special Philippine court vested with jurisdiction over criminal and
civil cases involving graft and corrupt practices and such other
offenses committed by public officers and employees.
San Miguel Packaging Group . .
A group comprised of SMYPC, SMYAC, SMYFMC, SMRPC
and Mindanao Corrugated Fibreboard, Inc.
SEC . . . . . . . . . . . . . . . . . . . . .
The Securities and Exchange Commission of the Philippines.
Securities Receipt Confirmation .
The written advice to be sent by the Registrar to Bondholders whether
signed by an authorized signatory of the Registrar when manuallygenerated or signatureless when computer-generated to confirm the
amount of Bonds registered in the Register of Bondholders in the
name of such Bondholder at any relevant time. A computer-generated
Securities Receipt Confirmation shall include a statement that it is a
computer-generated form, and if issued without alteration, does not
require any signature.
Series A Bonds . . . . . . . . . . . . . .
Bonds to be issued by the Issuer with an aggregate principal amount of
P13,590,000,000.00 having a term beginning on the Issue Date and
ending three years from the Issue Date or on April 3, 2012, with a
fixed interest rate equivalent to 8.250% per annum.
Series B Bonds . . . . . . . . . . . . . .
Bonds to be issued by the Issuer with an aggregate principal amount of
P22,400,000,000.00 having a term beginning on the Issue Date and
ending five years and one day from the Issue Date or on April 4,
2014, with a fixed interest rate equivalent to 8.875% per annum.
Series C Bonds . . . . . . . . . . . . . .
Bonds to be issued by the Issuer with an aggregate principal amount of
P2,810,000,000.00 having a term beginning on the Issue Date and
ending ten years from the Issue Date or on April 3, 2019, with a fixed
interest rate equivalent to 10.500% per annum.
SFAS . . . . . . . . . . . . . . . . . . . .
Statements of Financial Accounting Standards.
SMB Brands . . . . . . . . . . . . . . .
Certain Philippine beer and malt-based beverages brands, including
related trademarks, copyrights, patents, and other intellectual property
rights and know-how assigned by SMC to Iconic.
SMB Land . . . . . . . . . . . . . . . . .
Land on which all of the Company’s production facilities and certain
sales offices used by the Company for its beer businesses are located.
SMBD . . . . . . . . . . . . . . . . . . .
San Miguel Beer Division, a division of SMC before it was spun
off to create the Company.
SMBI . . . . . . . . . . . . . . . . . . . .
San Miguel Beverages, Inc.
5
SMC . . . . . . . . . . . . . . . . . . . . .
San Miguel Corporation.
SMC Group . . . . . . . . . . . . . . . .
SMC and its consolidated subsidiaries.
SMCSL . . . . . . . . . . . . . . . . . .
SMC Shipping and Lighterage Corporation.
SMCSTSC . . . . . . . . . . . . .
SMC Stock Transfer Service Corporatio n.
SMDCI . . . . . . . . . . . . . . . . . .
San Miguel Distribution Company, Inc.
SMBIL . . . . . . . . . . . . . . . . . . .
San Miguel Brewing International Limited.
SMITS . . . . . . . . . . . . . . . . . . .
SMITS, Inc.
SMPI . . . . . . . . . . . . . . . . . . . .
San Miguel Properties, Inc.
SMPFC . . . . . . . . . . . . . . . . . .
San Miguel Pure Foods Company, Inc.
SMRPC . . . . . . . . . . . . . . . . . .
San Miguel Rengo Packaging Corporation.
SMYAC . . . . . . . . . . . . . . . . . .
San Miguel Yamamura Asia Corporation.
SMYFMC . . . . . . . . . . . . . . . .
San Miguel Yamamura Fuso Molds Corporation.
SMYPC . . . . . . . . . . . . . . . . . .
San Miguel Yamamura Packaging Corporation.
SRC . . . . . . . . . . . . . . . . . . . . .
Republic Act No. 8799, otherwise known as “The Securities
Regulation Code of the Philippines,” as amended from time to
time, and including the rules and regulations issued thereunder.
Standard . . . . . . . . . . . . . . . . . .
In respect of the market for beer, used to describe a market segment,
meaning the middle tier of socio-economic groups. For the Company,
this refers to the popular segment which is comprised of San Miguel
Pale Pilsen, Red Horse, Colt 45 and Coors Regular. For the Canadean
Report, this refers to the standard segment which is comprised of Red
Horse and Colt 45 brands.
Tax Code . . . . . . . . . . . . . . . . .
The amended Philippine National Internal Revenue Code of 1997 and
its implementing rules and regulations.
Terms and Conditions . . . . . . .
The terms and conditions pursuant to which the Issuer issues, and the
Bondholders subscribe for, the Bonds which constitute an integral part
of the Master Bond Certificate.
Upper Popular . . . . . . . . . . . . .
In respect of the market for beer, used to describe a market segment by
the Company under its internal segmentation, meaning the upper
middle tier of socio-economic groups covering San Mig Light, San
Mig Strong Ice and Coors Light.
U.S. dollars or US$ . . . . . . . . .
The lawful currency of the United States of America.
VAT . . . . . . . . . . . . . . . . . . . . .
Value-added tax.
6
SUMMARY
The following summary is qualified in its entirety by the more detailed information, including the Company’s
audited financial statements and examined pro forma consolidated financial statements and notes relating
thereto, beginning on page F-1 of this prospectus. For a discussion of certain matters that should be considered
in evaluating an investment in the Bonds, see the section of this prospectus entitled “Risk Factors.” Investors
are recommended to read this entire prospectus carefully.
OVERVIEW OF THE COMPANY
The Company is the largest producer of beer in the Philippines, with a total market share of approximately 94%
in 2007, according to Canadean Limited (“Canadean”). The Company has five breweries strategically located
across the Philippines and a highly developed distribution system serving 478,757 outlets. The Company’s beer
brands include all of the top four beer brands in the country, namely San Miguel Pale Pilsen, Red Horse, San
Mig Light and Gold Eagle. San Miguel Pale Pilsen, the Company’s flagship brand, has a history of over 118
years. San Miguel beer was first produced by La Fabrica de Cerveza de San Miguel (“San Miguel Brewery”), a
small brewery in the Philippines that began its operations in 1890. San Miguel Brewery provided the foundation
from which SMC has grown to become the largest food, beverage and packaging company in the Philippines
today. San Miguel Brewery was renamed San Miguel Corporation (“SMC”) in 1963.
From a single brewery producing a single product in 1890, SMC’s corporate history and business portfolio have
evolved over the years. It entered the soft drinks business in 1922 and became the first overseas bottler of The
Coca-Cola Company in 1927. To meet the needs of its beer and soft drinks businesses, SMC established a glass
packaging plant in Manila in 1938 to supply its own requirements. SMC has expanded to include other food,
beverage and packaging products. It has also grown geographically from a Philippine-based beer company to
become a regional producer in the Asian beer market. The San Miguel brewery in Hong Kong was founded in
1948 and by the 1970s, San Miguel beer had established a strong market position in Hong Kong. Building on
San Miguel beer’s leading positions in the Philippines and Hong Kong, SMC expanded into new markets,
including China in 1991, Indonesia in 1992, Vietnam in 1993, and Thailand in 2004. Prior to the creation of the
Company, all of SMC’s beer operations were under the San Miguel Beer Division (“SMBD”), a business unit of
SMC.
On July 24, 2007, the shareholders of SMC approved the transfer of SMC’s domestic Philippine beer business
assets to the Company in exchange for additional shares in the Company, a wholly-owned subsidiary of SMC.
The assets transferred to the Company comprise the domestic beer business’ net assets as of June 30, 2007,
excluding land, brands and income and other taxes payable. The Company was incorporated on July 26, 2007,
and the domestic beer business was spun off from SMC effective October 1, 2007. The spin-off of SMC’s
domestic beer business into the Company was intended to realize the value of SMC’s flagship business.
Following approval by the shareholders of SMC of the spin-off of the domestic beer business and the creation of
the Company, all plant and equipment used by SMBD in the domestic beer business were transferred to the
Company, while SMC retained ownership of the brands and land assets used in the domestic beer business.
Under this structure, the Company has agreed to pay SMC royalties for the use of brands and other intellectual
property rights of SMC, rentals for the lease of the land assets, fees for shared services and dividends (see
“Related Party Transactions on page 98 of this prospectus). Some of these brands and related intellectual
property rights and the land assets are the subject of the Proposed Acquisitions (see “Use of Proceeds” on page
28 and “Proposed Acquisitions” on pages 29-36 of this prospectus).
The Company undertook an initial public offering of its shares (“IPO”) in April-May 2008. Prior to the IPO, the
Company had total outstanding shares of 15,333,426,960 common shares. In the IPO, a total of 77,052,000
common shares were offered by way of primary offering, while a total of 809,050,000 common shares owned
by SMC were offered by way of secondary offering. After the IPO, the Company’s resulting outstanding shares
totaled 15,410,478,960 common shares which were listed on the PSE on May 12, 2008.
On January 19, 2009, SMC signed a Memorandum of Agreement with Kirin Holdings Company, Limited
(“Kirin”). Under the terms of the agreement, Kirin will enter into exclusive negotiations with SMC to acquire
from SMC shares representing approximately 43.25% of the issued and outstanding capital stock of the
Company. On February 20, 2009, SMC and Kirin signed a share purchase agreement for the acquisition by
Kirin of 43.249% shareholdings in the Company. Under the terms of the agreement, Kirin will purchase shares
in the Company from SMC at a purchase price of P8.841 per share, for a total acquisition price of P58.9 billion.
7
Kirin will launch a tender offer to purchase additional shares from all existing shareholders of the Company at
the same purchase price offered to SMC. The details of the tender offer will be announced by Kirin once
determined.
Further to the agreement, SMC, Kirin and the Company will undertake to negotiate exclusively for the
Company’s potential purchase of shares in SMC’s overseas beer business. The exclusivity period is for six
months following SMC’s offer to sell the shares in its overseas beer business.
Strengths
The Company believes that its principal strengths include the following:
•
Strong and popular brand portfolio supported by high quality products. From a single product produced
in a single brewery in 1890, San Miguel beer has, over 118 years later, grown into an array of popular beer
products catering to the distinct tastes and preferences of beer drinkers across all segments and markets in
the Philippines. San Miguel Pale Pilsen, the Company’s flagship brand, has been an iconic Philippine
brand for most of the 20th century and up to today. After considering the Filipino beer drinker’s evolving
preferences, other brands and products have been introduced, and these have been very successful. Today,
the Company offers a portfolio of ten strong and popular brands: Pale Pilsen, Red Horse, San Mig Light,
Super Dry, Cerveza Negra, San Mig Strong Ice, Gold Eagle, San Miguel Premium All-Malt, Oktoberfest
Brew (a seasonal beer), and Cali, the country’s only malt-based non-alcoholic drink. The various products
carry distinct attributes that cater to the various segments of the Philippine beer market. The Company’s
products have been internationally recognized for quality, garnering a total of one grand gold award, 30
gold medals, 14 silver medals, two bronzes, one International High Quality trophy, and one Crystal Prestige
award from Monde Selection International since 2000.
•
Attractive growth prospects. Despite its dominant market position, the Company is well positioned to
capture further volume growth and market share in the Philippine beer industry.
•
¾
Strong overall industry growth. The Company expects industry volumes to continue to grow, driven
in part by the forecast GDP growth of 4% in the next three years, complemented by relatively low
inflation. Given its strong brands and leading market position, the Company believes it is best placed
to capture a very large portion of the expected overall growth in the industry.
¾
Expansion of Coverage Area. In addition, the Company expects to further increase its sales by
expanding its coverage of currently under-served areas. Despite its overall market dominance, the
Company believes there are areas where it holds less than 95% market share. The Company believes it
will be able to grow its sales and share in these markets through enhanced distribution and promotional
strategies.
¾
Increased market share of broader alcoholic beverage segment. Further, the Company also believes
additional sales growth can be achieved by increasing its share of the broader alcoholic beverage
segment. In particular, the Company believes its low cost, high-alcohol beer, Red Horse, which has
enjoyed substantial volume growth in the past few years, will be able to attract hard liquor consumers
and take an increasing share of the overall alcoholic beverage market from the hard liquor segment.
Strong market position presenting significant barriers to entry. The Company enjoys a number of
advantages that would be difficult for a potential competitor to replicate, making it difficult for other
companies to successfully compete with it in the Philippine beer market. These advantages include:
¾
Market leadership and economies of scale. San Miguel Brewery products have consistently
dominated the market for beer in the Philippines, the country’s largest alcoholic beverage segment.
Based on the Company’s internal data, the Company’s products captured a high market share of 95.6%
in 2008. The country’s top four beer brands are all produced by the Company. Unlike most other
markets for beer, in the Philippines, imported brands account for only 0.1% of the market, with
distribution limited to upscale bars and hotels and high-end supermarkets. Despite the entry of local
competition in 1981 and the introduction of a few locally brewed versions of foreign brands, the
Company has maintained an extremely strong market position. The popular acceptance and widespread
availability of San Miguel Brewery’s products have helped strengthen the Company’s market position
8
over the years. The Company’s size and scale of operations provide significant economies of scale in
production, research and development, distribution, and managerial and marketing functions over a
diversified product portfolio and geographic base. Its size also results in substantial leverage and
significant bargaining power with suppliers and retailers.
¾
Proximity of Production Facilities to Consumer Markets. To ensure product availability and
freshness, as well as to minimize distribution costs, the Company maintains a network of five local
breweries that are strategically located in the three main islands of the Philippines: Luzon, Visayas and
Mindanao. The Company has breweries in each of Valenzuela City, Metro Manila; San Fernando City,
Pampanga; Mandaue City, Cebu; Bacolod City, Negros Occidental; and Darong, Sta. Cruz, Davao del
Sur, with a total annual production capacity of 15.3 million hectoliters. Each of these breweries is
equipped with automated facilities capable of packaging the Company’s products in a variety of sizes
and formats, including bottles, cans, and kegs. The strategic location of the Company’s breweries
reduces overall risks by having alternative product sources to avert possible shortages and meet surges
in demand in any part of the country. This also assists the Company in ensuring that the beer is freshly
delivered to dealers at an optimal cost. The archipelagic nature of Philippine geography and the
relative difficulty of transporting products to the country’s substantial rural population make these
dispersed production facilities particularly valuable.
¾
Extensive and Efficient Distribution System Coverage. The Company has a far-reaching and efficient
distribution system, which is based on five strategically located breweries and effective management of
third party service providers and provides the Company with a competitive advantage. The Company’s
49 sales offices, contracted logistics providers and transportation assets including 452 hauling trucks,
200 routing trucks, 258 pre-sell vans and 396 service pick-ups and its network of 489 dealers across
the Philippines enable it to maintain optimum stock levels in terms of quality and quantity in 478,757
on-premise and off-premise outlets nationwide. The Company’s products are delivered from any one
of the Company’s five breweries by contract haulers to a sales office or dealer warehouse within five
days of production date or less. The sales office or dealer then delivers the beer to the wholesaler or
retailer promptly afterward, ensuring ample stock and quality wherever and whenever San Miguel Beer
products are needed.
The Company’s returnable bottle system helps keep the price of its beer products affordable. With the
high retrieval rates achieved under the system, bottle usage is maximized before bottles are replaced.
Under this system, the Company is able to achieve a 95% average retrieval rate for its bottles, which
substantially reduces its packaging costs.
¾
•
Cost Leadership. The Company maintains a strong cost leadership position through high productivity
and efficiency, as well as cost control measures, which facilitate pricing flexibility and greater profit
growth by maintaining the Company’s margins. The Company’s product quality initiatives, process
enhancements, and improvement programs for plant operations and facilities management are all
expected to be sustained. The Company continuously implements process optimization efforts and
technology enhancements to generate cost savings.
Experienced management and production team. The Company has an extensive pool of experienced
managers, with many senior managers having been with the Company for an average of 20 years. The
management team is well accustomed to the Philippine operating environment, and has been able to
effectively manage the Company through periods of crisis and instability in the Philippines. The Company
also has established experts in its production process, including 30 brewmasters, each of whom has
completed advanced training and has over ten years of on-the-job-training experience working for the
Company.
Strategies
The Company’s principal strategy is to increase the volume of its beer sales, both by increasing its market share
and by increasing the size of the market, while maintaining its margins. It plans to achieve this through the
following:
•
Increase market share. Although the Company already has a very strong position in the Philippine beer
market, it intends to increase its market share by pursuing targeted marketing efforts in the regions and
localities in which it believes its market share is lower than it is for the Philippines as a whole – which
9
currently stands at 95.6%, such as in specific areas in North and South Luzon, as well as in Visayas and
Mindanao. The Company intends to accomplish this by selecting specific products in appropriate packaging
to rival competing products and brands. The Company also intends to increase its product visibility in these
markets through tactical consumer promotions and improve outlet penetration through persuasive selling
and trade incentives. Similarly, the Company intends to increase its share of the overall market for alcoholic
beverages. This effort will focus on those specific regions and localities in which hard liquor sales are
higher, and, similar to the efforts to increase market share in the beer segment, will include brand- and
package-specific marketing campaigns, persuasive selling and incentives for dealers and retailers.
•
Increase the overall market for beer. The Company also plans to increase its sales volume by increasing
the total market for beer sales. The Company’s primary strategies to achieve this include:
¾
Segmented pricing strategy. The Company intends to keep its products affordable for the middle and
lower socio-economic sectors by maintaining a moderate pricing strategy for its products in the
Popular and Economy markets, where sales are highly price elastic. For the more upscale, or Upper
Popular, market, where sales are less price elastic, the Company plans to increase the pricing of its
existing and new specialty brands, supported by image-building activities to strengthen their premium
positioning and improve their profitability. Amid the global economic slowdown, the Company intends
to manage and align the timing and magnitude of price increases for all its products to sustain volume
growth as well as cover increases in tax rates on beer and higher material costs. With the forecasted
Philippine economic growth in 2009, the Company intends to pursue this segmented pricing strategy to
protect its gains and to sustain the general uptrend for the industry as evidenced by the Company’s
improved market share and increased level of sales in 2008.
¾
Increase the size of the Upper Premium and Premium segments. The Upper Premium and Premium
markets for beer in the Philippines are relatively small segments, but they play important roles in
brand-building and overall market development. The segments offer promising prospects, underpinned
by rising consumer incomes, increasing consumer sophistication, rapidly changing drinker habits and
preferences, as well as increasing urbanization. The Company intends to further develop the higherpriced segments of the beer industry by offering higher-priced and higher-margin products catering to
these segments. For example, in August 2008, the Company launched two new brands, San Miguel
Premium All-Malt and Oktoberfest Brew, a seasonal beer available for four months (from September
2008 to December 2008), which are marketed to the Upper Premium and Premium segments,
respectively. With this strategy, the Company aims to take advantage of opportunities in segmenting
the market as well as preempting the incursion of foreign brands. Relative to other Asian countries, the
Philippine beer market offers greater potential with regard to premium pricing of brands given the
current relatively narrow price gap between the Premium and Upper Popular brands.
¾
Strengthen the Brand Portfolio. The Company intends to strengthen its brand portfolio to take
advantage of segment-specific growth opportunities, increasing sophistication and changing lifestyles
of Philippine consumers and to maintain its market leadership position. The Company plans to
maintain the status of its flagship San Miguel Pale Pilsen brand and strengthen its value through an
integrated approach of national brand-building campaigns and retail promotional and marketing
efforts. Examples of brand-building activities include advertising campaigns for the brand using
famous endorsers such as Manny Pacquiao, Erik Morales and Kris Aquino under the “Walang
Katulad” (“Beer like no other”) and “Face to Face” campaigns and the TV commercial featuring actor
Jet Li, which forms part of the regional campaign to uplift the image and positioning of the San Miguel
Pale Pilsen brand in the Asian region.
The Company intends to implement new programs and initiatives catering to the younger segment of
the market to protect its core customers and strengthen the appeal and preference for the brand among
new drinkers. The Company expects to further grow main brands San Miguel Pale Pilsen, Red Horse
and San Mig Light through the introduction of new thematic campaigns, special events and volumegenerating programs aligned with the respective positioning of these brands in the market. For the
Company’s specialty brands, including Cerveza Negra, Super Dry, and San Mig Strong Ice, the
Company plans on increasing its efforts in on-premise channels by matching these brands with
appropriate on-premise outlets and through event sponsorships, party series and tie-ups with other
companies. Specialty brands will also be promoted in off-premise channels through increased visibility
and promotions.
10
¾
Optimize Trade Coverage and Efficiencies. The Company intends to further expand its trade reach
and increase the visibility and availability of its products in retail outlets through point-of-sale
merchandising materials and signage for both on- and off-premise outlets to increase sales and outlet
yield. In pursuing this strategy, the Company will focus on improving the efficiency of its trade
operations, including trade penetration levels and adherence to suggested retail prices in all distribution
channels by strengthening per-outlet management, intensifying route assisting activity and alternative
distribution mode management such as pedicabs (bicycle-driven cabs) and tricycles, which help to
deliver the Company’s products to remote areas. The Company also intends to raise its frequency of
calls to retail outlets. Management of the distributors’ territories will be strengthened through
intensified retail-based servicing and territorial reconfiguration.
¾
Increase Sales Through Special Events and by Focusing on Fast-growing Trade Channels. The
Company intends to continue its volume-generating initiatives and occasion-creation programs.
Examples of these activities include the Company’s sponsorship of town fiestas and major events, such
as San Miguel Beer Oktoberfest, that aim to make the beer drinking experience more relevant and
closer to the consumers. The Company recognizes the importance of fast-growing modern trade
channels such as large supermarket chains, hypermarkets and modern convenience stores in marketing
and carrying its products to consumers, especially in urban areas. Accordingly, the Company,
primarily through SMC’s Corporate Key Accounts Group (“CKAG”), is focusing on sales and
marketing programs for key upscale products to these fast growing segments of the market.
¾
New Product and Package Introduction. The Company plans to introduce new products and new
package formats. The Company believes this strategy can increase consumer interest and overall
market size, as well as address the needs of an increasingly fragmenting market, especially in high
growth segments. For example, to increase consumer interest, in May 2007, the Company introduced
San Miguel Pale Pilsen in paper label bottles. In 2008, the Company launched new products San
Miguel Premium All-Malt in the Upper Premium segment and the Oktoberfest Brew (seasonal brew) in
the Premium segment as well as introduced secondary packaging, i.e. Christmas-themed shrinkwrap
(6-pack) for San Miguel Premium All-Malt and clear shrinkwrap (6-pack) for San Miguel Pale Pilsen,
San Mig Light, Super Dry and San Mig Strong Ice. The Company intends to continue to pursue
packaging innovations and capitalize on the market trend towards convenience packaging. The
Company is developing packaging improvements for existing brands as well as convenience pack
formats consistent with faster-paced lifestyles and addressing the various activities and interest of
consumers.
RISKS OF INVESTING
Before making an investment decision, investors should carefully consider the risks associated with an
investment in the Bonds. These risks include:
•
risks relating to the Company and its business, including:
¾
The Company’s business and prospects may be adversely affected by changes in consumers’
preferences or purchasing power.
¾
The Company’s financial position and financial performance may be adversely affected by any
disruptions in the supply of, or the price fluctuations for, its major raw materials.
¾
Demand for the Company’s products is highly price elastic, and if the Company increases its prices,
sales volumes may fall, which may negatively affect the Company’s financial results and financial
performance.
¾
The Company may not be successful in implementing its strategy to increase its sales volume.
¾
Competition in the Company’s businesses and markets may cause the Company to lose market share or
reduce its operating margins, which could adversely affect its financial performance and financial
position.
¾
The Company depends on trademarks and proprietary rights that it proposes to acquire and which are
currently licensed from SMC to enhance its reputation, and infringement of these rights could
11
adversely affect the Company’s competitive position; reputational issues involving other entities
entitled to use the brands and trademarks used by the Company could also adversely affect the
Company.
•
¾
The Company’s financial position may be adversely affected if the Company is not able to raise
enough funds for the Proposed Acquisitions.
¾
The Company is dependent on its relationship with the SMC Group (other than the Company) and on
its relationship with other third parties.
¾
The Company’s current strategies may not be implemented as planned in the event Kirin Holdings
Company, Limited becomes a major shareholder.
¾
The Company’s controlling shareholder is able to exercise substantial influence over the Company’s
corporate policies and direct the outcome of corporate actions.
¾
The Company’s business and sales are affected by seasonality.
¾
An ongoing dispute regarding the ownership of certain shares in SMC could directly affect the current
control and management policies of SMC.
¾
The Company depends on certain key personnel, and its business and growth prospects may be
disrupted if their services were lost.
¾
Under certain circumstances, the Company may not be able to meet increased demand for its products
and may have to incur significant additional capital expenditures to avoid capacity constraints.
¾
Consolidation of sales channels in the Philippines may adversely affect the Company’s financial
position and financial performance.
¾
Product liability claims or other circumstances could harm the integrity and customer support for the
Company’s brands and adversely affect the sales of its products.
¾
Sales of the Company’s products may be adversely affected if its relationship with distributors
deteriorates.
¾
Regulatory decisions and changes in the legal and regulatory environment in which the Company
operates could limit its business activities or increase its operating costs.
¾
Increases in excise tax rates applicable to beer or increases in other taxes to which the Company is
subject may reduce consumption of the Company’s products or the Company’s margins or reduce
both.
¾
Philippine environmental laws and regulations create potential liabilities should the Company fail to
comply with prescribed environmental standards and limits.
¾
The Company may be adversely affected by any change in environmental, health and safety,
accounting standards and other laws and regulations.
¾
Outbreaks of disease may dampen demand for the Company’s products and may therefore adversely
affect the Company’s financial position and financial performance.
risks relating to the Proposed Acquisitions:
¾
•
The Company may not complete the Proposed Acquisitions.
risks relating to the Philippines, including:
¾
Political or social instability in the Philippines could have a negative effect on the financial position
and business of the Company.
12
•
•
¾
The Company’s business and sales may be negatively affected by slow growth rates and economic
instability in the Philippines as a result of the global economic recession.
¾
If foreign exchange controls were to be imposed, the Company’s ability to purchase raw materials,
primarily malted barley and technically advanced equipment, could be adversely affected.
¾
The occurrence of natural catastrophes or blackouts may materially disrupt the Company’s operations.
risks relating to the Offer, including:
¾
Secondary trading of the Bonds is subject to various market factors.
¾
The Bonds will constitute direct, unconditional, unsubordinated, general and unsecured obligations of
the Issuer.
¾
The Bonds may be redeemed prior to Maturity Date upon the occurrence of certain events such as
change in taxation or regulation.
¾
There is no assurance that a market for the Bonds will exist, and the Bonds may offer limited liquidity.
risks relating to certain statistical information in this prospectus:
Certain statistics in this prospectus relating to the Philippines, the industries and markets in which the
Company’s business operates have not been independently verified and may not be accurate, complete, upto-date or consistent with other information compiled within or outside the Philippines.
Please refer to the section of this prospectus entitled “Risk Factors,” which, while not intended to be an
exhaustive enumeration of all risks, must be considered in connection with the purchase of the Bonds.
13
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following tables present summary financial information for the Company and should be read in conjunction with the
report of independent auditors, Company’s audited historical financial statements and examined pro forma consolidated
financial statements and notes thereto contained in this prospectus and the section entitled “Management’s Discussion
and Analysis of Financial Position and Financial Performance.”
The information below is not indicative of the results of future operations.
Examined Pro
Forma Consolidated
Financial Statements
For the Year Ended
December 31, 2008
Audited Financial Statements
For the Year Ended
December 31, 2008
For the Period from
July 26, 2007 to
December 31, 2007
P
P
P
(in millions, except per share figures or where otherwise indicated)
Statement of Income Data
Net Sales
Cost of Sales
48,787
48,787
12,180
(24,800)
(24,800)
(6,333)
Gross Profit
23,987
23,987
5,847
Administrative and selling expenses
Operating Income
Interest Income
(7,288)
16,699
(8,366)
15,621
(2,349)
3,498
264
264
36
(3,484)
-
-
(377)
(377)
15
13,102
15,508
3,549
(4,303)
(5,466)
8,799
10,042
(1,239)
2,310
0.57
15,410
0.65
15,410
0.15
15,333
Interest Expense
Other Income (Charges)
Income Before Tax
Income Tax Expense
Net Income
(1)
Earnings per share – basic
Number of shares outstanding
Balance Sheet Data
Cash and cash equivalents
Trade and other receivables - net
Inventories - net
Other current assets
Total current assets
Property, plant and equipment (net of
accumulated depreciation and
amortization)
Intangible assets
Other noncurrent assets - net
Total noncurrent assets
6,427
3,662
3,279
379
13,747
6,041
3,661
3,279
418
13,399
5,262
3,676
2,447
180
11,565
12,932
32,011
5,206
50,149
5,864
11
5,360
11,235
5,616
3
5,424
11,043
Total assets
63,896
24,634
22,608
Accounts payable and accrued expenses
Income and other taxes payable
Total current liabilities
3,000
1,518
4,518
3,000
2,585
5,585
3,243
1,710
4,953
38,447
-
-
9
39
12
Total noncurrent liabilities
38,456
39
12
Total liabilities
42,974
5,624
4,965
Long-term debt (net of debt issue cost)
Other noncurrent liabilities
14
Examined Pro
Forma Consolidated
Financial Statements
Audited Financial Statements
For the Period from
July 26, 2007 to
December 31, 2007
P
P
P
(in millions, except per share figures or where otherwise indicated)
For the Year Ended
December 31, 2008
Capital Stock
For the Year Ended
December 31, 2008
15,410
15,410
15,333
Additional paid-in capital
515
515
-
Cumulative translation adjustments
(45)
(45)
-
4,800
3,130
2,310
242
-
-
20,922
19,010
17,643
63,896
24,634
22,608
Operating activities
8,961
11,027
5,831
Investing activities
(40,674)
(1,645)
(610)
Financing activities
32,878
(8,603)
41
1,165
779
5,262
5,262
5,262
-
6,427
6,041
5,262
18,457
16,699
17,379
15,621
3,913
3,498
829
1,758
49.2%
829
1,758
49.2%
362
415
48.0%
37.8%
34.2%
174.48
13.40
278.88
35.6%
32.0%
174.48
13.40
278.88
32.1%
28.7%
46.70
3.59
260.11
3,632
3,632
3,389
Retained Earnings
Minority Interest
Total equity
Total liabilities and equity
Cash Flow Data
Net cash provided by (used for):
Net increase in cash
Cash and cash equivalents, beginning
of period
Cash and cash equivalents, end of
period
Other Financial and Operating data
EBITDA (2)
EBIT (2)
Capital Expenditure
Depreciation and amortization
Gross profit margin
EBITDA margin
EBIT margin
Volume (Equivalent Cases)
Volume (Hectoliters)
Average selling price/case (in pesos)
Average selling price/Hectoliter (in
pesos)
______________
Notes:
(1)
Computed as net income divided by the weighted average number of Common Shares issued and outstanding each period.
(2)
EBITDA and EBIT are measures used by the Company’s management to internally evaluate the performance of its business. EBITDA
is calculated as operating income plus depreciation, amortization and impairment losses and EBIT is calculated as operating income.
Neither EBITDA nor EBIT is a measure determined in accordance with PFRS or IFRS, and should not be considered as an alternative
to net income as a measure of operating performance or to cash flow as a measure of liquidity. The items of net income excluded from
EBITDA are significant components in understanding and assessing the Company’s financial performance. Neither EBITDA nor EBIT
is intended to be a measure of free cash flow for management’s discretionary use, as it does not reflect certain cash requirements such
as interest payments, tax payments and capital expenditures. The Company’s calculation of EBITDA and EBIT may be different from
the calculation used by other companies and, as a result, the Company’s EBITDA and EBIT may not be comparable to other similarly
titled measures of other companies.
15
SUMMARY OF THE OFFER
The following summary is qualified in its entirety by, and should be read in conjunction with the more detailed
information appearing elsewhere in this prospectus.
Issuer
:
San Miguel Brewery Inc.
Instrument
:
Philippine Peso denominated fixed rate bonds with terms of
three years, five years and one day and ten years to be issued
by the Issuer with an aggregate principal amount of Thirty
Eight
Hundred
Million
Pesos
Eight
Billion
(P38,800,000,000.00) consisting of Series A Bonds, Series B
Bonds and Series C Bonds.
Use of Proceeds
:
To fund the Proposed Acquisitions.
Issue Price
:
100% of the face value for Series A Bonds, Series B Bonds
and Series C Bonds.
Form and Denomination of the Bonds
:
The Bonds will be issued in scripless form in denominations
of P50,000.00, as a minimum, and in integral multiples of
P10,000.00 in excess thereof.
Offer Period
:
The Offer shall commence at 9:00 a.m. on March 18, 2009
and end at 12:00 p.m. on March 27, 2009.
Issue Date
:
April 3, 2009 or such other date as the Issuer and the Joint
Issue Managers may agree in writing, provided that such date
shall be a date which is within the validity of the SEC Permit
to Sell Securities.
Maturity Date
:
Series A: three years from Issue Date
Series B: five years and one day from Issue Date
Series C: ten years from Issue Date
Interest Rate
:
Series A: 8.250%
Series B: 8.875%
Series C: 10.500%
Interest Payment
:
Interest on the Bonds will be calculated on a 30/360-day
count basis and will be paid semi-annually in arrears on
April 3 and October 3of each year, commencing on October
3, 2009, for Series A Bonds and Series C Bonds, and
October 4, 2009 for Series B Bonds.
Final Redemption
:
The Bonds will be redeemed at 100% face value on each of
their respective Maturity Date.
16
RISK FACTORS
An investment in the Bonds involves a number of risks. The price of securities can and does fluctuate, and any
individual security may experience upward or downward movements and may even become valueless. There is
an inherent risk that losses may be incurred rather than profit made as a result of buying and selling
securities. Past performance is not a guide to future performance. There may be a large difference between the
buying price and the selling price of these securities. Investors deal with a range of investments, each of which
may carry a different level of risk. This section entitled “Risk Factors” does not purport to disclose all of the
risks and other significant aspects of investing in these securities. Investors should undertake independent
research and study the trading of securities before commencing any trading activity. Investors may request
publicly available information on the Bonds and the Company from the SEC. Each Investor should seek
professional advice if he or she is uncertain of, or has not understood any aspect of, the securities to be invested
in or the nature of risks involved in the trading of securities.
Prospective investors should carefully consider the risks described below, in addition to the other information
contained in this prospectus, including the Company’s examined pro forma consolidated financial statements
and notes relating thereto included herein, before making any investment decision relating to the Bonds. The
occurrence of any of the events discussed below and any additional risks and uncertainties not presently known
to the Company or that are currently considered immaterial could have a material adverse effect on the
Company’s business, financial performance, financial position and prospects and the investors may lose all or
part of their investment.
The means by which the Company plans to address the risks discussed herein are principally presented in the
sections of this prospectus entitled “Business Overview — Strengths,” “Business Overview — Strategies” and
“Management’s Discussion and Analysis of Financial Position and Financial Performance.”
RISKS RELATED TO THE COMPANY
The Company’s business and prospects may be adversely affected by changes in consumers’ preferences
or purchasing power.
The ability of the Company to successfully launch new products and maintain demand for its existing products
depends on the acceptance of these products by consumers, as well as the purchasing power of consumers.
Consumer preferences may shift because of a variety of reasons, including changes in demographic and social
trends or changes in leisure activity patterns. For example, younger drinkers tend to be less loyal to any brand or
any type of drink than the previous generation of drinkers. Concerns about health effects due to negative
publicity regarding alcohol consumption or other factors may also affect consumers’ purchasing patterns. If the
Company does not respond effectively to changes in consumer preference, the Company’s business and
prospects may be adversely affected.
Sales of beer are also tied closely to consumers’ purchasing power and disposable income levels. Adverse
economic developments in the Philippines may affect consumers’ purchasing power and disposable income
levels, thereby adversely affecting the Company’s financial performance and financial position. For example,
in periods of economic uncertainty or downturns, consumers may purchase more hard liquor and less beer or
they may purchase less alcoholic beverages, either of which would affect the Company’s financial performance.
The Company intends to expand its product and brand portfolio in higher-priced premium market segments,
which would make the Company’s business and prospects more closely related to changes in consumer
purchasing power. A significant decrease in disposable income levels or consumer purchasing power in the
Company’s target markets could materially and adversely affect the Company’s financial position and financial
performance.
For more information, see “Business Overview — Strategies” on pages 78-80 of this prospectus.
The Company’s financial position and financial performance may be adversely affected by any
disruptions in the supply of, or the price fluctuations for, its major raw materials.
The Company’s products depend on raw materials that the Company procures from third parties, including
purchases of critical raw materials, primarily malted barley, from abroad and the water supply for Polo
17
Brewery. Certain raw materials are subject to price volatility caused by a number of factors, including changes
in global supply and demand, foreign exchange rate fluctuations, weather conditions and governmental controls.
For example, the current global focus on bio-ethanol fuels has contributed, and is expected to continue to
contribute to, higher prices for malted barley and adjuncts, which are among the Company’s most important raw
materials, as farmers shift their production out of barley and into grains used to produce those fuels, decreasing
available supply. Although the Company actively monitors the availability and prices of raw materials, there
can be no assurance that these items will be supplied in adequate quantities to meet the Company’s needs or
will not be subject to significant price fluctuations in the future. While the Company may, in certain limited
instances, be able to shift to alternative raw materials used in the production of its products, the Company
cannot assure prospective investors that it will be able to reduce its reliance on these raw materials in the future.
The Company does not fully hedge against commodity prices and any such hedging may not work as planned.
Moreover, the market prices of raw materials may increase significantly if there are material shortages due to,
among other things, competing usage or drastic changes in weather or natural disasters. The Company cannot
assure prospective investors that it will be able to pass increases in product costs to consumers. As a result, any
significant shortages or material increase in the market price of such raw materials may have a material adverse
effect on the Company’s financial position and financial performance.
For more information, see “Management’s Discussion and Analysis of Financial Position and Financial
Performance” on page 58 of this prospectus.
Demand for the Company’s products is highly price elastic, and if the Company increases its prices, sales
volumes may fall, which may negatively affect the Company’s financial results and financial
performance.
The substantial majority of beer drinkers in the Philippines belong to the lower socio-economic classes, where
discretionary income is limited. Accordingly, the beer market in the Philippines is highly price elastic. If the
Company raises the prices of its products, sales volumes will likely decline, and the decline may result in a
lower level of net sales. For example, on March 1, 2006, the Company raised the selling prices of its beer
products by an average of 9%. This price rise was in response to a 20% increase in the excise tax on beer that
was implemented effective January 1, 2005 and to cover higher costs of raw materials and fuel. As a result, the
Company’s average selling price in 2006 was 8.7% higher than in 2005. However, primarily as a result of this
price increase, the volume of the Company’s sales (in case equivalents) in 2006 was 9.0% lower than in 2005,
and its net sales in 2006 were 1% lower than in 2005. On April 1, 2008, the Company again raised the selling
prices of its beer products by an average of 9%, primarily in response to sharp increases in the prices of the
Company’s raw materials in 2007 and 2008. Despite the cost pressures and price increases, however, the
Company’s sales volume still grew by 4.2% in 2008, albeit at a slower rate than its volume growth in 2007.
Price elasticity of demand for the Company’s products may limit the Company’s ability to pass on increases in
excise taxes, raw material costs or other expenses, which may negatively affect the Company’s financial results
and financial performance.
For more information, see “Business Overview — Strategies” on pages 78-80 of this prospectus.
The Company may not be successful in implementing its strategy to increase its sales volume.
The Company has a strategy to increase its sales by increasing its market share, in terms of both the beer market
and the overall market for alcoholic beverages, and by increasing the total size of the beer market. Both parts of
this strategy involve uncertainties and risks, and the Company can offer potential investors no assurance that it
will be successful in implementing its strategy. For example, the Company’s strategy to increase its sales of
higher-priced, higher-margin products depends on its ability to convince consumers to pay more than they have
historically paid for beer, and the Company may not be successful in this respect, either for its existing higherpriced products or in respect of any new products that it may introduce. Failure by the Company to implement
its strategy to increase the volume of its sales would negatively affect the Company’s financial results and
growth prospects.
For more information, see “Business Overview — Strategies” on pages 78-80 of this prospectus.
18
Competition in the Company’s businesses and markets may cause the Company to lose market share or
reduce its operating margins, which could adversely affect its financial performance and financial
position.
The Company operates in a competitive environment. The Philippine alcoholic beverage industry in general is
highly competitive, and, while the Company estimates that it has the largest market share in the Philippines with
respect to beer, the Company cannot assure prospective investors that it will be able to maintain its current
market share for beer, or that it will be able to increase its market share in the future. The Company faces
competition from another domestic producer, which sells both its own brand and foreign brands it produces
under license, and from foreign brewers. The Company also competes with producers of other alcoholic
beverages, primarily low-priced gin and brandy. In the beer industry, and more generally the alcoholic beverage
industry, competitive factors generally include price, product quality, brand awareness and loyalty, distribution
coverage, and the ability to respond effectively to shifting consumer tastes and preferences. The Company also
competes with other discretionary items, including both other food and beverage products and other goods and
services generally. The consolidation of the Company’s competitors, the entrance of a new, larger competitor
into the Philippine market, or unanticipated actions or irrational behavior by existing competitors, could lead to
downward pressure on prices or a decline in the Company’s market share. Any such event could materially and
adversely affect the Company’s financial position and financial performance.
For more information, see “Business Overview — Competition” on page 87 of this prospectus.
The Company depends on trademarks and proprietary rights that it proposes to acquire and which are
currently licensed from SMC to enhance its reputation, and infringement of these rights could adversely
affect the Company’s competitive position; reputational issues involving other entities entitled to use the
brands and trademarks used by the Company could also adversely affect the Company.
The Company currently has an exclusive license from SMC to use various brand names and related trademarks
and other intellectual property rights to prepare, package, advertise, distribute and sell its products in the
Philippines. The use of these brand names and related intellectual property rights is key to maintaining the
Company’s distinctive corporate and market identities. If other parties sell products that use counterfeit versions
of the Company’s brands or otherwise look like the Company’s brands, consumers may confuse the Company’s
products with products that they consider inferior. This could cause consumers to refrain from purchasing the
Company’s brands in the future and adversely affect the Company’s brand image and sales. Under the license
agreement with SMC, SMC has the responsibility of defending against infringements, but the Company cannot
assure prospective investors that SMC will be successful in this regard. Any failure by SMC to protect the
Company’s proprietary rights could have an adverse effect on the Company’s competitive position. In addition
to risks from infringement, many of these brands and trademarks used by the Company can also be used for
products other than beer produced by SMC or other entities that SMC has licensed them to and on beer products
produced and sold by SMC’s brewing operations outside of the Philippines. As such, the Company’s brand
image could also be negatively affected by product quality or other reputational issues caused by these other
users of the brands and trademarks. Any damage to the Company’s brand image caused by other users of the
brands and trademarks could have an adverse effect on the Company’s sales and financial performance.
Upon completion of the Proposed Acquisitions, the Company as the parent company of Iconic, may be required
to defend against infringements. There is no assurance that the Company will be successful in this regard. The
Company will remain to be subject to the risks in the preceding paragraph in respect of the use of the SMB
Brands on products other than beer and in respect of the use of intellectual property similar to the SMB Brands
on beer products produced and sold by SMC’s brewing operations outside of the Philippines.
For more information, see “Proposed Acquisitions” on page 30 of this prospectus, and “Related Party
Transactions” on page 98 of this prospectus.
The Company’s financial position may be adversely affected if the Company is not able to raise enough
funds for the Proposed Acquisitions
The Company cannot assure prospective investors that it will be able to raise adequate funds from this offering
to enable the Company to implement the Proposed Acquisitions. Given that the current arrangement between
the Company and SMC regarding the Proposed Acquisitions does not provide for any partial purchase, the
Company may be constrained to resort to additional borrowings at higher financing costs to complete the
funding requirements for the Proposed Acquisitions. With the higher financing costs, the Company will incur
19
additional expenses for debt-servicing. The additional expenses for debt-servicing may have a material adverse
effect on the Company’s financial position and financial performance.
Moreover, the Company cannot assure prospective investors that it will be able to obtain sufficient funds from
the additional borrowings to complete the financing requirements for the Proposed Acquisitions. In such an
event, the Company will not only continue to incur additional expenses for the payment of royalties and land
lease rentals, it will also incur additional expenses related to debt-servicing. The payments for the royalties and
land lease rentals, with the additional expenses for debt-servicing may have a material adverse effect on the
Company’s financial position and financial performance.
The Company is dependent on its relationship with the SMC Group and on its relationship with other
third parties.
The Company has a very limited history of operating as an independent entity, and it previously was a division
of SMC. Even after the Company’s spin-off from SMC in October 2007, it remains dependent on its
relationship with the SMC Group in a number of critical areas, including the SMYPC, SMRPC and SMYAC,
with respect to its packaging requirements, and SMC with respect to many of its critical corporate functions
including strategic planning. For more information, see “Related Party Transactions” on page 98 of this
prospectus. If conflicts were to arise in the Company’s relationship with the SMC Group or if the SMC Group
were to fail to provide the services it has contracted to provide to the Company, the Company likely could not
easily replace SMC as a provider of the services. Any such development could cause a material disruption in the
Company’s business, negatively impacting its performance and growth prospects. In addition, the Company
relies on third parties in a number of critical areas of its operations, including distribution and logistics services,
for its finished products and certain raw material supplies. If any of these third parties were to fail to provide
these services or materials to the Company, the Company’s business could be negatively affected, including its
financial performance and growth prospects.
The Company’s current strategies may not be implemented as planned in the event Kirin Holdings
Company, Limited acquires significant shareholdings in the Company.
On January 19, 2009, SMC signed a Memorandum of Understanding with Kirin Holdings Company, Limited
(“Kirin”) regarding Kirin’s potential investment in the Company. Under the agreement, Kirin will enter into
exclusive negotiations with SMC to acquire from SMC shares representing approximately 43.25% of the issued
and outstanding capital stock of the Company. On February 20, 2009, SMC and Kirin signed a share purchase
agreement for the acquisition by Kirin of 43.249% shareholdings in the Company. Under the terms of the
agreement, Kirin will purchase shares in the Company from SMC at a purchase price of P8.841 per share, for a
total acquisition price of P58.9 billion. In the event that Kirin successfully acquires a significant stake in the
Company, there can be no assurance that the Company will be able to implement its planned strategies.
The Company’s controlling shareholder is able to exercise substantial influence over the Company’s
corporate policies and direct the outcome of corporate actions.
Currently, the Company’s controlling shareholder is SMC which holds approximately 94.3% of the Company’s
Common Shares. SMC is able to influence the Company’s business through its ability to control actions that
require majority shareholders’ approval and through its representatives on the Company’s Board of Directors.
SMC is not obligated to provide the Company with financial support or to exercise its rights as a shareholder in
the best interests of the Company or its other shareholders or creditors. In addition, SMC may engage in
activities that conflict with such interests. For example, a subsidiary of SMC is a major producer of hard liquor
in the Philippines, a product that competes directly with many of the Company’s products. SMC may take
actions through that subsidiary, such as pricing or marketing activities, that could cause the Company’s sales or
margins to decrease. SMC also owns other producers of beer, which produce and sell their products outside of
the Philippines primarily using the same brands and trademarks as those used by the Company. SMC could take
actions through these other beer producers, such as competing with the Company in markets outside the
Philippines, that would not be in the best interest of the Company or its other shareholders or creditors.
In addition, the Company believes that it benefits from its ongoing relationship with SMC and some of its
subsidiaries and affiliates through their global reach and relationships. The Company cannot assure potential
investors that SMC will continue to enable the Company to benefit from these relationships in the future.
20
The Company’s business and sales are affected by seasonality.
The Company’s sales are affected by seasonality in customer purchase patterns. In the Philippines, alcoholic
beverages, including those produced by the Company, experience increased sales during the Christmas season
and typically decline in the third quarter as a result of rainy weather. For example, from 2006 to 2008, on
average, 26.5% of the Company’s net sales were in the first three months of the year and 23.7% were in the
second quarter; while 22.7% were in the third quarter, typically the slowest period for sales, and 27.1% were in
the last three months of the year. As a result of this pattern, the Company’s financial position and financial
performance may fluctuate significantly from quarter to quarter.
For more information, see “Business Overview — Strategies” on pages 78-80 of this prospectus.
An ongoing dispute regarding the ownership of certain shares in SMC could directly affect the current
control and management policies of SMC.
Court proceedings regarding the ownership of certain shares in SMC are pending before the Sandiganbayan and
the Philippine Supreme Court. These proceedings were initiated by the Government in 1987 with respect to
shares of SMC held by (i) the Coconut Industry Investment Fund Holding Companies (“CIIF Holding
Companies”), administered by the United Coconut Planters Bank, comprising approximately 24.0% of SMC’s
total share capital; and (ii) the companies affiliated with Mr. Eduardo M. Cojuangco, Jr., Chairman and Chief
Executive Officer of SMC, comprising approximately 16.0% of SMC’s total share capital. In its complaints, the
Government has alleged that these shares were acquired with public funds and therefore belong to the
Government. On May 7, 2004 a partial summary judgment was rendered in favor of the Government with
respect to the shares of SMC held by the CIIF Holding Companies. The Philippine Coconut Producers
Federation, Inc. representing interests of coconut farmers appealed this judgment to the Philippine Supreme
Court. The Government’s complaint regarding the shares of SMC owned by companies affiliated with Mr.
Cojuangco was dismissed on November 28, 2007; the Government has appealed the said dismissal to the
Philippine Supreme Court. In July 2008, CIIF Holding Companies requested that the Supreme Court allow the
government to sell the shares of SMC held by CIIF Holding Companies, with the proceeds of such a sale to
benefit the coconut industry and farmers in the Philippines. The Company cannot anticipate the outcome of
these proceedings, the final results of which could directly affect the control and management policies of SMC
and indirectly of the Company.
The Company depends on certain key personnel, and its business and growth prospects may be disrupted
if their services were lost.
The Company’s future success is dependent upon the continued service of its key executives and employees.
The Company cannot assure potential investors that it will be able to retain these executives and employees. If
many of its key personnel were unable or unwilling to continue in their present positions, or if they joined a
competitor or formed a competing company, the Company may not be able to replace them easily, and the
business of the Company may be significantly disrupted and its financial position and financial performance
may be materially and adversely affected. For example, the Company has 30 brewmasters, a position critical to
its manufacture of beer. These brewmasters typically have degrees in chemistry or chemical engineering, and
each of them has over ten years of on-the-job-training experience working for the Company, making them
difficult to replace. The Company cannot assure potential investors that it will be able to attract and retain the
key personnel that it needs to achieve its business objectives.
For more information, see “Business Overview — Brewing Technology and Product Development” on page 85
of this prospectus.
Under certain circumstances, the Company may not be able to meet increased demand for its products and
may have to incur significant additional capital expenditures to avoid capacity constraints.
Although the Company continuously seeks to enhance the efficiency and manufacturing capabilities of its
production facilities, the Company may, from time to time, experience production difficulties that may cause
shortages and delays in deliveries, as is common in the manufacturing industry. The Company cannot assure
prospective investors that it will not experience production difficulties in the future and cannot assure
prospective investors that it will be able to increase the efficiency and manufacturing capabilities of its
production facilities in line with increased customer demand in the future. Furthermore, the Company cannot
21
assure prospective investors that it will be able to meet increasing demand for its products without having to
incur significant additional capital expenditures in the future.
For more information, see “Management’s Discussion and Analysis of Financial Position and Financial
Performance — Liquidity and Capital Resources” on page 63 of this prospectus.
Consolidation of sales channels in the Philippines may adversely affect the Company’s financial position
and financial performance.
The Philippine retail market has historically been highly fragmented and dominated by numerous small
neighborhood stores. These small neighborhood stores serve limited geographical areas and purchase relatively
small quantities of the Company’s products from distributors and larger supermarkets. In recent years, larger
supermarkets have begun to gain market share in the Philippines. There is a risk that the Company’s business
may become concentrated in fewer, larger customers, which could increase the relative bargaining power of
these customers. The Company cannot assure prospective investors that these customers will not exert
downward pressure on wholesale prices of the Company’s products, which may adversely affect the Company’s
financial position and financial performance.
For more information, see “Business Overview — Strategies” on pages 78-80 of this prospectus.
Product liability claims or other circumstances could harm the integrity and customer support for the
Company’s brands and adversely affect the sales of its products.
The success of the Company depends in large part upon consumers’ perception of its brands. The contamination
of products by bacteria or other external agents, whether arising accidentally or through deliberate third party
action, could result in product liability claims. Product liability claims, whether or not they are successful, could
adversely affect the reputation of the brands used by the Company and the sales by the Company. In addition,
other manufacturers, primarily affiliates of SMC that produce and sell beer outside of the Philippines, have
rights to produce products that carry the same brands and trademarks as used by the Company. Actions by these
other manufacturers, including producing deficient quality products, could tarnish the overall reputation of the
relevant brands. Any of the problems mentioned above may adversely affect the Company’s reputation and its
ability to charge a premium for its products, which may result in reduced sales and profitability of the affected
brand or all of the Company’s brands.
Sales of the Company’s products may be adversely affected if its relationship with distributors
deteriorates.
The Company’s products are primarily sold through distributors. Although many of these distributors have been
dealing with the Company for many years, there is no assurance that these distributors will continue to purchase
and distribute the Company’s products, or that these distributors can continue to effectively distribute the
Company’s products without delays or interruptions. In addition, the financial instability of, contractual disputes
with, or labor disruptions at, the Company’s distributors could disrupt the distribution of the Company’s
products and adversely affect the Company’s business.
For more information, see “Business Overview — Strengths” on pages 77-78 of this prospectus and “Business
Overview —Marketing, Sales and Distribution” on pages 86-87 of this prospectus.
Regulatory decisions and changes in the legal and regulatory environment in which the Company
operates could limit its business activities or increase its operating costs.
Regulatory decisions or changes in the legal and regulatory requirements in a number of areas may have
adverse effects on the Company’s business. In particular, governmental bodies may subject the Company to
actions such as product recall, seizure of products and other sanctions, any of which could have an adverse
effect on the Company’s sales. These governmental bodies may also impose limitations on advertising activities
used to market beer, such as prohibitions or limitations on television or print advertising, which may inhibit or
restrict the Company’s ability to maintain or increase consumer support for and recognition of its brands. In
addition, regulatory bodies may seek to restrict consumer access to the Company’s products by, among other
actions, regulating the hours when outlets are allowed to sell alcohol. These and other legal or regulatory
changes could materially and adversely affect the Company’s financial position and financial performance.
22
For more information, see “Business Overview — Regulation and Taxation” on pages 88-89 of this prospectus.
Increases in excise tax rates applicable to beer or increases in other taxes to which the Company is
subject may reduce consumption of the Company’s products or the Company’s margins or reduce both.
Beer is subject to an excise tax, and increases in excise taxes or value added taxes, or VAT, may reduce overall
consumption of the Company’s products, the Company’s profit margins or both. An additional 8% increase in
the excise tax rates applicable to beer was implemented on January 1, 2009 and the same rate increase is
scheduled to be implemented on January 1, 2011. Additional non-scheduled increases in excise tax or VAT
rates are also possible. Previous increases in excise tax rates have adversely affected the Company’s sales
volume. The scheduled increases in excise tax or other increases in excise tax or other taxes to which the
Company is subject to may (i) reduce consumption of the Company’s products if passed on to the consumers by
way of upward price adjustments, (ii) reduce the Company’s margins if prices remain unchanged or (iii) have
both such effects if additional taxes are not fully passed on to the consumers.
For more information, see “Management’s Discussion and Analysis of Financial Position and Results of
Operation — Factors Affecting Financial Performance — Taxes and Regulatory Environment” on page 57 of
this prospectus, “Business Overview — Strategies” on pages 78-80 of this prospectus and “Business Overview
— Regulation and Taxation” on pages 88-89 of this prospectus.
Philippine environmental laws and regulations create potential liabilities should the Company fail to
comply with prescribed environmental standards and limits.
Various environmental laws and regulations govern the operations of the Company including, but not limited to,
the management of solid wastes, water and air quality, toxic substances and hazardous wastes at the Company’s
breweries.
Non-compliance with the legal requirements or violations of prescribed standards and limits under these laws
could expose the Company to potential liabilities, including both administrative penalties in the form of fines
and criminal liability, which could result in imprisonment for officers of the Company who were involved in or
who are otherwise held to be responsible for any such violations. Violations of environmental laws could also
result in the suspension and/or revocation of permits or licenses held by the Company or the suspension or
closure of operations.
For more information, see “Business Overview — Health, Safety and Environmental Matters” on pages 90-91
of this prospectus and “Regulatory Framework — Environmental Matters” on pages 115-116 of this prospectus.
The Company may be adversely affected by any change in environmental, health and safety, accounting
standards and other laws and regulations.
The Company’s operations are subject to a number of national and local laws and regulations. These include
industry laws and regulations relating to environmental protection, health and safety, accounting standards and
tax. The Company cannot assure prospective investors that changes in laws or regulations, including
environmental, health and safety, accounting standards and laws and regulations, will not result in the Company
having to incur substantial additional capital expenditures to upgrade or supplement its existing facilities or
having to report lower income or being subject to an increased rate of taxation or fines and penalties. Any such
changes in laws and regulations could have a material adverse effect on the Company’s business, financial
position and financial performance.
For more information, see “Business Overview — Health, Safety and Environmental Matters” on pages 93-94
of this prospectus.
Outbreaks of disease may dampen demand for the Company’s products and may therefore adversely
affect the Company’s financial position and financial performance.
Several countries in Asia and Europe have reported cases of avian influenza, or bird flu, while in the
Philippines, several pig farms have recently reported cases of the ebola reston virus or “ebola virus”. While
23
there have been no known outbreaks of bird flu in the Philippines, recent reports indicated that some farmers
exposed to affected pig farms have tested positive for the ebola virus. There can be no assurance that these
viruses will not mutate, thereby causing a human pandemic in the Philippines or elsewhere. Any outbreak of
bird flu or the ebola virus that results in a human pandemic, or an outbreak of any other contagious disease for
which there is no known, effective, or readily available treatment, cure or vaccine, could have a material
adverse effect on the Company’s financial position and financial performance. For example, any outbreak of
bird flu or ebola virus could adversely affect consumer demand for the Company’s products, the Company’s
ability to adequately staff its operations, the distribution networks for the Company’s products, as well as the
general level of economic activity in the Philippines. The Company cannot assure prospective investors that any
future outbreak of bird flu, ebola virus or any other contagious disease will not have a material adverse effect on
the Company’s financial position and financial performance.
RISKS RELATING TO THE PROPOSED ACQUISITIONS
The Company may not complete the Proposed Acquisitions.
The Company will only be able to complete the Proposed Acquisitions after a number of steps are
accomplished, including regulatory approvals and securing the full funding required. There is no assurance,
however, that the Company will be able to successfully complete these steps on a timely basis or at all. If the
Company does not complete the Proposed Acquisitions, the information on the Proposed Acquisitions and the
examined pro forma consolidated financial statements related to the Proposed Acquisitions in this prospectus
would not be relevant.
RISKS RELATING TO THE PHILIPPINES
The Company is a Philippine corporation and substantially all of its operations are conducted in and all of its
production facilities and other assets are located in the Philippines. As a result, the Company’s financial
position and financial performance will be influenced by the political and social situation in the Philippines, as
well as the general state of the Philippine economy and the economies in the surrounding region.
Political or social instability in the Philippines could have a negative effect on the financial position and
business of the Company.
The Philippines has from time to time experienced political, social, economic and military instability. For
example, in 2005, following allegations of fraud and disenfranchisement of voters in relation to the 2004
presidential elections, several members of the Arroyo Cabinet resigned their posts and, along with certain
government officials, various opposition groups and individuals, began to call for the resignation or
impeachment of President Arroyo. Impeachment complaints based on allegations of violations of the
Constitution, graft and corruption and betrayal of public trust were filed against President Arroyo with the
House of Representatives. On August 31, 2005, the House Committee on Justice dismissed all these
impeachment complaints. On June 26, 2006 similar impeachment complaints were filed against President
Arroyo in the House of Representatives, but these were subsequently dismissed in August of 2006. On October
5, 2007, a new impeachment complaint was filed against President Arroyo following bribery allegations
involving government officials allegedly involved in the approval of a government contract with a Chinese
telecommunications company. This impeachment complaint was dismissed by the House of Representatives on
November 26, 2007. A fourth impeachment complaint was filed against President Arroyo on October 13, 2008
alleging culpable violation of the Constitution for approving the Northrail rehabilitation project, numerous
human rights violations and alleged ballot-switching in the 2004 presidential election, among others. This
impeachment complaint was also dismissed on November 26, 2008. There have been media reports that
opposition parties, including former members of the military, continue to call for President Arroyo’s
resignation.
The Philippines Presidential, Legislative and local elections are scheduled to be held on May 10, 2010. The
2010 elections shall lead to the election of the 15th President and Vice President of the Philippines,
respectively. The legislators elected in the 2010 elections will join the senators of the 2007 elections and will
comprise the 15th Congress of the Philippines. The 2010 election will be administered by the Commission on
Elections in compliance with the Republic Act No. 9369, also known as the Amended Computerization Act of
2007, and thus, shall also be the first computerized election in the Philippines.
24
Furthermore, the Philippines has been subject to sporadic terrorist attacks in the past several years. The
Philippine army has been in conflict with the Abu Sayyaf organization, which has been identified as being
responsible for kidnapping and terrorist activities in the Philippines. A series of bombings in the southern part
of the Philippines also occurred in 2004. Although no one has claimed responsibility for these attacks, it is
believed that the attacks are the work of various separatist groups, including possibly the Abu Sayyaf
organization, which is alleged to have ties to the Al-Qaeda terrorist network. On February 14, 2005, three bomb
explosions in the Makati financial district in Manila, Davao City and General Santos City resulted in the deaths
of eight persons and injured more than 100 persons. The Abu Sayyaf organization claimed responsibility for the
attack. The Philippine army has also been fighting a counter-insurgency campaign against the communist New
People’s Army (NPA) for decades, and the Arroyo administration has announced plans to increase the intensity
of its efforts against the NPA. There can be no assurance that the Philippines will not be subject to further acts
of terrorism or negative effects of its counter-insurgency campaign in the future.
No assurance can be given that the future political or social environment in the Philippines will be stable or that
current or future governments will adopt economic policies conducive to sustaining economic growth. Political
or social instability in the Philippines could negatively affect the general economic conditions and operation
environment in the Philippines, which could have a material impact on the Company’s business, financial
position and results of operation.
The Company’s business and sales may be negatively affected by slow growth rates and economic
instability in the Philippines as a result of the global economic recession or other factors adversely
affecting the country’s economic performance.
The Company derives approximately 99.0% of its sales from its Philippine operations. The Company’s products
are discretionary in nature and may be adversely impacted by weak economic conditions in the Philippines. The
Company’s future growth depends in large part on continued economic growth in the Philippines.
The Philippines has experienced periods of slow or negative growth, high inflation, significant depreciations of
the Philippine peso and debt restructuring, and has been significantly affected by economic volatilities in the
Asia-Pacific region. After the onset of the Asian financial crisis in mid-1997, the Philippines experienced
unfavorable economic conditions, including currency depreciation, reduced availability or higher cost of credit,
interest rate volatility and a reduction of foreign currency reserves. Currently, the Philippines is threatened by
the downstream effects of the recent global economic downturn. The Philippines is currently experiencing job
layoffs, slowdown in export growth, stock trading volatility and reduction in personal consumption expenditure,
among others. No assurance can be given on the extent the global recession shall effect the economic
conditions and operating environment in the Philippines.
Historically, the Philippines has experienced volatility in the exchange rate between the Philippine peso and the
U.S. dollar, as well as against other currencies. The Philippines has also experienced volatility of the prices of
shares traded on the domestic stock market. The Company cannot assure prospective investors that one or more
of these factors will not negatively impact Philippine consumers’ purchasing power or product preferences,
which could materially and adversely affect the Company’s financial position and financial performance.
For more information, see “Management’s Discussion and Analysis of Financial Position and Financial
Performance — Factors Affecting Financial Performance” on pages 55-57 of this prospectus and “Business
Overview — Strategies” on pages 78-80 of this prospectus.
If foreign exchange controls were to be imposed, the Company’s ability to purchase raw materials,
primarily malted barley and technically advanced equipment, could be adversely affected.
Currently, the Philippines does not have foreign exchange controls. However, the BSP has statutory authority,
with the approval of the President of the Philippines, during a foreign exchange crisis or in times of national
emergency, to:
•
suspend temporarily or restrict sales of foreign exchange;
•
require licensing of foreign exchange transactions; or
•
require the delivery of foreign exchange to the BSP or its designee banks for the issuance and guarantee
of foreign currency-denominated borrowings.
25
The Company purchases some critical raw materials, primarily malted barley, and most of its technically
advanced equipment from abroad and needs foreign currency to make these purchases. The Company cannot
assure prospective investors that foreign exchange controls will not be imposed by the Government in the
future. If imposed, these restrictions could materially and adversely affect the Company’s ability to obtain
malted barley and other materials from abroad, which could materially and adversely affect its financial position
and financial performance.
The occurrence of natural catastrophes or blackouts may materially disrupt the Company’s operations.
The Philippines has experienced a number of major natural catastrophes in recent years including typhoons,
volcanic eruptions, earthquakes, mudslides, droughts and floods related to the El Niño and La Niña weather
events. Natural catastrophes may impair the economic conditions in the affected areas, as well as the overall
Philippine economy, and disrupt the Company’s ability to produce or distribute its products. The Philippines
has also experienced electricity blackouts, both from insufficient power generation and from disruptions such as
typhoons. These types of events may materially disrupt and adversely affect the Company’s business and
operations. The Company cannot assure prospective investors that the insurance coverage it maintains for these
risks will adequately compensate the Company for all damages and economic losses resulting from natural
catastrophes or blackouts, including possible business interruptions.
RISKS ASSOCIATED WITH THE OFFER
Secondary trading of the Bonds is subject to various market factors.
The Company plans to list the Bonds in the PDEx to provide price transparency and liquidity to the
Bondholders. As with other fixed income securities, the Bonds could trade at prices higher or lower than the
initial offering price due to prevailing interest rates, the Company’s operations, the overall market for debt
securities, political and economic developments in the Philippines and other regions, among others. It is
possible that a selling Bondholder would receive sales proceeds lower than his initial investment should a
Bondholder decide to sell his Bonds prior to maturity.
The Bonds will constitute direct, unconditional, unsubordinated, general and unsecured obligations of the
Issuer.
The Bonds will rank at least pari passu in all respects and rateably without preference or priority (except for any
statutory preference or priority applicable in the winding-up of the Issuer) with all other outstanding unsecured
and unsubordinated obligations (contingent or otherwise, present and future) of the Issuer.
The Bonds may be redeemed prior to Maturity Date upon the occurrence of certain events such as
change in taxation or regulation.
Upon the occurrence of certain events such as a change in Philippine tax or regulatory laws or their general
application or interpretation having an effect on the Company, the Bonds could be redeemed in whole but not in
part prior to the Maturity Date. In such an event, the Bonds shall be redeemed at the relevant Issue Price plus
accrued interest.
There is no assurance that a market for the Bonds will exist, and the Bonds may offer limited liquidity.
The Bonds constitute a new issue of securities by the Company. Prior to this issue, there has been no public
market for the Bonds. Although the Company intends for the Bonds to be listed on PDEx as soon as
reasonably practicable, there can be no assurance that an active public market for the Bonds will develop and, if
such a market were to develop, the Joint Lead Managers and Underwriters are under no obligation to maintain
such a market. The liquidity and the market prices for the Bonds can be expected to vary with changes in
market and economic conditions, the financial position and prospects of the Company and other factors that
generally influence the market prices of securities.
26
RISKS RELATING TO CERTAIN STATISTICAL INFORMATION IN THIS PROSPECTUS
Certain statistics in this prospectus relating to the Philippines, the industries and markets in which the
Company’s business operates, including statistics relating to market size and market share, are derived from
various Government and private publications, including those produced by industry associations and research
groups and the Canadean Report. This information has not been independently verified and may not be
accurate, complete, up-to-date or consistent with other information compiled within or outside the Philippines.
27
USE OF PROCEEDS
The Company intends to use the net proceeds of this Offer to fund the Proposed Acquisitions. Specifically, the
Company intends to use the net proceeds as follows:
ƒ
ƒ
P 32.0 billion for the Brand Acquisition; and
P 6.8 billion for the Land Acquisition.
Any additional funding required to complete the Proposed Acquisitions will be sourced through additional
borrowings 1 . In the event that the net proceeds of this Offer will be insufficient to finance the Proposed
Acquisitions, the Company intends to place the amount in short-term Government securities with maturities of
up to three months until such time that the full amount required for the Proposed Acquisitions is raised. Further,
the Company undertakes that it will not use the net proceeds from this Offer for any other purpose.
For more information on the Proposed Acquisitions, see “Proposed Acquisitions” on pages 29-36 of this
prospectus.
The Company estimates that the net proceeds from this Offer, after deducting expenses payable by the
Company, will be approximately P38,400,152,939.52 (the “Net Proceeds”). Net proceeds from the Offer are
estimated as follows:
Estimated Proceeds from the Sale of the Bonds
Less: Estimated Expenses
P 38,800,000,000.00
Documentary Stamp Tax
SEC Registration
SEC Registration Fee
SEC Legal Research and Publication Fee
SEC Publication Fee
194,000,000.00
10,262,500.00
102,625.00
100,000.00
Underwriting and Other Professional Fees
Underwriting and Selling Fee
Legal Fee
Rating Fee
Listing Application Fee
Listing Maintenance Fee*
Printing Cost**
Trustee Fees***
Paying Agency and Registry Fees****
Investors' Conference Fee
Miscellaneous Fees
187,741,935.48
2,000,000.00
3,360,000.00
150,000.00
450,000.00
150,000.00
180,000.00
1,050,000.00
100,000.00
200,000.00
Estimated Net Proceeds to the Company
*
**
***
****
P 38,400,152,939.52
The Issuer will be charged an Annual Maintenance Fee of P150,000 per tranche of the Bonds, payable every January of each year.
The fee shown is for the first year only.
Estimated based on previous issuances.
The Issuer will pay the Trustee a fixed annual fee of P180,000. The fee shown is for the first year only.
The Issuer will pay PDTC P100,000 per tranche per interest payment date. The Paying Agency fee shown is for the first year
only. The Registrar will charge (i) a monthly maintenance fee based on the face value of the Bonds and the number of Bondholders
and (ii) out of pocket expenses for cost of mailing statement of accounts to Bondholders. The total amount shown includes an
account opening fee of P75.00 assuming 6,000 Bondholders.
1
Sources of additional borrowings are the Company’s existing credit facilities from both local and international
relationship banks.
28
PROPOSED ACQUISITIONS
On December 8, 2008, the Board of Directors of SMC approved the transfer of the SMB Brands and SMB Land
to Iconic and Brewery Properties, respectively. Iconic and Brewery Properties are wholly-owned subsidiaries
of SMC.
On January 27, 2009, the Company's Board of Directors approved the purchase of all the interests of SMC in
Iconic after completion of the transfer by SMC to Iconic of the SMB Brands (“Brand Acquisition”). The
Company and SMC agreed on the purchase price of P32.0 billion.
The Company engaged UBS Investments Philippines Inc. as its financial adviser to perform a valuation study
and analysis in connection with the Brand Acquisition. The Company arrived at the purchase price after taking
into account the valuation study and analysis and other factors (as discussed on pages 78-80 “Business
Overview-Strategies” and pages 17-27 “Risk Factors”).
On the same date, the Company's Board of Directors also approved the purchase of all the interests of SMC in
Brewery Properties after SMC has transferred the SMB Land to Brewery Properties (the “Land Acquisition”
and, together with the Brand Acquisition, the “Proposed Acquisitions”). The purchase price for the Land
Acquisition is P6.829 billion, which is equivalent to the appraised value of the SMB Land transferred by SMC
to Brewery Properties.
The transfer of the SMB Brands to Iconic was approved by the SEC on February 27, 2009 while the transfer of
the SMB Land to Brewery Properties is pending completion to date.
The Company intends to enter into the agreements with SMC for the Brand Acquisition and the Land
Acquisition by end March and end April 2009, respectively.
The Company intends to use the proceeds from the Offer together with any additional funding to fund the
Proposed Acquisitions. For a detailed description of the funding of the Proposed Acquisitions, see “Use of
Proceeds” on page 28 of this prospectus.
The Company currently expects the Brand Acquisition to be completed by end April 2009, and the Land
Acquisition to be completed by end 2009. Each Proposed Acquisition, however, is subject to conditions that
may not be satisfied. The Company can provide no assurance that the Proposed Acquisitions will be completed
on a timely basis or at all.
THE SMB BRANDS
The following is a description of the SMB Brands to be acquired by the Company under the Brand Acquisition.
LIST OF REGISTERED BRANDS
Mark
Class
Goods
CALI Device
32
Shandy, beers, mineral and aerated
waters, other non-alcoholic drinks, fruit
drinks, fruit juices, syrups and other
preparations for making beverages
Country
Philippines
Owner
SMC
Philippines
SMC
CALI Label & Design
32
Shandy
Philippines
SMC
CALI ICE LABEL
32
Philippines
SMC
CERVEZA NEGRA
33
Beers; mineral and aerated waters and
other non-alcoholic drinks; fruit drinks
and fruit juices; syrups and other
preparations for making beverages
Malt beverages
Philippines
SMC
CERVEZA NEGRA AN
EXHILARATING DARK LAGER
LABEL DESIGN
32
Beer
Philippines
SMC
SAN MIGUEL PALE PILSEN
FIESTA LABEL DESIGN
32
Beer
29
LIST OF REGISTERED BRANDS
Mark
Class
GOLD EAGLE BEER & BOTTLE
32
Beer
DESIGN
Country
Philippines
Owner
SMC
Philippines
SMC
GOLD EAGLE BEER
CONTAINER MARK
32
Beer
Philippines
SMC
GOLD EAGLE & DEVICE
32
Beer, lager, ale, pilsen, pilsener, pils,
stout, bock and other malt beverages
Philippines
SMC
GOLD EAGLE BEER MUCHO &
EAGLE DEVICE
32
Beer
Philippines
SMC
GRANDE
32
Beer, lager, ale, pilsen/ pilsener/pils,
stout, bock and other malt beverages
Philippines
SMC
MIGUELITO
32
Beer, lager, ale, pilsen/ pilsener/pils stout,
bock and other malt beverages
Philippines
SMC
MUCHO
32
Beer, lager, ale, pilsen/ pilsener/pils,
stout, bock and other malt beverages
Philippines
SMC
MUZIKLABAN
41
Entertainment services, amusement
services or recreation of people, namely,
annual amateur band competition
organized by Red Horse Beer; all services
included in Class 41
Philippines
SMC
RED HORSE & Device
32
Beer, lager, ale, pilsen, pilsener, pils,
stout, bock and other malt beverages
Philippines
SMC
RED HORSE STALLION
32
Beer
Philippines
SMC
SAN MIG LIGHT (stylized word)
32
Beer
Philippines
SMC
SAN MIG STRONG ICE &
DEVICE
32
Beer
Philippines
SMC
SAN MIG STRONG ICE LABEL
32
Beer
Philippines
SMC
SAN MIGUEL BEER DIVISION
32
Beer and other malt-based beverages
Philippines
SMC
SAN MIGUEL BEER DIVISION
32
Beer and other malt-based beverages
Philippines
SMC
SAN MIGUEL PALE PILSEN &
Label Design
32
Beer, ale, lager, pilsen/pilsener, pils,
stout, bock and shandy
Philippines
SMC
SAN MIGUEL SUPER DRY
(container)
32
Beer
Philippines
SMC
SMB PLAY & DESIGN
41
Providing entertainment, sporting and
cultural activities; providing purchase
discount services, arranging and
conducting promotional activities
Philippines
SMC
SAN MIGUEL CORPORATION
BEER DIVISION
32
Beer and other malt-based beverages
Philippines
SMC
SAN MIGUEL PILSEN ESCUDO
& Label Design
32
Beer
30
Goods
LIST OF REGISTERED BRANDS
Mark
Class
Goods
PASIKLABAN TOUR
41
Organizing and providing entertainment
and recreational service and cultural
activities, namely, rock band concerts and
variety shows
Country
Philippines
Owner
SMC
Philippines
SMC
SUPER X SERIES (wordmark)
41
Organizing and providing sporting
activities, namely, extreme sports events
Philippines
SMC
FOUR KICKS
41
Organizing and providing entertainment,
recreational, and promotional activities
Philippines
SMC
RED HORSE (stylized wordmark)
32
Beer, lager, ale, pilsen/pilsener/pils, stout,
bock and malt beverages all included in
Class 32
Philippines
SMC
HIT KAPALIT
41
Organizing and providing entertainment
and recreational services and sporting and
promotional activities, namely, onpremise dart competitions
Philippines
SMC
Ito ang Tama (wordmark)
16, 18
& 25
Class 16 - Promotional materials made of
paper or cardboard, namely, stationery,
paper envelopes and paper pouches,
calendars, catalogues, posters, postcards,
printed publications, advertisement
boards of paper and cardboard, bottle
wrappers of cardboard and paper boxes of
cardboard and paper, and labels (not of
textile)
Class 18 - Bags made of leather and
imitation of leather, garment bags for
travel, umbrellas
Class 25 - T-shirts, shirts, clothing
jackets, caps, shorts
Philippines
SMC
RED HORSE BEER EXTRA
STRONG & DEVICE
32
Beer, lager, ale, pilsen/pilsener/pils, stout,
bock and malt beverages all included in
Class 32
Philippines
SMC
4KICKS (word mark)
41
Organizing and providing entertainment,
recreational, and promotional activities
Philippines
SMC
OKTOBERFEST
41
Month-long beer festival of San Miguel in
which there would be events and
promotions like concerts, beer and food
stalls, contests, stalls in which
promotional/novelty items are sold
Philippines
SMC
GOLD EAGLE AGILAKAD
NIGHTS (WORD MARK)
41
Beer drinking event with on-premise
selling and karaoke singing
Philippines
SMC
SAN MIGUEL DESIGN MARK
32
Malt Beverages
Philippines
SMC
RED HORSE BEER ITO ANG
TAMA (Copyright)
M
--
Philippines
SMC
SAN MIGUEL BEER GRANDE
(NAGKAISA ANG GRUPO)
(copyright)
31
LIST OF REGISTERED BRANDS
Mark
Class
MAG-RELAKS MAG-GOLD
Class of
EAGLE BEER
Work:
M
Country
Philippines
Owner
SMC
Goods
Philippines
SMC
PLASTIC CASE (SAN MIGUEL
BEER)
Int'l
Class 21
Plastic crate
Philippines
SMC
A BOTTLE (SAN MIGUEL BEER)
21
Container for beer
Country
Philippines
Owner
SMC
Philippines
SMC
GOLD EAGLE BEER KING & EAGLE
DESIGN
Philippines
SMC
MULA SA SAN MIGUEL (Copyright)
Philippines
SMC
CERVEZA PALE PILSEN ESCUDO &
LABEL DESIGN
32
Beer
Philippines
SMC
SAN MIGUEL PALE PILSEN DRAFT LABEL
DESIGN
32
Beer
Philippines
SMC
SAN MIGUEL PALE PILSEN WITH
RECTANGULAR HOPS AND MALT
25 & 32
Philippines
SMC
CERVEZA NEGRA 1890 A DISTINCT
PLEASURE LABEL DESIGN
41
Events, competitions,
advertisements
Philippines
SMC
MAGNUM BEER (WORDMARK)
32
Beer
Philippines
SMC
SAN MIGUEL PREMIUM ALL-MALT BEER
& LABEL DESIGN
32
Beer
Philippines
SMC
SAN MIGUEL PALE PILSEN
OKTOBERFEST & LABEL DESIGN
32
Beer
Philippines
SMC
SAN MIGUEL ICE & DEVICE
32
Beer
Philippines
SMC
SAN MIGUEL DOUBLE CHILL DRAFT
32
Beer
Philippines
SMC
SAN MIGUEL DOUBLE CHILL PALE
PILSEN
32
Beer
Philippines
SMC
GOLD EAGLE VIDEOKE KING
WORDMARK
41
Philippines
SMC
METHOD OF MAKING COLORLESS AND
ARTIFICIALLY COLORED CLEAR BEER
Philippines
SMC
SAN MIGUEL DARK BEER & LABEL
DESIGN
LIST PENDING APPLICATIONS
Mark
Class
SAN MIGUEL SUPER DRY LABEL DESIGN
32
32
32
Goods
Beer
Beer
Copyright Application
-
32 & 33
Class 25 – Clothing
Class 32 – Beer
Clear beer
Beer, ale and non-alcoholic
malt based beverages
THE SMB LAND
The following is a description of the SMB Land.
Description and Use
Address / Location
TCT No.
GREATER MANILA AREA
M. Carreon St., Brgy. 866, Sta. Ana,
Sales Office -Sta.Ana
Manila
Dona Juana St., Brgy. Potrero, Malabon
Polo Brewery
City
Polo Brewery
Mc. Arthur Highway, Brgy. Marulas,
Valenzuela City
Polo Brewery
Banana Road cor. Dona Juana St.,
Potrero, Malabon City
Region/Sales Office Caloocan
A. Cruz St., Brgy. 96, Caloocan City
Sales Office - Tondo
Honorio Lopez Blvd., Guidote St., Tondo,
Manila
Sales Office - Cubao
Brgy. Mangga, Cubao, Quezon City
Sales Office - San Isidro
Sales Office – Guiguinto
Gapan-Olongapo Rd., Poblacion, San
Isidro, Nueva Ecija
Cagayan Valley Rd., Brgy. Sta. Cruz,
Guiguinto, Bulacan
Area in
sq.mts (Land
Title)
Appraised
Value
-240375-
6,865.50
102,982,500
M-34533
882
5,292,000
T-1759
T-126206
T-126207
T-126208
T-126209
T-197295
T-134350
-R-1383C-18257
C-18258
C-18259
80,064
532
268
174
189
481
10,513
8,933
4,586
5,117
361
1,200,960,000
7,980,000
4,020,000
2,610,000
2,835,000
7,215,000
63,078,000
53,598,000
45,860,000
51,170,000
3,610,000
-139443-
3,000
60,000,000
-139444-
1,290
25,800,000
RT-82256 (235850)
10,000
200,000,000
NT-163434
5,000
5,103,000
T-248955
6,819
34,095,000
150392-R
152641-R
152640-R
152639-R
550,018
11,718
3,702
1,692
1,650,054,000
35,154,000
11,106,000
5,076,000
-48189-
5,060
43,010,000
T-20561
5,496
27,480,000
T-150299
T-150300
T-173718
29659
-52655-52656-
1,262
1,001
1,500
3,536
925
944
3,786,000
3,003,000
4,500,000
10,608,000
2,922,600
2,969,400
T-22877
4,127.46
18,574,000
T-23010
T-61442
T-61441
T-61440
T-61443
T-50279
T-50330
5,000
500
2,624
1,000
363
500
292
10,000,000
4,000,000
20,992,000
8,000,000
2,904,000
4,000,000
2,336,000
T-179780
5,000
15,000,000
T-15637
5,000
8,000,000
T-50909
3,000
4,500,000
CENTRAL NORTH LUZON
San Fernando Brewery /
Region/Sales Office
Brgy. Quebiawan,
McArthur Hi-way, San Isidro, San
Fernando, Pampanga
Region/Sales Office Dagupan
Region/Sales Office - La
Union
Caranglaan Dist., Dagupan City,
Pangasinan
Pennsylvania Ave., Brgy. Madayegdeg,
San Fernando, La Union
Region/Sales Office Cauayan
Brgy. San Fermin, Cauayan City, Isabela
Region/Sales Office Angeles
San Andres St., San Angelo Subd.,
Sto.Domingo, Angeles City, Pampanga
Region/Sales Office - San Brgy. 22, San Guillermo, San Nicholas,
Nicolas
Ilocos Norte
Sales Office -Carmen
Carmen East, Rosales, Pangasinan
Sales Office - Baguio
Naguilian Road, San Carlos Heights,
Brgy. Irisan, Baguio City, Benguet
Warehouse - Ilocos
National Road, Brgy. Mabini, Santiago
City, Isabela
Brgy. Tablac, Candon City, Ilocos Sur
Warehouse - Lallo
Sta Maria, Lallo, Cagayan
Sales Office - Santiago
33
Description and Use
SOUTH LUZON
Area/Sales Office –
Canlubang
Region/Sales Office –
Lucena
Sales Office -Gumaca
Region/Sales Office –
Naga
Warehouse
Warehouse
Warehouse
Region/Sales Office –
Batangas
Address / Location
TCT No.
Area in
sq.mts (Land
Title)
Appraised
Value
Silangan Exit, Canlubang, Calamba City
T-172606
37,000
111,000,000
Maharlika Highway, Brgy. Isabang,
Lucena City
Maharlika Highway, Brgy. Villabota,
Gumaca, Quezon
T-30190
T-30203
2,100
1,005
6,300,000
3,015,000
T-163370
3,000
7,500,000
T-10692
260
0
T-10693
-20799-
5,811
1,512
34,866,000
6,726,000
6467
5,000
25,000,000
T-5548
3,822
5,733,000
T-78152
3,850
30,800,000
T-17707
T-17708
5,000
149
12,500,000
373,000
123,965
1,500
2,000
2,000
2,000
750
750
750
750
750
750
750
750
2,000
2,000
2,000
1,500
1,500
1,500
3,000
3,000
277,137,000
Maharlika Highway, Brgy. Concepcion,
Pequena, Naga City
Brgy. Mandaragat, Puerto Princesa City,
Palawan
Brgy., Labangan, San Jose, Occidental
Mindoro
JP Laurel Hi-way, Brgy. Balintawak, Lipa
City, Batangas
National Road, Brgy. Balagtas, Batangas
City, Batangas
NEGROS
Bacolod Brewery/Sales
Office
Brgy. Granada, Sta. Fe, Bacolod City,
Negros Occidental
T-141422
T-141424
T-141425
T-141426
T-141427
T-141428
T-141429
T-141430
T-141431
T-141432
T-141433
T-141434
T-141435
T-141436
T-141437
T-141438
T-141439
T-141440
T-141441
T-141442
T-141443
Warehouse - Sum-ag
Flores St., Brgy. Sum-ag, Bacolod City,
Negros Occidental
T-125650
3,480
4,176,000
Sales Office –
Himamaylan
National Highway, Brgy.4, Himamaylan
City, Negros Occidental
T-69650
T-73626
T-73624
T-33006
T-33007
T-0-276
T-13130
1,208
732
1,268
3,828
258
5,958
9,500
2,174,400
1,317,600
1,999,836
24,882,000
1,677,000
8,925,000
19,000,000
Sales Office – Iloilo
Sales Office - Numancia
Sales Office - Roxas
Muelle Loney St., Brgy. Legaspi, Iloilo
City
Brgy. Camansi Norte, Numancia, Aklan
Brgy. Libas, Roxas City
34
Description and Use
Address / Location
TCT No.
Area in
sq.mts (Land
Title)
Appraised
Value
VISAYAS
National Highway, Brgy. Tipolo,
Mandaue City
Mandaue Brewery/Sales
Office
National Highway, Brgy. Tipolo,
Mandaue City
National Highway, Brgy. Tipolo,
Mandaue City
P. Pasubas St., Brgy. Tipolo, Mandaue
City
Deepwell D
Deepwell E
Deepwell F
Deepwell B
Deepwell G
Tambalan-Budla-an, Brgy.Tambalan,
Mandaue City
Private Road, Brgy. Cabancalan,
Mandaue City
Private Road, Brgy. Cabancalan,
Mandaue City
AS Fortuna St., Brgy. Banilad, Mandaue
City
Private Road, Brgy. Cabancalan,
Mandaue City
-11787-11786-
37,494
13,639
581,157,000
211,404,500
-11206T-17143
5,811
3,000
90,070,500
46,500,000
-10888-
1,365
21,157,500
-30010-3000916110
-10887-
4,826
35,567
16,043
10,241
74,803,000
551,288,500
248,666,500
158,735,500
T-16649
1,187
18,398,500
-16689-
457
7,083,500
T-16648
2,098
32,519,000
-8190-8734-8733-9484-9483T-85039
T-85046
-85043T-85041
1,320
1,320
1,320
1,320
1,320
1,000
4,614
400
400
20,460,000
20,460,000
20,460,000
20,460,000
20,460,000
2,000,000
9,228,000
800,000
800,000
-8803-
636
1,590,000
-11761-
1,081
2,702,500
- 19033 -
400
2,400,000
-38618-
331
662,000
Deepwell C
H. Cortes St., Brgy. Banilad, Mandaue
City
T-16844
1,880
8,460,000
Region/Sales Office Tacloban
Fatima Village, Brgy. 73 (formerly part of
Brgy. Sagcahan), Tacloban City
T-19820
T-19821
T-19822
320
1,064
1,096
384,000
1,276,800
1,315,200
Davao Brewery, Brgy. Darong, Sta. Cruz,
Davao Del Sur
T-26530
269,573
161,743,800
T-3419
T-3420
T-3420-A
T-3422
T-3423
T-21267
T-21268
T-21269
T-21270
T-60306
T-60307
4,146
397
4,926
1,535
3,727
1,946
791
1,916
721
2,850
2,850
3,316,800
317,600
3,940,800
1,228,000
2,981,600
1,556,800
632,800
1,532,800
576,800
8,550,000
8,550,000
T-33128
20,000
30,000,000
T-33853
T-49827
1,511
737
7,555,000
3,685,000
MINDANAO
Davao Brewery
Region/Sales Office Opol
Warehouse - Tagum
Warehouse - GenSan
Warehouse - Marbel
National Highway, Brgy. Luyong
Bonbon, Opol, Misamis Oriental
National Highway, Brgy. Magugpo,
Tagum City
National Highway, Brgy. Lagao, General
Santos City
Sergio Osmena St., Brgy. Poblacion,
Koronadal City
35
Description and Use
Address / Location
TCT No.
Region/Sales Office –
Zamboanga
RT Lim Blvd., Baliwasan, Zamboanga
City
Warehouse - Tandag
Brgy. Bongtod, Tandag City, Surigao del
Sur
Region/Sales Office –
Butuan
Fort Poyohan, Molave St., Butuan City
Warehouse - Digos
JP Rizal Ave., Poblacion, Digos City
TOTAL
36
Area in
sq.mts (Land
Title)
Appraised
Value
T-53,629
2,000
8,000,000
T-48,426
T-47,396
T-47,397
T-47,398
3,736
1,500
1,500
2,160
14,944,000
6,000,000
6,000,000
5,576,000
T-5569 L-3411
221
331,500
T-5569 L-3409
T-6293
T-14953
T-14955
323
243
2,375
873
485,000
364,500
1,663,000
459,000
(T-10158) - T-2323
2,800
14,000,000
1,494,947.96
6,828,978,636
DETERMINATION OF ISSUE PRICE
The Bonds shall be issued on a fully-paid basis and at an issue price that is at par.
37
PLAN OF DISTRIBUTION
The Company plans to issue the Bonds to institutional and retail investors through a general public offering to
be conducted by the Joint Lead Managers and Underwriters.
JOINT LEAD MANAGERS AND UNDERWRITERS
The Development Bank of the Philippines and The Hongkong and Shanghai Banking Corporation Limited, as
Joint Issue Managers, have agreed to act as arranger in the issuance, placement, distribution, and sale of the
Bonds and together with BDO Capital & Investment Corporation (“BDO”), BPI Capital Corporation (“BPI
Capital”), China Banking Corporation (“CBC”), First Metro Investment Corporation (“FMIC”), ING Bank,
N.V. (“ING”), Land Bank of the Philippines (“LBP”), Philippine Commercial Capital, Inc. (“PCCI”), RCBC
Capital Corporation (“RCBC”), Standard Chartered Bank (“SCB”) and Union Bank of the Philippines
(“UBP”) (collectively, the “Joint Lead Managers and Underwriters”), to distribute and sell the Bonds at the
Issue Price, pursuant to an Issue Management and Underwriting Agreement entered into with the Company on
March 16, 2009 (the “Issue Management and Underwriting Agreement”). Each Joint Lead Manager and
Underwriter has committed severally to underwrite the Offer on a firm basis. The underwriting commitment
of each of the Joint Lead Managers and Underwriters is as follows:
BDO
BPI Capital
CBC
DBP
FMIC
HSBC
ING
LBP
PCCI
RCBC
SCB
UBP
Total……………………
Principal Amount of the Bonds
P10,000,000,000.00
P2,000,000,000.00
P3,000,000,000.00
P3,000,000,000.00
P4,800,000,000.00
P3,000,000,000.00
P2,000,000,000.00
P2,000,000,000.00
P2,000,000,000.00
P2,000,000,000.00
P2,000,000,000.00
P3,000,000,000.00
P38,800,000,000.00
There is no arrangement for any of the Joint Lead Managers and Underwriters to put back to the Issuer any
unsold Bonds.
The Issuer shall pay each Joint Lead Manager and Underwriter a fee of 0.45% flat based on its underwriting
commitment, as Joint Lead Manager and Underwriter’s fee (the “Joint Lead Manager and Underwriter’s Fee”).
The Joint Lead Manager and Underwriter’s Fee shall be grossed up for gross receipts tax of 7%. The fees due to
the Joint Lead Managers and Underwriters together with any applicable gross receipts tax or its equivalent and
net of any applicable withholding tax arising in respect of such fee, shall be due and payable by the Issuer to the
Joint Lead Managers and Underwriters immediately upon receipt of confirmation from the Issuer’s bank that
cleared funds representing payments for all accepted Applications to Purchase have been credited to the account
designated by the Issuer. The Joint Lead Managers and Underwriters are authorized to organize a syndicate of
Participating Underwriters for the purpose of the Offer. However, the Company has no obligation to any
member of such syndicate for the payment of any fee, underwriting or participating commissions.
The Issue Management and Underwriting Agreement may be terminated or suspended by the Joint Lead
Managers and Underwriters under certain circumstances prior to the issuance of the Bonds and payment being
made to the Company of the net proceeds of the Bonds. The Joint Lead Managers and Underwriters are duly
licensed by the SEC to engage in underwriting or distribution of the Bonds. The Joint Lead Managers and
Underwriters may, from time to time, engage in transactions with and perform services in the ordinary course of
business for the Company or any of its subsidiaries. The Joint Lead Managers and Underwriters have no direct
relations with the Company in terms of ownership by either of their respective major stockholder/s, and have no
right to designate or nominate any member of the Board of Directors of the Company.
38
The following includes a summary of certain provisions of the Issue Management and Underwriting Agreement
entered into by the Issuer and the Joint Lead Managers and Underwriters. This summary does not purport to be
complete and is qualified in its entirety by reference to the Issue Management and Underwriting Agreement.
SALE AND DISTRIBUTION
The distribution and sale of the Bonds shall be undertaken by the Joint Lead Managers and Underwriters who
shall sell and distribute the Bonds to institutional and retail investors. The Joint Lead Managers and
Underwriters are authorized to enter into sub-underwriting agreements with Participating Underwriters for the
sale and distribution to the public of the Bonds; provided, however, that the Joint Lead Managers and
Underwriters shall remain solely responsible to the Issuer in respect of their obligations under the Issue
Management and Underwriting Agreement entered into by them with the Issuer and the Issuer shall not be
bound by any of the terms and conditions of any agreement entered into by the Joint Lead Managers and
Underwriters with the Participating Underwriters. Nothing herein shall limit the rights of the Joint Lead
Managers and Underwriters from purchasing the Bonds for their respective accounts.
TERM OF APPOINTMENT
The engagement of the Joint Lead Managers and Underwriters shall subsist in accordance with the terms of the
Issue Management and Underwriting Agreement. The obligations of each Joint Lead Manager and Underwriter
will be several, and not solidary with the other Joint Lead Managers and Underwriters, and nothing in the Issue
Management and Underwriting Agreement shall be deemed to create a partnership or joint venture between or
among any of the parties therein. Unless otherwise expressly provided in the Issue Management and
Underwriting Agreement, the failure by any Joint Lead Manager and Underwriter to carry out its obligations
shall not relieve any other Joint Lead Manager and Underwriter of its obligations thereunder, nor shall any Joint
Lead Manager and Underwriter be responsible for the obligations of any other Joint Lead Manager and
Underwriter thereunder.
MANNER OF DISTRIBUTION
The Joint Lead Managers and Underwriters, in consultation with the Issuer, shall agree on the procedure for
application, acceptance, or rejection of the Applications to Purchase, whether in whole or in part (the
“Allocation Plan”). Consistent with bank procedures and the Allocation Plan, each of the Joint Lead Managers
and Underwriters and Participating Underwriters shall observe the policies and procedures regarding acceptance
of Applications to Purchase, evaluation and assessment of such applications and supporting documentary
requirements, allocations of the Bonds to clients and acceptance of deposits of its potential investors.
Based on each Joint Lead Manager and Underwriter’s and Participating Underwriter’s tentative reports on sales,
as monitored by the Joint Issue Managers during the Offer Period, the Joint Issue Managers shall, as soon as
practicable, commence the evaluation of the same for purposes of allocating the Bonds to applicants based on
the Allocation Plan.
OFFER PERIOD
The Offer Period shall commence at 9:00 a.m. on March 18, 2009 and end at 12:00 p.m.] on March 27, 2009 or
such other dates as may be determined by the Issuer and the Joint Issue Managers.
APPLICATION TO PURCHASE
All applications to purchase the Bonds shall be evidenced by a duly completed and signed Application to
Purchase. An Application to Purchase may be obtained from the Joint Lead Managers and Underwriters and the
Participating Underwriters by interested corporate/institutional investors and upon submission, must be
accompanied by the following documents, among others: (i) two fully executed signature cards authenticated by
the corporate secretary or authorized officer; (ii) a copy of its Certificate of Incorporation issued by the SEC or
equivalent government institution, its Articles of Incorporation and By-Laws and latest amendments thereof
stamped and signed as certified true copies by the SEC or the applicant’scorporate secretary or by an equivalent
authorized officer(s) who is/are authorized signatories; (iii) duly notarized certificate of its corporate secretary
or other authorized officer setting forth the resolution of the board of directors or its equivalent body authorizing
the purchase of the Bonds indicated in the Application to Purchase and designating the authorized signatory(ies)
for the purchase of the said Bonds with their specimen signatures; and (iv) identification document(s) of
39
applicant’s authorized signatories. Individual applicants must, on the other hand, submit, among others, (i) a
photocopy of any valid identification card duly issued by the Government showing the signature and residential
address of the applicant and (ii) two duly accomplished signature cards containing the specimen signature of the
applicant.
Each Joint Lead Manager and Underwriter and Participating Underwriter shall be responsible for accepting
payments accompanying the Applications to Purchase of their respective clients in accordance with the Issue
Management and Underwriting Agreement and the relevant sub-underwriting agreement.
An applicant who is exempt from or is not subject to withholding tax, or who claims reduced tax treaty rates
shall, in addition, be required to submit the following requirements to the relevant Joint Lead Manager and
Underwriter and Participating Underwriter (together with their Applications to Purchase) who shall then
forward the same to the Registrar, subject to acceptance thereof by the Issuer and the Joint Lead Managers and
Underwriters and Participating Underwriters as being sufficient in form and substance: (i) certified true copy of
the original tax exemption certificate, ruling or opinion issued by the BIR confirming the exemption or
preferential rate; (ii) with respect to tax treaty relief, proofs to support applicability of reduced tax rates, such as
the consularized proof of tax domicile issued by the relevant tax authority of the applicant, and original or
certified true copy of the SEC confirmation that the relevant entity is not doing business in the Philippines; (iii)
a duly notarized undertaking declaring and warranting the applicant’s tax-exempt status or preferential tax rate
entitlement and undertaking to immediately notify the Issuer of any suspension or revocation of the tax
exemption certificates and treaty privileges, and agreeing to indemnify and hold the Issuer, the Registrar and the
Paying Agent free and harmless against all claims, actions, suits, and liabilities resulting from the nonwithholding or incorrect withholding of the required tax; and (iv) such other documentary requirements as may
be required under the applicable regulations of the relevant taxing or other authorities.
Copies of the completed Applications to Purchase together with the supporting documents must be received by
the Registrar from the relevant Joint Lead Manager and Underwriter and Participating Underwriter on such
date/s as may be designated in the Issue Management and Underwriting Agreement. The corresponding
payments received by each Joint Lead Manager and Underwriter and Participating Underwriter net of any
refunds for a rejected or scaled down Application to Purchase must be deposited or be remitted not later than
11:00 a.m. of the Issue Date via RTGS to a depository account designated by the Issuer.
The Joint Lead Managers and Underwriters and the Participating Underwriters shall prepare a sales report of
Applications to Purchase that each has approved, in the form required by the Registrar (the “Sales Report”).
The Sales Report by each of the Joint Lead Managers and Underwriters and the Participating Underwriters shall
be submitted to the Registrar no later than 5:00 p.m., three Business Days immediately preceding the Issue Date,
together with such other documents as may be required by the Registrar under the Registry and Paying Agency
Agreement to enable the Registrar to issue and prepare the Register of Bondholders and the relevant Securities
Receipt Confirmations.
The actual number of Bonds that an applicant will be allowed to purchase is subject to the confirmation of the
Joint Lead Managers and Underwriters. All Applications to Purchase shall be subject to the final approval of
the Issuer and the Joint Lead Managers and Underwriters. The Issuer reserves the right to accept or reject in full
or in part any Application to Purchase due to any of the grounds specified in the Issue Management and
Underwriting Agreement. Moreover, any payment received upon submission of an Application to Purchase
does not mean approval or acceptance by the Issuer or the Joint Lead Managers and Underwriters and the
Participating Underwriters of the Application to Purchase. An Application to Purchase, once accepted, shall
constitute the duly executed purchase agreement covering the amount of the Bonds so accepted and shall be
valid and binding on the Issuer and the applicant. Once accepted, an Application to Purchase may not be
unilaterally revoked or canceled by the applicant, in full or in part, and the rights and privileges pertaining
thereto shall be non-transferrable.
MINIMUM PURCHASE
A minimum purchase of P50,000.00 shall be considered for acceptance. Purchases in excess of the minimum
shall be in multiples of P10,000.00.
40
REFUNDS
In the event an Application to Purchase is rejected or the amount of Bonds applied for is scaled down, the
relevant Joint Lead Manager and Underwriter and Participating Underwriter, upon receipt of the Allocation
Report, shall notify the applicant concerned that his application has been rejected or that the amount of Bonds
applied for is scaled down. Payments made by the applicants whose Applications to Purchase are rejected or
scaled down will be returned to them no later than three Business Days after the Issue Date by the relevant Joint
Lead Manager and Underwriter and Participating Underwriter to whom the Application to Purchase was
submitted, in full (in case of a rejection) or in a proportionate sum corresponding to the amount of the Bonds
partially rejected (in case of a scale down), but in both instances without any interest whatsoever. Refund shall
be made either (i) through the issuance of a check payable to the order of the applicant and crossed “Payees’
Account Only” and mailed or delivered, at the risk of the applicant, to the address specified in the Application to
Purchase; or (ii) through the issuance of instructions for automatic credit payments to the accounts of the
relevant applicants, as indicated in their respective Applications to Purchase The Issuer and the Joint Issue
Managers shall not be liable in any manner to the applicant for any refund corresponding to any rejected or
scaled-down Application to Purchase which is not transmitted by the relevant Joint Lead Manager and
Underwriter and Participating Underwriter. In such case, the relevant Joint Lead Manager and Underwriter and
Participating Underwriter shall be responsible directly to their respective applicants for the actual refund of the
payment.
REGISTER OF BONDHOLDERS
The Bonds shall be issued in scripless form and will be eligible for trading under the scripless book-entry
system of PDTC. Master Bond Certificates representing the Bonds sold during the Offer Period shall be issued
to and registered in the name of the Trustee, on behalf of the Bondholders.
Legal title to the Bonds shall be shown in the Register of Bondholders to be maintained by the Registrar. Initial
placement of the Bonds and subsequent transfers of interests in the Bonds shall be subject to applicable
Philippine selling restrictions prevailing from time to time. The Issuer will cause the Register of Bondholders to
be kept at the specified office of the Registrar. The names and addresses of the Bondholders and the particulars
of the Bonds held by them and of all transfers of Bonds shall be entered into the Register of Bondholders.
EXPENSES
All reasonable and documented out-of-pocket expenses, including but not limited to, registration with the SEC,
credit rating, printing, publicity, communication and signing expenses incurred by the Joint Lead Managers and
Underwriters in connection with the Offer will be for the Issuer’s account irrespective of whether the Offer is
completed. Such expenses are to be reimbursed upon presentation of a composite statement of account.
SECONDARY TRADING
The Issuer intends to list the Bonds in PDEx for secondary market trading. The Bonds will be traded in a
minimum board lot size of P10,000.00 as a minimum, and in multiples of P10,000.00 in excess thereof for so
long as any of the Bonds are listed on PDEx. Secondary market trading in PDEx shall follow the applicable
PDEx rules and conventions, which include, among others, rules and conventions on trading and settlement.
Upon listing of the Bonds with PDEx, investors shall course their secondary market trades through PDEx
brokering participants for execution in the PDEx Public Market Trading Platform in accordance with PDEx
Trading Rules, Conventions and Guidelines, and shall settle such trades on a Delivery versus Payment basis in
accordance with PDEx Settlement Rules and Guidelines. The PDEx rules and conventions are available in the
PDEx website (www.pdex.com.ph).
41
DESCRIPTION OF TERMS AND CONDITIONS OF THE BONDS
The following does not purport to be a complete listing of all the rights, obligations, or privileges of the Bonds.
Some rights, obligations, or privileges may be further limited or restricted by other documents. Prospective
investors are enjoined to carefully review the articles of incorporation, by-laws and resolutions of the Board of
Directors of the Company submitted to the SEC, the information contained in this prospectus, the Trust
Agreement, Registry and Paying Agency Agreement, Issue Management and Underwriting Agreement, and
other documents relevant to the Offer.
The issue of the Bonds was authorized by a resolution of the Board of Directors of the Issuer passed on January
30, 2009. The Bonds shall be governed by a Trust Agreement (the “Trust Agreement”) executed on March 16,
2009 between the Issuer and The Hongkong and Shanghai Banking Corporation Limited (the “Trustee” which
expression shall wherever the context permits, include all other persons or companies for the time being acting
as Trustee or Trustees under the Trust Agreement). The description of the terms and conditions of the Bonds set
out below includes summaries of, and is subject to, the detailed provisions of the Trust Agreement. A registry
and paying agency agreement (the “Registry and Paying Agency Agreement”) was executed on March 16, 2009
between the Issuer and the Philippine Depository and Trust Corp. as registrar (the “Registrar”) and as paying
agent (the “Paying Agent”). The Bonds will be offered and sold through a general public offering in the
Philippines, and issued in minimum principal amounts of P50,000.00, and multiples of P10,000.00 in excess
thereof, and traded in amounts of P10,000.00 as a minimum, and in multiples of P10,000.00 in excess thereof.
Series A, Series B and Series C Bonds will mature on April 3, 2012, April 4, 2012 and April 3, 2019,
respectively, unless earlier redeemed by the Issuer pursuant to the terms thereof and subject to the provisions on
redemption and payment as summarized below.
Copies of the Trust Agreement and the Registry and Paying Agency Agreement will be available for inspection
during normal business hours at the specified offices of the Trustee. The Bondholders are entitled to the benefit
of, are bound by, and are deemed to have notice of, all the provisions of the Trust Agreement and the Registry
and Paying Agency Agreement applicable to them.
FORM, DENOMINATION AND TITLE
Form and Denomination
The Bonds are in scripless form, and will be issued in denominations of P50,000.00 each, as a minimum, and in
multiples of P10,000.00 in excess thereof.
Title
Legal title to the Bonds will be shown in the register of Bondholders (the “Register of Bondholders”)
maintained by the Registrar. A notice confirming the principal amount of the Bonds purchased by each
applicant in the Offer will be issued by the Registrar to all Bondholders following the Issue Date.
BOND RATING
The Bonds have been rated PRS Aaa by PhilRatings. The rating is subject to regular annual review, or more
frequently as market developments may dictate, for as long as the Bonds are outstanding.
TRANSFER OF BONDS
Register of Bondholders
The Issuer will cause the Register of Bondholders to be kept by the Registrar, in electronic form. The names
and addresses of the Bondholders and the particulars of the Bonds held by them and of all transfers of Bonds
shall be entered into the Register of Bondholders. As required by Circular No. 428-04 issued by the BSP, the
Registrar shall send each Bondholder a written statement of registry holdings at least every quarter (at the cost
of the Issuer) and a written advice confirming every receipt or transfer of the Bonds that is effected in the
Registrar’s system (at the cost of the relevant Bondholder). Such statement of registry holdings shall serve as
the confirmation of ownership of the relevant Bondholder as of the date thereof. Any requests of Bondholders
42
for certifications, reports or other documents from the Registrar, except as provided herein, shall be for the
account of the requesting Bondholder.
Transfers; Tax Status
The Bonds may be transferred upon exchange of confirmation of sale and confirmation of purchase, or by book
entry in recording platforms maintained by approved securities dealers. The Registrar shall ultimately and
conclusively determine all matters regarding the evidence necessary to effect any such transfer. Settlement in
respect of such transfer or change of title to the Bonds, including the settlement of any documentary stamps
taxes, if any, arising from subsequent transfers, shall be settled directly between the transferee and/or the
transferor Bondholders.
Subject to the provisions of the Registry and Paying Agency Agreement, Bondholders may transfer their Bonds
at anytime, regardless of tax status of the transferor vis-à-vis the transferee.
Should a transfer between Bondholders of different tax status occur on a day, which is not an Interest Payment
Date, tax-exempt entities trading with non tax-exempt entities shall be treated as non tax-exempt entities for the
interest period within which such transfer occurred. A Bondholder claiming tax-exempt status is required to
submit a written notification of the sale or purchase to the Trustee and the Registrar, including the tax status of
the transferor or transferee, as appropriate, together with the supporting documents specified under the Registry
and Paying Agency Agreement within three days from the settlement date for such transfer.
RANKING
The Bonds constitute direct, unconditional, unsecured and unsubordinated obligations of the Issuer and will
rank pari passu and ratably without any preference or priority amongst themselves and at least pari passu with
all other present and future, contingent or otherwise, unsecured and unsubordinated obligations of the Issuer,
except for any statutory preference or priority established by law.
INTEREST
Interest Payment Dates
Each Series A Bond bears interest on its principal amount from and including Issue Date at the rate of 8.250%
per annum, payable semi-annually in arrears on October 3 and April 3 in each year (each of which, for purposes
of this clause is an “Interest Payment Date”) commencing on October 3, 2009 or the subsequent Business Day
without adjustment if such Interest Payment Date is not a Business Day.
Each Series B Bond bears interest on its principal amount from and including Issue Date at the rate of 8.875%
per annum, payable semi-annually in arrears on October 3 and April 3 in each year (each of which, for purposes
of this clause is an “Interest Payment Date”), provided, however, that the first Interest Payment Date for Series
B Bonds shall be on October 4, 2009 or the subsequent Business Day without adjustment if such Interest
Payment Date is not a Business Day.
Each Series C Bond bears interest on its principal amount from and including Issue Date at the rate of 10.500%
per annum, payable semi-annually in arrears on October 3 and April 3 in each year (each of which, for purposes
of this clause is an “Interest Payment Date”) commencing on October 3, 2009 or the subsequent Business Day
without adjustment if such Interest Payment Date is not a Business Day.
Interest Accrual
Each Bond will cease to bear interest on the Maturity Date, as defined in the “Final Redemption” below, unless,
upon due presentation, payment of the full amount due is improperly withheld or refused or default is otherwise
made in respect of such payment, in which case, the Penalty Interest (see “Penalty Interest”), below, will apply.
Determination of Rate of Interest
The interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in
the case of an incomplete month, the number of days elapsed on the basis of a month of 30 days.
43
REDEMPTION AND PURCHASE
Final Redemption
Unless previously redeemed, purchased and cancelled, the Series A Bonds, Series B Bonds and Series C Bonds
will be redeemed at par or 100.00% of their face value on April 3, 2012, April 4, 2014 and April 3, 2019,
respectively (the “Maturity Date”). However, payment of all amounts due on such dates may be made by the
Issuer through the Paying Agent, without adjustment, on the succeeding Business Day if the relevant Maturity
Date is not a Business Day.
The Issuer may purchase the Bonds (and the Bondholders shall not be obliged to sell) at any time in the open
market or by tender or by contract at any price without any obligation to make pro-rata purchases from all
Bondholders. All Bonds so purchased or redeemed will be cancelled by the Issuer and may not be re-issued or
re-sold.
Early Redemption due to Taxation, Change in Law or Circumstance, Illegality
If payments under the Bonds become subject to additional or increased taxes other than the taxes prevailing on
the Issue Date as a result of certain Changes in Law, and such additional or increased rate of such tax cannot be
avoided by use of reasonable measures available to the Issuer, then the Issuer may redeem the Bonds in whole,
but not in part, on any Interest Payment Date (having given not more than sixty (60 days) nor less than thirty
(30) days’ notice to the Trustee) at par plus accrued interest made; provided that if the Issuer does not redeem
the Bonds, then all payments of principal and interest in respect of the Bonds shall be made free and clear of and
without withholding or deduction for, any such new taxes, duties, assessments or governmental charges, unless
such withholding or deduction is required by law. In that event, the Issuer shall pay to the Bondholders
concerned such additional amount as will result in the receipt by the Bondholders of such amounts as would
have been received by them had no such withholding or deduction for new taxes has been required.
In the event that after the Issue Date there shall occur any Change in Law, or any approval, permit, license,
consent, authorization, registration, exemption, or any other right to be granted or granted by the Government
to the Issuer now or after the Issue Date necessary for the conduct of the Issuer’s business or operations is not
obtained, or is subsequently terminated, withdrawn, rescinded, or amended, and the result of any of the
foregoing, as determined by the Issuer, will materially and adversely affect the ability of the Issuer to comply
with its obligations under the Bonds or the Trust Agreement or the Issuer’s financial position or operations,
then the Issuer shall redeem the Bonds at any time in whole, but not in part, (having given not more than sixty
(60 days) nor less than thirty (30) days’ notice to the Trustee from the time of the occurrence of the event) at
par plus accrued interest.
If any provision of the Issue Management and Underwriting Agreement, Trust Agreement, or the Registry and
Paying Agency Agreement shall become, for any reason, invalid, illegal or unenforceable, or any act or
condition or thing required to be done, fulfilled or performed at any time by the Issuer is not done, fulfilled or
performed, to the extent that it will become unlawful for the Issuer to give effect to its rights and obligations
under the Trust Agreement or the Bonds or to enforce the provisions of the Trust Agreement or the Bonds in
whole or in part, then the Issuer shall redeem the Bonds at any time in whole, but not in part, (having given not
more than sixty (60 days) nor less than thirty (30) days’ notice to the Trustee from the time of illegality) at par
plus accrued interest.
Payments
The principal of, interest on, and all other amounts payable on the Bonds shall be paid to the Bondholders
through the Paying Agent by crediting the proper amounts via RTGS, net of final taxes and fees (if any), to the
Philippine Peso cash account maintained and designated by or on behalf of the Bondholder in his/her
Application to Purchase. The principal of, and interest on, the Bonds shall be payable in Philippine Pesos. The
Issuer shall ensure that so long as any of the Bonds remain outstanding, there shall at all times be a Paying
Agent for purpose of disbursing payments on the Bonds.
Taxation
Interest income on the Bonds and the prepayment penalty are subject to a final withholding tax at rates of
between 20% and 30% depending on the tax status of the relevant Bondholder under relevant law, regulation or
44
tax treaty. Except for such final withholding tax and as otherwise provided, all payments of principal and
interest are to be made free and clear of any deductions or withholding for or on account of any present or future
taxes or duties imposed by or on behalf of the Republic of the Philippines, including but not limited to, issue,
registration or any similar tax or other taxes and duties, including interest and penalties, if any.
Documentary stamp tax for the primary issue of the Bonds and the execution of the Bond Agreements, if any,
shall be for the Issuer’s account.
FINANCIAL COVENANTS
So long as any of the Bonds remain outstanding, the Issuer undertakes to maintain and to observe the following
financial ratios:
1.
2.
Minimum current ratio of 1:1; and
Maximum debt to equity ratio of 3.5:1.
For purposes hereof, current ratio shall mean the Issuer’s current assets divided by current liabilities and debt to
equity ratio shall mean the Issuer’s total indebtedness for borrowed money divided by its total stockholders’
equity.
NEGATIVE COVENANTS
The Issuer covenants and agrees that the Issuer shall not, among others:
(a)
create, assume, incur, permit or suffer to exist, any indebtedness to: (i) be secured by or to benefit from
any liens, encumbrances, restrictions, pledges, mortgages, security interest, charges or preferential
arrangements of any kind (collectively the “Liens”) in favor of any creditor or class of creditors with
respect to any present or future property of the Issuer or the right of the Issuer to receive income, unless
the Bonds are secured by such Lien equally and ratably with such other indebtedness or (ii) receive any
priority or preference over the claims of the Bondholders (which claims shall at all times rank pari passu
in all respects with all other direct, unconditional, unsecured, and unsubordinated obligations of the Issuer
other than those obligations preferred by mandatory provisions of law); provided, that for purposes of the
foregoing, the terms “Lien,” “priority” or “preference” shall not include the Permitted Liens (as this term is
defined in the Trust Agreement).
(b) engage in any business except that authorized by its articles of incorporation.
(c)
sell, transfer, convey, lend or otherwise dispose of all or substantially all of its assets.
(d) voluntarily suspend all or substantially all of its business operations.
(e)
amend its Articles of Incorporation or By-laws, if such amendments have the effect of changing the
general character of its business from that being carried on at the signing date of the Trust Agreement.
GOVERNING LAW
The Bonds and the Trust Agreement are governed by and are construed in accordance with Philippine law.
DEFAULT
Events of Default
The Issuer shall be considered in default under the Bonds in case any of the following events (each an “Event of
Default”) shall occur:
(a) Non-payment. The Issuer fails to pay any interest or principal on any of the Bonds when due and
payable.
(b) Insolvency Default. The Issuer (i) is adjudged by a final order of a competent court to be insolvent or
bankrupt or unable to pay its debts, (ii) stops, suspends or threatens to stop or suspend payment of all
45
or a material part of its debts, (iii) proposes or makes any agreement for the deferral, rescheduling or
other readjustment of all of its debts, or (iv) proposes or makes a general assignment or an arrangement
or composition with or for the benefit of the relevant creditors in respect of any of such debts. In
addition, if a moratorium is agreed or declared in respect of or affecting all or any material part of the
debts of the Issuer, such agreement or declaration shall also constitute an Event of Default under this
item (b).
(c) Cross default. The Issuer defaults in the repayment of any amount of principal and premium (if any) or
interest, or violates any term or condition, in respect of any contract or contracts executed by the Issuer
with any bank, financial institution or other person, corporation or entity for the payment of borrowed
money which constitutes an event of default, or with the giving of notice or the passage of time would
constitute an event of default, under said contract; and which (i) if remediable, is not remedied by the
Issuer within 30 days from such default, or is otherwise not contested by the Issuer, (ii) results in the
acceleration or declaration of the whole financial obligation to be due and payable prior to the stated
normal date of maturity, or (iii) will adversely and materially affect the performance by the Issuer of its
obligations under the Bonds, provided, that no Event of Default shall occur under this paragraph unless
the aggregate amount of the principal, premium and interest in respect of which the Issuer has
defaulted or which has been declared to be due and payable prior to the stated normal date of maturity
under such contract or contracts equals or exceeds P500,000,000.00.
(d) Winding Up proceedings. The Issuer takes any corporate action or other steps are taken or legal
proceedings are started by or against the Issuer for its winding up, bankruptcy, dissolution or
reorganization (except in any such case for the purposes of a merger, consolidation, reorganization,
reconstruction or amalgamation upon which the continuing corporation or the corporation formed
thereby effectively assumes the entire obligations of the Issuer under the Bonds and the terms of which
have previously been approved by Bondholders representing at least two-thirds of the Bonds then
outstanding) or for the appointment of a receiver, administrator, administrative receiver, trustee or
similar officer of all or substantially all of its revenues and assets, provided that for winding-up
proceedings instituted against the Issuer, an Event of Default may be declared only upon issuance of a
final order of a court of competent authority.
(e) Representation/Warranty Default. Any representation and warranty of the Issuer or any certificate or
opinion issued by the Issuer in connection with the issuance of the Bonds is untrue, incorrect, or
misleading in any material respect as and when made and with reference to the facts and circumstances
then existing, and the circumstances which caused such representation or warranty to be untrue,
incorrect or misleading continue for not less than 15 days (or such longer period as the Majority
Bondholders shall approve).
(f) Covenant Default. The Issuer fails to perform or violates its covenants under the Trust Agreement,
and such failure or violation is not remediable or, if remediable, continues to be unremedied for a
period of 30 days from notice by the Trustee to the Issuer. For the avoidance of doubt, any violation by
the Issuer of its negative covenants set out above shall be deemed irremediable.
(g) Breach of Obligations Default. The Issuer does not perform or comply with any one or more of its
obligations in the Bonds and in the Trust Agreement and such default or non-compliance is incapable
of remedy or is not remedied within 30 days after notice of such default shall have been given to the
Issuer at its specified office by any Bondholder or the Trustee.
(h) Expropriation Default. An order of the Government is issued to suspend the whole or a substantial
portion of the operations of the Issuer or to condemn, seize, nationalize or expropriate (with or without
compensation) the Issuer or any substantial portion of its properties or assets.
(i) Judgment Default. Any final and executory judgment, decree, or arbitral award for the sum of money,
damages, fine, or penalty is entered against the Issuer and the enforcement of which is not stayed, and
is not paid, discharged, or duly bonded within 60 days after the date when payment of such judgment,
decree, or award is due under the applicable law or agreement and such final judgment, decree or
award shall have a material and adverse effect on the Issuer’s ability to perform its obligations under
the Bonds.
46
(j) Writ and Similar Process Default. Any writ, warrant of attachment or execution, or similar process
shall be issued or levied against all or substantially all of the Issuer's assets, and such writ, warrant, or
similar process shall not be released, vacated, or fully bonded within 60 days after its issue or levy.
(k) Closure Default. The Issuer voluntarily suspends or ceases operations of a substantial portion of its
business for a continuous period of 30 days, except in the case of strikes or lockouts when necessary to
prevent business losses, or when due to fortuitous events or force majeure, and, provided that, in any
such event, there is no material and adverse effect on the business operations or financial condition of
the Issuer.
(l) Validity Default. The validity of the Bonds or the Trust Agreement shall be contested by the Issuer.
(m) Change of Control Default. The Issuer ceases to be at least 51% owned by its parent company, SMC.
Consequences of Default
If any one or more of the Events of Default shall occur and be continuing after the lapse of the period given to
the Issuer within which to cure such Event of Default under the Trust Agreement, if any, or upon the occurrence
of such Event of Default for which no cure period is provided, (i) the Trustee, upon the written direction of the
Majority Bondholders, by notice in writing delivered to the Issuer, or (ii) the Majority Bondholders, by notice in
writing delivered to the Issuer and the Trustee, or (iii) the Trustee, in its discretion, in case of a Non-Payment or
Insolvency Default, may declare the Issuer in default and declare the principal of the Bonds then outstanding,
together with all interest accrued and unpaid thereon and all amounts due thereunder, to be due and payable not
later than five Business Days from the receipt of the declaration of default (“Default Payment Date”) with copy
to the Paying Agent, who shall then prepare a payment report in accordance with the Registry and Paying
Agency Agreement. Thereupon, the Issuer shall pay in accordance with the Registry and Paying Agency
Agreement.
Notwithstanding the declaration of default, the Majority Bondholders, by written notice to the Issuer and to the
Trustee, may rescind and annul such declaration made by the Trustee upon such terms, conditions and
agreements, if any, as they may determine; provided, that, no such rescission and annulment shall extend to or
shall affect any subsequent default or shall impair any right consequent thereto and shall not apply to the
following Events of Default: Non-payment, Insolvency Default, Winding-up Proceedings, Expropriation
Default and Closure Default. Any such rescission and annulment of declaration of default shall be conclusive
and binding upon all the Bondholders and upon all future holders and owners of such Bonds, or of any Bond
issued in lieu thereof or in exchange therefor.
Penalty Interest
In case any amount payable by the Issuer under the Bonds, whether for principal, interest, or otherwise, is not
paid on due date, the Issuer shall, without prejudice to its obligations to pay the said principal, interest and other
amounts, pay penalty fee on the defaulted amount(s) at the rate of 1.00% per month (the “Penalty Interest”)
from the time the amount fell due until it is fully paid.
Payment in the Event of Default
Upon a declaration of default and acceleration of payment of the Bonds by the Majority Bondholders pursuant
to the terms of the Trust Agreement, the Issuer shall pay to the Paying Agent for the benefit of the Bondholders
the whole amount which shall then have become due and payable on such outstanding Bonds with interest at the
rate borne by the Bonds on the overdue principal and with Penalty Interest, where applicable.
Application of Payments
Subject to the provisions of the Trust Agreement or the Registry and Paying Agency Agreement, any money
collected by the Trustee from the Issuer upon a declaration of default and any other funds held by it shall be
applied by the Trustee in the order of preference as follows:
47
(a)
To the pro-rata payment to the Trustee, the Registrar and the Paying Agent of the reasonable and
documented costs, expenses, fees, and other charges of collection, including reasonable compensation
to them, their agents, attorneys, and all reasonable and documented expenses and liabilities incurred or
disbursements made by them, without negligence or bad faith in carrying out their respective
obligations under their respective agreements with the Issuer in connection with the Bonds.
(b)
To the payment of all outstanding interest, including any Penalty Interest, in the order of maturity of
such interest.
(c)
To the payment of the principal amount of the Bonds then due and payable.
(d)
The remainder, if any, shall be paid to the Issuer, its successors, or assigns, or to whoever may be
lawfully entitled to receive the same, or as a court of competent jurisdiction may direct.
Prescription
Claims in respect of principal and interest or other sums payable under the Bonds will prescribe unless made
within ten (10) years (in the case of principal or other sums) or five (5) years (in the case of interest) from the
date on which the payment becomes due.
Remedies
All remedies conferred by the Trust Agreement upon the Trustee and the Bondholders shall be cumulative and
not exclusive and shall not be so construed as to deprive the Bondholders of any legal remedy by judicial or
extra judicial proceedings appropriate to enforce such direct rights under the Trust Agreement.
No delay or omission by the Trustee or the Bondholders, or any one of them, to exercise any right or power
arising from or on account of any default shall impair any such right or power, or shall be construed to be a
waiver of any such default or an acquiescence thereto; and every power and remedy provided under the Trust
Agreement to the Trustee and Bondholders may be exercised from time to time and as often as may be
necessary or expedient.
Waiver
The Majority Bondholders may direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred upon the Trustee, or the Majority
Bondholders may decide for and in behalf of the Bondholders, upon the written request of the Issuer, to waive
the application of the Events of Default and its consequences except for Non-payment, Insolvency Default,
Winding-Up Proceedings, Expropriation Default and Closure Default, which Events of Default cannot be
waived by the Bondholders. No such waiver shall extend to any subsequent or other default or impair any right
consequent thereto. Any such waiver by the Majority Bondholders shall be conclusive and binding upon all the
Bondholders and upon all future holders and owners thereof.
Ability to File Suit
No Bondholder shall have any right by virtue or by availing of any provision of the Trust Agreement to institute
any suit, action or proceeding for the collection of any sum due from the Issuer on account of principal or
interest, or for the appointment of a receiver or Trustee, or for any other remedy hereunder, unless (i) such
holder shall previously have given to the Trustee a written notice of default and of the continuance thereof and
the related request for the Trustee to convene a meeting of the Bondholders to take up matters related to their
rights and interests under the Bonds, or (ii) the Majority Bondholders shall have decided and made a written
request upon the Trustee to institute such suit, action or proceeding in its own name, or (iii) the Trustee for sixty
(60) days after receipt of such notice and request shall have neglected or refused to institute any such suit, action
or proceeding, and (iv) no directions inconsistent with such written request or rescission and annulment of a
declaration default by the Bondholders has been made.
No one or more Bondholder shall have any right in any manner whatsoever by virtue of or by availing of any
provision of the Trust Agreement to affect, disturb or prejudice the rights of the holders of any other such Bonds
48
or to obtain or seek to obtain priority over or preference to any other such holder or to enforce any right under
the Trust Agreement, except in the manner provided under the Trust Agreement and for the equal, ratable and
common benefit of all Bondholders.
TRUSTEE
Appointment of Trustee
The Issuer has appointed HSBC as Trustee for and on behalf and benefit of the Bondholders, in connection with
the distribution and sale by the Issuer of the Bonds.
Duties and Responsibilities of the Trustee
The Trustee shall be responsible for performing, among others, the following duties for the benefit of the
Bondholders:
(a)
Monitor compliance by the Issuer with its obligations under the Trust Agreement;
(b)
Report regularly to Bondholders any non-compliance by the Issuer with the Trust Agreement and any
developments with respect to the Issuer that adversely affect the interest of the Bondholders and advise
the Bondholders of the course of action that they may take to protect their interest; and
(c)
Act on behalf of the Bondholders including calling for and/or attending meetings of the Bondholders.
Resignation and Change of Trustee
The Trustee may resign at any time by giving the Issuer at least 60 calendar days prior written notice to that
effect. Upon receipt of such notice of resignation, the Issuer shall immediately appoint a replacement trustee
(the “Replacement Trustee”) by written instrument in duplicate, one copy of which instrument shall be delivered
to the resigning Trustee and one copy to the Replacement Trustee. If no Replacement Trustee shall have been
so appointed and have accepted appointment within thirty (30) days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a
Replacement Trustee.
The Issuer may, subject to the occurrence of certain events as specified in the Registry and Paying Agency
Agreement, within thirty (30) days therefrom, remove the Trustee and appoint a Replacement Trustee, by
written instrument in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and
one copy to the Replacement Trustee. If the Issuer fails to remove the Trustee and appoint a Replacement
Trustee, any Bondholder may, on behalf of himself and all other Bondholders, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a Replacement Trustee. Such court may
thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a
Replacement Trustee.
The Majority Bondholders may at any time remove for cause the Trustee and with the consent of the Issuer,
appoint a Replacement Trustee in accordance with the terms of the Registry and Paying Agency Agreement,
without prejudice to whatever remedies may be available to the Majority Bondholders under the law or in
equity.
Replacement Trustee
The Replacement Trustee shall execute, acknowledge and deliver to the Issuer and to the Outgoing Trustee an
instrument accepting his/her appointment, and thereupon the resignation or removal of the Outgoing Trustee
shall become effective and the Replacement Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts, duties and obligations of its predecessor under the Trust Agreement.
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Upon acceptance of appointment by the Replacement Trustee, the Issuer shall notify the Bondholders in writing
and/or by publication in a newspaper of general circulation in Metro Manila, Philippines of the succession of
such Replacement Trustee to the duties of the Outgoing Trustee. If the Issuer fails to notify the Bondholders
within ten (10) days after acceptance of appointment by the Replacement Trustee, the latter shall cause the
Bondholders to be so notified at the expense of the Issuer.
MEETING OF BONDHOLDERS
The Trustee may at any time call a meeting of the Bondholders, on its own accord or upon the written request by
the Issuer or Majority Bondholders, for purposes of taking any actions authorized under the Trust Agreement.
Notice of Meetings
Notice of every meeting of the Bondholders, setting forth the time, place, and purpose of such meeting in
reasonable detail, shall be sent by the Trustee to the Issuer and to each of the registered Bondholders not less
than fourteen (14) days prior to the date fixed for the meeting and shall likewise be published in a newspaper of
general circulation in the Philippines prior to the date stated in the notice for the date of the meeting; provided,
that any meetings of the Bondholders shall be held at such time and place within Metro Manila as the party
requesting such meeting may determine.
Failure to Call a Meeting
The failure of the Trustee to call a meeting upon the written request of either the Issuer or the Majority
Bondholders within three (3) days from such request shall entitle the requesting party to send the appropriate
notice of Bondholders’ meeting and the costs therefor shall be charged to the account of the Trustee.
Quorum for Meetings
The presence of Bondholders holding 51% of the outstanding Bonds, personally or by proxy, shall be necessary
to constitute a quorum to do business at any meeting of the Bondholders.
Procedure for Meetings
The Trustee shall preside at all the meetings of the Bondholders, unless the meeting shall have been called by
the Issuer or by the Bondholders, in which case the Issuer or the Bondholders calling the meeting, as the case
may be, shall move for the election of the chairman and secretary of the meeting.
Any meeting of the Bondholders may be adjourned from time to time for a period not to exceed in the aggregate
one year from the date for which the meeting shall originally have been called, and the meeting as so adjourned
may be held without further notice. Any such adjournment may be ordered by persons representing a majority of
the aggregate principal amount of the Bonds represented at the meeting and entitled to vote, whether or not a
quorum shall be present at the meeting.
Voting Rights
To be entitled to vote at any meeting of the Bondholders, a person should be a registered holder of the Bonds as
reflected in the Register of Bondholders or a person appointed by a public instrument in writing as proxy or
agent by any such Bondholder (and, in case of corporate or institutional Bondholders, duly supported by the
resolutions of its board of directors or equivalent body authorizing the appointment of the proxy or agent duly
certified by its corporate secretary or an authorized officer) as of the date of the meeting. For avoidance of
doubt, P1.00 is equal to one (1) vote.
Voting Requirements
All matters presented for resolution by the Bondholders in a meeting duly called for the purpose shall be
decided or approved by the affirmative vote of the Bondholders holding 51% of the outstanding Bonds present
or represented in a meeting at which there is a quorum, except as otherwise provided in the Trust Agreement.
Any resolution of the Bondholders which has been duly approved with the required number of votes of the
Bondholders shall be binding upon all the Bondholders and the Trustee.
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Action of the Bondholders
In cases where, pursuant to the Trust Agreement, the holders of a specified percentage of the aggregate
outstanding principal amount of Bonds are allowed to take any action (including the making of any demand or
request, the giving of any notice or consent, or the taking of any other action), the fact that at the time of taking
any such action the Bondholders of such specified percentage have joined such action may be evidenced by: (i)
any instrument executed by the Bondholders in person or by the agent or proxy appointed in writing; (ii) the
duly authenticated record of voting in favor thereof at the meeting of the Bondholders duly called and held in
accordance with the Trust Agreement; or (iii) a combination of such instruments and any such record of meeting
of the Bondholders.
Non-Reliance
Each Bondholder represents and warrants to the Trustee and to the Issuer that it has independently and, without
reliance on the Trustee or the Issuer, made its own credit investigation and appraisal of the financial position
and affairs of the Issuer on the basis of such documents and information it has deemed appropriate and that it
has subscribed to the Bonds on the basis of such independent appraisal, and that it shall continue to make its
own credit appraisal without reliance on the Trustee or the Issuer.
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CAPITALIZATION AND INDEBTEDNESS
The following table sets forth in accordance with PFRS, on an actual and pro forma consolidated basis the
Company’s capitalization and indebtedness as of December 31, 2008. The figures for the examined pro forma
consolidated financial statements represent audited actual amounts adjusted to reflect the impact of this Offer
and the Proposed Acquisitions. The examined pro forma consolidated financial statements assume that this
Offer and the Proposed Acquisitions were completed as of January 1, 2008.
The information in this table should be read in conjunction with “Selected Financial Information”,
“Management’s Discussion and Analysis of Financial Position and Financial Performance”, and the Company’s
financial statements and the notes thereto included in this prospectus.
As of December 31, 2008
Pro Forma
for the
Actual
Pro forma
Proposed
Adjustment
Acquisition
(in P millions)
Cash and Cash Equivalents (1)
6,041
386
6,427
Short-term Debt
Long-term Debt
Equity:
Common Shares – P 1.00 par value
Authorized – 25,000,000,000 shares
Issued and Paid-up – 15,410,478,960 shares
-
38,447
38,447
15,410
-
15,410
Additional Paid-in Capital
Cumulative translation adjustments
Retained Earnings
Minority Interest
Total Equity
515
(45)
3,130
19,010
1,670
242
1,912
515
(45)
4,800
242
20,922
Total Capitalization
19,010
40,359
59,369
______________
Note:
(1)
Cash equivalents include temporary cash investments that are readily convertible to known amounts of cash with original
maturities of three months or less and that are subject to an insignificant risk of change in value.
52
SELECTED FINANCIAL INFORMATION
The following tables present summary financial information for the Company and should be read in conjunction with the
report of independent auditors, Company’s audited historical financial statements and examined pro forma consolidated
financial statements and notes thereto contained in this prospectus and the section entitled “Management’s Discussion
and Analysis of Financial Position and Financial Performance.”
The information below is not indicative of the results of future operations.
Examined Pro
Forma Consolidated
Financial Statements
For the Year Ended
December 31, 2008
Audited Financial Statements
For the Year Ended
December 31, 2008
For the Period from
July 26, 2007 to
December 31, 2007
P
P
P
(in millions, except per share figures or where otherwise indicated)
Statement of Income Data
Net Sales
Cost of Sales
48,787
48,787
12,180
(24,800)
(24,800)
(6,333)
Gross Profit
23,987
23,987
5,847
Administrative and selling expenses
Operating Income
Interest Income
(7,288)
16,699
(8,366)
15,621
(2,349)
3,498
264
264
36
(3,484)
-
-
(377)
(377)
15
13,102
15,508
3,549
(4,303)
(5,466)
8,799
10,042
(1,239)
2,310
0.57
15,410
0.65
15,410
0.15
15,333
Interest Expense
Other Income (Charges)
Income Before Tax
Income Tax Expense
Net Income
(1)
Earnings per share – basic
Number of shares outstanding
Balance Sheet Data
Cash and cash equivalents
Trade and other receivables - net
Inventories -net
Other current assets
Total current assets
Property, plant and equipment (net of
accumulated depreciation and
amortization)
Intangible assets
Other noncurrent assets -net
Total noncurrent assets
6,427
3,662
3,279
379
13,747
6,041
3,661
3,279
418
13,399
5,262
3,676
2,447
180
11,565
12,932
32,011
5,206
50,149
5,864
11
5,360
11,235
5,616
3
5,424
11,043
Total assets
63,896
24,634
22,608
Accounts payable and accrued expenses
Income and other taxes payable
Total current liabilities
3,000
1,518
4,518
3,000
2,585
5,585
3,243
1,710
4,953
38,447
-
-
9
39
12
Total noncurrent liabilities
38,456
39
12
Total liabilities
42,974
5,624
4,965
Long-term debt (net of debt issue cost)
Other noncurrent liabilities
53
Examined Pro
Forma Consolidated
Financial Statements
Audited Financial Statements
For the Period from
July 26, 2007 to
December 31, 2007
P
P
P
(in millions, except per share figures or where otherwise indicated)
For the Year Ended
December 31, 2008
Capital Stock
For the Year Ended
December 31, 2008
15,410
15,410
15,333
Additional paid-in capital
515
515
-
Cumulative translation adjustments
(45)
(45)
-
4,800
3,130
2,310
242
-
-
20,922
19,010
17,643
63,896
24,634
22,608
Operating activities
8,961
11,027
5,831
Investing activities
(40,674)
(1,645)
(610)
Financing activities
32,878
(8,603)
41
1,165
779
5,262
5,262
5,262
-
6,427
6,041
5,262
18,457
16,699
17,379
15,621
3,913
3,498
829
1,758
49.2%
829
1,758
49.2%
362
415
48.0%
37.8%
34.2%
174.48
13.40
278.88
35.6%
32.0%
174.48
13.40
278.88
32.1%
28.7%
46.70
3.59
260.11
3,632
3,632
3,389
Retained Earnings
Minority Interest
Total equity
Total liabilities and equity
Cash Flow Data
Net cash provided by (used for):
Net increase in cash
Cash and cash equivalents, beginning
of period
Cash and cash equivalents, end of
period
Other Financial and Operating data
EBITDA (2)
EBIT (2)
Capital Expenditure
Depreciation and amortization
Gross profit margin
EBITDA margin
EBIT margin
Volume (Equivalent Cases)
Volume (Hectoliters)
Average selling price/case (in pesos)
Average selling price/Hectoliter (in
pesos)
______________
Notes:
(1)
Computed as net income divided by the weighted average number of Common Shares issued and outstanding each period.
(2)
EBITDA and EBIT are measures used by the Company’s management to internally evaluate the performance of its business.
EBITDA is calculated as operating income plus depreciation, amortization and impairment losses and EBIT is calculated as
operating income. Neither EBITDA nor EBIT is a measure determined in accordance with PFRS or IFRS, and should not be
considered as an alternative to net income as a measure of operating performance or to cash flow as a measure of liquidity. The
items of net income excluded from EBITDA are significant components in understanding and assessing the Company’s financial
performance. Neither EBITDA nor EBIT is intended to be a measure of free cash flow for management’s discretionary use, as it
does not reflect certain cash requirements such as interest payments, tax payments and capital expenditures. The Company’s
calculation of EBITDA and EBIT may be different from the calculation used by other companies and, as a result, the Company’s
EBITDA and EBIT may not be comparable to other similarly titled measures of other companies.
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND FINANCIAL PERFORMANCE
Prospective investors should read the following discussion and analysis of the Company’s financial position
and financial performance together with (i) the report of independent auditors; (ii) the audited financial
statements as of December 31, 2008 and 2007, for the year ended December 31, 2008 and for the period from
July 26, 2007 to December 31, 2007 and the notes thereto; (iii) the examined pro forma consolidated financial
statements as of and for the year ended December 31, 2008 that assume the Proposed Acquisitions occurred as
of January 1, 2008 and the notes thereto.
OVERVIEW
The Company is the largest producer of beer in the Philippines, with a total market share of approximately 94%
in 2007, according to Canadean. The Company has five breweries strategically located across the Philippines
and a highly developed distribution system serving 478,757 retail outlets. The Company’s beer brands include
all of the top four beer brands in the country, namely San Miguel Pale Pilsen, Red Horse, San Mig Light and
Gold Eagle. San Miguel Pale Pilsen, the Company’s flagship brand, has a history of nearly 120 years. For years
ended 2007 and 2008, the Company’s net sales were P12,180 million, and P48,787 million, respectively, and
net income was, P2,310 million and P10,042 million, respectively.
FACTORS AFFECTING FINANCIAL PERFORMANCE
Demand and Pricing
Increases in beer prices are driven by increases in raw material prices, excise tax increases, fuel prices and other
costs of doing business. Unlike basic necessities, beer is a discretionary purchase. Since the majority of beer
drinkers in the Philippines belong to the lower socio-economic classes, where discretionary income is limited,
the beer market is highly price elastic. Consumers tend to cut back on their consumption when beer prices rise
and they tend to increase their consumption when prices fall.
In addition to beer pricing, demand for beer is also influenced by the relative price relationships between beer
and other alcoholic beverages such as hard liquor, as well as the relationship between the prices of beer and nonalcoholic beverages, basic necessities and other goods and services in general. Drinkers are prone to adjust their
buying choices according to shifts in the perceived value-for-money propositions of beer relative to other
alcoholic beverages, non-alcoholic beverages and other consumer products and services.
During periods of relatively weak economic growth, consumers tend to purchase more Economy beer brands,
sales of which produce lower profit margins for the Company. In the last few years, consumers have been
turning to high-alcohol beers, not only because of their affordability (most high-alcohol beers are relatively lowpriced), but also because they need to purchase fewer bottles of these beers to obtain the same amount of
alcohol. The Philippines has historically been primarily an off-premise market, as consumers drink most of their
beer at home, mainly because drinking at home is cheaper than in bars, restaurants and other on-premise outlets.
The table below presents sales data by volume and average selling prices of the Company for the periods
indicated.
For the Year ended
December 31, 2008
Volume (Equivalent Cases, in millions) ................................
Volume (Hectoliters, in millions) ..........................................
Average selling price/case (in pesos).....................................
Average selling price/hectoliter (in pesos) ............................
55
174.48
13.40
278.88
3,632
For the Period from
July 26, 2007 to
December 31, 2007
46.70
3.59
260.11
3,389
Changes in Consumer Tastes and Preferences
Consumer preferences may change due to a number of factors, including changes in economic conditions and
income levels, shifts in demographic and social trends, changes in lifestyle and leisure activity patterns,
regulatory actions and negative publicity regarding alcohol consumption, and customer complaints against the
alcoholic beverage industry or any company in the industry, any of which may affect consumers’ perception of
beer and their willingness to purchase the Company’s products.
For example, the recent trend in the Philippines towards health consciousness is encouraging a shift away from
beer drinking towards consumption of low-calorie beer, wine and non-alcoholic drinks. The rise of young
professionals as a consumer class has led to increased popularity of mixed alcoholic drinks. Demographic
changes in the Philippines have increased the number of potential consumers of the Company’s products and
have also resulted in younger drinkers who tend to be more informed, more adventurous and who live a
different lifestyle than the older generation of consumers. However, these consumers, because of their greater
exposure to media, other cultures and lifestyles, tend to be less loyal to any brand or any type of drink than the
older generation. The future growth of the Company will depend on its ability to maintain the competitive
positions of its products and brands by being able to proactively anticipate and react to changes in consumer
tastes and preferences.
Supply and Prices of Raw Materials
The Company depends on raw materials sourced from third parties to produce its products. Beer production
requires malted barley and hops, which are sourced primarily from the United States, Australia and Europe, and
adjuncts, primarily corn and sugar, which are primarily sourced domestically. Raw materials are subject to price
volatility caused by a number of factors, including changes in global supply and demand, weather conditions
and governmental controls. The prices of these commodities to the Company are also affected by the Philippine
peso’s relative strength against other currencies, primarily the U.S. dollar. In recent years, the prices of certain
raw materials, primarily malted barley, have been increasing. The current global focus on bio-ethanol fuels has
and is expected to continue to contribute further to the recent trend for higher prices for malted barley and
adjuncts, as farmers shift their production out of barley and into grains used to produce those fuels, decreasing
available supply. The ability to obtain raw materials is also affected by a number of other factors beyond the
Company’s control, including interruptions in production by suppliers, decisions by suppliers to allocate raw
materials to other purchasers and the availability and cost of transportation. Price increases for the Company’s
raw materials have driven up production costs and adversely affected the Company’s operating margins, and
this trend could continue. The Company has only limited hedges against commodity prices and, to the extent it
does hedge, any such hedging activity may not work as planned. Price fluctuations have been mitigated to some
extent by the Company through material substitution, which provides flexibility in using a combination of
malted barley and adjuncts that reduces cost while maintaining high quality standards for the Company’s beer
products. New sources of materials such as malted barley and hops are also being developed to reduce reliance
on traditional sources such as the United States, where the thrust towards biofuels, with its consequent upward
impact on the prices of barley, continues to gain momentum.
Supply and Prices of Packaging Materials
Approximately 98% of the Company’s beer sales are in returnable glass bottles. The Company’s efficient
returnable bottle system decreases its exposure to rising packaging costs driven by increases in fuel and
aluminum prices, and therefore helps the Company to keep its products affordable. The durable nature of the
returnable glass bottles results in an average usage of 60 cycles over a span of 10 years. When beer is sold in
returnable bottles, the Company records an account receivable with respect to the deposit amount for the bottles,
and this account is later paid by the return of the bottles. Under this deposit-driven system, the Company has
achieved a high bottle retrieval rate of 95% on average during the last two years, and, as a result, bottle usage is
maximized before bottles are replaced. New glass bottles are purchased only to support accelerating sales and to
replace broken and scuffed bottles.
The Company sources most of its packaging materials from SMYPC, a subsidiary of SMC, which
manufactures, among other packaging products, new glass bottles, aluminum cans, crowns, plastic cases, and
carton boxes.
56
Advertising and Promotions
Advertising and promotions are important factors for consumer buying choices. Advertising affects consumer
awareness of the brands used by the Company, which in turn, affects purchase decisions and therefore sales
volumes. Product differentiation and brand loyalty are achieved through the marketing and image-building
efforts of competing brands. The Company believes that consumer brand preferences are the cumulative result
of exposure to the brands over an extended period of time, rather than of one specific advertisement.
Competition
The Company faces competition from another domestic producer, which sells both its own brand and foreign
brands it produces under license, and from foreign brewers. The Company also competes with producers of
other alcoholic beverages, primarily from low-priced gin and brandy. In the beer industry — and more generally
the alcoholic beverage industry — competitive factors generally include price, product quality, brand awareness
and loyalty, distribution coverage, and the ability to respond effectively to shifting consumer tastes and
preferences. The Company also competes with other discretionary items, including both other food and
beverage products and other goods and services generally.
Taxes and Regulatory Environment
The Company’s operations are subject to various taxes. Excise tax accounts for a significant portion of the
Company’s production costs. The Government increased the excise tax rates applicable to beer products on
January 1, 2005 by 20%, on January 1, 2007 by 8% and on January 1, 2009 by an additional 8%. The
Government has announced that the excise tax rates applicable to beer will be raised by a further 8% effective
January 1, 2011. See “Business Overview — Regulation and Taxation.” In 2006, the Government increased the
corporate income tax rate from 32% to 35% and the VAT rate from 10% to 12%. In general, the Company
attempts to pass on higher taxes to its consumers by raising the prices of its products, although the timing and
size of such price rises can be influenced by factors such as inflation and other economic conditions in the
Philippines. Price changes the Company makes in reaction to changes in tax rates could affect the demand for
the Company’s products as well as the Company’s profit margins, product pricing and net income.
DESCRIPTION OF REVENUE AND COST ITEMS
Net Sales
The Company generates its net sales primarily from the production and sale of beer. The Company’s net sales
are net of VAT and discounts.
The following table presents the Company’s net sales for the periods indicated:
For the Year ended
December 31, 2008
For the Period from
July 26, 2007 to
December 31, 2007
(in millions)
P
Beer Sales
Philippines .................................................................
Exports(1) ...................................................................
Other Revenues(2) ..........................................................
Total ..............................................................................
_______
P
48,310
366
111
48,787
12,052
100
28
12,180
Notes:
(1)
The Company’s top three export markets in 2008 were Taiwan, USA and South Korea; exports to these markets accounted for
approximately 18%, 15% and 10%, respectively, of its total export revenues.
(2)
Other Revenues include sales of CO2 and toll packing services for SMC subsidiaries.
57
Cost of Sales
Cost of sales consists of:
•
inventory costs, which are accounted for under the moving average cost method, include the cost of raw
materials that the Company uses in the production of its products, including malted barley, adjuncts, hops
and water;
•
taxes and licenses, including excise taxes and tariffs. Total taxes and licenses amounting to P14,523
million, primarily consists of P14,490 million excise tax, P31 million real property tax and P2 million other
taxes and licenses;
•
depreciation and amortization costs, which relate primarily to the depreciation of production equipment,
facilities and buildings;
•
aluminum cans and secondary carton packaging;
•
personnel expenses, which include salary and wages, employee benefits and retirement costs for employees
involved in the production process;
•
repairs and maintenance costs relating to production equipment, facilities and buildings;
•
fuel and oil costs relating to the production process;
•
communications, light and water expenses relating to the Company’s production processes and facilities;
and
•
other costs of sales, which include miscellaneous expenses such as supplies, rental, insurance and freight
expenses.
In 2007 and 2008, the Company’s cost of sales was P6,333 million and P24,800 million, respectively.
Operating Expenses
The Company’s operating expenses consist of selling expenses and administrative expenses. In 2007 and 2008,
the Company’s operating expenses were P2,349 million and P8,366 million, respectively.
The Company’s selling expenses consist primarily of:
•
trade and consumer promotion expenses, which include the cost of event sponsorships, billboards,
merchandising activities and other promotional activities;
•
personnel expenses, including salary and wages, employee benefits and retirement costs for sales
employees;
•
freight, trucking and handling expenses in connection with the distribution of the Company’s products; and
•
depreciation expenses, which relate to the depreciation of sales-related facilities and equipment.
Selling expenses also consist of repairs and maintenance expenses for the Company’s sales offices,
communications, light and water expenses, rental expenses, supplies, taxes and licenses and professional fees. In
2007 and 2008, the Company’s selling expenses were P765 million and P3,520 million, respectively.
The Company’s administrative expenses mainly consist of:
•
land rental, shared service fees and royalties, all of which are paid to SMC;
58
•
personnel expenses, including salaries and wages, employee benefits and retirement costs for executive,
administrative, finance and human resource personnel;
•
depreciation, which relates primarily to the depreciation of office buildings, information technology
equipment and other office equipment;
•
breakages and loss, primarily those attributable to the Company’s returnable beer bottles;
•
repair and maintenance expenses relating to office buildings, information technology systems and other
office equipment;
•
professional fees of accountants and financial and legal advisors, as well as information technology
systems, administration and project-related fees;
•
certain of the Company’s advertising and promotional expenses; and
•
freight, trucking and handling expenses that are related to the Company’s production processes or other
internal requirements.
Administrative expenses also include supplies, rental expenses, communications, light and water expenses, and
taxes and licenses. In 2007 and 2008, the Company’s administrative expenses were P1,584 million and P4,846
million, respectively.
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are set out in note 3 of the Company’s audited financial
statements included elsewhere in this prospectus. The Company has identified the following accounting policies
as critical to an understanding of its financial position and financial performance, as the application of these
policies requires significant management assumptions and estimates that could result in the reporting of
materially different amounts if different assumptions or estimates are used.
Asset Impairment
The carrying values of property, plant and equipment and other long-lived assets, including goodwill, intangible
assets and investment properties, are reviewed periodically for impairment. Under PFRS, depending on the type
of assets, the Company reviews for impairment annually and/or when events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. Determining the net recoverable value of
assets requires the estimation of cash flows expected to be generated from the continued use and ultimate
disposition of such assets. Changes in these estimates could materially affect the assessment of recoverable
values and any resulting impairment loss could have a material adverse impact on the Company’s financial
position and financial performance.
Revenue Recognition
Except for interest income and other income, which historically have not been significant for the Company, the
Company records its revenue as net sales, which represents the Company’s sales of its products, net of VAT and
discounts. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Company and the revenue can be reliably measured. For sales by the Company of its products, revenue is
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, which is normally upon delivery.
Taxes
Current tax. Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the
amount are those that are enacted or substantively enacted at the relevant balance sheet date.
59
Deferred tax. Deferred income tax is provided using the balance sheet liability method on all temporary
differences at the financial statements date between the tax bases of the assets and liabilities and their carrying
amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary
differences, except:
•
where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and
•
with respect to taxable temporary differences associated with investments in subsidiaries, associates and
interest in joint ventures, where the timing of the reversal of the temporary differences can be controlled
and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax
credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which
the deductible temporary differences, and the carryforward benefits of unused tax credits and unused tax losses
can be utilized, except:
•
where the deferred tax asset relating to the deductible temporary difference arises from the initial
recognition of an asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss; and
•
with respect to deductible temporary differences associated with investments in subsidiaries, associates and
interest in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the
temporary differences will reverse in the foreseeable future and taxable profit will be available against
which the temporary differences can be utilized.
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 profit will be available to allow all or part of the deferred tax asset
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 profit 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 to the year when the
asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at balance sheet date.
Income tax relating to items recognized directly in equity is recognized in equity and not in the statements 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.
As of December 31, 2008, the Company had deferred tax assets of P427 million. The Company reviews its
deferred tax assets at each balance sheet date and reduces the carrying amount if it is not probable that sufficient
taxable profit will be available in future periods to allow all or part of the deferred tax assets to be utilized. In
addition, unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized if it has
become probable that future taxable profit will allow the deferred tax asset to be recovered.
VAT. Revenues, expenses and assets are recognized net of the amount of VAT, except:
•
where the VAT incurred on a purchase of assets or services is not recoverable from the taxation authority,
in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense
item as applicable, and
•
receivables and payables that are stated with the amount of VAT included.
60
The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables
and payables in the balance sheet.
Useful Lives of Property, Plant and Equipment
As of December 31, 2008, the Company had property, plant and equipment net of accumulated depreciation and
amortization of P5,864 million. Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. For a discussion of impairment see “— Asset Impairment.”
Depreciation and amortization are computed using the straight-line method over the following estimated useful
life of the assets:
Building and improvements ....................................................................................
Machinery and equipment ......................................................................................
Transportation equipment .......................................................................................
Tools and small equipment .....................................................................................
Office equipment, furniture and fixtures .................................................................
Leasehold improvements . .......................................................................................
5 to 50 years
10 to 40 years
5 to 7 years
2 to 5 years
2 to 6 years
5 to 50 years or term of the
lease, whichever is shorter
The Company estimates the useful life of property, plant and equipment based on the period over which the
assets are expected to be available for use. Estimates of the useful life of property, plant and equipment are
based on a collective assessment of industry practice, internal technical evaluation and the Company’s
experience with similar assets. The estimated useful life of property, plant and equipment are reviewed
periodically and are updated if expectations differ from previous estimates due to physical wear and tear,
technical or commercial obsolescence or legal or other limits on the use of such assets. Changes in such
estimates could significantly affect the Company’s financial performance. In particular, a reduction in the
estimated useful life of property, plant and equipment would increase depreciation and amortization expense
and reduce operating income.
See notes 4 and 9 of the Company’s audited financial statements included elsewhere in this prospectus.
Estimating Allowance for Doubtful Accounts
As of December 31, 2008, the Company had trade and other receivables of P3,661 million, net of allowance for
doubtful accounts of P647 million. Allowances for doubtful accounts are made when there is objective evidence
of impairment. The Company evaluates its receivables for impairment based on available facts and
circumstances, including, among others, the length of the Company’s relationship with the customer, the
customer’s current credit status, third-party credit reports and known market trends, the average age of the
account, and the Company’s collection and historical loss experience.
Estimating Allowance for Inventory Losses
The Company’s finished goods and in-process inventory and materials and supplies inventory are stated at the
lower of cost and net realizable value. Net realizable value for finished goods and in-process inventory is the
estimated selling price in the ordinary course of business, less the estimated costs of completion and selling
costs. Net realizable value for materials and supplies inventory is the current replacement cost. The Company
provides allowance for inventories whenever net realizable value is lower than cost due to damage, physical
deterioration, obsolescence, changes in price levels or other factors. Allowance for inventory losses is reviewed
periodically. As of December 31, 2008, allowance for inventory obsolescence amounted to P320 million and
P15 million for Containers and Materials and Supplies, respectively. As of December 31, 2008, inventories net
of allowance for inventory losses, were P3,279 million.
See note 7 of the Company’s audited financial statements included elsewhere in this prospectus.
61
Fair Value of Financial Assets and Liabilities
A portion of the Company’s financial assets and liabilities are carried at fair value, with changes in fair value
being recorded directly in the Company’s statements of income. Fair value is determined by various valuation
methods, including discounted cash flow, that depend on a number of estimates and assumptions, as well as a
significant degree of judgment. The determination of fair value could change significantly if different estimates,
assumptions and valuation methods were used. Changes in the fair value of the Company’s financial assets and
liabilities could materially affect the Company’s financial position and financial performance.
FINANCIAL PERFORMANCE
The following comparison of the Company’s financial performance is based on the Company’s audited financial
statements as of and for the year ended December 31, 2008 and for the period from July 26, 2007 to December
31, 2007.
Statement of Income
Net Sales
Net Sales for 2008 was P48,787 million while 2007 was posted at P12,180 million. Average selling prices per
equivalent case were P278.88 and P260.11, respectively. The significant increase in selling prices per case was
due to a price increase implemented in April 1, 2008.
Cost of Sales
Cost of Sales for 2008 was P24,800 million. Previous year’s operations posted P6,333 million. Apart from
higher sales volumes, cost of sales in 2008 increased as a result of higher cost of raw materials particularly
malted barley and fuel prices.
Gross Profit and Gross Margin
Gross Profit for 2008 and 2007 were P23,987 million and P5,847 million, respectively. Gross profit margin
increased by 1.2% from 48.0% in 2007 to 49.2% in 2008.
Operating Expenses
Operating expenses for 2008 was P8,366 million while 2007 incurred P2,349 million in selling and
administrative expenses. The table below sets forth the principal components of operating expenses in the
periods indicated.
For the period from
July 26, 2007 to
December 31, 2007
(in millions of P)
For the year ended
December 31, 2008
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,520
4,846
8,366
765
1,584
2,349
Selling Expenses
Selling expenses was P765 million in 2007 while total year expenses for 2008 was P3,520 million.
Administrative Expenses
Administrative Expenses for 2008 was P4,846 million while 2007 resulted to P1,584 million.
62
Income From Operating Activities
As a result of the foregoing, 2008 income from operating activities was P15,621 million and P3,498 million in
2007. Operating income margin for 2008 increased to 35.6% from 32.1% in 2007.
Interest Income
Interest Income for 2008 was P264 million while previous year brought in P36 million of interest income.
Other Income (Expenses)
Other expenses for 2008 totaled P377 million while other income in 2007 was P15 million. In 2008, other
income and expenses include recognition of marked-to-market losses amounting to P345 million.
Income Tax Expense
Income tax expense was P5,466 million in 2008 while 2007 resulted to a tax expense of P1,239 million.
Net Income
Net Income in 2008 was P10,042 million and P2,310 million in 2007. Net income margin improved from 19.0%
in 2007 to 20.6% in 2008 as a result of higher sales volume, increase in production efficiency and cost
containment efforts.
Liquidity and Capital Resources
In 2008 and 2007, the Company's cash flows from operations were sufficient to provide cash for the Company's
operations and capital expenditures.
The table below sets forth the cash dividends declared by the Company’s Board of Directors from February
2008 to January 2009.
Amount of Cash Dividends
Per share
Total
Declaration Date
Payment Date
February 4, 2008
April 10, 2008
July 24, 2008
October 16, 2008
January 27, 2009
February 8, 2008
April 18, 2008
August 22, 2008
November 12, 2008
February 23, 2009
P0.15
P0.16
P0.14
P0.15
P0.19
P2.300 billion
P2.453 billion
P2.157 billion
P2.312 billion
P2.928 billion
The following table sets out the Company’s cash flows in 2008 and 2007:
For the period from
July 26, 2007 to
December 31, 2007
(in millions of P)
For the year ended
December 31, 2008
Net cash flows provided by operating activities
Net cash flows used for investing activities
Net cash flows provided by/(used for) financing activities
Net increase in cash and cash equivalents
11,027
(1,645)
(8,603)
779
5,831
(610)
41
5,262
Net Cash Flows from Operating Activities
Net cash flows provided by operating activities were P11,027 million in 2008. The Company's income before
income tax for this period was P15,508 million. This amount was positively adjusted for, among other things,
depreciation of the Company's plant and equipment and amortization amounting to P1,758 million and an
adjustment for provision for doubtful accounts and inventory losses of P127 million, resulting in operating cash
63
flows before working capital changes of P16,858 million. Aggregate changes in working capital decreased this
amount by P777 million, resulting in cash generated from operating activities of P16,081 million. This amount
was further reduced by income taxes paid of P5,054 million.
Net cash flows provided by operating activities were P5,831 million in 2007. The Company's income before
income tax for this period was P3,549 million. This amount was positively adjusted for, among other things,
depreciation of the Company's plant and equipment and amortization amounting to P415 million, resulting in
operating cash flows before working capital changes of P3,920 million. Aggregate changes in working capital
increased this amount by P1,917 million, resulting in cash generated from operating activities of P5,837 million.
This amount was further reduced by income taxes paid of P6 million.
Net Cash Flows Used in Investing Activities
Net cash used for investing activities were P1,645 million in 2008 and P610 million in 2007. Said amount
reflects replacements of bottles and containers as well as additions, replacements and upgrades of various plant
equipment to improve efficiencies.
Net Cash Flows Provided by (Used for) Financing Activities
Net cash flows used for financing activities were P8,603 million in 2008. This amount reflects cash dividends
paid during the period amounting to P9,222 million, partially offset by proceeds from issuances of capital stock
amounting to P592 million. Net cash flows provided by financing activities in 2007 were P41 million. This
reflects, among other things, proceeds from issuances of capital stock.
Balance Sheet
Total assets as of December 31, 2008 amounted to P24,634 million, P2,026 million higher than the Company's
total assets as of December 31, 2007 totaling P22,608 million, primarily due to cash and cash equivalents which
increased from P5,262 million in 2007 to P6,041 million in 2008. This was mostly due to higher net income.
Trade and other receivables were nearly flat at P3,661 million in 2008 and P3,676 million in 2007. Inventories
as of 2008 were higher than 2007 year-end balance by P832 million. This is due to higher valuation as a result
of increases in prices of major raw materials. Other noncurrent assets slightly declined from P5,424 million as
of end last year to P5,360 million as of end 2008.
Total liabilities as of end 2008 were P5,624 million, higher by P659 million compared to last year's P4,965
million. This is due to an increase in income and other taxes payable brought about by higher earnings.
Stockholder's equity increased from P17,643 million to P19,010 million. This is due to higher retained earnings
caused by higher net income in 2008.
Capital Resources
As of December 31, 2008, the Company has cash and cash equivalents of P6,041 million. As of the same date,
the Company has no outstanding short-term debt.
As of December 31, 2008, the Company has current assets of P13,399 million and current liabilities of P5,585
million. Its working capital (current assets minus current liabilities) was P7,814 million. The Company believes
that its working capital is sufficient for its present requirements.
In the ordinary course of business, the Company makes certain purchase commitments for the procurement of
raw materials. As of December 31, 2008, the Company’s outstanding purchase commitments were P522
million. A significant portion of these purchase commitments is payable within one year. The Company expects
to finance these commitments through cash flows from its operations and short-term borrowings.
Off-Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements. The Company has, however, entered
into derivative transactions to manage its exposures to currency exchange rates and fuel oil prices. See “—
Derivative Financial Instruments.”
64
Derivative Financial Instruments
The Company has entered into derivative financial instrument transactions, including swaps, options and
forwards, to manage its exposure to exchange rate risk and its risk relating to changes in fuel oil prices. A more
detailed description of the Company’s derivative financial instruments is set out in note 25 of the Company’s
audited financial statements included elsewhere in this prospectus.
FINANCIAL PERFORMANCE
The following comparison of the Company’s financial performance is based on the Company’s audited financial
statements as of and for the year ended December 31, 2008 and the Company’s examined pro forma
consolidated financial statements as of and for the year ended December 31, 2008.
Operating income increased from P15,621 million in the audited statement of income to P16,699 million in the
examined pro forma consolidated statement of income as a result of the assumed acquisition of brands and other
intangible assets and parcels of land on January 1, 2008. This was caused by a decrease in operating expenses
from P8,366 million in the audited statement of income to P7,288 million in the examined pro forma
consolidated statement of income. However, net income decreased from P10,042 million in the audited
statement of income to P8,799 million in the examined pro forma consolidated statement of income as a result
of the assumed bond issuance. The bond caused an increase in interest expense by P3,484 million in the
examined pro forma consolidated statement of income. Correspondingly, income tax expense decreased from
P5,466 million in the audited statement of income to P4,303 million in the examined pro forma consolidated
statement of income.
As a result of the foregoing, gross profit margin was maintained at 49.2% for both audited and examined pro
forma consolidated statements. Operating income margin increased from 32.0% in the audited financial
statements to 34.2% in the examined pro forma consolidated financial statements. However, net income margin
decreased from 20.6% in audited statements to 18.0% in the examined pro forma consolidated statements as a
result of interest expense.
Net cash flow provided by operating activities decreased from P11,027 million in the audited statement of cash
flows to P8,961 million in the examined pro forma consolidated statement of cash flows as a result of interest
payments pertaining to bond issuances. Net cash used for investing activities increased from P1,645 million in
the audited statement of cash flows to P40,674 million in the examined pro forma consolidated statement of
cash flows as a result of the acquisition of brands and other intangible assets and parcels of land. Audited
statement of cash flows recorded net cash used for financing activities of P8,603 million mainly due to payment
of cash dividends while examined pro forma consolidated statement of cash flows shows net cash provided by
financing activities of P32,878 million as a result of cash proceeds from bond issuances.
Total assets increased from P24,634 million in the audited balance sheet to P63,896 million in the examined pro
forma consolidated balance sheet as a result of the acquisition of parcels of land, increasing property, plant and
equipment account from P5,864 million in the audited balance sheet to P12,932 million in the examined pro
forma consolidated balance sheet, and acquisition of brands and other intangible assets, increasing intangible
assets from P11 million in the audited balance sheet to P32,011 million in the examined pro forma consolidated
balance sheet.
Total liabilities increased from P5,624 million in the audited balance sheet to P42,974 million in the examined
pro forma consolidated balance sheet as a result of bond issuance lodged under long term debt account. Total
equity also increased from P19,010 million in the audited balance sheet to P20,922 million in the examined pro
forma consolidated balance sheet due to increased retained earnings. Cash dividends are assumed at 70%
dividend payout in the examined pro forma consolidated statements.
65
KEY PERFORMANCE INDICATORS
Following below are the major performance measures that the Company uses. The Company employs analyses
using comparisons and measurements based on financial data.
The table below sets forth the Company’s performance indicators based on the Company’s audited financial
statements and examined pro forma consolidated financial statements:
Examined Pro Forma
Consolidated Financial
Statements
For the Year Ended
December 31, 2008
Audited Financial Statements
For the Year Ended
December 31, 2008
For the Period from
July 26, 2007 to
December 31, 2007
Current ratio ....................................
3.04
2.40
2.33
Debt-to-equity ratio .........................
2.05
0.30
0.28
Return on average equity of the
Company .....................................
45.6%
54.8%
52.4%(1)
34.2%
32.0%
28.7%
Operating Margin ………………..
__________
(1) Computation was based on an annualized net income
The manner in which the Company calculates its key performance indicators is set out in the table below:
Key Performance Indicator
Formula
Current ratio ....................................................................
Current Assets
Current Liabilities
Debt-equity ratio .............................................................
Total Liabilities (current + noncurrent)
Equity
Return on average equity ................................................
Net Income
Average Equity of the Company
Operating Margin……………………………………...
Income from Operating Activities
Net Sales
RECENT ACCOUNTING PRONOUNCEMENTS
New Standards, Amendment to Standards and Interpretations Adopted in 2008
•
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions: This interpretation
describes how to apply PFRS 2, Share-based Payment to share-based payment arrangements involving an
entity’s own equity instruments and share-based payment arrangements of subsidiaries involving equity
instruments of its parent company. The adoption of this interpretation did not have a material effect on the
Company’s financial statements.
•
Philippine Interpretation IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction: This interpretation provides general guidance on how to assess the
limit in PAS 19, Employee Benefits, on the amount of the surplus that can be recognized as an asset. It also
66
explains how the retirement asset or liability may be affected when there is a statutory or contractual
minimum funding requirement. The adoption of this interpretation did not have a material effect on the
Company’s financial statements.
•
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and PFRS 7 Financial
Instruments: Disclosures: This standard permits an entity to reclassify non-derivative financial assets, other
than those designated at fair value through profit or loss upon initial recognition, out of the trading category
in certain circumstances. The amendments also permit an entity to transfer from the available-for-sale
category to the loans and receivables category a financial asset that otherwise would have met the definition
of loans and receivables, if the entity has the intention and ability to hold that financial asset for the
foreseeable future. The adoption of these amendments to standard did not have an effect on the Company’s
financial statements.
New and Revised Standards and Interpretations Not Yet Adopted
The following are the new and revised standards and interpretations that are not yet effective as of December
31, 2008 and have not been applied in preparing the Company’s financial statements:
ƒ
PFRS 8, Operating Segments, becomes effective for financial years beginning on or after January
1, 2009 and will replace PAS 14, Segment Reporting. This standard introduces the “management
approach” to segment reporting. It will require a change in the presentation and disclosure of
segment information based on the internal reports regularly reviewed by the Company’s Chief
Operating Decision Maker in order to assess each segment’s performance and to allocate resources
to them. The Company has determined that this standard has no impact on its financial statements
since it operates as one segment only (both in terms of business and geography).
ƒ
Revised PAS 1, Presentation of Financial Statements, becomes effective for financial years
beginning on or after January 1, 2009. The standard has been revised to introduce the term total
comprehensive income, which represents changes in equity during a period other than those
changes resulting from transactions with owners in their capacity as owners. Total comprehensive
income may be presented in either a single statement of comprehensive income (effectively
combining both the statement of income and all non-owner changes in equity in a single statement),
or in an statement of income and a separate statement of comprehensive income. The Company is
currently assessing the impact of the revised standard on the financial statements when it adopts the
standard on January 1, 2009.
ƒ
Revised PAS 23, Borrowing Costs, becomes effective for financial years beginning on or after
January 1, 2009. The standard has been revised to require an entity to capitalize borrowing costs
directly attributable to the acquisition, construction or production of a qualifying asset as part of the
cost of that asset. The Company will assess the impact of this revised standard on the financial
statements when it adopts the standard on January 1, 2009.
ƒ
Amended PFRS 1 and PAS 27, Cost of an Investment in a Subsidiary, Jointly Controlled Entity or
Associate, becomes effective for financial years beginning on or after January 1, 2009. The
amendments to PFRS 1 allow a first-time adopter, at its date of transition to PFRSs in its separate
financial statements, to use deemed cost to account for an investment in a subsidiary, jointly
controlled entity or associate. The amendments to PAS 27 remove the definition of “cost method”
currently set out in PAS 27, and instead require all dividend from a subsidiary, jointly controlled
entity or associate to be recognized as income in the separate financial statements of the investor
when the right to receive the dividend is established. The Company will assess the impact of this
revised standard on the financial statements when it adopts the standard on January 1, 2009.
ƒ
Improvements to PFRSs 2008 discusses 35 amendments and is divided into two parts: a) Part I
includes 24 amendments that result in accounting changes for presentation, recognition or
67
measurement purposes; and b) Part II includes 11 terminology or editorial amendments that the
International Accounting Standards Board expects to have either no or only minimal effects on
accounting. These amendments are generally effective for annual periods beginning on or after
January 1, 2009. The adoption of the amendments in 2009 is not expected to have any material
effect on the Company’s financial statements.
ƒ
Revised PFRS 3, Business Combinations, incorporates the following changes that are likely to be
relevant to the Company’s operations:
ƒ
The definition of a business has been broadened, which is likely to result in more acquisitions
being treated as business combinations.
ƒ
Contingent consideration will be measured at fair value, with subsequent changes therein
recognized in profit or loss.
ƒ
Transaction costs, other than share and debt issue costs, will be expensed as incurred.
ƒ
Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss
recognized in profit or loss.
ƒ
Any non-controlling (minority) interest will be measured at either fair value, or at its
proportionate interest in the identifiable assets and liabilities of the acquiree, on a transactionby-transaction basis.
Revised PFRS 3 will be applied prospectively and therefore there will be no impact on prior
periods in the Company’s financial statements.
ƒ
Amended PAS 27, Consolidated and Separate Financial Statement, requires accounting for
changes in ownership interests by the Company in a subsidiary, while maintaining control, to be
recognized as an equity transaction. When the Company loses control of a subsidiary, any interest
retained in the former subsidiary will be measured at fair value with the gain or loss recognized in
profit or loss. The amendments to PAS 27 are not expected to have a significant impact on the
Company’s financial statements.
ƒ
Amendments to PAS 39, Financial Instruments: Recognition and Measurement - Eligible Hedged
Items, becomes effective for financial years beginning on or after July 1, 2009. The standard has
been amended to provide for the following: a) new application guidance to clarify the existing
principles that determine whether specific risks or portions of cash flows are eligible for
designation in a hedge relationship; and b) additional application guidance on qualifying items;
assessing hedge effectiveness; and designation of financial items as hedged items. The
amendments to PAS 39, which will become mandatory for the Company’s 2010 financial
statements, are not expected to have a significant impact on the financial statements.
ƒ
Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners, becomes effective
for financial years beginning on or after July 1, 2009. This interpretation provides guidance on the
accounting for non-reciprocal distributions of non-cash assets to owners acting in their capacity as
owners. It also applies to distributions in which the owners may elect to receive either the non-cash
asset or a cash alternative. The liability for the dividend payable is measured at fair value of the
assets to be distributed. The Company will assess the impact of this interpretation on the financial
statements when it adopts the standard on July 1, 2009.
68
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various types of market risks in the ordinary course of business, including interest
rate risk, foreign currency exchange rate risk and commodity price risk.
Exchange Rate Risk
The Company’s foreign currency exchange rate risk exposure results primarily from business transactions
denominated in foreign currencies. The Company uses a combination of natural hedges, with U.S. dollar
revenue from exports providing a partial hedge against U.S. dollar-denominated raw material expenses, and
derivative instruments to manage its exchange rate risk exposure. Authorized derivative instruments include
currency forwards, currency swaps and currency options. For more information regarding the Company’s
exchange rate risk exposure and related derivative instruments, see note 24 of the Company’s financial
statements included elsewhere in this prospectus.
The following table sets forth the Company’s foreign currency-denominated assets and liabilities and their peso
equivalents as of the date indicated:
As of December 31, 2008
U.S. Dollar (1)
Peso equivalent
(in millions)
Assets
Cash and cash equivalents ......................................................................................
Trade and other receivables ....................................................................................
Liabilities
Accounts payable and accrued expenses………………………………………...
Net foreign currency-denominated monetary assets ...............................................
5
4
243
181
2
77
7
347
____________
(1) U.S. Dollar equivalent of foreign currency-denominated balances as of balance sheet date
Commodity Price Risk
The Company’s commodity price risk exposure results primarily from the use of commodities as raw materials
and fuel in its production processes. The Company enters into various commodity derivative transactions to
manage its commodity price risk exposure, including swaps, futures, options and forwards. The Company enters
into commodity swaps, futures and options primarily to manage the price risks of fuel oil. The Company makes
commodity forward purchases of a variety of commodities. The prices of the commodity forwards are generally
fixed through direct agreements with suppliers or by reference to a commodity price index. For more
information regarding the Company’s commodity price risk exposure and relative derivative instruments, see
note 24 of the Company’s financial statements included elsewhere in this prospectus.
69
CAPITAL EXPENDITURES
The Company, as of December 31, 2008, has spent a total of P829.5 million to fund priority capital
expenditures, which include the following:
Amount
(in millions P)
Project Type
Replacement and Maintenance
Operations Improvement
Expansion and Diversification
General and Administrative
Total Capital Expenditures, YTD Dec. 31, 2008
375.2
390.4
28
35.9
829.5
Implementation
Period
2008
2008
2008
2008
Major projects in the foregoing priority capital expenditures include replacement and maintenance projects such
as replacement of electronic bottle inspectors, Schenk Automation System can seamers, mash filters, line
monitoring systems and various equipment repairs and rehabilitation. Operations Improvement projects include
acquisition of bottle coating machines and labelers, installation of yeast propagation system and conversion of
Polo's high speed line 2 to multi-product line.
For 2009, the Company has currently budgeted P789 million for capital expenditures, intended primarily for
replacement and maintenance projects and secondarily for operations improvement projects. These capital
expenditures are expected to be funded from internally generated cash flow. The Company’s budgeted capital
expenditures are based on management’s estimates and have not been appraised by an independent organization.
In addition, the Company’s capital expenditures are subject to various factors, including new product
introductions, tolling arrangements and perceived surges in sales volumes of various products. There can be no
assurance that the Company will implement its capital expenditure plans as intended at or below estimated
costs.
70
THE BEER INDUSTRY IN THE PHILIPPINES
The information and data contained in this Prospectus relating to the Philippine beer industry has been
provided by Canadean Limited (“Canadean”), a leading global beverage research company, and is taken from
Canadean’s database and other sources. The Company does not have any knowledge that the information
provided by Canadean is inaccurate in any material respect. Canadean has advised that (i) some information in
Canadean’s database is derived from estimates or subjective judgments, (ii) the information in the databases of
other data collection agencies may differ from the information in Canadean’s database, and (iii) while
Canadean has taken reasonable care in the compilation of the statistical and graphical information and
believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures
and may accordingly contain errors.
OVERVIEW
Between 2003 and 2008, global beer sales volumes increased at a compound annual growth rate (“CAGR”) of
4.8%. Over the same time period, the Philippines beer market also grew at a CAGR of 2.8%. Regionally, Asia
Pacific beer sales volumes grew at a faster rate than markets in all other regions around the world. The
following table sets forth the beer sales volumes CAGR from 2003 and 2008 for the Philippines, Asia Pacific
and various regions:
CAGR 2003-2008
Beer Sales Volumes
8.2%
4.8%
2.8%
Philippines Asia Pacific
3%
Europe
3.4%
America
World
________
Source: Canadean “The Beer Service, Global Beer Trends 2008 Cycle”
The Philippines is the third largest beer market in Southeast Asia (Indonesia, Malaysia, the Philippines,
Singapore, Thailand and Vietnam) and the sixth largest beer market in greater Asia by sales volume. In 2008,
sales volume for beer in the Philippines was 14.2 million hectolitres. The following table sets forth beer sales
volumes in 2008 and the 2003 to 2008 CAGR for various countries in Southeast and greater Asia:
Majo r Asia n Beer Countries 2008
Sales Volume
(HL Millions)
Country
CAGR
(20032008E)
China
Japan
Thailand
South Korea
Vietnam
Philippines
Taiwan
Indonesia
Hong Kong
Malaysia
Singapore
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
………………………………………………………………
425.6
66.6
22.5
18.0
17.9
14.2
5.5
2.0
1.6
1.2
0.8
10.7%
(0.1)%
7.3%
0.3%
11.5%
2.8%
1.3%
6.2%
1.3%
(2.5)%
0.6%
Total
………………………………………………………………
575.9
8.2%
71
Between 2006 and 2008, the per capita sales volume of beer for the Philippines grew from approximately 15.0
litres to 16.3 litres. The following table sets forth the largest Asian beer markets ranked by per capita
consumption and per capita GDP.
Major Asian Beer Countries
Beer Consumption Per Capita vs GDP Per Capita, 2008
Indonesia
1
Malaysia
5
Philippines
16
Singapore
18
Vietnam
23
Taiwan
24
China
41
1
32
18
3
32
Thailand
4
34
South Korea
8
2
21
HongKong
Japan
2
20
37
38
52
Beer Consumption per Capita
(in Liters/Person)
GDP per Capita
(in ‘000 US$)
_________
Source: Canadean “The Beer Service, Global Beer Trends 2008 Cycle,” International Monetary Fund (IMF).
The following table sets forth changes in the Philippines’ per capita sales volume of beer for the periods
indicated:
Development of Philippines Beer Market Per Capita Sales Volume
2002
2003
2004
2005
2006
2007
2008
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
Liters
14.2
15.5
17.5
16.8
15.0
15.8
16.3
___________
Source: Canadean, “The Beer Service, Annual report — 2008 Cycle, Philippines.”
Beer Segmentation
The beer market in the Philippines can be broken down into four segments: (i) economy brands, (ii) standard
brands, (iii) premium brands and (iv) super-premium brands, principally differentiated by pricing. Brands from
economy and standard segments are heavily advertised and promoted and can be generally differentiated by
marketing policy and packaging.
Economy brands. Economy brands are low-priced products, which are brewed locally and accounted for
approximately 11.7% of sales volume in the Philippines in 2007. Economy beer is widely available to the mass
market through a range of different outlets and is distributed mostly in glass bottles through small supermarkets,
sari-sari stores (“mom and pop”) and on-premise channels throughout the country. Consumers in this segment
are particularly price-sensitive. The typical retail selling price of a 320 millilitre bottle is between P14.00 and
P15.00. Economy brands in the Philippines include Beer Na Beer and Gold Eagle.
Standard brands. Standard brands are mostly brewed locally and represented approximately 54.9% of the beer
72
market by sales volume in 2007. The brands in this segment are targeted at consumers nationally. The brands
within this segment are generally priced 20% to 21% above economy brands, with the typical retail selling price
of a 330 millilitre bottle generally between P17.00 and P 18.00. Standard brands have been increasingly popular
with consumers given the stronger alcohol content on leading brands such as Red Horse and Colt 45.
Premium brands. Premium brands are mostly brewed locally and represented approximately 32.9% of sales
volume in 2007. The brands in this segment are targeted at consumers mostly in urban areas with a purchasing
power greater than the mass market. The brands in this segment are generally priced 12% to 22% above
standard brands, with the typical retail selling price of a 330 millilitre bottle generally between P19.00 and
P22.00. San Miguel is the dominant force in this segment through San Miguel Pale Pilsen and San Mig Light.
Super-premium. This segment represented the remaining 0.5% of the beer market by sales volume in the
Philippines in 2007, and comprises mainly local brands and international brands imported into the Philippines.
The brands in this segment are targeted at urban consumers with relatively high purchasing power and tourists.
These products are mostly sold through high-end bars, restaurants and hotels in the Metro Manila area. Super
premium brands are significantly more expensive than economy, standard and premium brands and use more
sophisticated packaging designed to appeal to urban consumers. The typical retail selling price of a 330
millilitre bottle is approximately P24.00 and upwards. The most popular local brands include San Mig Strong
Ice, San Miguel Super Dry and Cerveza Negra whilst imported brands include Tiger, Corona and Foster’s.
Compared with other leading beer markets in Asia, both off and on-premise pricing per litre in the Philippines
represent one of the lowest for Asia. The following table sets forth average beer pricing per litre in 2007 across
the major beer markets in Asia:
Leading Asian Beer Markets Average Per Litre Prices 2007 — US$
Ave. Price per
Litre (in US$)
Country
China
Hong Kong
Indonesia
Japan
Philippines
Vietnam
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
0.83
3.04
2.77
5.37
1.46
1.21
______________
Source: Canadean “The Beer Service, Annual Report — 2008 Cycle.”
Key Industry Trends
Economic impact. Consumer incomes have been improving in recent years supported by a favorable economic
performance and higher incomes as farmers and farm workers have traditionally been a key consumption
segment for beer. In 2006, VAT was raised from 10% to 12% as the government attempts to reduce the fiscal
deficit resulted in a softening of consumer demand. Excise tax on beer was likewise increased by 8% in 2007
and 2009. Despite cost pressures, the beer industry managed to grow in the past two years. Industry profitability
has come under increasing pressure as a result of the higher prices of commodities and volatility of the local
peso which affects the distribution and raw materials import costs.
Preference for mainstream over premium brands. The Philippine beer market is largely a pilsner lager type
beer market. In recent years, there is increasing preference for mainstream beer which contains higher alcohol
content than premium beer due to affordability with consumers. Red Horse brewed by San Miguel Corporation
contains alcohol-by-volume (“ABV”) of 6.7% is the leading brand in the mainstream segment whilst San
Miguel Pale Pilsen, the leading brand in the premium segment contains an ABV of 5%.
Distribution challenges. The Philippines is composed of over 7,000 islands that renders distribution a highly
complex and expensive business and represents a significant barrier to market entry for new brewers wishing to
distribute nationally. San Miguel Corporation and Asia Brewery Inc. (“ABI”) remain dominant in the beer
market and limit competition nationally.
73
Competition
The beer market in the Philippines is highly concentrated with San Miguel Corporation continuing to
consolidate its leadership locally. The company has increased its corporate share from 91% in 2000 to 94% in
2007 as a result of strong performance from key brands such as Red Horse and San Mig Light.
The other key local player is Asia Brewery Inc. (“ABI”) which started out brewing Carlsberg under license in
1987 and followed in 1988 with the launch of its own Beer na Beer brand. Despite new product introductions in
recent years ABI’s corporate market share has declined from 9% in 2000 to just under 6% in 2007. They are
highly dependent on Beer na Beer and competition from Red Horse and Gold Eagle in particular have resulted
in loss of market share.
Imported beer comprises a small proportion of the market as these products can only be found in upscale hotels,
bars, restaurants and supermarkets in Metro Manila.
On January 1, 2005 the Philippines Government raised excise duty by 20% on beer which was unpopular with
both the industry and consumers. Unlike other markets where excise duty is levied on the specific gravity of
alcohol, in the Philippines, excise duties charged according to net retail price / per liter of volume capacity.
On February 1, 2006, VAT was raised to 12% from 10% as part of the Government’s policy to reduce the fiscal
deficit. As a result, beer retail prices increased during 2006 which had a dampening effect on beer consumption
during the same year.
On January 1, 2007 and 2009, beer excise tax rate was increased by 8%.
Philippines — Leading Brewers / Importers 2005-2007 (000 hl)
Company
San Miguel
………………………………………………………….
Asia Brewery
………………………………………………………….
Others
………………………………………………………….
2005
13,020
937
19
2006
2007
11,830 12,734
812
794
20
20
_______________
Source: Canadean “The Beer Service, Annual Report — 2008 Cycle.”
Distribution
The Philippines is composed of 7,000 islands that renders distribution a highly complex and expensive business,
and create a significant barrier to market entry for new brewers wishing to compete nationally. Metro Manila on
the island of Luzon is the most densely populated conurbation and accounts for around 35% of all beer
consumption in the country.
The brewers distribute direct to retailers through a network of independent, exclusive distributors. In the
provinces, these distributors work with a large number of sub-distributors known as bookers. In 2004, San
Miguel embarked on a strategic programme of initiatives to improve its distribution system at the expense of
local rival ABI.
The returnable glass bottle enjoys widespread distribution across all channels as it is popular with consumers.
For example, the leading brand Red Horse costs P51.00 for a one liter returnable glass bottle with a P4.50
deposit on the bottle when purchased from sari-sari stores. On average, each returnable glass bottle can be used
anywhere from 40 to 60 manufacturing cycles depending on the quality of the glass used to make the bottles.
Beer distribution covers large modern supermarkets, smaller supermarkets, convenience stores, gas stations and
sari-sari stores as well as on-premise outlets such as bars, clubs, hotels and restaurants. Modern retail such as
supermarkets is growing from a small base particularly in Metro Manila.
74
The following table sets forth the outlet universe for beer in the Philippines:
Outlet Universe for Beer (2007)
Retail
Convenience stores
Supermarkets
Warehouse Clubs
Gas Stations
Sari-Sari Stores
Other retail
Total Retail
On-Premise
Hotels
Restaurants, cafes, fast
food
Clubs, kiosks, others
Total On-Premise
Number
% share
………...……………………………………………………….
………...……………………………………………………….
………...……………………………………………………….
………...……………………………………………………….
………...……………………………………………………….
………...……………………………………………………….
………...……………………………………………………….
1,020
84
30
220
350,000
240
351,594
0.29%
0.02%
0.008%
0.06%
99.55%
0.07%
100.00%
………...……………………………………………………….
………...……………………………………………………….
3,659
68,500
4.13%
77.26%
………...……………………………………………………….
………...……………………………………………………….
16,500
88,659
18.61%
100.00%
_______________
Source: Canadean “The Beer Service, Annual Report — 2008 Cycle, Philippines.”
The on-premise channel accounts for around 23% of overall beer consumption in 2007 and has been declining
in recent years partially due to higher on-premise prices. Increased fuel cost has also added to distribution cost
which has also pushed up prices. The following table sets forth distribution of beer in leading Asian markets for
2007:
Major Asian Beer Countries — Off vs. On Premise Volume Sales 2007
100%
23%
28%
75%
45%
57%
70%
67%
50%
77%
72%
25%
55%
43%
30%
33%
0%
China
Hong Kong
Indonesia
Philippines
Off‐Premise
Thailand
Vietnam
On‐Premise
__________
Source: Canadean “The Beer Service, Global Beer Trends 2008 Cycle.”
Outlook
Overall, private consumption will be the key driver of the economy with GDP expected to grow at between 5%
to 6% and inflation averaging at 5% over the next three years. Buoyant remittances from Filipinos working
overseas will ensure that the current account remains in surplus.
For the beer market the forecast is for a return to single-digit volume growth of 5 % per annum in 2007 and
2008 as prices stabilizes and remittances from Overseas Filipino Workers (“OFW’s”) continue to increase. High
alcohol beer volume is expected to grow.
75
BUSINESS OVERVIEW
The Company is the largest producer of beer in the Philippines, with a total market share of approximately 94%
in 2007, according to Canadean. The Company has five breweries strategically located across the Philippines
and a highly developed distribution system serving 478,757 outlets. The Company’s beer brands include all of
the top four beer brands in the country, namely San Miguel Pale Pilsen, Red Horse, San Mig Light and Gold
Eagle. San Miguel Pale Pilsen, the Company’s flagship brand, has a history of over 118 years. San Miguel beer
was first produced by La Fabrica de Cerveza de San Miguel (“San Miguel Brewery”), a small brewery in the
Philippines that began its operations in 1890. San Miguel Brewery provided the foundation from which SMC
has grown to become the largest food, beverage and packaging company in the Philippines today. San Miguel
Brewery was renamed San Miguel Corporation (“SMC”) in 1963.
From a single brewery producing a single product in 1890, SMC’s corporate history and business portfolio have
evolved over the years. It entered the soft drinks business in 1922 and became the first overseas bottler of The
Coca-Cola Company in 1927. To meet the needs of its beer and soft drinks businesses, SMC established a glass
packaging plant in Manila in 1938 to supply its own requirements. SMC has expanded to include other food,
beverage and packaging products. It has also grown geographically from a Philippine-based beer company to
become a regional producer in the Asian beer market. The San Miguel brewery in Hong Kong was founded in
1948 and by the 1970s, San Miguel beer had established a strong market position in Hong Kong. Building on
San Miguel Beer’s leading positions in the Philippines and Hong Kong, SMC expanded into new markets,
including China in 1991, Indonesia in 1992, Vietnam in 1993, and Thailand in 2004. Prior to the creation of the
Company, all of SMC’s beer operations were under the San Miguel Beer Division (“SMBD”), a business unit of
SMC.
On July 24, 2007, the shareholders of SMC approved the transfer of SMC’s domestic Philippine beer business’
assets to the Company in exchange for additional shares in the Company, a wholly-owned subsidiary of SMC.
The assets transferred to the Company comprise of the domestic beer business’ net assets as of June 30, 2007,
excluding land, brands and income and other tax payable. The Company was incorporated on July 26, 2007, and
the domestic beer business was spun off from SMC effective October 1, 2007. The spin-off of SMC’s domestic
beer business into the Company was intended to realize the value of SMC’s flagship business. Following
approval by the shareholders of SMC of the spin-off of the domestic beer business and the creation of the
Company, all plant and equipment used by SMBD in the domestic beer business were transferred to the
Company, while SMC retained ownership of the brands and land assets used in the domestic beer business.
Under this structure, the Company paid SMC royalties for the use of brands and other intellectual property
rights of SMC, rentals for the use of the land assets of SMC, fees for shared services and dividends. (see
“Related Party Transactions” on page 98 of this prospectus). Some of these brands and related intellectual
property rights and land assets are the subject of the Proposed Acquisitions (see “Use of Proceeds” on page 28
and “Proposed Acquisitions” on pages 29-36 of this prospectus).
The Company undertook an initial public offering of its shares (“IPO”) in May 2008. Prior to the IPO, the
Company had total outstanding shares of 15,333,426,960 common shares. In the IPO, a total of 77,052,000
common shares were offered by way of primary offering, while a total of 809,050,000 common shares owned
by SMC was offered by way of secondary offering. After the IPO, the Company’s resulting outstanding shares
totaled 15,410,478,960 common shares which were listed on the PSE on May 12, 2008.
On January 19, 2009, SMC signed a Memorandum of Agreement with Kirin. Under the terms of the agreement,
Kirin will enter into exclusive negotiations with SMC to acquire from SMC shares representing approximately
43.25% of the issued and outstanding capital stock of the Company. On February 20, 2009, SMC and Kirin
signed a share purchase agreement for the acquisition by Kirin of 43.249% shareholdings in the Company.
Under the terms of the agreement, Kirin will purchase shares in the Company from SMC at a purchase price of
P8.841 per share, for a total acquisition price of P58.9 billion. Kirin will launch a tender offer to purchase
additional shares from all existing shareholders of the Company at the same purchase price offered to SMC.
The details of the tender offer will be announced by Kirin once determined.
Further to the agreement, SMC, Kirin and the Company will undertake to negotiate exclusively for the
Company’s potential purchase of shares in SMC’s overseas beer business. The exclusivity period is for six
months following SMC’s offer to sell the shares in its overseas beer business.
76
STRENGTHS
The Company believes that its principal strengths include the following:
•
Strong and popular brand portfolio supported by high quality products. From a single product produced
in a single brewery in 1890, San Miguel beer has, over 118 years later, grown into an array of popular beer
products catering to the distinct tastes and preferences of beer drinkers across all segments and markets in
the Philippines. San Miguel Pale Pilsen, the Company’s flagship brand, has been an iconic Philippine brand
for most of the 20th century and up to today. After considering the Filipino beer drinker’s evolving
preferences, other brands and products have been introduced, and these have been very successful. Today,
the Company offers a portfolio of ten strong and popular brands: Pale Pilsen, Red Horse, San Mig Light,
Super Dry, Cerveza Negra, San Mig Strong Ice, Gold Eagle, San Miguel Premium All-Malt, Oktoberfest
Brew and Cali, the country’s only malt-based non-alcoholic drink. The various products carry distinct
attributes that cater to various segments of the Philippine beer market. The Company’s products have been
internationally recognized for quality, garnering a total of one grand gold award, 30 gold medals, 14 silver
medals, two bronzes, one International High Quality trophy, and one Crystal Prestige award from Monde
Selection International since 2000.
•
Attractive growth prospects. Despite its dominant market position, the Company is well positioned to
capture further volume growth and market share in the Philippine beer industry.
•
¾
Strong overall industry growth. The Company expects industry volumes to continue to grow, driven in
part by the forecasted GDP growth of 4% in the next three years, complemented by relatively low
inflation. Given its strong brands and leading market position, the Company believes it is best placed to
capture a very large portion of the expected overall growth in the industry.
¾
Expansion of Coverage Area. In addition, the Company expects to further increase its sales by
expanding its coverage of currently under-served areas. Despite its overall market dominance, the
Company believes there are areas where it holds less than 95% market share. The Company believes it
will be able to grow its sales and share in these markets through enhanced distribution and promotional
strategies.
¾
Increased market share of broader alcoholic beverage segment. Further, the Company also believes
additional sales growth can be achieved by increasing its share of the broader alcoholic beverage
segment. In particular, the Company believes its low cost, high-alcohol beer, Red Horse, which has
enjoyed substantial volume growth in the past few years, will be able to attract hard liquor consumers
and take an increasing share of the overall alcoholic beverage market from the hard liquor segment.
Strong market position presenting significant barriers to entry. The Company enjoys a number of
advantages that would be difficult for a potential competitor to create, making it difficult for other
companies to successfully compete with it in the Philippine beer market. These advantages include:
¾
Market leadership and economies of scale. San Miguel Brewery products have consistently dominated
the market for beer in the Philippines, the country’s largest alcoholic beverage segment. Based on the
Company’s internal data, the Company’s products captured a high market share of 95.6% in 2008. The
country’s top four beer brands are all produced by the Company. Unlike most other markets for beer, in
the Philippines, imported brands account for only 0.1% of the market, with distribution limited to
upscale bars and hotels and high-end supermarkets. Despite the entry of local competition in 1981 and
the introduction of a few locally brewed versions of foreign brands, the Company has maintained an
extremely strong market position. The popular acceptance and widespread availability of San Miguel
Brewery’s products have helped strengthen the Company’s market position over the years. The
Company’s size and scale of operations provide significant economies of scale in production, research
and development, distribution, and managerial and marketing functions over a diversified product
portfolio and geographic base. Its size also results in substantial leverage and significant bargaining
power with suppliers and retailers.
¾
Proximity of Production Facilities to Consumer Markets. To ensure product availability and
freshness, as well as to minimize distribution costs, the Company maintains a network of local
breweries that are strategically located in the three main islands of the Philippines: Luzon, Visayas and
Mindanao. The Company has breweries in each of Valenzuela City, Metro Manila; San Fernando City,
77
Pampanga; Mandaue City, Cebu; Bacolod City, Negros Occidental; and Darong, Sta. Cruz, Davao del
Sur, with a total annual production capacity of 15.3 million hectoliters. Each of these breweries is
equipped with automated facilities capable of packaging the Company’s products in a variety of sizes
and formats, including bottles, cans, and kegs. The strategic location of the Company’s breweries
reduces overall risks by having alternative product sources to avert possible shortages and meet surges
in demand in any part of the country. This also assists the Company in ensuring that the beer is freshly
delivered to dealers at an optimal cost. The archipelagic nature of Philippine geography and the relative
difficulty of transporting products to the country’s substantial rural population make these dispersed
production facilities particularly valuable.
¾
Extensive and Efficient Distribution System Coverage. The Company has a far-reaching and efficient
distribution system, which is based on five strategically located breweries and effective management of
third party service providers and provides the Company with a competitive advantage. The Company’s
49 sales offices, contracted logistics providers and transportation assets including 452 hauling trucks,
200 routing trucks, 258 pre-sell vans and 396 service pick-ups and its network of 489 dealers across the
Philippines enable it to maintain optimum stock levels in terms of quality and quantity in 478,757 onpremise and off-premise outlets nationwide. The Company’s products are delivered from any one of
the Company’s five breweries by contract haulers to a sales office or dealer warehouse within five days
of production date or less. The sales office or dealer then delivers the beer to the wholesaler or retailer
promptly afterward, ensuring ample stock and quality wherever and whenever San Miguel Beer
products are needed.
The Company’s returnable bottle system helps keep the price of its beer products affordable. With the
high retrieval rates achieved under the system, bottle usage is maximized before bottles are
replaced. Under this system, the Company is able to achieve a 95% average retrieval rate for its bottles,
which substantially reduces its packaging costs.
¾
•
Cost Leadership. The Company maintains a strong cost leadership position through high productivity
and efficiency, as well as cost control measures, which facilitate pricing flexibility and greater profit
growth by maintaining the Company’s margins. The Company’s product quality initiatives, process
enhancements, and improvement programs for plant operations and facilities management are all
expected to be sustained. The Company continuously implements process optimization efforts and
technology enhancements to generate cost savings
.
Experienced management and production team. The Company has an extensive pool of experienced
managers, with many senior managers having been with the Company for an average of 20 years. The
management team is well accustomed to the Philippine operating environment, and has been able to
effectively manage the Company through periods of crisis and instability in the Philippines. The Company
also has established experts in its production process, including 30 brewmasters, each of whom has
completed advanced training and has over ten years of on-the-job-training experience working for the
Company.
STRATEGIES
The Company’s principal strategy is to increase the volume of its beer sales, both by increasing its market share
and by increasing the size of the market, while maintaining its margins. It plans to achieve this through the
following:
•
Increase market share. Although the Company already has a very strong position in the Philippine beer
market, it intends to increase its market share by pursuing targeted marketing efforts in the regions and
localities in which it believes its market share is lower than it is for the Philippines as a whole – which
currently stands at 95.6%, such as in specific areas in North and South Luzon, as well as in Visayas and
Mindanao. The Company intends to accomplish this by selecting specific products in appropriate packaging
to rival competing products and brands. The Company also intends to increase its product visibility in these
markets through tactical consumer promotions and improve outlet penetration through persuasive selling
and trade incentives. Similarly, the Company intends to increase its share of the overall market for alcoholic
beverages. This effort will focus on those specific regions and localities in which hard liquor sales are
higher, and, similar to the efforts to increase market share in the beer segment, will include brand- and
package-specific marketing campaigns, persuasive selling and incentives for dealers and retailers.
78
•
Increase the overall market for beer. The Company also plans to increase it s sales volume by
increas ing the total market for beer sales. The Company’s primary strategies to achieve this
include:
¾
Segmented pricing strategy. The Company intends to keep its products affordable for the middle and
lower socio-economic sectors by maintaining a moderate pricing strategy for its products in the Popular
and Economy markets, where sales are highly price elastic. For the more upscale, or Upper Popular,
market, where sales are less price elastic, the Company plans to increase the pricing of its existing and
new specialty brands, supported by image-building activities to strengthen their premium positioning
and improve their profitability. Amid the global economic slowdown, the Company intends to manage
and align the timing and magnitude of price increases for all its products to sustain volume growth as
well as cover increases in tax rates on beer and higher material costs. With the forecasted Philippine
economic growth in 2009, the Company intends to pursue this segmented pricing strategy to protect its
gains and to sustain the general uptrend for the industry as evidenced by the Company’s improved
market share and increased level of sales in 2008.
¾
Increase the size of the Upper Premium and Premium segments. The Upper Premium and Premium
markets for beer in the Philippines are relatively small segments, but they play important roles in
brand-building and overall market development. The segments offer promising prospects, underpinned
by rising consumer incomes, increasing consumer sophistication, rapidly changing drinker habits and
preferences, as well as increasing urbanization. The Company intends to further develop the higherpriced segments of the beer industry by offering higher-priced and higher-margin products catering to
these segments. For example, in August 2008, the Company launched two new brands, San Miguel
Premium All-Malt and Oktoberfest Brew, a seasonal beer available for four months (from September
2008 to December 2008), which are marketed to the Upper Premium and Premium segments,
respectively. With this strategy, the Company aims to take advantage of opportunities in segmenting
the market as well as preempting the incursion of foreign brands. Relative to other Asian countries, the
Philippine beer market offers greater potential with regard to premium pricing of brands given the
current relatively narrow price gap between the Upper Premium/Premium and Upper Popular brands.
¾
Strengthen the Brand Portfolio. The Company intends to strengthen its brands to take advantage of
segment-specific growth opportunities, increasing sophistication and changing lifestyles of Philippine
consumers and to maintain its market leadership position. The Company plans to maintain the status of
its flagship San Miguel Pale Pilsen brand and strengthen its value through an integrated approach of
national brand-building campaigns and retail promotional and marketing efforts. Examples of brandbuilding activities include advertising campaigns for the brand using famous endorsers such as Manny
Pacquiao, Erik Morales and Kris Aquino under the “Walang Katulad” (“Beer like no other”) and “Face
to Face” campaigns and the TV commercial featuring actor Jet Li, which forms part of the regional
campaign to uplift the image and positioning of the San Miguel Pale Pilsen brand in the Asian region.
The Company intends to implement new programs and initiatives catering to the younger segment of
the market to protect its core customers and strengthen the appeal and preference for the brand among
new drinkers. The Company expects to further grow main brands San Miguel Pale Pilsen, Red Horse
and San Mig Light through the introduction of new thematic campaigns, special events and volumegenerating programs aligned with the respective positioning of these brands in the market. For the
Company’s specialty brands, including Cerveza Negra, Super Dry, and San Mig Strong Ice, the
Company plans on increasing its efforts in on-premise channels by matching these brands with
appropriate on-premise outlets and through event sponsorships, party series and tie-ups with other
companies. Specialty brands will also be promoted in off-premise channels through increased visibility
and promotions.
¾
Optimize Trade Coverage and Efficiencies. The Company intends to further expand its trade reach
and increase the visibility and availability of its products in retail outlets through point-of-sale
merchandising materials and signage for both on- and off-premise outlets to increase sales and outlet
yield. In pursuing this strategy, the Company will focus on improving the efficiency of its trade
operations, including trade penetration levels and adherence to suggested retail prices in all distribution
channels by strengthening per-outlet management, intensifying route assisting activity and alternative
distribution mode management such as pedicabs (bicycle-driven cabs) and tricycles, which help to
deliver the Company’s products to remote areas. The Company also intends to raise its frequency of
79
calls to retail outlets. Management of the distributors’ territories will be strengthened through
intensified retail-based servicing and territorial reconfiguration.
¾
Increase Sales Through Special Events and by Focusing on Fast-growing Trade Channels. The
Company intends to continue its volume-generating initiatives and occasion-creation programs.
Examples of these activities include the Company’s sponsorship of town fiestas and major events, such
as San Miguel Beer Oktoberfest, that aim to make the beer drinking experience more relevant and
closer to the consumers. The Company recognizes the importance of fast-growing modern trade
channels such as large supermarket chains, hypermarkets and modern convenience stores in marketing
and carrying its products to consumers, especially in urban areas. Accordingly, the Company, primarily
through SMC’s Corporate Key Accounts Group (“CKAG”), is focusing on sales and marketing
programs for key upscale products to these fast-growing segments of the market.
¾
New Product and Package Introduction. The Company plans to introduce new products and new
package formats. The Company believes this strategy can increase consumer interest and overall
market size, as well as address the needs of an increasingly fragmenting market, especially in high
growth segments. For example, to increase consumer interest, in May 2007, the Company introduced
San Miguel Pale Pilsen in paper label bottles. In 2008, the Company launched new products San
Miguel Premium All-Malt in the Upper Premium segment and the Oktoberfest Brew (seasonal brew) in
the Premium segment as well as introduced secondary packaging, i.e. Christmas-themed shrinkwrap
(6-pack) for San Miguel Premium All-Malt and clear shrinkwrap (6-pack) for San Miguel Pale Pilsen,
San Mig Light, Super Dry and San Mig Strong Ice. The Company intends to continue to pursue
packaging innovations and capitalize on the market trend towards convenience packaging. The
Company is developing packaging improvements for existing brands as well as convenience pack
formats consistent with faster-paced lifestyles and addressing the various activities and interest of
consumers.
PRODUCTS AND BRANDS
In the Philippines, beer has become synonymous with San Miguel, a company that has been known for its
quality products for over 118 years. Specifically, Filipinos readily associate beer with a San Miguel product that
embodies the attributes and values they look for in their beverage. The Company has differentiated its product
offerings through effective marketing programs. With the Company’s diverse product portfolio, Filipino beer
drinkers can have a San Miguel product that caters to their specific tastes and preferences. The Company
considers the strong brand associations and imagery that San Miguel beer brands carry to be among the
important selling points for San Miguel beer products.
The Company markets its beer under the following brands: San Miguel Pale Pilsen, which is the Company’s
flagship brand, San Miguel Super Dry, San Mig Light, San Miguel Premium All-Malt, San Mig Strong Ice,
Cerveza Negra, Red Horse, Oktoberfest Brew and Gold Eagle. The Company also sells Cali, the country’s only
malt-based non-alcoholic drink. Cali is available in three variants: Cali Pineapple, Cali Ice and Cali Light (lowcalorie).
The Company’s products can be categorized into three classes based on the target market: Premium/Upper
Premium, Upper Popular, Popular and Economy. Premium, Upper Premium and Upper Popular products cater
to upscale markets especially in highly urbanized areas, while the Popular segment serves the majority of the
population or the mass market. The Economy segment caters to the low-end market. Over time, the share of the
Company’s sales to the Upper Popular segment has been steadily increasing from 2% in 2000 to 11% in 2008.
In contrast, the shares of the Popular and Economy segments have been decreasing. These trends reflect
primarily shifts in consumer preferences given improvements in incomes, increased urbanization and changes in
lifestyles.
80
The following table sets forth each of the Company’s products, organized by market segment, and includes a
description of each product as well as the specific packaging in which the product is sold.
Brand and Product Portfolio
Market
Segment
Upper
Premium
Premium
Upper
Popular
Brand/ Product
Product
Price(1)
(P)
Description/Target Market
Packaging
San Miguel Premium All-Malt has
a malty flavor with pleasant hoppy
notes. It is full-flavored with a
smooth balanced bitterness.
Targeting both male and females
aged 25-45. Alcohol content: 5%
330ml bottle
35.00
San Miguel Super Dry is the first
and only “dry” beer in the
Philippine market. The target
market for this beer is primarily
males, aged 22-45 in higher socioeconomic groups. It is a clear light
amber lager with strong aromatic
hop notes. It is light to mediumbodied with moderate bitterness.
Alcohol content: 5% by volume.
330ml bottle,
330ml can
25.00
Cerveza Negra is a full-bodied
dark lager with a balance of
moderate bitterness and sweetish
roasted malt bouquets. Alcohol
content: 5% by volume. It is
marketed to both men and women,
primarily those between the ages
of 25-34 in higher socioeconomic
groups.
330ml bottle
25.00
Oktoberfest Brew (seasonal) is a
pale lager with malty notes
balanced with floral and citrus hop
notes. It is full flavored yet lightbodied, sweet and smooth without
the inebriating effect of alcohol.
Targeting both males and females
aged 18-24. Alcohol content:
3.6% by volume
330ml bottle
25.00
San Mig Strong Ice is an icefiltered beer with higher alcohol
content than regular beers. It is
marketed primarily to men aged
18-24. Alcohol content: 6.3% by
volume.
330ml bottle,
330ml can
24.00
81
Brand and Product Portfolio
Market
Segment
Brand/ Product
Description/Target Market
Packaging
Product
Price(1)
(P)
San Mig Light is the first
light/low-calorie beer in the
market. Alcohol content: 5% by
volume. This beer is marketed to
men and women aged 18-34,
primarily those in higher
socioeconomic groups.
330ml bottle,
330ml can,
15L, 30L &,
50L kegs
22.00
San Miguel Pale Pilsen is a pale
golden lager with a clean, hoppy
finish. It has a medium body, with
a distinct bitter hop character.
This beer, the Company’s flagship
brand, is marketed to all socioeconomic groups, primarily to
those in the 24-45 age group, but
also to those aged 18-24. It is
marketed through various
campaigns, including those linked
to national marketing events and
local festivals that are sponsored
or supported by the Company.
Alcohol content: 5% by volume.
320ml bottle,
1000ml
bottle, 330ml
can, 15L,
30L & 50L
Kegs
19.00
Red Horse Beer is a full-flavored
high-alcohol beer. This beer is
marketed primarily to men
between the ages of 18-24 in
middle and lower socio-economic
groups. Marketing for this beer is
often tied to rock music and
sports. Alcohol content: 6.7% by
volume
330ml bottle
500ml bottle
1000ml
bottle 330 ml
can
18.00
Economy
Gold Eagle is a low-priced beer. It
has a pale amber hue and is
moderately light-bodied. It is
brewed to have an “easydrinking” character. It is marketed
primarily to men aged 24-45 in
middle and lower socioeconomic
groups. Alcohol content: 4.5% by
volume.
320ml bottle
750ml bottle
1000ml
bottle
15.00
NonAlcoholic
Cali is a line of clear, nonalcoholic malt-based beverages
with fruit flavors and slight
effervescence. Cali has three
variants: Cali Pineapple, Cali Ice
(apple) and Cali Light (lowcalorie).
330ml bottle
330ml can
18.00
Popular
________________
(1) Product prices represent the Company’s suggested retail price for each product, expressed in 320ml/330ml bottle
82
Over the years, the Company’s beer products have been the recipient of numerous international awards for
product quality and excellence. San Miguel beer brands are consistent Monde Selection winners. Monde
Selection is a Belgian based international institute for quality selections founded in 1961. The Company
considers “Monde Selection” awards to constitute an exceptional advertising asset and a recognized quality
assurance for consumers. The latest awards in 2008 give San Miguel a grand total of one grand gold award, 30
gold medals, 14 silver medals, two bronzes, one International High Quality trophy, and one Crystal Prestige
award since 2000.
San Miguel Pale Pilsen is also a certified Superbrand in Asia. Superbrands Ltd. (“Superbrands”) is an
independent arbiter on branding based in the United Kingdom that represents over 57 countries (9 in Southeast
Asia, including the Philippines) across four continents and is widely regarded as the world’s leading brand
recognition program. Superbrands promotes the discipline of branding and pays tribute to exceptional brands
that achieve a level of brand trust and reputation in the minds of consumers. The Company has been a
consistent award winner for Superbrands, winning the platinum award in the Philippines for the fifth
consecutive year after earning a gold citation when the survey began in 1999.
PRODUCTION
Facilities
Due to the high cost of shipping relative to product cost — as well as the importance of maintaining freshness
and other distribution considerations — the Company maintains a system of regional breweries rather than a
central consolidated brewing facility. Each of the Company’s breweries is equipped with automated facilities
capable of packaging the products in a variety of packages to meet market preferences, including bottles, cans
and kegs. The Company currently owns and operates five breweries in the Philippines. These breweries are
strategically located in the Philippines’ three main island groups of Luzon, Visayas and Mindanao, and are
located close to the intended end-markets in order to reduce transportation costs.
In 2008, the overall utilization rate of the Company’s breweries, calculated as the quotient of production divided
by capacity, was 75%. The following table sets forth the year of establishment and annual brewing capacity in
hectolitres, of each of the Company’s breweries in December 2008:
Brewery
Year Established
Capacity
(in millions of hl)
Polo
San Fernando
Mandaue
Bacolod
Davao
…………………………………………………………
…………………………………………………………
…………………………………………………………
…………………………………………………………
…………………………………………………………
Total
…………………………………………………………
1947
1981
1968
1990
1995
3.3
5.5
3.4
1.0
2.1
15.3
The Polo Brewery is located north of Metro Manila and serves the Metro Manila and Southern Luzon markets.
Established in 1947, it is the Company’s oldest operating brewery. The Polo Brewery underwent a
modernization program during the 1990s to upgrade its brewhouse facilities. The San Fernando Brewery is
located in the Pampanga province, north of Metro Manila and serves Central and Northern Luzon. It was built in
1981 and was expanded and upgraded in the late 1980s up to mid 1990s. The Mandaue Brewery, located on the
island of Cebu, serves part of the Visayas region and Mindanao. This brewery was built in 1968 and its facilities
were expanded and modernized in the early 1990s. The Bacolod Brewery was built in 1990 on the island of
Negros and serves Negros and the island of Panay and its facilities were modernized in 2005-2006. The Davao
brewery was built in 1995 and serves the Mindanao market. Although production at each brewery is typically
targeted to serve the geographical area around it, the Company’s distribution system can shift production from
one brewery to other regions if operational issues or demand changes require it. The Company can also make
use of excess packaging capacity in one brewery to accommodate shortages elsewhere by, for example, shipping
finished beer from the Polo Brewery to the San Fernando Brewery, which has excess packaging capacity, for
bottling.
83
The Company employs state-of-the art brewing technology. Its main brewing equipment and technology are
sourced from Huppmann Handel GmbH & Co. KG, one of Germany’s leading brewing equipment
manufacturers. Beer fermentation and maturation are done in stainless steel cylindro-conical tanks. Beer is
filtered using vertical filters with horizontal plates made by a German company, SeitzSchenk Filtersystems
GmbH. Most of the Company’s packaging machines are from leading packaging equipment manufacturers from
around the world, including Germany’s Klöckner, Holstein Seitz AG. The Company also uses washers from
Barry-Wehmiller Companies, Inc. and pasteurizers with regenerative energy savings systems from the United
States and camera-type electronic bottle inspectors capable of detecting transparent foreign materials in the
empty bottles from Kirin Techno-System Corporation of Japan. The Company’s labeling equipment is from
Krones AG of Germany and Production Engineering (PE) Labellers of Italy.
The Company’s packaging materials are sourced from certain members of the San Miguel Packaging Group. All
of the Company’s breweries are in a state of certifiability for ISO 9001:2000 and ISO 14001:2004, as reviewed
by SMC’s Corporate Quality Management and Environment Management units. All of the breweries are also
good manufacturing practices-certified by the Food Development Center.
Raw Materials
The main raw materials for brewing beer include malted barley, hops, water and yeast. Adjuncts, such as sugar
and non-malted grains including rice, corn grits and food starch from cassava, can also be used in conjunction
with malted barley, which is generally more expensive. All of these commodities have experienced, and are
expected to continue to experience, price fluctuations.
The Company procures key raw materials for its beer operations through a procurement group that uses
standardized procurement procedures. Malted barley and hops are generally sourced from the United States,
Australia and Europe, while new sources in China and India are being developed. Adjuncts are generally
sourced locally. The Company enters into supply contracts with key raw material suppliers with terms ranging
from approximately one month to five years. These contracts typically provide for a pre-determined price for the
duration of the contract. In addition, depending on considerations such as price trends and the quality of raw
materials, the Company also makes spot purchases in the open market. To ensure the quality of its products, the
Company closely monitors the quality of its raw materials.
The following table indicates the trend of the Company’s raw material costs:
For the years ended
December 31,
2007
2008
2006
In P per kilogram
Malt price
……………………………………………………
19.67
17.86
30.55
Corn Price
……………………………………………………
15.55
16.72
18.91
Packaging costs are also a significant factor in the manufacture of beer. The Company mostly sells its products
in returnable glass bottles of varying sizes and shapes, as well as in aluminum cans and kegs. In 2008,
approximately 95% of the glass bottles used by the Company were returned bottles. The returnable glass bottle
is by far the most important and popular package for beer in the Philippines, accounting for 98% of the
Company’s sales in 2008. The Company enjoys wide distribution across all trade channels, from supermarkets,
grocery and convenience stores to sari-sari (“mom and pop”) stores and on-premise outlets throughout the
country. These returnable glass bottles are used for up to 60 cycles typically over a span of approximately 10
years. Retail outlets selling the Company’s products collect deposits on these bottles when customers buy the
beer and return the deposit when the bottles are returned. New glass bottles are purchased from time to time to
support accelerating sales and to replace broken and scuffed bottles. The existing system for returnable glass
bottles shields the Company from rising packaging costs triggered by the uptrend in fuel and aluminum prices.
Cans are less popular mainly because they are more expensive, although the number of cans has been increasing
in recent years with greater availability. Kegs for draft beer which come in 15, 30 and 50 liter sizes are very
limited and represent a decreasing share of the market.
All water supply used by the Company in its production is provided by deep wells owned by SMC and are
operated by the Company, except for water used at the Polo Brewery, which is supplied by the Maynilad Water
Services, Inc., a privatized water company serving parts of Metro Manila.
84
The following table sets forth the major raw materials and packaging supplies used in the Company’s business,
the source countries for these items and the Company’s typical contract periods for procurement.
Major Raw Materi als and Packaging Supplies
Key Materials
Malted Barley
Hops
Adjuncts
Corn Grits
Sugar
Food Starch (from Cassava)
Rice
Packaging Materials
Bottles
Crowns
Aluminum Cans
Plastic Cases
Cartons
Labels
Sources
Contract Period
Australia
Europe
USA, Canada, China
5 years
5 years
1 year
USA
Germany
1 month – 1 year
1 month – 1 year
Philippines
Philippines
Thailand, Vietnam
Philippines
3 years
One – two months
Spot
3 years
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines, Malaysia
1 year
1 year
1 year
1 year
1 year
1 year
BREWING TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company employs state-of-the-art brewing technology. Its highly experienced brewmasters and quality
assurance practitioners provide technical leadership and direction to continuously improve and maintain high
standards in product quality, process efficiency, cost effectiveness and manpower competence. Brewing
technology and processes are constantly updated and new product development is ensured through continuing
research and development. A research and development group is housed in the technical center building of the
Polo Brewery. Research and development activities are primarily undertaken in a pilot plant located in Polo
Brewery. The pilot plant is a complete miniature brewery equipped with a 35-hl capacity brewhouse.
The Company also has a central analytical laboratory, or CenLab, located in the technical center building of the
Polo Brewery. The laboratory is equipped with modern equipment necessary for strategic raw materials (hops,
malted barley, adjuncts) analysis and validation, beer product evaluation and new raw material accreditation.
Specialized equipment includes gas chromatography, high performance liquid chromatography, atomic
absorption spectroscopy, protein analyzer, and laboratory scale mashing/milling system for malt analysis.
Analytical methods and validation procedures are constantly reviewed and updated, and these are standardized
across all San Miguel Beer laboratories. CenLab runs proficiency tests for brewery laboratories and malted
barley suppliers to ascertain continuous reliability and quality of analytical test results. CenLab is also tasked
with ensuring compliance of all systems with international standards, specifically ISO 17025-2005.
The following table presents the amounts spent by the Company on research and development activities, in
millions of pesos and as a percentage of net sales, for the periods indicated:
For the years ended
December 31,
2006
2007
2008
Amount (in millions)
……………………………………………………………………………..
P59.0
P23.0
P32.0
Percentage of net sales
……………………………………………………………………………..
0.1%
0.1%
0.1%
To promote technical manpower development, the Company runs the San Miguel School of Brewing, which
offers various programs spanning all levels of professional brewing technical training, starting from the basic
brewing course for newly hired personnel to the advanced brewing course for senior technical personnel.
85
Courses offered at the school included those highly advanced classes necessary to qualify the most senior of its
technical personnel as brewmasters. Each of the Company’s 30 brewmasters has extensive advanced
coursework and over ten years of on-the-job-training experience working for the Company.
MARKETING, SALES AND DISTRIBUTION
Domestic Market
The Company markets, sells and distributes its products principally in the Philippines. Many of the Company’s
products have strong market positions in the Philippines. The Company believes that it maintains the most
extensive distribution network in the Philippine beverage market. The Company’s beer products are distributed
and sold at 478,757 outlets, including off-premise outlets such as supermarkets, grocery stores, sari-sari stores,
and convenience stores, as well as on-premise outlets such as bars, restaurants, hotels and beer gardens.
As of December 31, 2008, the Company had 49 sales offices and 489 dealers throughout the Philippines.
Generally, it takes five days or less for a bottle of beer to travel from production in the brewery to a sales outlet
anywhere in the country. Beer is transported from the breweries by a variety of methods, mainly through thirdparty haulers and, in certain circumstances, by a fleet of boats contracted by the Company.
The following chart is a graph of the Company’s distribution network as of December 31, 2008:
PRODUCTION
SALES AND DISTRIBUTION
S
a
l
e
s
SMB
(5 Breweries)
S
u
p
e
r
v
i
s
o
r
s
Dealers
(489)
Dealer Sales
Persons
Wholesalers(2)
END MARKETS
Sales Persons
Reta ilers
[c .468,878]
Account
Specialists
Wholesalers(2)
Sales Persons
&
O
f
f
i
c
e
s
Call Center Associates (632-BEER)
Corporate Key Accounts Group (1)
O n - P remise
B ar/P ub /Loun ge
R e stau rant
Fastfood
Ca rin deria
Indu strial/O ffice C an teen
R e freshe m e nt/S n ack
Bar
Beer H ous e
Ho tel/M otel/P e nsion
hous e
R e creation c e nter/R es ort
Sarinu m a n
B urger H o use
O ff - P re m is e
Sari-S ari
Superm arket
M ark et S tall
G roce ry/M inim a rt
W arehou se C lu b
C o nv enie nce S tore
W in ehou se/Liquor S ho p
Drugs tore
P ort/B u s S n ack C o unter
M all S nac k C ente r
Bak ery
(1 ) SM C’s C K A G d ivisio n w ill p rov ide ta rg e ted sa le s an d d is trib u tio n s e rv ice s to S M B o n an a rm ’s le n g th b as is . See Rela te d P a rt y T ra n sa c tio n s
(2) The Company has a total of 9,879 Wholesalers
Dealers generally provide their own warehouse facilities and trucks, considerably reducing the Company’s own
investment requirements. To increase distribution efficiency, the Company has gradually reduced the number of
its dealers. The Company has also increased the support that it provides to its dealers, including software
support with respect to streamlining logistics, promotional support and financial management training. The
Company enters into written distribution agreements with its dealers that specify the territory in which the
dealer is permitted to sell the Company’s products, the brands that the dealer is permitted to sell, the
performance standards applicable to the dealer, procedures to be followed by the dealer in connection with the
distribution rights and circumstances upon which distribution rights may be terminated. The Company’s sales
force designs and awards strategic sales territories to dealers based on research of the specific territory covered.
Distribution rights, performance standards and sales procedures are developed by the Company and
implemented in tandem with dealers to ensure high quality of services. As dealers are given exclusivity over
defined geographic areas that the Company actively monitors and enforces, these franchises are heavily sought
after by potential dealers.
To handle the modern trade accounts, such as hypermarkets, and high-visibility on-premise outlets, SMC’s
Corporate Key Accounts Group (CKAG) acts as an agent, with the Company as principal, and handles the sale
and distribution of the Company’s beer brands in key outlets such as hotels, bars and restaurants,
supermarkets/malls and convenience stores. CKAG accounts for only 4% of total sales volume. The Company is
not at the mercy of the modern trade given its strong relationship and the relatively large contributions of the
86
secondary and tertiary trades.
As of December 31, 2008, the Company, together with its distributors and call center associates, had a sales
force of approximately 1,607 in the Philippines. The Company recently introduced initiatives to increase sales
performance, including sales technique training for the Company’s distributors. Training that the Company
provides to its dealers includes selling systems and procedures, logistics management systems, finance, quality
management and human resource management. The Company also provides training to dealer personnel,
including selling systems and procedures, selling skills workshops and quality management. The Company has
also instituted systems to improve communication between its sales force and retail outlets, including an
electronic sales-booking system for large customers.
Marketing Activities
The Company actively pursues marketing initiatives to promote new and existing products, as well as to
maintain and enhance brand awareness of its existing products. These initiatives include media advertisements
featuring well-known Philippine celebrities, sponsorship of special events, conducting various consumer and
trade promotions and other merchandising activities. The Company also uses television, radio and print
advertisements, outdoor billboards and posters that can be placed on the walls of retail outlets and restaurants,
bars and other on-premise outlets. The Company operates a call center, “632-BEER,” which provides free beer
delivery service for parts of Metro Manila. Advertising and promotion expenses of the Company’s domestic
beer operations were P1,395 million in 2007 and P825 million in 2008.
The Company holds major events and sponsors numerous music events. San Miguel Beer Oktoberfest has been
the brand’s flagship event for over three decades. This month-long festival of beer and activities takes places at
numerous locations simultaneously across the Philippines. Popular bands and celebrities, including San Miguel
beer endorsers, are on hand to entertain the crowds. The Company also holds San Miguel Pale Pilsen’s
nationwide SMBabad Summerfest, which is an annual get-together of games, concerts and parties at the
country’s popular beaches. In addition to San Miguel Pale Pilsen, Red Horse is also often a major sponsor of
concerts, with the brand affiliated with Muziklaban, the country’s biggest annual rock challenge, a band
competition. The Company also conducted other brand-specific bar tours, including Cerveza Negra Jazz Nights
bar tours as well as Super Dry “Tranquility” lounge tours and “Sultry Groovin’” night events.
International Market
In addition to its domestic sales, the Company also exports its beer products to over 40 countries, with key
markets in Taiwan, Japan and the United States. The Company’s exports are primarily sold under various San
Miguel brands as well as under private labels. In 2008, export sales accounted for less than one percent of the
Company’s total beer sales.
SMC also owns brewery operations in Hong Kong, China, Vietnam, Thailand and Indonesia. In addition to
serving their local markets, these breweries which have a combined annual capacity of 5 million hl, also sell
their products in various export markets. The export operations of all of these breweries, plus those of the
Company, are coordinated at the direction of SMC. See “Related Parties Transactions.”
Grupo Mahou San Miguel of Madrid, Spain has the rights to the San Miguel brand for beer in Europe. It is not
affiliated with either the Company or SMC.
COMPETITION
The Company faces competition from another domestic producer, ABI, which sells both its own brand and
foreign brands it produces under license, and from foreign brewers. ABI is the Company’s largest competitor in
the Philippine market. It operates two breweries and also holds the license for Carlsberg beer and Colt 45 in the
Philippines. ABI competes, mainly on the basis of price, through its own Beer na Beer and Colt 45 brands. ABI
also competes with the Company’s market-leading high-alcohol beer product, Red Horse, with its licensed Colt
45 brand. Competition from imported beers is minimal. The Company also competes with producers of other
alcoholic beverages, primarily low-priced gin and brandy. In the beer industry — and more generally the
alcoholic beverage industry — competitive factors generally include price, product quality, brand awareness and
loyalty, distribution coverage, and the ability to respond effectively to shifting consumer tastes and preferences.
The Company believes that its market leadership, size and scale of operations, and extensive distribution
87
network create high entry barriers and provide the Company with a competitive advantage.
REGULATION AND TAXATION
Philippine national and local government legislation require a license to sell alcoholic beverages and prohibit
the sale of alcoholic beverages to persons below 18 years of age or within a certain distance from schools and
churches. Advertising and marketing of alcoholic beverages is largely unregulated in the Philippines. The
Company, however, aims to promote responsible drinking habits through its advertising and marketing
programs, and has in fact adopted its own Advertising & Marketing Code of Ethics for Alcoholic Beverages.
In the Philippines, excise tax represents a significant component of beer production costs. Excise tax is payable
by the producer, and the tax rate varies depending on the type of alcoholic beverage being produced, with more
expensive products being subject to higher rates. The Government raised excise tax rates for beer products on
January 1, 2005 by 20%, on January 1, 2007 by 8% and on January 1, 2009 by an additional 8%. As of January
1, 2009, the excise tax rates applicable to the Company’s products ranged from P9.64 per liter to P19.05 per
liter. These excise tax rates will be raised by an additional 8% effective January 1, 2011. The sale of beer in the
Philippines is also subject to a VAT. Effective February 1, 2006, the Government increased the VAT rate from
10% to 12%.
The following table sets forth the taxation system, both excise taxes and VAT, applicable to beer from 2000
through 2009.
88
BEER TAXATION IN THE PHILIPPINES
Year
Effective Date
Excise Tax Structure
Specific Excise Tax Rates (P/liter)
VAT (in %)
2000
Jan.1
Three-tiered specific 12%
increase from 1997
Low-priced (1) – 6.89
Medium-priced (2) – 10.25
High-priced (3) – 13.61
10
2005
Jan.1
Three-tiered specific 20%
increase from 2000,with
8% increases every two
years starting Jan 1, 2007
until Jan. 1, 2011
Low-priced (1) – 8.27
Medium-priced (2) – 12.30
High-priced (3) – 16.33
10
2006
Feb. 1
Three-tiered specific
Low-priced (1) – 8.27
Medium-priced (2) – 12.30
High-priced (3) – 16.33
12
2007
Jan.1
Three-tiered specific,
reflecting first set of 8%
increases
Low-priced (1) – 8.93
Medium-priced (2) – 13.28
High-priced (3) – 17.64
12
2009
Jan. 1
Three-tiered specific,
reflecting second set of
8% increases
Low-priced (1) – 9.64
Medium-priced (2) – 14.34
High-priced (3) – 19.05
12
________
Notes:
(1)
Low-priced beer — net selling price per liter (excluding VAT & excise tax) less than P 14.50.
(2)
Medium-price beer — net retail price per liter (excluding VAT & excise tax) from P 14.50 up to P 22.00.
(3)
High-priced beer — net retail price per liter (excluding VAT & excise) is more than P 22.00.
The following table sets forth the excise tax rates applicable to fermented liquors, including beer, as of January
1, 2007, January 1, 2009 and as scheduled to be applied on January 1, 2011, respectively.
Schedule of Current and Planned Excise Tax Rates on Fermented Liquors
Effectivity Date
January 1, 2007
Fermented liquors, where the net retail price (excluding excise
tax and VAT) per liter of volume capacity is:
Less than P 14.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 14.50 up to P 22.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
More than P 22.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fermented liquors brewed and sold at microbreweries or
small establishments such as pubs and restaurants,
regardless of the
net retail price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 1, 2009
January 1, 2011
P 8.93
P 13.28
P 17.64
P 9.64
P 14.34
P 19.05
P 10.41
P 15.49
P 20.57
P 17.64
P 19.05
P 20.57
EMPLOYEES
The table below presents the Company’s personnel numbers by functional category for the periods indicated.
89
Number of Employees
Category
For the year ended
For the year ended
For the year ended
Dec. 31, 2006
Dec. 31, 2007
Dec. 31, 2008
Executives (Officers and Managers). . . . . . . . . .
Project employees and Consultants. . . . . . . . . .
All other employees. . . . . . . . . . . . . . . . . . . . . .
136
225
2,667
125
233
2,465
Total. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .
3,028
2,823
138
121
2,499
2,758
The Company approved its retirement plan on February 4, 2008. Under the plan, all regular monthly-paid
employees and daily-paid workers of the Company are eligible members. Eligible members who reach the age
of 60 (65 for employees transferred from SMC) are entitled to compulsory retirement. The Company may,
however, at its own discretion, continue an employee’s membership under the plan on a year-to-year basis after
he/she reaches compulsory retirement. Eligible members may opt to retire earlier after they have completed at
least 15 years of credited service at the Company. Upon retirement, eligible members will receive a certain
percent of their final monthly pay for each year of their credited service. The amount varies depending on the
years of service of the retiree. Eligible members may receive certain resignation benefits if they resign before
they reach an eligible retirement date if they have completed at least five years of service at the Company.
All of the Company’s employees are based in the Philippines. The Company does not expect the number of its
employees to materially change in the next 12 months.
The Company assumed the responsibilities of SMC under 10 existing CBAs that cover approximately 50% of
the Company’s employees. Details of the CBAs and their expiration dates, in respect of both the term of the
agreement for employment and the term for the union to represent employees, are set out in the table below:
Union
No. of CBAs
SMC Employees Union-PTGWO (M) . . . . . . . . . . . . . . . . . . . . .
Ilaw at Buklod ng Manggagawa-SMC Chapter (D) . . . . . . . . . . .
Ilaw at Buklod ng Manggagawa- local 42 (D) . . . . . . . . . . . . . . .
Ilaw at Buklod ng Manggagawa- local 48 (M) . . . . . . . . . . . . . .
New San Miguel Sales Force Union-GMA(M) . . . . . . . . . . . . . . .
Philippine Agricultural, Commercial Industrial Workers Union (M)
San Miguel Bacolod Brewery Employees Union (D) . . . . . . . . . .
Ilaw at Buklod ng Manggagawa- Mandaue Chapter (D) . . . . . . .
New San Miguel Sales Force Union-Cebu(M) . . . . . . . . . . . . . . . . .
San Miguel Davao Brewery Independent Union (D) . . . . . . . . . .
________
1
1
1
1
1
1
1
1
1
1
Expiration
Economic
Representation
30-Jun-10
30-Jun-10
15-Feb-11
31-Dec-10
31-Jan-11
31-Oct-10
31-Jul-10
31-Dec-11
15-Feb-09(1)
30-Nov-09
30-Jun-09
30-Jun-09
15-Feb-10
31-Dec-09
31-Jan-10
31-Oct-13
27-Apr-09
31-Dec-10
15-Feb-11
30-Nov-12
Notes:
(M) Monthly wage-earners
(D) Daily wage-earners.
(1) The Company intends to renegotiate this agreement.
SMC has not experienced any strikes or work stoppages in the past three years. Neither has the Company
experienced any such strikes or work stoppages since the effectivity of the spin-off on October 1, 2007. The
Company considers its relationship with its employees to be good.
INSURANCE
The Company has an all-risk policy that covers its facilities and inventories against a variety of risks, including,
among others, fire, lightning, catastrophic perils (typhoon, flood, earthquake, volcanic eruption), machinery
breakdown, explosion, civil commotion, riot/strike, malicious damage, and other perils liability. The Company
does not maintain business interruption insurance for its production facilities. The total sum insured under this
policy is approximately US$627 million, with a maximum recovery for any one loss of US$250 million.
In addition to the all-risk policy, the Company maintains various general liability and product liability insurance
90
policies covering its operations. These policies do not cover liability as a result of pollution or environmental
damage by the Company.
The Company has a marine cargo insurance policy to cover domestic and international shipment of goods and
equipment. A product liability insurance policy insures all of the Company’s exported products. The Company’s
insurance policies are provided by leading Philippine insurance companies that are generally reinsured by major
international insurance companies.
HEALTH, SAFETY AND ENVIRONMENTAL MATTERS
The Company is subject to a number of employee health and safety regulations in the Philippines. For example,
the Company is subject to the occupational safety and health standards promulgated by the Philippine
Department of Labor and Employment. The Company believes that a safe and healthy work environment is
fundamental to the management of its human resources as well as conducive to greater employee productivity.
SMC has a safety management group, and under the Shared Services Agreement it is responsible for
formulating, implementing and enforcing the Company’s employee health and safety policies as well as
ensuring compliance with applicable laws and regulations. See “Related Party Transactions” for a description of
the Shared Services Agreement.
The Company is subject to extensive regulation by the Philippine Department of Environment and Natural
Resources. SMC’s environmental management group is responsible for formulating and implementing an
environmental management system based on ISO14001 standards for the Company under the Shared Services
Agreement. See “Related Party Transactions” for a description of the Shared Services Agreement. SMC’s
environmental management group, with assistance from outside environmental consultants, regularly conducts
employee environmental training as well as audits of the Company’s facilities and production processes. In
addition, the environmental management group conducts an annual compliance audit to ensure compliance with
applicable environmental laws and regulations as well as with the Company’s internal policies, and advises the
Company’s senior management of critical environmental issues. As of the date of this prospectus, the permits or
licenses of the Company for its operations have been transferred from SMC except for the water permits
covering the deep wells in the breweries (except in Polo Brewery which relies on a third-party for its water
supply).
As part of the extensive regulation by the DENR on the Company’s operations, the Company is also required to
comply with various laws and regulations concerning the discharge of materials into the environment. Prior to
the spin-off of its domestic beer business, in 2004 SMC received a notice from the Pollution Adjudication Board
(“PAB”) relating to the discharge of ammonia to the immediate surroundings of the Bacolod Brewery.
Following SMC’s submission of an environmental risk assessment report on this discharge, the PAB, in a
resolution dated March 31, 2005, referred the matter to the Regional Office of the Environment Management
Bureau (Region VI) of the DENR for their evaluation, after the receipt of which the PAB shall decide on the
matter. PAB also referred the matter to the Department of Labor and Employment for its separate independent
evaluation. The Company inquired as to the status of these referrals by separate letters to the Regional Office
(Region IV) of the DENR and Central Office of the DENR — Environment Management Bureau in November
2007. In October 2008, the central office of the DENR-EMB replied that they have requested the Regional
Office to forward the relevant documents for their evaluation and calendar the matter for proper deliberation of
the DENR-EMB board. Pursuant to a Technical Conference on January 30, 3009, the Company, in a letter dated
February 3, 2009, confirmed its commitment to remit to DENR-PAB the amount of P10,000 in compliance with
its obligations under Republic Act No. 8749. To date, the Company has yet to receive the resolution from the
DENR-EMB on the matter.
In a separate matter, in April 2007 SMC received a notice from the Environmental Management Bureau of the
DENR for sulfur dioxide emissions of the boilers in the Mandaue Brewery in excess of the standards of The
Clean Air Act of 1999 (the “Clean Air Act”), which resulted from the use of high sulphur bunker fuel.
Subsequent to receiving this notice, SMC has been relying on a grace period granted by the Secretary of the
DENR in a memorandum dated July 1, 2007 in favor of all industrial facilities using bunker fuel. The grace
period granted under the memorandum allows the continuous use by these industrial facilities of bunker fuel for
their operations without penalties, subject to the approved environmental management plan based on guidelines
of the Environment Management Bureau. Under this memorandum, the grace period will be available until the
DENR formulates definite guidelines for compliance with The Clean Air Act. On October 20, 2008, however,
the DENR issued a memorandum which revoked the grace period for compliance with the Clean Air Act. With
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the revocation of the July 2007 memorandum, the Company has commenced arrangements for the use of lowsulfur fuel oil in its Mandaue Brewery.
In 2008, the Company spent P73.3 million in complying with environmental laws and regulations.
LEGAL PROCEEDINGS
Except as otherwise disclosed above, as of the date of this prospectus, the Company is not a party to any
material pending legal proceedings, and none of the properties of SMC that was transferred to the Company
pursuant to the spin-off of the domestic beer business of SMC is the subject of any legal proceeding. SMC will
continue to be responsible for all pending legal proceedings that involve the domestic beer business prior to the
effectivity of the spin-off on October 1, 2007 (such as collection cases and foreclosure of properties given as
collateral for product purchases and cases for tax refunds filed with the BIR).
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BOARD OF DIRECTORS AND MANAGEMENT
The table below sets forth each member of the Board of Directors of the Company as of the date of this
prospectus:
Name
Age
Citizenship
Positio n
Ramon S. Ang. . . . . . . . . . . . . . . . . . . . . 55
Fil ipino
Ferdinand K. Constantino. . . . . . . . . . . .
Francis H. Jardeleza. . . . . . . . . . . . . . . .
Virgilio S. Jacinto. . . . . . . . . . . . . . . . . .
Joseph N. Pineda. . . . . . . . . . . . . . . . . . .
Roberto N. Huang. . . . . . . . . . . . . . . . . .
Rosabel T. Balan. . . . . . . . . . . . . . . . . . .
Iñigo Zobel. . . . . . . . . . . . . . . . . . . . . . .
Carmelo L. Santiago. . . . . . . . . . . . . . . .
Fil ipino
Fil ipino
Fil ipino
Fil ipino
Filipino
Filipino
Filipino
Filipino
Chairman, President and
Director
Director
Director
Dir ector
Dir ector
Director
Director
Indepe ndent Director
Indepen dent Director
57
59
52
45
60
45
52
66
Ramon S. Ang has served as Director of the Company since July 26, 2007 and its President since October 8,
2007. He also holds, among others, the following positions: Vice Chairman, President and Chief Operating
Officer of SMC; Chairman and Chief Executive Officer of Petron Corporation; Chairman of San Miguel
Properties, Inc. (“SMPI”), The Purefoods-Hormel Company, Inc., San Miguel Yamamura Packaging
Corporation (“SMYPC”), Anchor Insurance Brokerage Corporation (“AIBC”) and San Miguel Brewery Hong
Kong Limited (Hong Kong); Vice Chairman of Manila Electric Company; and Director of Ginebra San Miguel,
Inc. (“GSMI”) and San Miguel Pure Foods Company, Inc. (“SMPFC”). He is also the Chairman of Liberty
Telecoms Holdings Inc., Philippine Diamond Hotel & Resort, Inc., Philippine Oriental Realty Development,
Inc., Atea Tierra Corporation and Cyber Bay Corporation and an independent director of Philweb Corporation.
Mr. Ang has held directorships in various subsidiaries of SMC during the last five years.
Ferdinand K. Constantino has served as Director of the Company since July 26, 2007 and its Chief Finance
Officer and Treasurer until March 16, 2009. He also holds, among others, the following positions: Senior Vice
President, Chief Finance Officer and Treasurer of SMC; Chief Finance Officer of Manila Electric Company;
President of AIBC; and Director of GSMI, SMPFC, SMPI, SMYPC, Bank of Commerce, San Miguel Brewery
Hong Kong Limited (Hong Kong), Magnolia, Inc. and San Miguel Foods, Inc. Mr. Constantino previously
served as Chief Finance Officer of the San Miguel Beer Division of SMC (1999-2005) and has held
directorships in various subsidiaries of SMC during the last five years.
Francis H. Jardeleza has served as Director and Corporate Secretary of the Company since July 26, 2007. He
also holds, among others, the following positions: Senior Vice President, General Counsel, Corporate Secretary
and Compliance Officer of SMC; Corporate Secretary and Compliance Officer of GSMI, SMPFC and SMPI;
Corporate Secretary of The Purefoods-Hormel Company, Inc. and SMYPC; Chairman and President of SMC
Stock Transfer Service Corporation (“SMCSTSC”) and Director of SMBI. Mr. Jardeleza has been a director,
corporate secretary and/or assistant corporate secretary of various subsidiaries of SMC during the last five years
and is a professorial lecturer at the University of the Philippines, College of Law (1992-2003, 2007-2009).
Virgilio S. Jacinto has served as Director of the Company since July 26, 2007. He also holds among others, the
following positions: Vice President, First Deputy General Counsel of SMC and Director of San Miguel
Beverages Inc. (“SMBI”). Mr. Jacinto is also an Associate Professor at the University of the Philippines,
College of Law since June 1, 1993.
Joseph N. Pineda has served as Director of the Company since July 26, 2007. He also holds, among
others, the following positions: Vice President and Deputy Chief Finance Officer of SMC and Director
of SMCSTSC, Monterey Foods Corporation, SMC Shipping and Lighterage Corporation (“SMCSL”),
SMITS, Inc. (“SMITS”) and Process Synergy, Inc. Mr. Pineda was former President of UCPB Savings
Bank (2004), Chief of Staff to the Office of the COO and Vice-President, Officer-in-Charge of the Trust
Banking Division of United Coconut Planters Bank (2003) and President and Nominee to the Philippine Stock
Exchange of UCPB Securities (1999-2003).
Roberto N. Huang has served as Director and General Manager of the Company since October 8, 2007. He
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also holds the following positions: Senior Vice President of SMC and Director of SMBI. He also served as
Director of GSMI (2004-2008) and SMPFC (2004-2008); President of Coca-Cola Bottlers Philippines, Inc.,
Cosmos Bottling Corporation and Philippine Beverage Partners, Inc. (2003-2007); and Senior Vice President,
Director, Corporate Sales for the Food, Beverage, Corporate Key Accounts and Corporate Export Sales Groups
(2002-2003) and Vice President and Director, Corporate Sales for the Beverage Group (2001-2002) of SMC.
Rosabel Socorro T. Balan has served as Director of the Company since October 8, 2007. She also holds,
among others, the following positions: Vice President and Deputy General Counsel of SMC; Assistant
Corporate Secretary of SMC, GSMI, SMPFC and SMPI and Compliance Officer of AIBC and SMCSTSC. Ms.
Balan has also been a director, corporate secretary and/or assistant corporate secretary of various subsidiaries of
SMC during the last five years.
Iñigo Zobel has served as Independent Director of the Company since October 8, 2007. He is also an
Independent Director of SMC, GSMI, SMPFC and SMPI. Mr. Zobel also holds the following
positions: President and Chief Executive Officer of E. Zobel, Inc.; President of Ayala España S.A., Calatagan
Golf Club, Inc. and Hacienda Bigaa, Inc.; and a Director of Top Frontier Investment Holdings, Inc., Global
5000 Investments, Inc., Calatagan Resort, Inc., Calatagan Gulf Realty, Inc., and Mermac, Inc., and has been the
President of Diamond Star Agro Products, Inc. during the last five years.
Carmelo L. Santiago has served as Independent Director of the Company since October 8, 2007. He is
currently an Independent Director of SMC, SMPI, AIBC, Liberty Telecoms Holdings Inc., and San Miguel
Brewery Hong Kong Limited (Hong Kong) and Director of Terbo Concept, Inc. Mr. Santiago is the founder
and owner of several branches of Melo’s Restaurant and has held directorships in SMPI (2001-2004),
GSMI (1998-2004), Manila Standard, Inc. (1998-2004), National Power Corporation (1998-2004) and
Philippine National Bank — Hong Kong (1998-2004).
SENIOR MANAGEMENT
The table below sets forth the Company’s executive officers as of the date of this prospectus.
Name
Age
Citizenship
Positio n
Ramon S. Ang. . . . . . . . . . . . . . . .
Mercy Marie Jacqueline L. Ama do r.
Francis H. Jardeleza. . . . . . . . . . . .
Roberto N. Huang. . . . . . . . . . . . .
Minerva Lourdes B. Bibonia . . . . . .
Debbie D. Namalata . . . . . . . . . . .
Rene T. Ceniza. . . . . . . . . . . . . . . .
Enrico E. Reyes . . . . . . . . . . . . . . . .
Rebecca S. Flores . . . . . . . . . . . . . . . . . .
Susan Y. Yu . . . . . . . . . . . . . . . . . . . . . .
55
47
59
60
50
43
46
46
53
32
F ilipino
F ilipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
President
Chief Financ e Officer/ Treasurer
Corporate Secretary
General Manager
Head – Marketing
Head – National Sa les
Head – Logistics
Head – Human Resources
Head – Brewing Te chnical Group
Senior Procuremen t Manager
Mercy Marie Jacqueline L. Amador was appointed Vice President and Chief Finance Officer and Treasurer of
the Company on March 16, 2009. She was previously Chief Finance Officer of San Miguel Brewing
International, Ltd. (SMBIL). She also sits on the boards of several subsidiaries of SMC, among them
Guangzhou San Miguel Brewery Ltd., San Miguel Guangdong Food & Beverages, Neptunia Corporation
Limited and SMBIL.
Minerva Lourdes B. Bibonia has served as Head of Marketing of the Company since October 8, 2007. She
also holds among others the following positions: Senior Vice President for Corporate Marketing of SMC since
January 2002; Director of San Miguel Brewery Hong Kong Limited (Hong Kong) and a Commissioner of PT
Delta Djarkarta Tbk (Indonesia). She previously served SMC in the following capacities: Vice President and
Head of the CKAG (2001) and Consultant to the Office of the Chairman (2000-2001).
Debbie D. Namalata has served as the National Sales Manager of the San Miguel Beer Division of SMC since
July 2007. She was previously Executive Assistant to the San Miguel Beer Division President (April-June
2007); General Manager of San Miguel Super Coffeemix Co., Inc. (2006-2007); General Manager for butter,
margarine, cheese and jellyace of Magnolia, Inc.; and Director of Sugarland Corporation, Star Dari, Inc. and
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Magnolia, Inc. (2005-2006); and Assistant Vice President, Visayas-Mindanao Business Development Manager
of The Purefoods-Hormel Company, Inc. (2002-2003) and Regional Sales Manager (2003-2004).
Rene T. Ceniza has served as Assistant Vice President and Manager for National Logistics of the San Miguel
Beer Division of SMC since May 2005. He previously served SMC in the following capacities: Manager,
National Logistics (2004-2005), Manager, GMA Logistics (2003-2004); and Manager, Logistics Technical
Services (2002-2003) of the San Miguel Beer Division. He was also placed on special assignment as Logistics
Consultant for Coca-Cola Bottlers Philippines, Inc. in 2001.
Enrico E. Reyes has served as Manager for Human Resources of the San Miguel Beer Division of SMC since
April 2007. He previously served SMC in the following capacities: Compensation and Benefits Manager,
Human Resources Division (2006) and Human Resources and Administration Manager for San Miguel Beer
Division, Visayas (1997-2005).
Rebecca S. Flores is the Assistant Vice President and Head of the Brewing Technical Group. She was
previously Plant Manager of San Miguel Baoding Brewery, North China Operations (2006-2008); and Mandaue
and Bacolod Breweries (2001-2006); and Brewmaster and Brewing Manager of Mandaue Brewery of San
Miguel Brewing Philippines (former name of the San Miguel Beer Division) of SMC.
Susan Y. Yu is the Assistant Vice President and Senior Corporate Procurement Manager of the Company. She
was previously Assistant Vice President and Senior Corporate Procurement Manager (2006-2008) and
Corporate Procurement Manager (2003-2006) of SMC and Fuel Purchasing and Price Risk Management
Manager of Philippine Airlines (1997-2003).
The Company has engaged the consultancy services of Mr. Josefino C. Cruz to direct the Company’s
manufacturing operations.
TERM OF OFFICE
Pursuant to the Company’s amended by-laws, the directors are elected at each annual shareholder’s meeting by
shareholders entitled to vote. Each director holds office until the next annual election and his successor is duly
elected, unless he resigns, dies or is removed prior to such election.
QUALIFICATIONS AND DISQUALIFICATIONS
The Company’s amended by-laws require that directors have at least 5,000 shares registered in their names in
the books of the Company.
No person shall qualify or be eligible for nomination or election to the Board of Directors if such person is
engaged in any business, which competes with or is antagonistic to the business of the Company. Without
limiting the generality of the foregoing, a person shall be deemed to be engaged in a business competing with or
antagonistic to the Company’s business under the following circumstances:
(a) If the person is an officer, manager or controlling person of, or the owner (either of record or beneficially)
of 10% or more of any outstanding class of shares of, any corporation (other than one in which the
Company owns at least 30% of the capital stock) engaged in a business which the Board of Directors, by
at least three-fourths vote, determines to be competitive or antagonistic to that of the Company; or
(b) If the person is an officer, manager or controlling person, or the owner (either of record or beneficially) of
10% or more of any outstanding class of shares of, any other corporation or entity engaged in any line of
business of the Company, when in the judgment of the Board of Directors, by at least three-fourths vote,
the laws against combinations in restraint of trade shall be violated by such person’s membership in the
Board of Directors of the Company; or
(c) If the Board of Directors, in the exercise of its judgment in good faith, determines by at least three-fourths
vote that he is the nominee of any person set forth in (a) or (b) above.
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The Board of Directors may also take into account other factors such as business and family relationship in
determining whether or not a person is a controlling person, beneficial owner or the nominee of another.
EXECUTIVE COMPENSATION
By resolution of the Board of Directors, each director shall receive a reasonable per diem allowance for his
attendance at each board meeting. The Company intends to provide each director with reasonable per diem of
P20,000 and P10,000 for each Board and Board Committee meeting, respectively, attended by such director.
Other than these per diem amounts, there are no standard arrangements pursuant to which the directors of the
Company are compensated, or are to be compensated, directly or indirectly, by the Company for services
rendered by such directors as of the date of this prospectus.
The table below sets out the aggregate compensation paid or incurred by the Company in 2007 and 2008 and
estimated to be paid in the ensuing fiscal year to the President and senior executive officers of the Company:
NAME
YEAR
SALARY
BONUS
OTHERS
TOTAL
(in P millions)
Total Compensation of the
President and the nine named
Executive Officers other than
the President(1) . . . . . . . . . . . . .
All other officers and directors as
a group unnamed . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
2009
(estimated)
2008
48.9
16.6
14.7
80.2
44.3
13.9
10.5
68.7
2007(1)
2009
(estimated)
2008
8.1
42.9
3.6
14.5
2.4
18.3
14.1
75.7
41.5
19.8
14.2
75.5
2007(1)
12.2
5.0
5.1
22.3
2009
(estimated)
2008
91.8
31.1
33.0
155.9
85.8
33.7
24.7
144.2
2007(1)
20.3
8.6
7.5
36.4
__________
(1) 2007 figures are from October to December only.
OTHER ARRANGEMENTS
There are no other arrangements pursuant to which the directors of the Company are compensated, or are to be
compensated, directly or indirectly, by the Company for services rendered by such directors as of the date of this
prospectus.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-INCONTROL
There are no employment contracts between the Company and its executive officers. There is no compensatory
plan nor arrangement with respect to an executive officer which results or will result from the resignation,
retirement or any other termination of such executive officer’s employment with the Company, or from a
change-in-control of the Company, or a change in an executive officer’s responsibilities following a change-incontrol of the Company.
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WARRANTS AND OPTIONS OUTSTANDING
As of the date of this prospectus, there are no outstanding warrants or options held by the Company’s President,
named executive officers and all directors and officers as a group.
SIGNIFICANT EMPLOYEES
The Company has no individual employee who is not an executive officer but who is expected to make a
significant contribution to the business.
FAMILY RELATIONSHIPS
There are no family relationships up to the fourth civil degree either by consanguinity or affinity among the
Company’s directors, executive officers or persons nominated or chosen by the Company to become its
directors or executive officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the directors and executive officers of the Company have been involved in any legal proceeding,
including, without limitation, being the subject of any (a) bankruptcy petition, (b) conviction by final judgment,
(c) order, judgment or decree of suspension, enjoinment or limitation of his involvement in any type of business,
securities, commodities or banking activities, or (d) violation of a securities or commodities law, for the past
five years up to the latest date, that is material to the evaluation of his ability or integrity to hold the relevant
position in the Company.
DISCLOSURE ON COMPLIANCE WITH LEADING PRACTICES ON CORPORATE GOVERNANCE
Manual on Corporate Governance
The Company’s Manual on Corporate Governance (the “Manual”) was approved by the Board of Directors on
October 25, 2007, as amended on April 10, 2008.
Independent Directors
Under the present SEC policy, the Company is required to have at least two independent directors in its Board
of Directors. The Manual, in turn, requires at least two independent directors to serve on the Company’s Audit
Committee and one independent director on each of the Nomination and Hearing Committee and the Executive
Compensation Committee. Under the implementing rules and regulations of the SRC, an independent director is
defined as a person who, apart from his fees and shareholdings, is independent of management and free from
any business or other relationship which could, or could reasonably be perceived to, materially interfere with his
exercise of independent judgment in carrying out his responsibilities as a director. An independent director must
satisfy the qualifications and must have none of the disqualifications of an independent director set out in the
SRC and its implementing rules and regulations, the Manual, the amended articles of incorporation and
amended by-laws of the Company.
Board Committees
Audit Committee
The Audit Committee is comprised of at least three members of the Board of Directors, at least two of whom
shall be independent directors. One of the independent directors shall be the Chairman of the Audit Committee.
The Audit Committee is responsible for assisting the Board of Directors in discharging its corporate governance
and fiduciary duties in relation to financial reporting, internal control structure, risk management systems and
internal and external audit functions. It reviews and monitors, among others, the integrity of the Company’s
financial statements and reports, and ensures their compliance with pertinent accounting standards and
regulatory requirements, and performs oversight financial management functions specifically in the areas of
managing credit, market, liquidity, operational, legal and other risks of the Company, and crisis management.
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The Company’s Audit Committee is chaired by Mr. Carmelo L. Santiago (independent director) with Mr. Iñigo
Zobel and Mr. Joseph N. Pineda as members.
Nomination and Hearing Committee
The Nomination and Hearing Committee is composed of at least three voting members and one non-voting
member in the person of the Human Resources director or manager. One of the three voting members must be
an independent director. The Nomination and Hearing Committee shall be responsible for making
recommendations to the Board of Directors on matters relating to the directors’ appointment, election and
succession, with the view of appointing individuals to the Board of Directors with the relevant experience and
capabilities to maintain and improve the competitiveness of the Company and increase its value. It shall prescreen and shortlist all nominees in accordance with the qualifications and disqualifications for directors set out
in the Manual, the amended articles of incorporation and amended by-laws of the Company and applicable
laws, rules and regulations.
The Company’s Nominations and Hearing Committee is chaired by Mr. Iñigo Zobel (independent director) with
Mr. Carmelo L. Santiago and Joseph N. Pineda as voting members and Mr. Dave S. Santos as non-voting
member.
Executive Compensation Committee
The Executive Compensation Committee shall be composed of three members, one of whom must be an
independent director. It is responsible for advising and assisting the Board of Directors in the establishment of
formal and transparent policies and practices on directors and executive remuneration and providing oversight
over remuneration of directors, senior management and other key personnel to ensure that the Company’s
compensation scheme fairly and responsibly reward directors and executives based on their performance and the
performance of the Company, and remain competitive to attract and retain directors and officers who are needed
to run the Company successfully.
The Executive Compensation Committee is chaired by Mr. Iñigo Zobel (independent director) with Mr.
Ferdinand K. Constantino and Mr. Carmelo L. Santiago as members.
Compliance and Monitoring System
The Chairman of the Board of Directors shall designate a Compliance Officer who shall be responsible for
monitoring compliance by the Company with the provisions and requirements of the Manual and ensure
adherence to corporate principles and best practices.
Mr. Francis H. Jardeleza is the Company’s Compliance Officer.
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RELATED PARTY TRANSACTIONS
SMC directly owns and controls approximately 94.25% of the Company’s issued and outstanding Common
Shares. Following the spin-off of the domestic beer business of SMC, which was then conducted by SMC
through SMBD, to the Company, SMC and the Company entered into certain agreements, and SMC assigned to
the Company all of its rights and obligations under various agreements with third parties relating to SMC’s
domestic beer business, including those agreements entered into with SMC’s subsidiaries.
The Company’s policy with respect to related party transactions is to ensure that these transactions are entered
into on terms comparable to those available from unrelated third parties.
Below is a summary of the Company’s related party transactions.
SMC
•
SMC receives a monthly royalty fee of 2% of the Company’s net sales
revenue under a License Agreement in consideration for its grant to the
Company of an exclusive license to use, in the Philippines,
certain know-how relating to the manufacture, packaging and handling
of certain beer products currently produced by the Company (the
“Licensed Products”) and certain specified Philippine trademarks, trade
dress, copyrights and patents, which include the SMB Brands, (the “IP
Rights”) in connection with the production, preparation and distribution
of the Licensed Products. The license is effective for a period of 25 years
from October 1, 2007, renewable for another 25 years at the option of
SMC upon request by the Company. It extends to such know-how or
intellectual property rights as may be developed or acquired by SMC
during the life of the License Agreement, and may not be used outside
of the Philippines or applied to other products other than the Licensed
Products. The rate of the royalty fee is subject to review by the parties
every five years, and no royalty is paid for any IP Rights that expire
and cannot be renewed under applicable intellectual property laws. Other
key terms under the License Agreement include undertakings (a) by
the Company (i) to spend at least 2% of its total sales revenues of the
previous year during each year of the term of the License Agreement
for the advertising and promotions of the Licensed Products; (ii) not to
introduce new beer products and brands in the Philippines, or to
manufacture, prepare, package, distribute, sell, deal in or otherwise be
concerned with any other alcoholic beverage products (other than the
Licensed Products) without SMC’s prior written consent; (iii) to secure
the consent of SMC in the event of a change in the control of the
Company; and (b) by SMC (i) to include in the Licensed Products all new
beer products and brands introduced in the Philippines; and (ii) to allocate
funds for advertising support in the amount of P375 million each year
for the Licensed Products in the first two years of the License
Agreement.
Following the approval of the transfer of the SMB Brands to Iconic by the
SEC on February 27, 2009, the License Agreement was amended to exclude
therefrom the SMB Brands and SMC assigned all its rights and obligations
under the License Agreement, as amended, to Iconic in respect of the SMB
Brands.
Upon completion of the Brand Acquisition, the Company and Iconic will
execute a license agreement whereby the latter will grant the Company an
exclusive license to use the SMB Brands under such terms and conditions as
may be agreed by the parties.
•
SMC receives a monthly service fee equivalent to 0.5% of the Company’s
net sales revenue for the previous month under a Shared Services Agreement
in consideration for rendering to the Company certain corporate services and
99
facilities related to finance, audit, legal, human resources,
procurement, facilities audit, safety and property risk
management,
operations research, product technology and formulations, marketing,
government and media affairs, and other similar services such as, mergers
and acquisitions. The Company shall likewise pay SMC the actual costs and
expenses incurred by SMC in performing the said services, and shall be liable
for all taxes due and payable in connection therewith. The Shared Services
Agreement has a term of 49 years commencing on October 1, 2007; but
may be terminated upon termination of the License Agreement.
•
SMC receives lease payments under a Contract of Lease, for the Lease by the
Company of lands owned by SMC on which all of the Company’s production
facilities, as well as certain sales office facilities in the Philippines, are
located. The rental payments under the lease are P154 million for the first
year, subject to an escalation of 10% in each succeeding year until the end of
the term.
The term of the lease is 5 years commencing on October 1, 2007.
Following the sale by SMC to Brewery Landholdings of certain parcels of
land on which certain sales offices used by the Company are located, the
Contract of Lease was amended to exclude therefrom such parcels of land
sold to Brewery Landholdings, and SMC assigned its rights and obligations
under the Contract of Lease, as amended, to Brewery Landholdings, in
respect of such parcels of land.
After the completion of the Land Acquisition, the Company intends to enter
into a contract of lease with Brewery Properties and Brewery Landholdings
for the lease of the land on which all of the Company’s production facilities
and certain of its sales offices used in its business are located, including the
SMB Land, under such terms and conditions as may be agreed upon by the
parties.
•
SMC receives a service fee on a per-brand per-unit basis to cover actual costs
and expenses incurred by its CKAG, a division of SMC, which acts as the
Company’s sales agent in the on-premise channel, and provides marketing
services to the Company, including the formulation of plans and programs in
connection with selling and marketing activities and management of the
implementation of marketing plans and programs for the Company’s beer
brands in identified key on-premise and off-premise accounts such as hotels,
bars and restaurants, supermarkets, malls and convenience stores, as approved
by the Company. SMC, through CKAG, also acts as the Company’s dealer in
the off-premise channel, for which it receives a service fee that is given as a
discount on the wholesale price of the products it purchases from the
Company on a per-brand per-unit basis. The term of the agreement is up to
September 30, 2009, subject to annual review by the parties. The service fees
paid to and discounts earned by SMC for the foregoing services for 2007 and
2008 were P 337 million and P 282 million, respectively.
•
SMC receives service fees at the rate of 4% of the invoiced value of the
products sold in the export market every month following the month when the
exports sales were collected for services rendered by its CESBD to the
Company. CESBD acts as agents of the Company in handling the marketing,
selling and distribution of the Company’s beer products in the export markets.
The term of the agreement is up to September 30, 2009 subject to annual
review of the parties. The service fees paid for such services in 2007 and 2008
were P 10 million and P 14 million, respectively.
•
The Company pays, under a Cost-Sharing Agreement, its monthly
proportionate share of certain expenses and costs of services incurred by
100
SMC, such as but not limited to janitorial and security services, utilities and
rentals for SMC Head Office and 808 building space, internet, email, SAP
and photocopying charges, from which services and expenses the Company
has benefited. The Company’s proportionate share is based on the amount
billed by the third party service provider or the amount of the expenses and
the agreed basis of allocation as set out in the agreement and shall be without
mark-up or profit on the part of SMC. SMC, at its sole option, however, may
impose interest of 1% per month on any proportionate share due and unpaid
by the Company. The Company paid its proportionate share of such services
and expenses in 2007 and 2008 in the amount of P14 million and P38 million,
respectively. The term of this agreement commenced on January 1, 2008 and
will remain effective until terminated upon mutual agreement of the parties.
SMCSL
San Miguel
Distribution
Company, Inc.
(SMDCI)
SMBI
•
SMCSL, a 70% subsidiary of SMC and a joint venture between SMC and
KADIWA Transport Corporation, receives fixed service fees for cargo
handling, warehousing, and shipping services rendered to the Company for
the distribution and delivery of its raw materials and finished goods to and
from the Company’s Mandaue Brewery. The service fees may be adjusted
upward or downward in case of a 10% adjustment in the salary scale and/or
benefits of SMCSL’s employees or a 5% fluctuation in prevailing fuel and oil
prices. The Service Agreement is for a term of 23 years, effective on March 1,
2001, and shall automatically terminate upon the expiration or termination of
the Joint Venture Agreement between SMC and KADIWA Transport
Corporation. The Company may terminate the Service Agreement by giving
SMCSL 60 days’ prior written notice if the price charged by SMCSL is not
the best price available or if the quality of SMCSL’s service is not acceptable
to the Company, unless such quality of service is remedied by SMCSL to the
satisfaction of the Company within 30 days from SMCSL’s receipt of the
termination notice. The service fees paid for such services in 2007 and 2008
were P 102 million and P 415 million respectively.
•
SMDCI, a wholly-owned subsidiary of SMC, receives a service fee per month
based on a per case rate with a minimum guaranteed monthly volume from
the Company for management of logistics service providers. The term of the
agreement covering the Mandaue Brewery is up to December 31, 2008, and
after that date on a month-to-month basis if the parties continue their relations
under the agreement but no written renewal has yet been executed.
•
SMDCI also receives a fixed service fee for the provision of logistics
technical services, including provision of advice on the selection criteria for
other third party logistics service providers, benchmarking of logistics
services rates, improvements of logistics, and related business processes,
among others. The term of the agreement is up to January 31, 2009, and after
that date on a month-to-month basis if the parties continue their relations
under the agreement but no written renewal has yet been executed
•
The Company receives from SMBI, a wholly-owned subsidiary of SMC,
service fees on a per case basis for warehousing and delivery of SMBI’s
finished goods in accordance with the plans and schedules provided by
SMBI under a Logistics Management Agreement. The Company is also
required to provide storage space for SMBI’s products only to the extent that
such storage space is not needed for the Company’s products. Rentals for
any delivery truck needed for the services under the agreement in
addition to the required fleet complement for the Company’s products are
paid for by SMBI. The term of the agreement is from April 01, 2007 to
March 31, 2008, and after that date on a month-to-month basis if the parties
continue their relations under the agreement but no written renewal has yet
been executed.
•
The Company receives a fixed discount on a per case basis for SMBI’s
101
products that it sells under a Distribution Agreement, pursuant to which
the Company, using its sales organization, dealer force and other modes of
distribution, acts as the distributor of SMBI’s ready-to-drink and powdered
mix products in specified areas in the Philippines. The term of the
agreement is from April 01, 2007 to March 31, 2008, and after that date on a
month-to-month basis if the parties continue their relations under the
agreement but no written renewal has yet been executed.
•
The Company also receives rentals for leasing certain equipment and building
to a third-party contractor, Supa Nova Foods, Inc., which in turn provides
toll-manufacturing services to SMBI.
•
The Company receives fees for the toll-manufacturing of SMBI’s fruit drink
and tea products under the toll-manufacturing arrangement with SMBI.
GSMI
and a subsidiary
•
GSMI, a majority-owned subsidiary of SMC, pays a fee on a per case basis in
consideration for toll-manufacturing services rendered by the Company for
GSMI’s alcoholic beverages, which services are performed in the Polo
Brewery using the brewery’s excess capacities. The Company agrees not to
toll-manufacture any other product which directly competes with the products
it toll-manufactures for GSMI. The agreement is valid until December 31,
2009. The fees received by the Company for such services in 2007 and 2008
were P 2 million and P 8 million, respectively. A subsidiary of GSMI also
paid its share for the use of utilities to the Company.
SMYPC, SMRPC,
SMYAC
•
SMYPC, SMRPC and SMYAC, all subsidiaries of SMC, receive payments
from the Company for packaging materials such as bottles, crowns, caps,
cartons, plastic crates and pallets purchased by the Company. These
purchases are covered by various purchase orders which define the prices and
delivery schedules negotiated and agreed upon by the parties. These SMC
subsidiaries form part of the San Miguel Packaging Group, which, with its
business partners, is one of the leading suppliers of packaging materials in the
Philippines and exports packaging materials to more than 10 countries.
Purchases of packaging products from SMYPC, SMRPC and SMYAC in
2007 and 2008 collectively amounted to P 538 million and P 2,116 million,
respectively.
SMPFC
and subsidiarie s
•
SMPFC, a majority-owned subsidiary of SMC, has a subsidiary which obtains
spent grains that are among the waste products resulting from the Company’s
brewing process. SMPFC’s subsidiary uses spent grains as a minor
component in the production of animal feeds. All costs associated with the
withdrawal of the spent grains are for the account of SMPFC’s subsidiary.
Spent grains would be a pollutant if retained in the Company’s facilities, and
their disposal would be an expense for the Company. SMPFC’s subsidiary
obtained grains free of charge in 2007. In 2008, purchases amounted to P17
million.
•
A subsidiary of SMPFC also paid the Company its share in the use of utilities
for its chicken processing plant, which is located beside the Company’s San
Fernando Brewery, up to December 31, 2007. Beginning January 1, 2008,
SMPFC’s subsidiary and the Company paid their respective shares in the use
of electricity directly to SMC. However, SMPFC’s subsidiary paid its shares
in the expenses for water consumption and use of communication facilities
directly to the Company.
•
The Company purchases products of subsidiaries of SMPFC for its
employees’ annual Christmas gift packages and promo bundles.
•
SMITS, a wholly-owned subsidiary of SMC, and a subsidiary receive fees
SMITS
102
from the Company on a per-engagement and/or per-service basis for
information technology and systems services, including maintenance of the
Company’s software and hardware facilities, and business process
outsourcing and customer care services. SMITS also provides advisory
services on the development of new systems and/or up-grade of existing
systems which are outsourced to non-related third parties. The term of these
engagements/services is usually for a year. The fees paid for such services in
2007 and 2008 were P 26 million and P 98 million, respectively.
and a subsidiary
Ancho r Insurance
Brokerage
Corporation
(“AIBC”)
•
AIBC, a subsidiary of SMC, receives service fees on a per transaction or
engagement basis from the Company for the Company’s share in the
insurance brokering services rendered by AIBC for the entire SMC Group for
the SMC Group’s consolidated insurance requirements such as insurance for
motor vehicles, fire insurance, etc. For the comprehensive insurance coverage
of the SMC Group which is bidded out to global insurance institutions, AIBC
is engaged to assist in the bidding process and pre-qualification of insurance
companies under the direction of SMC. The fees paid for such services in
2007 and 2008 were P 0.17 million and P 0.65 million, respectively.
San Miguel
Brewi ng
International
Limited
(“SMBIL”) and
subsidiaries
•
SMBIL, a wholly-owned subsidiary of SMC, and its subsidiaries purchase
beer products from the Company. These purchases are covered by various
purchase orders which define the prices and delivery schedules negotiated and
agreed upon by the parties. Purchases of beer products by SMBIL and its
subsidiaries in 2007 and 2008 were P 25 million and P 3 million, respectively.
Archen
Technologies, Inc.
(“Arche n”)
•
Archen, a wholly-owned subsidiary of SMC, receives a fixed service fee for
liaison and consultancy services relating to power and energy concerns of the
Company. The agreement commenced on June 1, 2008 and shall expire one
year thereafter. Archen also receives fees for consultancy services relating to
the capital expenditures of the Company. In 2008, the Company paid P 4.0
million for such services.
SMC S tock
Trans fer Service
Corporation
(“SMCSTSC”)
•
SMCSTSC, a wholly-owned subsidiary of SMC, receives retainer fees and
processing fees for stock transfer services rendered to the Company. The
agreement commenced on April 1, 2008 and ended on December 31, 2008 but
was subsequently renewed for a period of 1 year ending on December 31,
2009. In 2008, the Company paid P 0.18 million for such stock transfer
services.
Bank of
Commerce
(“BOC”)
•
BOC is held as to 30% of its capital stock by SMPI, a subsidiary of SMC. In
consideration for the use of BOC’s deposit pick up services, the Company
agrees to maintain an agreed-upon reasonable average daily balance in a
specified account with BOC, failing which (after a 30-day curing period),
shall entitle BOC to charge a service fee. The agreement shall remain in
effect until terminated by either party upon at least 30 day’s prior notice.
For further information on the Company’s related-party transactions, including detailed breakdowns of amounts
receivable from affiliated companies, see Note 19 of the Company’s audited financial statements.
103
DESCRIPTION OF PROPERTIES
OWNED PROPERTIES
The Company’s principal owned properties consist of five breweries, 34 out of its 49 sales offices and 11
warehouses. The land improvements, buildings, machinery, transportation equipment, office equipment and
furniture, and/or tools and small equipment owned by the Company in these breweries, region offices, sales
offices and warehouses, as well as those in certain terminals and wharfs leased by the Company, have a net
book value of P5.86 billion as of December 31, 2008. The locations and general asset description of these
properties and equipment are set out below:
Breweries
The Company has 5 breweries in the following locations:
•
Polo Brewery
Marulas, Valenzuela City, Metro Manila
•
San Fernando Brewery
Brgy. Quebiawan, McArthur Highway, San Isidro, San Fernando, Pampanga
•
Bacolod Brewery
Brgy. Granada, Sta. Fe, Bacolod City, Negros Occidental
•
Mandaue Brewery
National Highway, Brgy.Tipolo, Mandaue City
•
Davao Brewery
Brgy. Darong, Sta. Cruz, Davao del Sur
A more detailed description of these breweries are found in the section entitled “Business Overview —
Production.”
Sales/Area Offices and Warehouses
The Company owns land improvements, buildings, machinery, transportation, office equipment, tools and/or
furniture in the following sales/area offices and warehouses located nationwide.
•
Central North Luzon Area
¾
SMC Complex, Brgy. Quebiawan, McArthur Highway, San Fernando, Pampanga
¾
Carmen East, Rosales, Pangasinan
¾
Caranglaan Dist., Dagupan City, Pangasinan
¾
Naguilian Road, San Carlos Heights, Brgy. Irisan, Baguio City, Benguet
¾
Pennsylvania Ave., Brgy. Madayegdeg, San Fernando, La Union
¾
Brgy. San. Fermin, Cauayan, Isabela
¾
National Road, Brgy. Mabini, Santiago City, Isabela
¾
San Andres St., San Angelo Subdivision, Sto. Domingo, Angeles City, Pampanga
104
•
•
•
¾
Maharlika Road, Bitas, Cabanatuan City, Nueva Ecija
¾
Brgy. 22, San Guillermo, San Nicolas, Ilocos Norte
Greater Manila Area North
¾
Cagayan Valley Rd., Brgy. Sta. Cruz, Guiguinto, Bulacan
¾
Gapan-Olongapo Rd., Poblacion San Isidro, Nueva Ecija
¾
A. Cruz St., Brgy. 96, Caloocan City
¾
Honorio Lopez Blvd., Guidote St., Tondo, Manila
¾
Brgy. Mangga, Cubao , Quezon City
¾
Bldg. 23 Plastic City Cpd., #8 T. Santiago St., Brgy. Canumay, Valenzuela City, Metro Manila
¾
Quirino Highway, Novaliches, Quezon City, Metro Manila
Greater Manila Area South
¾
GF SMC HOC, #40 San Miguel Ave., Mandaluyong City, Metro Manila (office equipment and
furniture only)
¾
Brgy. 425, Zone 43, Sampaloc District, Manila
¾
M. Carreon St., Brgy. 866, Sta. Ana District, Manila
¾
Manila East Rd., Brgy. Dolores, Taytay, Rizal
¾
Bernabe Subdivision, Brgy. San Dionisio, Parañaque City, Metro Manila
¾
Mercedes Ave., Pasig City, Metro Manila
South Luzon Area
¾
Silangan Exit, Canlubang, Calamba City, Laguna
¾
Maharlika Highway, Brgy. Isabang, Lucena City, Quezon
¾
Maharlika Highway, Brgy. Villa Bota, Gumaca, Quezon
¾
Maharlika Highway, Brgy. Concepcion Grande, Naga City, Camarines Sur
¾
Brgy. Mandaragat, Puerto Princesa City, Palawan
¾
Aurora Quezon and Calderron St., Brgy. Labangan, San Jose, Occidental Mindoro
¾
Governor’s Drive, Brgy. Lankaan II, Dasmariñas, Cavite
¾
Bo. Balagtas, Batangas City, Batangas
¾
Ayala Highway, Lipa City, Batangas
¾
Corner Cogon and Patricio Streets, Bgy. Cruzada, Legaspi City, Bicol
¾
National Highway, San Pedro, Laguna
105
•
•
•
¾
Tirona Highway, Habay, Bacoor, Cavite
¾
Matungao, Tugbo, Masbate City
¾
Pagsawitan, Sta. Cruz, Laguna
Negros
¾
Brgy. Granada, Sta. Fe, Bacolod City, Negros Occidental
¾
Muelle Loney St., Brgy. Legaspi, Iloilo City
¾
National Hi-way, Brgy. 4, Himamaylan City, Negros Occidental
¾
Flores St., Brgy. Sum-Ag, Bacolod City, Negros Occidental
¾
Brgy., Camansi Norte, Numancia, Aklan
¾
Brgy. Libas, Roxas City, Capiz
¾
Pulantubig, Dumaguete City
Visayas
¾
National Highway, Brgy. Tipolo, Mandaue City
¾
Fatima Village, Brgy. 73 (formerly part of Brgy. Sagcahan), Tacloban City, Leyte
¾
CPG North Ave., Tagbilaran City, Bohol
Mindanao
¾
Brgy. Darong Sta. Cruz, Davao del Sur
¾
Ulas Crossing, Ulas, Davao City
¾
National Highway, Brgy. Magugpo, Tagum City
¾
Sergio Osmeña, Brgy. Poblacion, Koronadal City
¾
National Highway, Brgy. Lagao, Gen. Santos City
¾
National Highway, Brgy. Luyong Bonbon, Opol, Misamis Oriental
¾
R.T. Lim Blvd., Baliwasan, Zamboanga City
¾
Molave St., Butuan City
¾
Brgy. Mangangoy, Bislig City, Surigao del Sur (building only)
¾
Brgy. Bongtod, Tandag City, Surigao del Sur
¾
J.P. Rizal Ave., Poblacion, Digos City
¾
National Highway, Sta. Felomina, Dipolog City
¾
National Highway, Sta. Filomena, Iligan City
¾
Baybay, Liloy, Zamboanga del Norte
106
Terminal
Bataan Malt Terminal, Mariveles, Bataan (building, machineries and equipment, furniture and fixtures only).
LEASED PROPERTIES
The Company leases buildings and improvements in various locations in the Philippines. The Company also
leases parcels of land from SMC for its five breweries, 30 area, region and sales offices, 12 warehouses and 6
deepwells. See “Related Party Transactions” for information on the rentals under the lease with SMC. Set out
below are the details on the leases of the Company.
Leases from Third Parties
Terminal
Bataan Malt Terminal
*average
Location
Leased Asset
Description
Mariveles, Bataan
Land
Monthly Rental (P)
Expiration
Date
460,000.00*
12/16/2013
231,960.27
4/30/2010
658,924.56
11/15/2009
45,198.72
10/15/2009
744,187.47
7/31/2011
64,935.61
10/31/2009
268,800.00
12/31/2010
Sales Offices and Warehouse
Greater Manila Area North
Valenzuela S.O.
Land &
Bldg. 23 Plastic City
Cpd., #8 T. Santiago St., Land
Improvement
Brgy. Canumay,
Valenzuela City, Metro
Manila
Novaliches S.O.
Tondo S.O.
Greater Manila Area South
Pasig S.O.
Central North Luzon
Cabanatuan S.O.
South Luzon Area
Legazpi S.O.
Negros
Iloilo S.O.
Mindanao
Butuan Region Office
Quirino Highway,
Novaliches, Quezon
City, Metro Manila
Land &
Buildings
Cor. Buendia &
Guidote St., Tondo
Manila
Land
Mercedes Ave., Pasig
City, Metro Manila
Land &
Warehouse
No. 140, Bitas,
Cabanatuan City
Land &
Building
Corner Cogon and
Patricio Streets, Bgy.
Cruzada, Legaspi City,
Bicol
Land &
Land
Improvements
Solid Manila Bldg
Diversion Road, Bgy,
San Rafael,
Mandurriao, Iloilo
Land,
Leasehold
Improvement
& Buildings
76,975.36
12/15/2009
Fort Poyohan, Molave
St., Butuan City,
Agusan del Norte
Land &
Land
Improvement
45,682.78
1/31/2010
107
Leased Asset
Description
Location
Ozamis Region Office
Bonifacio St., Lam-an,
Ozamis City, Misamis
Occidental
Land &
Building
Monthly Rental (P)
Expiration
Date
47,040.00
6/19/2009
Leases from SMC
Land for Breweries
Location
¾
¾
¾
¾
¾
Polo Brewery
San Fernando Brewery
Bacolod Brewery
Mandaue Brewery
Davao Brewery-Main
Marulas, Valenzuela City, Metro Manila
Brgy. Quebiawan, San Isidro, San Fernando, Pampanga
National Road, Brgy. Sta. Fe, Bacolod City, Negros Occidental
National Highway, Brgy. Tipolo, Mandaue City
Brgy. Darong, Sta. Cruz, Davao del Sur
Land For Sales Offices and Warehouses
Location
•
Central North Luzon Area
¾ Angeles Region Office
¾ Baguio S.O.
¾
¾
¾
¾
¾
¾
¾
¾
•
•
Carmen S.O.
Cauayan Region Office
Dagupan Region Office
Ilocos Warehouse
La Union Region Office
Lal-lo Warehouse
Santiago S.O.
San Nicolas Region Office
Greater Manila Area North
¾ Caloocan S.O.
¾ Cubao S.O.
¾ Guiguinto S.O.
¾ San Isidro S.O.
¾ Tondo S.O.
Greater Manila Area South
¾ Paranaque S.O.
¾ Pureza S.O.
¾ Sta. Ana S.O.
¾ Taytay S.O.
San Angelo Subdivision, Sto. Domingo, Angeles City, Pampanga
Naguilian Road., San Carlos Heights, Brgy. Irisan Baguio City,
Benguet
Carmen East, Rosales, Pangasinan
Brgy. San Fermin, Cauayan City, Isabela
Caranglaan District, Dagupan City, Pangasinan
Brgy., Tablac, Candon City, Ilocos Sur
Pennsylvania Ave., Brgy. Madayegdeg, San Fernando, La Union
Sta. Maria, Lal-lo, Cagayan
National Road, Brgy. Mabini, Santiago City, Isabela
Brgy. San Guillermo, San Nicholas, Ilocos Norte
A. Cruz St., Brgy. 96, Caloocan City
Brgy. Mangga, Cubao, Quezon City
Cagayan Valley Rd., Brgy. Sta. Cruz, Guiguinto, Bulacan
Gapan-Olongapo Rd., Poblacion, San Isidro, Nueva Ecija
Honorio Lopez Blvd., Guidote St., Tondo, Manila
No. 100, Bernabe Subdivision, Brgy. San Dionisio, Sucat, Paranaque
City
Brgy. 425, Zone 43, Sampaloc District, Metro Manila
M. Carreon St., Brgy. 864, Sta. Ana, Manila
Manila East Rd., Brgy. Dolores, Taytay, Rizal
Location
•
South Luzon Area
¾ Area Office
¾ Batangas Region Office
¾ Gumaca S.O.
¾ Lipa Warehouse
¾ Lucena S.O.
Silangan Exit, Canlubang, Calamba City
National Rd., Brgy. Balagtas, Batangas City, Batangas
Maharlika Highway, Brgy. Villa Bota, Gumaca, Quezon
J.P. Laurel Hiway, Brgy. Balintawak, Lipa City, Batangas
Maharlika Hiway, Brgy. Isabang, Lucena City
108
¾
¾
¾
•
•
•
Naga S.O.
Puerto Princesa Warehouse
San Jose Warehouse
Maharlika Highway, Brgy. Concepcion, Pequena, Naga City
Brgy. Mandaragat, Puerto Princesa City, Palawan
Brgy. Labangan, San Jose, Occidental Mindoro
Negros
¾ Sum-ag Warehouse.
¾ Himamaylan S.O.
¾ Iloilo S.O.
¾ Numancia S.O.
¾ Roxas S.O.
Flores St., Brgy. Sum-ag, Bacolod City, Negros Occidental
National Hi-way, Brgy. 4, Himamaylan City, Negros Occidental
Muelle Loney St., Brgy. Legazpi, Iloilo City
Brgy. Camansi Norte, Numancia, Aklan
Brgy. Libas, Roxas City, Capiz
Visayas
¾ Tacloban S.O.
¾ Warehouse-Oro Verde
Access Rd., Fatima Village, Brgy. 73, Tacloban City
H. Cortes St., Brgy. Banilad, Mandaue City
Mindanao
¾ Butuan S.O.
¾ Digos Warehouse
¾ GenSan Warehouse
¾ Marbel Warehouse
¾ Opol Region Office
¾ Tagum Warehouse
¾ Tandag Warehouse
¾ Zamboanga S.O.
Fort Poyohan, Molave St., Butuan City
J.P. Rizal Ave., Poblacion, Digos City
National Highway, Brgy. Lagao, Gen. Santos City
Sergio Osmeña St., Brgy. Poblacion, Koronadal City
National Hi-way, Brgy. Luyong Bonbon, Opol, Misamis Oriental
National Highway, Brgy. Magugpo, Tagum City
Brgy. Bongtod, Tandag City, Surigao del Sur
R.T. Lim Boulevard, Baliwasan, Zamboanga City
Others
Location
¾
¾
¾
¾
¾
¾
Deepwell D
Deepwell B
Deepwell C
Deepwell E
Deepwell F
Deepwell G
Tambalan-Budla-an Rd., Brgy. Tambalan, Mandaue City
A.S. Fortuna St., Brgy. Banilad, Mandaue City
H. Cortes St., Brgy. Banilad, Mandaue City
Private Rd., Brgy. Cabancalan, Mandaue City
Private Rd., Brgy. Cabancalan, Mandaue City
Private Rd., Brgy. Cabancalan, Mandaue City
CONDITION OF PROPERTIES
The properties owned by the Company and leased by the Company from SMC are in good condition and
are free from liens and encumbrances, other than those permitted under the Trust Agreement. The Company
does not intend to acquire any other material assets except for those to be acquired from the proceeds of
the Offer as discussed in “Use of the Proceeds” on page 28 of this prospectus and those in connection with
capital expenditure projects as discussed in “Capital Expenditures” on page 70 of this prospectus. All of the
Company’s existing lease contracts contain a provision that the contract is renewable upon agreement by the
parties.
109
MATERIAL CONTRACTS
The following are summaries of the material terms of the principal contracts related to the Company’s primary
business and should not be considered to be a full statement of the terms and provisions of such contracts.
Accordingly, the following summaries are subject to the full text of each contract.
Following the spin-off of the beer domestic business of SMC to the Company as discussed in the “Business
Overview” section of this prospectus, SMC assigned to the Company all its rights and obligations under the
principal contracts described below.
SUPPLY OF RAW MATERIALS
Malted Barley
The Company sources a portion of its malted barley requirements from Joe White Maltings Pty. Ltd. (“JWM”)
under a supply agreement with a term of five years from January 1, 2007 to December 31, 2011, subject to a
renewal for another five years upon mutual agreement of the parties. Under the agreement, JWM is a preferred
supplier, with the Company having the option to increase its purchases up to 20% above the agreed minimum
tonnage at the agreed prices and up to 50% above the agreed minimum tonnage at prices and conditions to be
negotiated by the parties. JWM commits to provide new malted barley capacity in the event of increased malted
barley purchases to support the Company’s future requirements and agrees to give priority to the Company for
the supply of malted barley in the event of drought, change in barley varieties or barley quality variations.
Fuel Oil
The Company sources a portion of its fuel oil requirements from Pilipinas Shell Petroleum Corporation under an
exclusive supply and equipment loan agreement entered into by SMC on behalf of its subsidiaries using
petroleum products, such as the Company. Orders for the products must be placed at least 48 hours prior to the
intended date of delivery and purchases during the months are payable on or before the 30th day of the
succeeding month, subject to payment of interest on the amount outstanding in the event of default on payments.
The term of the agreement is five years until April 2012. The agreement is currently under review by the
parties.
AGREEMENTS WITH SMC
The Company entered into a License Agreement, a Shared Services Agreement and a Contract of Lease with
SMC following the spin-off of the domestic beer business of SMC to the Company. See “Related Party
Transactions” for descriptions of the terms of these agreements.
SUPPLY OF PACKAGING MATERIALS
The Company principally sources its packaging requirements from SMYPC, SMRPC and SMYAC. The
Company currently has several outstanding purchase orders of various packaging materials from these suppliers
with delivery dates averaging 15 days. The terms and conditions of these purchase orders provide, among
others, that the Company reserves the right to reject or return any shipment of packaging materials not in
conformity with the orders, standards and specifications of the Company. Payment term for these purchases,
unless agreed otherwise, is 30 days after delivery date and presentation of invoices and delivery receipts. A
performance bond shall be required by the Company, where necessary, which shall be forfeited in favor of the
Company in the event of breach by the suppliers. The Company may terminate the orders at any time in the
event of breach by the sellers of any of the terms and conditions of the purchase orders, without prejudice to the
right of the Company to recover amounts due, such as, one percent of the cost of delayed deliveries in the event
that the Company accepts late deliveries. See also “Related Party Transactions.”
110
RELATED STOCKHOLDER MATTERS
HOLDER OF THE COMPANY’S COMMON SHARES
As of January 31, 2009, the following are the top 20 stockholders of the Company:
1
Stockholder Name
San Miguel Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Shares
14,524,332,960
% to O/S
94.249718
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
PCD Nominee Corporation (Non-Filipino) . . . . . . . . . . . . . . . . . .
PCD Nominee Corporation (Filipino) . . . . . . . . . . . . . . . . . . . . . .
San Miguel Brewery Inc. Retirement Plan . . . . . . . . . . . . . . . . . . .
Henry Sy, Sr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Syntrix Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Isaias G. Lumanta &/or Melinda F. Lumanta . . . . . . . . . . . . . . . .
Marilyn D. Maranon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virgilio A. Salonoy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Victor Martin Soriano &/or Grace Llane . . . . . . . . . . . . . . . . . . . .
Macario Enriquez Asistio III . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ponciano V. Cruz, Jr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marivic L. Almeda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rene Michael S. French . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cecilio D. Hipolito Sr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rosario Montaner Lovero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mario Ong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florito F. Santos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mariano P. Blanco &/or Ligaya V. Blanco . . . . . . . . . . . . . . . . . . .
Ramon C. Garcia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
629,242,736
136,535,764
89,582,000
12,500,000
12,500,000
132,000
124,000
82,000
75,000
63,000
62,500
62,000
62,000
62,000
62,000
62,000
60,000
50,000
50,000
4.083213
0.885993
0.581306
0.081114
0.081114
0.000857
0.000805
0.000532
0.000487
0.000409
0.000406
0.000402
0.000402
0.000402
0.000402
0.000402
0.000389
0.000324
0.000324
Description of Principal Shareholder
SMC is a publicly listed food, beverage and packaging holding company in the Philippines. Established in 1890
as a single-product brewery, the SMC Group today has over 100 facilities in the Philippines, Southeast Asia and
China.
The SMC Group’s extensive product portfolio includes beer, hard liquor, water, powdered juice and juice
drinks, processed and packaged food products, meat, poultry, dairy products, snack foods, cooking oil, coconut
oil, pet food, animal and aquatic fees and a number of packaging products.
Kirin, one of the largest beer manufacturing companies in Japan, has a significant stake in SMC. The SMC
Group also has strategic partnerships with international companies, among them Hormel Foods Corporation of
the United States, Nihon Yamamura Glass Company, Ltd. (“NYG”), Rengo Co., Ltd. of Japan and Super
Coffeemix Manufacturing Ltd. of Singapore. On January 31, 2008, SMC further expanded its partnership with
NYG with the completion of the sale of its 35% interest in the packaging businesses comprised of its domestic
businesses under SMPSI and regional operations under San Miguel Packaging International, Ltd. (“SMPIL”).
SMPSI and SMPIL were later renamed San Miguel Yamamura Packaging Corporation and San Miguel
Yamamura Packaging International Limited.
On January 19, 2009, SMC signed a Memorandum of Agreement with Kirin. Under the terms of the agreement,
Kirin will enter into exclusive negotiations with SMC to acquire from SMC shares representing approximately
43.25% shares representing 43.25% of the issued and outstanding capital stock of the Company. On February
20, 2009, SMC and Kirin signed a share purchase agreement for the acquisition by Kirin of a 43.249% stake in
the Company. Under the terms of the agreement, Kirin will purchase shares in the Company from SMC at a
purchase price of P8.841 per share, for a total acquisition price of P58.9 billion. Kirin will launch a tender offer
111
to purchase additional shares from all existing shareholders of the Company at the same purchase price offered
to SMC. The details of the tender offer will be announced by Kirin once determined.
Further to the agreement, SMC, Kirin and the Company will undertake to negotiate exclusively for the
Company’s potential purchase of shares in SMC’s overseas beer business. The exclusivity period is for six
months following SMC’s offer to sell the shares in its overseas beer business.
Beverage
The domestic beer operations of SMC are carried out by the Company. The international beer operations, on the
other hand, are carried out by SMC through its foreign subsidiary, San Miguel Brewing International Limited,
and its other subsidiaries, which include San Miguel Brewery Hong Kong Limited, PT Delta Djarkarta Tbk and
San Miguel Beer (Thailand) Limited. SMC maintains three breweries in Southeast Asia and two breweries in
China for its international operations.
Apart from beer, SMC also produces hard liquor through its majority-owned subsidiary, GSMI. GSMI is not only
the leader in the domestic hard liquor market, but also the world’s largest gin producer by volume and the fourth
largest spirits company by volume.
SMC participates in the non-carbonated beverage business in the Philippines, Thailand and Indonesia through
its wholly owned subsidiary, SMBI.
Food
The SMC Group’s domestic food and agribusiness operations are comprised of SMPFC and its major
subsidiaries, which include San Miguel Foods, Inc. and its subsidiary, San Miguel Mills, Inc.; The PurefoodsHormel Company, Inc.; Magnolia, Inc.; Monterey Foods Corporation; San Miguel Super Coffeemix Co., Inc.
and Star Dari, Inc.
The SMC Group’s business portfolio offers a complete line of food products and services for both individual
and food service customers. Its businesses range from vegetable oils, feeds, flour, poultry, fresh and processed
meats, coffee, snacks, and dairy products, to food service. The SMC Group carries some of the best-known
brands in the Philippine food and agribusiness industry, among them Magnolia, Monterey, Star, Purefoods, Dari
Crème, and B-Meg.
SMC expanded its food operations in the Southeast Asian region with the increase in equity participation of
SMPFC in P.T. San Miguel Pure Foods Indonesia (formerly P.T. Purefoods Suba Indah), a company engaged in
the manufacture and trade of processed meats and related products in Indonesia and its 51% investment in San
Miguel Pure Foods Investment (BVI) Limited, which wholly owns San Miguel Pure Foods (VN) Co., Ltd.,
(formerly TTC (VN) Co. Ltd.), a hogs and feed mill business in Binh Duong, Vietnam.
Packaging
The San Miguel Packaging Group is a “Total Packaging Solutions” business servicing many of the region’s
leading food, pharmaceutical, chemical, beverages, and personal care manufacturers. The San Miguel Packaging
Group serves clients in the Asia-Pacific, Middle East, and U.S. markets, and manufactures glass bottles, PET
bottles, corrugated cartons, paperboard, paper pallets, flexible packaging, plastic crates and pallets, plastic caps,
plastic poultry flooring, plastic pails and trays, plastic films, industrial laminates, woven bags, metal closures,
two-piece aluminum beverage cans; and offers filling services, as well as graphics design and testing services.
Apart from supplying the internal requirements of the SMC Group, the San Miguel Packaging Group also
supplies major Philippine-based multinational corporations such as Nestlé, Unilever, Kraft, Diageo, Del Monte,
Coca-Cola and Pepsi-Cola Products Phils., Inc.
The San Miguel Packaging Group also competes in the international market through its packaging businesses in
Vietnam, Malaysia and China: San Miguel Plastic Films Sdn Bhd, San Miguel Packaging & Printing Sdn Bhd.,
San Miguel Woven Products Sdn Bhd, Packaging Research Center Sdn Bhd, San Miguel Yamamura Haiphong
Glass Co., Ltd., San Miguel Phu Tho Packaging Company Ltd. and Zhaoqing San Miguel Glass Co., Ltd. It has
five international packaging plants located in China (glass, metal, plastic), Vietnam (glass, metal), Indonesia
112
(plastic) and Malaysia (corrugated carton and paperboard, composites, plastic films, laminates and woven bags).
Property
SMPI is SMC’s primary property subsidiary, currently owned 98.45% by SMC. SMPI is presently engaged in
the development, sale and lease of real properties. It is the corporate real estate arm of the SMC Group. It is
also a principal shareholder of Bank of Commerce (“BOC”), currently holding a 30% stake in BOC.
New Businesses
In line with SMC’s plans to participate in high-growth industries such as mining, power, infrastructure, water
and other utilities, SMC entered into a sale and purchase agreement with the Government Service Insurance
System (“GSIS”) in 2008 to acquire GSIS’ 27% stake in the Manila Electric Company. SMC likewise entered
into an option agreement with SEA Refinery Holdings B.V. (“SEA BV”) for an option to acquire and purchase
from SEA BV up to 100% of its interests in SEA Refinery Corporation (“SRC”). SRC is a wholly-owned
subsidiary of SEA BV, which in turn currently owns 50.1% of the outstanding shares of Petron Corporation.
The option may be exercised by SMC within a period of two (2) years from December 24, 2008. SMC and SEA
BV have agreed that SMC shall have representation in the board and management of Petron Corporation. SMC
is currently in talks with Qatar Telecom for a possible investment in Liberty Telecoms Holdings.
DIVIDENDS AND DIVIDEND POLICY
The table below sets forth the cash dividends declared by the Company’s Board of Directors from February
2008 to January 2009.
Amount of Cash Dividends
Per share
Total
Declaration Date
Payment Date
February 4, 2008
April 10, 2008
July 24, 2008
October 16, 2008
January 27, 2009
February 8, 2008
April 18, 2008
August 22, 2008
November 12, 2008
February 23, 2009
P0.15
P0.16
P0.14
P0.15
P0.19
P2.300 billion
P2.453 billion
P2.157 billion
P2.312 billion
P2.928 billion
The Company is allowed under Philippine laws to declare dividends, subject to certain requirements. These
requirements include, for example, that the Company’s Board of Directors is authorized to declare dividends
only from its unrestricted retained earnings. Dividends may be payable in cash, shares or property, or a
combination of the three, as the Board of Directors shall determine. The declaration of stock dividends is subject
to the approval of shareholders holding at least two-thirds of the Company’s outstanding capital stock. The
Company’s Board of Directors may not declare dividends which will impair its capital.
The cash dividend policy of the Company entitles the holders of its Common Shares to receive annual cash
dividends equivalent to 100% of the prior year’s recurring net income, which is net income calculated without
respect to extraordinary events that are not expected to recur, based on the recommendation of the Board of
Directors. Such recommendation will take into consideration factors such as the implementation of business
plans, debt service requirements, operating expenses, budgets, funding for new investments and acquisitions,
appropriate reserves and working capital, among others. The cash dividend policy is subject to review and may
be changed by the Company’s Board of Directors at any time.
MARKET PRICE OF COMPANY’S COMMON EQUITY
The Company's Common Shares are traded in the PSE. Such shares were listed on the Main Board of the PSE
on May 12, 2008.
The Company’s high and low closing prices for the following quarters are as follows:
2008
2nd
High
8.60
Low
7.90
113
3rd
4th
12.50
11.50
8.20
8.10
RECENT SALES OF UNREGISTERED OR EXEMPT SECURITIES
The following are issuances of Common Shares constituting an exempt transaction under the SRC which were
made by the Company since its incorporation on July 26, 2007 to the date of this prospectus:
(1) The Company was incorporated on July 26, 2007 with an authorized capital stock of P100,000,000
divided into 1,000,000 Common Shares with a par value of P100.00 per Common Share. SMC subscribed
to 250,000 Common Shares (then with a par value of P100.00 per Common Share) prior to the
incorporation of the Company to comply with the requirements under the Corporation Code as to the
percentage of the capital stock of a corporation which should be subscribed before it can be registered
with the SEC. The subscription is an exempt transaction pursuant to Section 10.1 (i) of the SRC.
(2) The Company subsequently approved the increase in its authorized capital from P 100,000,000 to
P25,000,000,000, the decrease of the par value of its shares from P 100.00 to P 1.00, and the issuance of a
total of 15,308,416,960 Common Shares, comprising of 75,000,000 Common Shares from its unissued
authorized capital stock and 15,233,416,960 Common Shares from the increase in its authorized capital
stock, in exchange for the net assets of the domestic beer business of SMC with a net book value
equivalent to P 15,308,416,960. The transfer of the net assets is pursuant to a Master Deed of Assignment
of Domestic Beer Assets dated August 23, 2007 between SMC and the Company as amended by an
Amendment to the Master Deed of Assignment of Domestic Beer Assets between the same parties dated
September 7, 2007. The issuance of these Common Shares is an exempt transaction under Section 10.1 (e)
of SRC.
Under the Corporation Code, where the consideration for the issuance of shares is other than actual cash,
the valuation thereof shall initially be determined by the Board of Directors, subject to the approval of the
SEC. The SEC approved the valuation of the net assets of SMC as full payment of the 15,308,416,960
Common Shares issued on September 27, 2007. However, 2,557,573,242 Common Shares issued by the
Company to SMC in exchange for motor vehicles and receivables out of the entire 15,308,416,960
Common Shares issued by the Company pursuant to the transfer of the net assets of the domestic beer
business by SMC to the Company are held in escrow by the SEC and shall only be released upon
presentation of the transfer of ownership of such motor vehicles in the name of the Company and the
proof of collection of receivables. The holding of such Common Shares in escrow is a standard condition
of the SEC for approval of applications for increase in authorized capital where the payment for the shares
issued pursuant to such increase is made in the form of motor vehicles and receivables. For more
information on the transfer of the assets and liabilities of the domestic beer division of SMC to the
Company, see the section entitled “Business Overview.”
(3) The issuance of 5,000 Common Shares to each of the independent directors of the Company is an exempt
transaction under Section 10.1 (c) of the SRC.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Record and Beneficial Owners
Owners of more than 5% of the Company’s voting securities as of the date of this prospectus are as follows:
Title of Class
Common
Name, Address
of Record Owner
and Relationship
with Issuer
San Miguel
Corporation,
40 San Miguel
Avenue,
Name of
Beneficial
Owner and
Relationship
with Record
Owner
Citizenship
Not
applicable
Filipino
114
Number of Shares
Held
Percent
14,524,367,960
94.25%
Mandaluyong
City 1550
Philippines,
parent
company
Security Ownership of Management
The following are the number of Common Shares comprising the Company’s capital stock (all of which are
voting shares) owned of record by the directors and key executive officers of the Company, as of the date of this
prospectus:
Title of Class
Common
Common
Common
Common
Common
Common
Common
Common
Common
_________
Name of Owner
Ramon S. Ang
Ferdinand K. Constantino
Francis H. Jardeleza
Virgilio S. Jacinto
Joseph N. Pineda
Roberto N. Huang
Rosabel Socorro T. Balan
Iñigo Zobel
Carmelo L. Santiago
Amount and Nature of
Ownership
Citizenship
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
5,000 (Direct)
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
%
__(1)
__(1)
__(1)
__(1)
__(1)
__(1)
__(1)
__(1)
__(1)
(1) Shareholding represents less than 0.01% of the Company’s capital stock.
Except for the two independent directors, each of whom hold 5,000 Common Shares, all directors are nominees
of the Company and hold nominee shares in their names. The beneficial ownership of the nominee shares held
by such nominee directors remain with the Company.
VOTING TRUST HOLDERS OF 5% OR MORE
As of the date of this prospectus, there were no persons holding more than 5% of the Common Shares under a
voting trust or similar agreement.
115
REGULATORY FRAMEWORK
REGULATORY MATTERS
Various government agencies in the Philippines regulate the different aspects of the Company’s beer
manufacturing, sales and distribution business.
The Bureau of Food and Drugs (under the Department of Health) administers and enforces the law, and issues
rules and circulars, on safety and good quality supply of food, drug and cosmetic to consumers; and regulation
of the production, sale, and traffic of the same to protect the health of the people.
Pursuant to this, food manufacturers are required to obtain a license to operate as such. The law further requires
food manufacturers to obtain a certificate of product registration for each product.
The Department of Health also prescribed the Guidelines on Current Good Manufacturing Practice in
Manufacturing, Packing, Repacking, or Holding Food for food manufacturers.
The Consumer Act of the Philippines, the provisions of which are principally enforced by the Department of
Trade and Industry, seeks to protect consumers against hazards to health and safety and against deceptive, unfair
and unconscionable sales acts and practices; and provide information and education to facilitate sound choice
and the proper exercise of rights by the consumer.
This law imposes rules to regulate such matters as (i) consumer product and safety; (ii) the production, sale,
distribution and advertisement of food, drugs, cosmetics and devices as well as substances hazardous to the
consumer’s health and safety; (iii) fair, honest consumer transactions and consumer protection against
deceptive, unfair and unconscionable sales acts or practices; (iv) practices relative to the use of weights and
measures; (v) consumer product and service warranties; (vi) compulsory labeling, and fair packaging; (vii)
liabilities for defective products and services; (viii) consumer protection against misleading advertisements and
fraudulent sales promotion practices; and (ix) consumer credit transactions.
The Standards of Trade Practices and Conduct in the Advertising Industry as formulated by the Philippine
Advertising Board, a voluntary association of various companies and groups engaged in the fields of
advertising, marketing and media in the Philippines, prescribe rules on the advertising activities of its members.
Under the SRC, the SEC has jurisdiction and supervision over all corporations, partnerships or associations that
are grantees of primary franchises, license to do business or other secondary licenses. As the government agency
regulating the Philippine securities market, the SEC issues regulations on the registration and regulation of
securities exchanges, the securities market, securities trading, the licensing of securities brokers and dealers and
reportorial requirements for publicly listed companies and the proper application of SRC provisions, as well as
the Corporation Code, and certain other statutes.
ENVIRONMENTAL MATTERS
The operations of the Company are subject to various Philippines legislation, which are promulgated for the
protection of the environment.
The Company is required to comply with the provisions of the Philippine Environmental Impact Statement
System (“EIS Law”). The EIS Law is the general regulatory framework for any project or undertaking that is
either (i) classified as environmentally critical; or (ii) is situated in an environmentally critical area. The law is
implemented by the DENR.
Under the EIS Law, an entity that will undertake any such declared environmentally critical project or operate in
any such declared environmentally critical area is required to submit an Environmental Impact Statement and
secure an Environmental Compliance Certificate (“ECC”). This ECC requirement is applicable to each of the
five (5) breweries that the Company operates throughout the Philippines.
116
The Company is also subject to the provisions of the Philippine Clean Water Act of 2004 (“Clean Water Act”)
and its implementing rules and regulations. The Clean Water Act requires the Company to secure a wastewater
discharge permit, which authorizes it to discharge liquid waste and/or pollutants of specified concentration and
volume from its breweries into any water or land resource for a specified period of time. The Environmental
Management Bureau of the DENR is responsible for issuing discharge permits and monitoring and inspection of
the facilities of the grantee of the permit.
The provisions of the Philippine Clean Air Act and its implementing rules and regulations are likewise
applicable to the Company. The Clean Air Act provides that before any business may be allowed to operate
facilities and equipment, which emit regulated air pollutants, the establishment must first obtain a Permit to
Operate Air Pollution Source and Control Installations. The Environmental Management Bureau is responsible
for issuing permits to operate air pollution source and control installations as well as monitoring and inspection
of the facilities of the grantee of the permit.
Other regulatory environmental laws and regulations applicable to the Company are as follows:
¾
The Water Code, which governs the appropriation and use by any entity of water within the
Philippines. Water permits are issued by the National Water Resources Board.
¾
Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990 and its implementing
rules and regulations, which requires waste generators to register with the Environmental
Management Bureau. The law aims to regulate the management of hazardous wastes generated by
various establishments such as the Company.
117
PHILIPPINE TAXATION
The following is a discussion of the material Philippine tax consequences of the acquisition, ownership and
disposition of the Bonds. This general description does not purport to be a comprehensive description of the
Philippine tax aspects of the Bonds and no information is provided regarding the tax aspects of acquiring,
owning, holding or disposing of the Bonds under applicable tax laws of other applicable jurisdictions and the
specific Philippine tax consequence in light of particular situations of acquiring, owning, holding and disposing
of the Bonds in such other jurisdictions. This discussion is based upon laws, regulations, rulings, and income
tax conventions (treaties) in effect at the date of this prospectus. The tax treatment of a holder of Bonds may
vary depending upon such holder’s particular situation, and certain holders may be subject to special rules not
discussed below. This summary does not purport to address all tax aspects that may be important to a
Bondholder.
PROSPECTIVE PURCHASERS OF THE BONDS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF A BOND, INCLUDING THE APPLICABILITY AND EFFECT OF ANY LOCAL OR
FOREIGN TAX LAWS.
As used in this section, the term “resident alien” refers to an individual whose residence is within the
Philippines and who is not a citizen thereof; a “non-resident alien” is an individual whose residence is not
within the Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within the
Philippines for an aggregate period of more than 180 days during any calendar year is considered a “nonresident alien doing business in the Philippines,” otherwise, such non-resident alien who is actually within the
Philippines for an aggregate period of 180 days or less during any calendar year is considered a “non-resident
alien not doing business in the Philippines.” A “resident foreign corporation” is a non-Philippine corporation
engaged in trade or business within the Philippines; and a “non-resident foreign corporation” is a nonPhilippine corporation not engaged in trade or business within the Philippines.
TAXATION OF INTEREST
The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine sourced income
subject to Philippine income tax. Interest income derived by Philippine resident individuals from the Bonds is
thus subject to income tax, which is withheld at source, at the rate of 20% based on the gross amount of interest.
Generally, interest on the Bonds received by non-resident aliens engaged in trade or business in the Philippines
is subject to a 20% final withholding tax while that received by non-resident aliens not engaged in trade or
business is subject to a final withholding tax rate of 25%. Interest income received by domestic corporations and
resident foreign corporations from the Bonds is subject to a final withholding tax rate of 20%. Interest income
received by non-resident foreign corporations from the Bonds is subject to a 30% final withholding tax.
The foregoing rates are subject to further reduction by any applicable tax treaties in force between the
Philippines and the country of residence of the non-resident owner. Most tax treaties to which the Philippines is
a party generally provide for a reduced tax rate of 15% in cases where the interest which arises in the
Philippines is paid to a resident of the other contracting state. However, most tax treaties also provide that
reduced withholding tax rates shall not apply if the recipient of the interest who is a resident of the other
contracting state, carries on business in the Philippines through a permanent establishment and the holding of
the relevant interest-bearing instrument is effectively connected with such permanent establishment.
TAX-EXEMPT STATUS OR ENTITLEMENT TO PREFERENTIAL TAX RATE
Bondholders who are exempt from or are not subject to final withholding tax on interest income may claim such
exemption by submitting the necessary documents. Said Bondholder shall submit the following requirements:
(i) certified true copy of the tax exemption certificate, ruling or opinion issued by the BIR confirming the
exemption or preferential rate; (ii) with respect to tax treaty relief, proof to support applicability of reduced tax
rates, such as the consularized proof of tax domicile issued by the relevant tax authority of the Bondholder, and
original or SEC-certified true copy of the SEC confirmation that the relevant entity is not doing business in the
Philippines; (iii) a duly notarized undertaking to immediately notify the Issuer, the Registrar and the Paying
Agent of any suspension or revocation of the tax exemption certificate, certificate, ruling or opinion issued by
the BIR, executed using the prescribed form, with a declaration and warranty of its tax-exempt status or
entitlement to a preferential tax rate, and an agreement to indemnify and hold the Issuer, the Registrar and the
118
Paying Agent free and harmless against any claims, actions, suits, and liabilities resulting from the nonwithholding or incorrect withholding of the required tax; and (iv) such other documentary requirements as may
be required under the applicable regulations of the relevant taxing or other authorities; provided, that the Issuer,
the Registrar and the Paying Agent shall have the exclusive discretion to decide whether the documents
submitted are sufficient for purposes of applying the exemption or the reduced rate being claimed by the
Bondholder on the interest payments to such Bondholder; provided further that, all sums payable by the Issuer
to tax-exempt entities shall be paid in full without deductions for taxes, duties, assessments, or government
charges, subject to the submission by the Bondholder claiming the benefit of any exemption of the required
documents and of additional reasonable evidence of such tax-exempt status to the Registrar.
The foregoing requirements shall be submitted, (i) in respect of an initial issuance of Bonds, to the underwriters
or selling agents who shall then forward the same with the Application to Purchase to the Registrar; or (ii) in
respect of a transfer from a Bondholder to a purchaser, to the Registrar within three days from settlement date.
VALUE-ADDED TAX
Gross receipts arising from the sale of the Bonds in the Philippines by dealers in securities shall be subject to a
12% value-added tax.
GROSS RECEIPTS TAX
Bank and non-bank financial intermediaries performing quasi-banking functions are subject to gross receipts tax
on gross receipts derived from sources within the Philippines in accordance with the following schedule:
On interest, commissions and discounts from lending activities as well as income from financial leasing, on the
basis of remaining maturities of instruments from which such receipts are derived:
Maturity period is five years or less
Maturity period is more than five years
5%
1%
Non-bank financial intermediaries not performing quasi-banking functions doing business in the Philippines are
likewise subject to gross receipts tax. Gross receipts of such entities derived from sources within the Philippines
from interests, commissions and discounts from lending activities are taxed in accordance with the following
schedule based on the remaining maturities of the instruments from which such receipts are derived:
Maturity period is 5 years or less
Maturity period is more than 5 years
5%
1%
In case the maturity period of the instruments held by banks, non-bank financial intermediaries performing
quasi-banking functions and non-bank financial intermediaries not performing quasi-banking functions is
shortened through pre-termination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly.
Net trading gains realized within the taxable year on the sale or disposition of the Bonds by banks and non-bank
financial intermediaries performing quasi-banking functions shall be taxed at 7%.
DOCUMENTARY STAMP TAX
A documentary stamp tax is imposed upon the issuance of debt instruments issued by Philippine companies,
such as the Bonds, at the rate of P1.00 for each P200, or fractional part thereof, of the issue price of such debt
instruments; provided that, for debt instruments with terms of less than one year, the documentary stamp tax to
be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to 365
days.
The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted, or
transferred, when the obligation or right arises from Philippine sources, or the property is situated in the
Philippines. Any applicable documentary stamp taxes on the original issue shall be paid by the Issuer for its own
account.
119
TAXATION ON SALE OR OTHER DISPOSITION OF THE BONDS
Income Tax
Any gain realized from the sale, exchange or retirement of bonds will, as a rule, form part of the gross income of
the sellers, for purposes of computing the relevant taxable income subject to the regular rates of 32%, 25%, or
30%, as the case may be. If the bonds are sold by a seller, who is an individual and who is not a dealer in
securities, who has held the bonds for a period of more than 12 months prior to the sale, only 50% of any capital
gain will be recognized and included in the sellers’ gross taxable income.
However, under the Tax Code, any gain realized from the sale, exchange or retirement of bonds, debentures and
other certificates of indebtedness with an original maturity date of more than five years (as measured from the
date of issuance of such bonds, debentures or other certificates of indebtedness) shall not be subject to income
tax.
Moreover, any gain arising from such sale, regardless of the original maturity date of the bonds, may be exempt
from income tax pursuant to various income tax treaties to which the Philippines is a party, and subject to
procedures prescribed by the Bureau of Internal Revenue for the availment of tax treaty benefits.
Estate and Donor’s Tax
The transfer by a deceased person, whether a Philippine resident or a non-Philippine resident, to his heirs of the
Bonds shall be subject to an estate tax which is levied on the net estate of the deceased at progressive rates
ranging from 5% to 20%, if the net estate is over P200,000. A Bondholder shall be subject to donor’s tax based
on the net gift on the transfer of the Bonds by gift at either (i) 30%, where the donee or beneficiary is a stranger,
or (ii) at progressive rates ranging from 2% to 15% if the net gifts made during the calendar year exceed
P100,000 and where the donee or beneficiary is not a stranger. For this purpose, a “stranger” is a person who is
not a: (a) brother, sister (whether by whole or half-blood), spouse, ancestor or lineal descendant; or (b) relative
by consanguinity in the collateral line within the fourth degree of relationship.
The estate or donor’s taxes payable in the Philippines may be credited with the amount of any estate or donor's
taxes imposed by the authority of a foreign country, subject to limitations on the amount to be credited, and the
tax status of the donor.
The estate tax and the donor’s tax, in respect of the Bonds, shall not be collected (a) if the deceased, at the time
of death, or the donor, at the time of the donation, was a citizen and resident of a foreign country which, at the
time of his death or donation, did not impose a transfer tax of any character in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country; or (b) if the laws of the foreign
country of which the deceased or donor was a citizen and resident, at the time of his death or donation, allows a
similar exemption from transfer or death taxes of every character or description in respect of intangible personal
property owned by citizens of the Philippines not residing in the foreign country.
In case the Bonds are transferred for less than an adequate and full consideration in money or money's worth, the
amount by which the fair market value of the Bonds exceeded the value of the consideration may be deemed a gift
and may be subject to donor’s taxes.
Documentary Stamp Tax
No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds, trading the Bonds in a
secondary market or though an exchange. However, if the transfer constitutes a renewal of the Bonds,
documentary stamp tax is payable anew.
120
LEGAL MATTERS
Certain Philippine legal matters in connection with the Offer have been passed upon for the Company by Picazo
Buyco Tan Fider & Santos, Makati, Philippines, and for the Joint Issue Managers and for the Joint Lead
Managers and Underwriters by SyCip Salazar Hernandez & Gatmaitan, Makati, Philippines.
Neither Picazo Buyco Tan Fider & Santos nor SyCip Salazar Hernandez & Gatmaitan, has or will receive any
direct or indirect interest in the Company or in any securities thereof (including options, warrants, or rights
thereto) pursuant to, or in connection with, the Offer. Neither Picazo Buyco Tan Fider & Santos nor SyCip
Salazar Hernandez & Gatmaitan has acted or will act as promoter, underwriter, voting trustee, officer or
employee of the Company.
121
EXPERTS
Canadean, a leading global beverage research company, provided certain information and statistics set forth in
this prospectus. Canadean does not own any interests in the Company.
122
INDEPENDENT PUBLIC ACCOUNTANTS
The examined pro forma consolidated financial statements of the Company as of and for the year ended
December 31, 2008 and the historical financial statements which comprise the balance sheets as at December
31, 2008 and 2007, and the statements of income, statements of changes in equity and statements of cash flows
for the year ended December 31, 2008 and for the period from July 26, 2007 to December 31, 2007, including
the notes thereto which are incorporated by reference included in this prospectus, have been examined and
audited, as the case may be, without qualification by Manabat Sanagustin & Co., auditors as stated in their
reports appearing herein.
The Company has not had any disagreements on accounting and financial disclosures with its current external
auditors for the same periods or any subsequent interim periods. Manabat Sanagustin & Co., one of the top four
auditing firms in the Philippines, has acted as the auditors of San Miguel Corporation (SMC), the parent
company where the historical information of the Company was carved-out since 2006. The shareholders
approved the appointment of Manabat Sanagustin & Co. as the Company’s external auditors upon the
recommendation of the management. The Company has also engaged the services of Manabat Sanagustin & Co.
for the public offering of its Common Shares. The Company’s management recommended and engaged
Manabat Sanagustin & Co.’s services based on their professionalism, efficient services and cost
competitiveness. Jose P. Javier, Jr. is the Engagement Partner. Manabat Sanagustin & Co. has neither
shareholdings in the Company nor any right, whether legally enforceable or not, to nominate persons or to
subscribe for the securities in the Company. Manabat Sanagustin & Co. will not receive any direct or indirect
interest in the Company or in any securities thereof (including options, warrants or rights thereto) pursuant to or
in connection with the Offer. The foregoing is in accordance with the Code of Ethics for Professional
Accountants in the Philippines set by the Board of Accountancy and approved by the Professional Regulation
Commission.
AUDIT AND AUDIT-RELATED FEES
The Company’s audit and audit-related fees are as indicated in the table below:
(in P)
Audit and Audit Related Fees
Professional fees related to the statutory reports as of December 31, 2008 . . . . .
Professional fees related to the examined pro forma consolidated financial
statements of the Company as of and for the years ended December 31,
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,000,000
2,000,000
8,000,000
Apart from the foregoing, no other services were rendered or fees billed by the Company’s auditors as of and for
the year ended December 31, 2008. Manabat Sanagustin and Co. does not have any direct or indirect interest in
the Company.
123
ISSUER
San Miguel Brewery Inc.
40 San Miguel Avenue
Mandaluyong City
Philippines
JOINT ISSUE MANAGERS
The Development Bank of the Philippines
DBP Bldg., Sen. Gil Puyat Ave.
Makati City, Philippines
The Hongkong and Shanghai Banking Corporation
Limited
8/F The Enterprise Center, Tower I, 6766 Ayala Avenue
cor. Paseo de Roxas, Makati City
JOINT LEAD MANAGERS AND UNDERWRITERS
The Development Bank of the Philippines
The Hongkong and Shanghai Banking Corporation
Limited
DBP Bldg., Sen. Gil Puyat Ave.
Makati City, Philippines
8/F The Enterprise Center, Tower I, 6766 Ayala Avenue
cor. Paseo de Roxas, Makati City
BDO Capital & Investment Corporation
BDO Corporate Center
7899 Makati Avenue, Makati City
BPI Capital Corporation
8/F BPI Building Ayala Avenue corner Paseo de Roxas
Makati City
China Banking Corporation
China Bank Building
8745 Paseo de Roxas corner Villar Street, Makati
City
First Metro Investment Corporation
45/F GT Tower International
6813 Ayala Avenue corner H.V. Dela Costa St., Makati
City
ING Bank N.V.
21/F Tower One, Ayala Triangle,
Ayala Avenue Makati City
Land Bank of the Philippines
1598 M.H. del Pilar corner Dir. J. Quintos Sts., Malate,
Manila
Philippine Commercial Capital, Inc.
PCCI Corporate Centre
118 LP Leviste St, Salcedo Village Makati City
RCBC Capital Corporation
7/F Yuchengco Tower, RCBC Plaza, 6819 Ayala
Avenue, Makati City
124
Standard Chartered Bank
8/F and 9/F, Standard Chartered Bank Building
6788 Ayala Avenue, Makati City
Union Bank of the Philippines
UnionBank of Plaza
Meralco Ave. cor. Onyx St., Ortigas Center, Pasig City
PARTICIPATING UNDERWRITER
SB Capital Investment Corp.
LEGAL COUNSEL TO THE COMPANY
Picazo Buyco Tan Fider & Santos
18th Floor Liberty Center
104 H. V. Dela Costa Street Salcedo Village, Makati City, Philippines
LEGAL COUNSEL TO THE JOINT ISSUE MANAGERS AND THE JOINT LEAD MANAGERS AND
UNDERWRITERS
SyCip Salazar Hernandez & Gatmaitan
SSHG Law Centre
105 Paseo de Roxas, Makati City, Philippines
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Manabat Sanagustin & Co.
9th Floor, The KPMG Center, 6787 Ayala Avenue
Makati City, Philippines
125
INDEX TO FINANCIAL STATEMENTS
Examined Pro Forma Consolidated Financial Statements as of and for the year ended December 31,
2008, and notes to the Pro Forma Consolidated Financial Statements .................................................
F-1
Appendix A – Audited Financial Statements as at December 31, 2008 and 2007, and for the year ended
December 31, 2008 and for the period from July 26, 2007 to December 31, 2007, and the notes to
the Audited Financial Statements. ........................................................................................................
F-58
126
SAN MIGUEL BREWERY INC. AND SUBSIDIARIES
(A Subsidiary of San Miguel Corporation and Formerly the
Domestic Beer Division of San Miguel Corporation)
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
F-1
STATEMENT OF MANAGEMENT RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The Management of San Miguel Brewery Inc. is responsible for all information and
representations contained in the examined consolidated pro forma financial statements for the
year ended December 31, 2008 and for the period from July 26, 2007 to December 31, 2007. The
examined pro forma financial statements have been prepared in conformity with generally
accepted accounting principles in the Philippines and reflect amounts that are based on the best
estimates and informed judgment of management with an appropriate consideration to
materiality.
In this regard, management maintains a system of accounting and reporting which provides for
the necessary internal controls to ensure that transactions are properly authorized and recorded,
assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The
management likewise discloses to the Company’s audit committee and to its external auditor: (i)
all significant deficiencies in the design or operation of internal controls that could adversely
affect its ability to record, process, and report financial data; (ii) material weaknesses in the
internal controls; and (iii) any fraud that involves management or other employees who exercise
significant roles in internal controls.
The Board of Directors reviews the examined pro forma financial statements before such
statements are approved.
Manabat Sanagustin & Co., the independent auditors appointed by the stockholders, has
examined the pro forma financial statements of the Company in accordance with auditing
standards generally accepted in the Philippines and has expressed its opinion on the fairness of
presentation upon completion of such examination, in its report to the Board of Directors and
stockholders.
(ORIGINAL SIGNED)
Ramon S. Ang
Chairman and President
(ORIGINAL SIGNED)
Ferdinand K. Constantino
Chief Finance Officer and Treasurer
SUBSCRIBED AND SWORN to before me this 4th day of February 2009, affiant exhibiting to
me their passports as follows:
Name
Ramon S. Ang
Ferdinand K. Constantino
Passport No.
ZZ202387
XX0167306
Doc. No. 180;
Page No. 37;
Book No. I ;
Series of 2009.
Date/Place of Issue
December 20, 2006/Manila
November 24, 2007/Manila
(ORIGINAL SIGNED)
NOTARY PUBLIC
F-2
Manabat Sanagustin & Co.
Certified Public Accountants
The KPMG Center, 9/F
6787 Ayala Avenue
Makati City 1226, Metro Manila, Philippines
Telephone
Fax
Internet
E-Mail
Branches · Subic · Cebu · Bacolod · Iloilo
PRC-BOA Registration No. 0003
SEC Accreditation No. 0004-FR-2
BSP Accredited
+63 (2) 885 7000
+63 (2) 894 1985
www.kpmg.com.ph
manila@kpmg.com.ph
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
San Miguel Brewery Inc.
40 San Miguel Avenue
Mandaluyong City
We have examined the pro forma financial information reflecting the transactions as described in
Note 2 to the pro forma consolidated financial statements, including the appropriate adjustments
to the historical amounts in the assembly of the accompanying pro forma consolidated balance
sheet of San Miguel Brewery Inc. (the “Parent Company”) and Subsidiaries as of December 31,
2008, and the pro forma consolidated statement of income, pro forma consolidated statement of
changes in equity and pro forma consolidated statement of cash flows for the year then ended.
The 2008 historical financial statements are derived from the balance sheet of San Miguel
Brewery Inc. as of December 31, 2008 and the statement of income, statement of changes in
equity and statement of cash flows for the year then ended. These historical financial statements
of San Miguel Brewery Inc. were audited by us, of which our report thereon dated January 30,
2009, expressed an unqualified opinion with respect to those statements which are attached and
labeled as Appendix A. The pro forma adjustments are based on Parent Company’s management
assumptions as described in Note 2 to the pro forma consolidated financial statements. The Parent
Company’s management is responsible for the pro forma financial information. Our
responsibility is to express an opinion on the pro forma financial information based on our
examination.
Our examination was conducted in accordance with the Philippine Standard on Assurance
Engagements 3000, Assurance Engagements Other than Audits or Review of Historical Financial
Information and Philippine Securities and Exchange Commission Memorandum Circular No. 2,
Series of 2008, Guidelines on Reporting and Attestation of Pro Forma Financial Information
and, accordingly, included such procedures as we considered necessary in the circumstances. We
believe that our examination provides a reasonable basis for our opinion.
The objective of this pro forma financial information is to show what the significant effects on
the audited financial statements might have been had the transactions described in Note 2 to the
pro forma consolidated financial statements occurred at an earlier date. However, the pro forma
consolidated financial statements are not necessarily indicative of the consolidated financial
performance or related effects on the consolidated financial position and consolidated cash flows
that would have been attained had the above-mentioned transactions actually occurred earlier.
Manabat Sanagustin & Co., certified public accountants, a professional partnership
established under Philippine law, is a member firm of the KPMG network of independent
member firms affiliated with KPMG International, a Swiss cooperative.
In our opinion, Parent Company’s management assumptions to the pro forma consolidated
information provide a reasonable basis for presenting the significant effects directly attributable
to the above-mentioned transactions described in Note 2 to the pro forma consolidated financial
statements, the related pro forma adjustments give appropriate effect to those assumptions, and
the pro forma column reflects the proper application of those adjustments to the audited financial
statements amounts in the pro forma consolidated balance sheet of San Miguel Brewery Inc. and
Subsidiaries as of December 31, 2008 and the pro forma consolidated statement of income, pro
forma consolidated statement of changes in equity and pro forma consolidated statement of cash
flows for the year then ended.
MANABAT SANAGUSTIN & CO.
(ORIGINAL SIGNED)
JOSE P. JAVIER, JR.
Partner
CPA License No. 0070807
SEC Accreditation No. 0678-A
Tax Identification No. 112-071-224
BIR Accreditation No. 08-001987-16-2007
Issued December 11, 2007; Valid until December 10, 2010
PTR No. 1564061MB
Issued January 5, 2009 at Makati City
February 12, 2009
Makati City, Metro Manila
F-4
SAN MIGUEL BREWERY INC. AND SUBSIDIARIES
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2008
(In Millions)
Note
ASSETS
Current Assets
Cash and cash equivalents
Trade and other receivables - net
Inventories - net
Prepaid expenses and other current assets
Total Current Assets
Noncurrent Assets
Property, plant and equipment - net
Intangible assets
Deferred tax assets
Other noncurrent assets - net
Total Noncurrent Assets
2, 5, 26, 27
2, 4, 6, 26, 27
4, 7
2, 8, 27
P6,427
3,662
3,279
379
13,747
2, 4, 9
2, 4, 10
2, 4, 14
2, 4, 11, 27
12,932
32,011
312
4,894
50,149
P63,896
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses
Income and other taxes payable
Total Current Liabilities
2, 12, 26, 27
2, 14
P3,000
1,518
4,518
Noncurrent Liabilities
Long-term debt - net of debt issue costs
Other noncurrent liabilities
Total Noncurrent Liabilities
2, 13, 26, 27
2
38,447
9
38,456
Forward
F-4
Note
Equity
Capital stock
Additional paid-in capital
Cumulative translation adjustments
Retained earnings
15
Total Equity Attributable to Equity Holders
of the Parent Company
Minority Interests
Total Equity
27
2
P15,410
515
(45)
4,800
2
20,680
2
242
20,922
P63,896
San Miguel Brewery Inc. (“Parent Company”) was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of
San Miguel Corporation were transferred to the Parent Company on October 1, 2007. Commercial operations of the Parent
Company likewise started on October 1, 2007. As explained in Note 2 to the pro forma consolidated financial statements, the
commercial operations of the subsidiaries was assumed to start on January 1, 2008.
See Notes to the Pro Forma Consolidated Financial Statements.
F-5
SAN MIGUEL BREWERY INC. AND SUBSIDIARIES
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2008
(In Millions, Except Basic Earnings Per Share)
Note
SALES
P48,787
COST OF SALES
16
24,800
23,987
GROSS PROFIT
ADMINISTRATIVE AND SELLING
EXPENSES
2, 17
(7,288)
INTEREST EXPENSE AND OTHER
FINANCING CHARGES
2, 13
(3,484)
INTEREST INCOME
264
OTHER INCOME (EXPENSE) - Net
20
INCOME BEFORE INCOME TAX
(377)
13,102
INCOME TAX EXPENSE
NET INCOME
Attributable to:
Equity holders of the Parent Company
Minority interests
Basic Earnings Per Share, attributable to equity
holders of the Parent Company
2, 14
4,303
P8,799
2, 24
2
P8,787
12
P8,799
24
P0.57
San Miguel Brewery Inc. (“Parent Company”) was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of
San Miguel Corporation were transferred to the Parent Company on October 1, 2007. Commercial operations of the Parent
Company likewise started on October 1, 2007. As explained in Note 2 to the pro forma consolidated financial statements, the
commercial operations of the subsidiaries was assumed to start on January 1, 2008.
See Notes to the Pro Forma Consolidated Financial Statements.
F-6
SAN MIGUEL BREWERY INC. AND SUBSIDIARIES
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
PRO FORMA CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2008
(In Millions, Except for Par Value and Number of Shares of Stock)
Note
CAPITAL STOCK - P1 par value
Authorized - 25,000,000,000 shares
Balance at beginning of year
Issuances during the year
Balance at end of year
15
P15,333
77
15,410
ADDITIONAL PAID-IN CAPITAL
515
CUMULATIVE TRANSLATION
ADJUSTMENTS
RETAINED EARNINGS
Balance at beginning of year
Net income for the year
Cash dividends
Balance at end of period
TOTAL EQUITY ATTRIBUTABLE TO
EQUITY HOLDERS OF THE PARENT
COMPANY
27
(45)
2, 28
2,310
8,787
(6,297)
4,800
20,680
MINORITY INTERESTS
Balance at beginning of year
Pre-acquisition carrying amount of minority
interests
Share in equity during the year
Cash dividends
Balance at end of year
239
12
(9)
242
P20,922
San Miguel Brewery Inc. (“Parent Company”) was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of
San Miguel Corporation were transferred to the Parent Company on October 1, 2007. Commercial operations of the Parent
Company likewise started on October 1, 2007. As explained in Note 2 to the pro forma consolidated financial statements, the
commercial operations of the subsidiaries was assumed to start on January 1, 2008.
See Notes to the Pro Forma Consolidated Financial Statements.
F-7
SAN MIGUEL BREWERY INC. AND SUBSIDIARIES
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2008
(In Millions)
Note
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax
Adjustments for:
Interest expense and other financing charges
Depreciation and amortization
Interest income
Reversal of allowance for doubtful accounts,
inventory losses and others
Gain on sale of property, plant and
equipment - net
Operating income before working capital changes
Decrease (increase) in:
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Income and other taxes payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash flows from operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant and equipment
Proceeds from sale of property, plant and
equipment
Increase in intangible assets
Increase in other noncurrent assets
Interest received
Net cash flows used in investing activities
P13,102
18
3,484
1,758
(264)
6, 7
(127)
20
(17)
17,936
65
(751)
(199)
(307)
332
17,076
(3,392)
(4,723)
8,961
9
(8,002)
44
(32,012)
(963)
259
(40,674)
Forward
F-8
Note
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of long-term debt
Decrease in other noncurrent liabilities
Proceeds from issuances of capital stock
Dividends paid to minority shareholders
Cash dividends paid
Increase in minority interests
Net cash flows provided by financing activities
15
28
NET INCREASE IN CASH AND CASH
EQUIVALENTS
P38,355
(3)
592
(9)
(6,296)
239
32,878
1,165
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS
AT END OF YEAR
5,262
5
P6,427
San Miguel Brewery Inc. (“Parent Company”) was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of
San Miguel Corporation were transferred to the Parent Company on October 1, 2007. Commercial operations of the Parent
Company likewise started on October 1, 2007. As explained in Note 2 to the pro forma consolidated financial statements, the
commercial operations of the subsidiaries was assumed to start on January 1, 2008.
See Notes to the Pro Forma Consolidated Financial Statements.
F-9
SAN MIGUEL BREWERY INC. AND SUBSIDIARIES
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
NOTES TO THE PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share and Number of Shares Data)
1. Reporting Entity
San Miguel Brewery Inc. (the “Parent Company”) [formerly the domestic beer division
of San Miguel Corporation (“SMC”)] was registered with the Philippine Securities and
Exchange Commission (SEC) on July 26, 2007. The pro forma consolidated financial
statements as of and for the year ended December 31, 2008 comprise the financial
statements of the Parent Company and its Subsidiaries (collectively referred to as the
“Group”). The Parent Company is engaged in manufacturing, selling and distribution of
fermented and malt-based beverages and its Subsidiaries (Note 2) are engaged in the
business of selling, managing, developing and dealing in real estate properties and in
manufacturing, selling or dealing in alcoholic and non-alcoholic beverages and acquiring,
licensing or owning trademarks and intellectual property rights necessary for such
business. The registered office address of the Parent Company is 40 San Miguel Avenue,
Mandaluyong City, Philippines.
The Parent Company is 94.25% owned and controlled by SMC. SMC is the ultimate
parent company.
On July 24, 2007, the stockholders of SMC, during the annual stockholders’ meeting,
approved the transfer of SMC’s domestic Philippine beer business assets to a whollyowned subsidiary of SMC, the Parent Company, in exchange for shares of stock. The
assets transferred to the Parent Company comprise the domestic beer business’ net assets
as of June 30, 2007 excluding land, brands, and income and other taxes payable. The
transfer of SMC’s domestic beer business’ net assets to the Parent Company is pursuant
to the listing with the Philippine Stock Exchange (PSE) and the public offering of the
shares of the Parent Company. The actual transfer of the net assets in exchange for shares
of stock took effect on October 1, 2007.
On May 12, 2008, the Parent Company’s shares were listed with the PSE.
The pro forma consolidated financial statements as of and for the year ended
December 31, 2008 were approved and authorized for issue by the Board of Directors
(BOD) on February 12, 2009.
2. Basis of Preparation
The accompanying pro forma consolidated financial statements have been prepared as if
the acquisitions of brands and other intangible assets (trademarks, copyrights, patents and
other intellectual property rights and know-how) and parcels of land by the Subsidiaries,
start of commercial operations of the Subsidiaries and issuance of long-term debt
occurred on January 1, 2008.
F-10
The pro forma consolidated financial statements are based on the historical information
of the Parent Company as shown in the audited financial statements as of and for the year
ended December 31, 2008, after giving effect to the assumptions and adjustments
described below.
The pro forma consolidated financial statements are presented in Philippine peso, which
is the Parent Company’s functional and presentation currency, and all values are rounded
to the nearest million (P000,000), except when otherwise indicated.
The accompanying pro forma consolidated financial statements are for informational
purposes only and do not purport to present what the financial position, financial
performance and cash flows would have been had the acquisitions of intangible assets
(trademarks, copyrights, patents and other intellectual property rights and know-how) and
parcels of land by the Subsidiaries and issuance of long-term debt actually occurred on
January 1, 2008 or purport to project the financial position, financial performance and
cash flows for any future period.
The pro forma adjustments arising from the transactions described in the succeeding
paragraph represent the significant effects directly attributable to those transactions
which have been determined based upon available information and certain assumptions
that management believes to be reasonable.
The accompanying pro forma consolidated financial statements assume that:
(i)
the Parent Company acquired on January 1, 2008 all the interests of SMC in
Iconic Beverages, Inc. (“IBI”) after SMC has transferred to IBI certain Philippine
beer and malt-based beverages brands and other intangible assets, including
trademarks, copyrights, patents and other intellectual property rights and knowhow of SMC;
(ii)
the Parent Company also acquired on January 1, 2008 all the interests of SMC in
Brewery Properties Inc. (“BPI”) after SMC has transferred certain parcels of land
used in the domestic beer operations of the Company to BPI;
(iii)
IBI is a wholly-owned subsidiary of the Parent Company, with an outstanding
capital stock of P10,000 divided into 100,002,500 common shares, fully paid and
with a par value of P100 per common share;
(iv)
BPI has an outstanding capital stock of P856 (inclusive of additional paid in
capital) divided into 2,389,494 preferred shares with par value of P100 per
preferred share and 1,592,996 common shares with par value of P350 per common
share;
(v)
all outstanding common shares of BPI are owned by the Parent Company and all
outstanding preferred shares are owned by SMBRP;
(vi)
Brewery Landholdings, Inc. (“BLI”) is a wholly-owned subsidiary of BPI, with an
outstanding capital stock of P239 divided into 2,389,494 common shares, fully
paid and with par value of P100 per common share and owns certain parcels of
land it has purchased from SMC on which the sales offices of the Parent Company
are located;
(vii)
BLI and BPI charged the Parent Company rental fee of 4% of the appraised value
of the land for the use of land owned by BPI and BLI by the Parent Company in
its operations and the lease is negotiable yearly;
F-11
(viii)
the dividends for preferred shares of BPI is at a fixed rate of 7% of net income of
BPI;
(ix)
BPI and IBI declared 100% of its net income in the month following the end of
each quarter as cash dividends;
(x)
IBI charged the Parent Company royalty fee for the use of the brands and other
intellectual property rights owned by IBI at a rate of 5% of the net beer and maltbased beverages sales revenue of the Parent Company;
(xi)
IBI, BPI and, BLI started commercial operations on January 1, 2008;
(xii)
the Parent Company issued multi-tranche peso bonds in the aggregate principal
amount of P38,800;
(xiii)
the multi-tranche peso bonds issued by the Parent Company carry a fixed rate of
8%, 9% and 10% for tenors of three, five years and one day and ten years,
respectively; and
(xiv)
the Parent Company declared 70% of its unappropriated retained earnings in the
month following the end of each quarter as cash dividends.
Statement of Compliance
The accompanying pro forma consolidated financial statements were based on the
audited financial statements of the Parent Company as of and for the year ended
December 31, 2008, which were prepared in compliance with Philippine Financial
Reporting Standards (PFRS). PFRS includes statements named PFRS, Philippine
Accounting Standards (PAS) and Philippine interpretations from International Financial
Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting
Standards Council (FRSC).
F-12
The following tables show the effects of the pro forma adjustments to the Parent
Company’s audited financial statements as of and for the year ended December 31, 2008.
December 31, 2008
Pro Forma
Consolidated
Balances
Parent Company
Audited Balances
Pro Forma
Adjustments
P6,041
3,661
3,279
P386
1
-
(1)
418
13,399
(39)
348
(3)
379
13,747
5,864
11
427
4,933
11,235
7,068
32,000
(115)
(39)
38,914
(4)
12,932
32,011
312
4,894
50,149
P24,634
P39,262
P3,000
2,585
5,585
P (1,067)
(1,067)
39
39
38,447
(30)
38,417
ASSETS
Current Assets
Cash and cash equivalents
Trade and other receivables - net
Inventories - net
Prepaid expenses and other current
assets
Total Current Assets
Noncurrent Assets
Property, plant and equipment - net
Intangible assets
Deferred tax assets
Other noncurrent assets - net
Total Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued
expenses
Income and other taxes payable
Total Current Liabilities
Noncurrent Liabilities
Long-term debt - net of debt issue
costs
Other noncurrent liabilities
Total Noncurrent Liabilities
Equity
Capital stock
Additional paid-in capital
Cumulative translation
adjustments
Retained earnings
15,410
515
Total Equity Attributable to
Equity Holders of the Parent
Company
Minority Interests
Total Equity
F-13
(2)
(5)
(6)
(7)
P63,896
(8)
(9)
(10)
-
(45)
3,130
1,670
19,010
19,010
1,670
242
1,912
P24,634
P39,262
P6,427
3,662
3,279
P3,000
1,518
4,518
38,447
9
38,456
15,410
515
(11)
(12)
(45)
4,800
20,680
242
20,922
P63,896
(1)
Represents payment of debt issue costs, interest expense, reversal of rent and royalty, adjustment of income
tax expense, dividend payments and other charges
Debt issue costs
Interest expense
Reversal of rent and royalty previously paid to SMC
Taxes and other charges
Dividends adjustment based on actual payments made
versus pro forma assumptions
Total
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(P445)
(3,392)
1,147
159
2,917
P386
Represents tax certificate receivables on rent income of BPI and BLI
Represents reversal of two months advance rent for the use of the land previously leased from SMC
Represents cost of land acquired by BPI and BLI from SMC
Represents cost of brands and other intangible assets acquired by IBI from SMC
Represents adjustment due to debt issue costs
Represents reversal of two months rent deposit for the use of the land previously leased from SMC
Represents adjustment of income tax expense due to lower taxable income
Represents proceeds from issuance of long-term debt less unamortized debt issue costs
Represents reversal of accrued rent on land previously leased from SMC
Represents adjustment primarily due to change in dividends declaration from 100% of unappropriated
retained earnings to 70%, net of the effect of the other assumptions on net income
Represents minority interest of SMBRP in BPI
December 31, 2008
SALES
COST OF SALES
GROSS PROFIT
ADMINISTRATIVE AND
SELLING EXPENSES
INTEREST EXPENSE AND
OTHER FINANCING
CHARGES
INTEREST INCOME
OTHER EXPENSE - Net
INCOME BEFORE
INCOME TAX
INCOME TAX EXPENSE
NET INCOME
(13)
Parent
Company
Audited
Balances
P48,787
24,800
23,987
Pro Forma
Adjustments
P -
(8,366)
1,078
(13)
(7,288)
264
(377)
(3,484)
-
(14)
(3,484)
264
(377)
15,508
5,466
P10,042
(2,406)
(1,163)
(P1,243)
(15)
13,102
4,303
P8,799
Represents reversal of rental and royalty expense paid to SMC, net of expenses of the two
subsidiaries (BPI & IBI)
Royalty
Rental
Taxes and licenses
Total
(14)
(15)
Pro Forma
Consolidated
Balances
P48,787
24,800
23,987
P974
188
(84)
P1,078
Represents interest and financing charges and amortization of debt issue costs for the long-term debt
Represents adjustment of income tax expense due to lower taxable income
F-14
December 31, 2008
Parent
Company
Audited
Balances
Pro Forma
Adjustments
P11,027
(P2,066)
(16)
P8,961
(1,645)
(39,029)
(17)
(40,674)
(8,603)
41,481
(18)
32,878
779
386
1,165
-
5,262
Net cash flows from
operating activities
Net cash flows used in
investing activities
Net cash flows provided by
(used in) financing activities
Net increase in cash and cash
equivalents
Cash and cash equivalents at
beginning of year
Cash and cash equivalents at
end of year
(16)
(17)
(18)
5,262
P6,041
Pro Forma
Consolidated
Balances
P386
P6,427
Represents decrease in net income primarily due to interest expense
Represents cash used to purchase land, brands and other intangible assets
Represents proceeds from issuance of long-term debt and adjustment due to change in dividends
declaration from 100% of unappropriated retained earnings to 70%
Basis of Consolidation
The pro forma consolidated financial statements include the accounts of the Parent
Company and the following subsidiaries:
Percentage
of Ownership
Iconic Beverages, Inc.
Brewery Properties Inc. and a wholly-owned Subsidiary
(Brewery Landholdings, Inc.)
Country
of Incorporation
100%
Philippines
40%
Philippines
A subsidiary is an entity controlled by the Group. Control exists when the Group has the
power, directly or indirectly, to govern the financial and operating policies of an entity so
as to obtain benefit from its activities. In assessing control, potential voting rights that
are presently exercisable or convertible are taken into account. The financial statements
of the subsidiary are included in the pro forma consolidated financial statements from the
date when the Group obtains control, and continue to be consolidated until the date that
such control ceases.
Following the provisions of PAS 27, Consolidated and Separate Financial Statements,
the Parent Company included the accounts of BPI in the consolidation.
The pro forma consolidated financial statements are prepared for the same reporting
period as the Parent Company, using uniform accounting policies for like transactions
and other events in similar circumstances. Intergroup balances and transactions, including
intergroup unrealized profits and losses, are eliminated in preparing the pro forma
consolidated financial statements.
Minority interests represent the portion of profit or loss and net assets not held by the
Group and are presented in the pro forma consolidated balance sheet, separately from
equity attributable to equity holders of the Parent Company.
Minority interests represent the interest not held by the Group in BPI.
F-15
3. Significant Accounting Policies
The accounting policies set out below have been applied consistently by the Group to all
periods presented in the pro forma consolidated financial statements.
Adoption of New Standards, Amendments to Standards and Interpretations
The FRSC approved the adoption of new standards, amendment to standards, and
interpretations.
Amendments to Standard and Interpretation Adopted in 2008
Starting January 1, 2008, the Group adopted the following amendments to standard and
Philippine Interpretations from IFRIC:
ƒ
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share
Transactions: This interpretation describes how to apply PFRS 2, Share-based
Payment to share-based payment arrangements involving an entity’s own equity
instruments and share-based payment arrangements of subsidiaries involving equity
instruments of its parent company. The adoption of this interpretation did not have a
material effect on the Group’s pro forma consolidated financial statements.
ƒ
Philippine Interpretation IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction: This interpretation provides
general guidance on how to assess the limit in PAS 19, Employee Benefits, on the
amount of the surplus that can be recognized as an asset. It also explains how the
retirement asset or liability may be affected when there is a statutory or contractual
minimum funding requirement. The adoption of this interpretation did not have a
material effect on the Group’s pro forma consolidated financial statements.
ƒ
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and
PFRS 7 Financial Instruments: Disclosures: This standard permits an entity to
reclassify non-derivative financial assets, other than those designated at fair value
through profit or loss upon initial recognition, out of the trading category in certain
circumstances. The amendments also permit an entity to transfer from the availablefor-sale category to the loans and receivables category a financial asset that otherwise
would have met the definition of loans and receivables, if the entity has the intention
and ability to hold that financial asset for the foreseeable future. The adoption of
these amendments to standard did not have an effect on the Group’s pro forma
consolidated financial statements.
New and Revised Standards and Amendments to Standards Not Yet Adopted
The following are the new and revised standards and amendments to standards which are
not yet effective for the year ended December 31, 2008, and have not been applied in
preparing these pro forma consolidated financial statements:
ƒ
PFRS 8, Operating Segments, becomes effective for financial years beginning on or
after January 1, 2009 and will replace PAS 14, Segment Reporting. This standard
introduces the “management approach” to segment reporting. It will require a change
in the presentation and disclosure of segment information based on the internal
reports regularly reviewed by the Group’s Chief Operating Decision Maker in order
to assess each segment’s performance and to allocate resources to them. The Group
has determined that this standard has no impact on its pro forma consolidated
financial statements since it operates as one segment only (both in terms of business
and geography).
F-16
ƒ
Revised PAS 1, Presentation of Financial Statements, becomes effective for
financial years beginning on or after January 1, 2009. The standard has been revised
to introduce the term total comprehensive income, which represents changes in
equity during a period other than those changes resulting from transactions with
owners in their capacity as owners. Total comprehensive income may be presented in
either a single statement of comprehensive income (effectively combining both the
income statement and all non-owner changes in equity in a single statement), or in an
income statement and a separate statement of comprehensive income. The Group is
currently assessing the impact of the revised standard on the pro forma consolidated
financial statements when it adopts the standard on January 1, 2009.
ƒ
Revised PAS 23, Borrowing Costs, becomes effective for financial years beginning
on or after January 1, 2009. The standard has been revised to require an entity to
capitalize borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset as part of the cost of that asset. The Group will
assess the impact of this revised standard on the pro forma consolidated financial
statements when it adopts the standard on January 1, 2009.
ƒ
Amended PFRS 1 and PAS 27, Cost of an Investment in a Subsidiary, Jointly
Controlled Entity or Associate, becomes effective for financial years beginning on or
after January 1, 2009. The amendments to PFRS 1 allow a first-time adopter, at its
date of transition to PFRSs in its separate financial statements, to use deemed cost to
account for an investment in a subsidiary, jointly controlled entity or associate. The
amendments to PAS 27 remove the definition of “cost method” currently set out in
PAS 27, and instead require all dividend from a subsidiary, jointly controlled entity
or associate to be recognized as income in the separate financial statements of the
investor when the right to receive the dividend is established. The Group will assess
the impact of this revised standard on the pro forma consolidated financial statements
when it adopts the standard on January 1, 2009.
ƒ
Improvements to PFRSs 2008 discusses 35 amendments and is divided into two
parts: a) Part I includes 24 amendments that result in accounting changes for
presentation, recognition or measurement purposes; and b) Part II includes 11
terminology or editorial amendments that the International Accounting Standards
Board expects to have either no or only minimal effects on accounting. These
amendments are generally effective for annual periods beginning on or after
January 1, 2009. The adoption of the amendments in 2009 is not expected to have
any material effect on the Group’s pro forma consolidated financial statements.
ƒ
Revised PFRS 3, Business Combinations, incorporates the following changes that are
likely to be relevant to the Group’s operations:
o
The definition of a business has been broadened, which is likely to result in
more acquisitions being treated as business combinations.
o
Contingent consideration will be measured at fair value, with subsequent
changes therein recognised in profit or loss.
o
Transaction costs, other than share and debt issue costs, will be expensed as
incurred.
o
Any pre-existing interest in the acquiree will be measured at fair value with
the gain or loss recognised in profit or loss.
F-17
o
Any non-controlling (minority) interest will be measured at either fair value,
or at its proportionate interest in the identifiable assets and liabilities of the
acquiree, on a transaction-by-transaction basis.
Revised PFRS 3, which becomes mandatory for the Group’s 2010 pro forma
consolidated financial statements, will be applied prospectively and therefore there
will be no impact on prior periods in the Group’s 2010 pro forma consolidated
financial statements.
ƒ
Amended PAS 27, Consolidated and Separate Financial Statement, requires
accounting for changes in ownership interests by the Group in a subsidiary, while
maintaining control, to be recognised as an equity transaction. When the Group loses
control of a subsidiary, any interest retained in the former subsidiary will be
measured at fair value with the gain or loss recognised in profit or loss. The
amendments to PAS 27, which become mandatory for the Group’s 2010 pro forma
consolidated financial statements, are not expected to have a significant impact on
the pro forma consolidated financial statements.
ƒ
Amendments to PAS 39, Financial Instruments: Recognition and Measurement Eligible Hedged Items, becomes effective for financial years beginning on or after
July 1, 2009. The standard has been amended to provide for the following: a) new
application guidance to clarify the existing principles that determine whether specific
risks or portions of cash flows are eligible for designation in a hedge relationship;
and b) additional application guidance on qualifying items; assessing hedge
effectiveness; and designation of financial items as hedged items. The amendments
to PAS 39, which will become mandatory for the Group’s 2010 pro forma
consolidated financial statements, are not expected to have a significant impact on the
pro forma consolidated financial statements.
ƒ
Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners,
becomes effective for financial years beginning on or after July 1, 2009. This
interpretation provides guidance on the accounting for non-reciprocal distributions of
non-cash assets to owners acting in their capacity as owners. It also applies to
distributions in which the owners may elect to receive either the non-cash asset or a
cash alternative. The liability for the dividend payable is measured at fair value of the
assets to be distributed. The Group will assess the impact of this interpretation on the
pro forma consolidated financial statements when it adopts the standard on July 1,
2009.
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 and are subject to an insignificant risk of change in
value.
Financial Assets and Liabilities
Date of Recognition. The Group recognizes a financial asset or a financial liability in the
pro forma consolidated balance sheet when it becomes a party to the contractual
provisions of the financial instrument. In the case of a regular way purchase or sale of
financial assets, recognition and derecognition, as applicable, are done using settlement
date accounting.
F-18
Initial Recognition of Financial Instruments. Financial instruments are recognized
initially at fair value, which is the fair value of the consideration given (in case of an
asset) or received (in case of a liability). The fair value of the consideration given or
received is determined by reference to the transaction price or other market prices. If
such market prices are not reliably determinable, the fair value of the consideration is
estimated as the sum of all future cash payments or receipts, discounted using the
prevailing market rate of interest for similar instruments with similar maturities. The
initial measurement of financial instruments, except for those designated at fair value
through profit and loss (FVPL), includes transaction costs.
Subsequent to initial recognition, the Group classifies its financial assets and liabilities in
the following categories: held-to-maturity (HTM) financial assets, available-for-sale
(AFS) investments, FVPL financial assets, and loans and receivables. The classification
depends on the purpose for which the investments are acquired and whether they are
quoted in an active market. Management determines the classification of its financial
assets at initial recognition and, where allowed and appropriate, re-evaluates such
designation at every reporting date.
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
quotation (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, options pricing models and other relevant valuation models.
Day 1 Profit. Where the transaction price in a non-active market is different from the fair
value of the other observable current market transactions for 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 pro forma consolidated statement of income unless it qualifies for
recognition as some other type of asset. In cases where use is made of data which are not
observable, the difference between the transaction price and model value is only
recognized in the pro forma 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
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. Gains or losses on investments held for trading are recognized in
the pro forma consolidated statement of income.
F-19
Financial assets may be designated by management at initial recognition as at FVPL,
when any of the following criteria is met:
ƒ
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
ƒ
the assets are part of a group of financial assets, financial liabilities or both which are
managed and the performance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy; or
ƒ
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 recognized.
Derivatives are also classified as held for trading unless they are designated as effective
hedging instruments.
The Group accounts for its derivative transactions (including embedded derivatives)
under this category with fair value changes being reported directly to profit or loss,
except when the derivative is treated as an effective accounting hedge, in which case the
fair value change is deferred in equity under the “Cumulative translation adjustments”
account.
The Group’s derivative assets are classified under this category (Notes 8 and 27).
The carrying values of financial assets under this category amounted to P28 as of
December 31, 2008 (Notes 8 and 27).
Loans and Receivables. Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active market. They are not
entered into with the intention of immediate or short-term resale and are not designated
as AFS or financial assets at FVPL. Loans and receivables are carried at cost or
amortized cost, less impairment in value. Amortization is determined using the effective
interest method.
The Group’s cash and cash equivalents, trade and other receivables and noncurrent
receivables are included in this category (Notes 5, 6 and 11).
The carrying values of financial assets under this category amounted to P10,100 as of
December 31, 2008 (Note 27).
HTM Investments. HTM investments are quoted non-derivative financial assets with
fixed or determinable payments and fixed maturities for which the Group’s management
has the positive intention and ability to hold to maturity. Where the Group sells other
than an insignificant amount of HTM investments, the entire category would be tainted
and classified as AFS investments. After initial measurement, these investments are
measured at amortized cost using the effective interest 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.
Gains and losses are recognized in the pro forma consolidated statement of income when
the HTM investments are derecognized or impaired, as well as through the amortization
process.
F-20
The Group has no investments classified as HTM investments as of December 31, 2008.
AFS Investments. AFS investments are non-derivative financial assets that are designated
in this category or are not classified in any of the other categories. Subsequent to initial
recognition, AFS investments are carried at fair value in the pro forma consolidated
balance sheet. Changes in the fair value of such assets are reported in the equity section
of the pro forma consolidated balance sheet until the investment is derecognized or the
investment is determined to be impaired. On derecognition or impairment, the
cumulative gain or loss previously reported in equity is transferred to the pro forma
consolidated statement of income. Interest earned on holding AFS investments is
recognized in the pro forma consolidated statement of income using effective interest
rate.
The Group has no investments classified under this category as of December 31, 2008.
Financial Liabilities
Financial Liabilities at FVPL. Financial liabilities are classified in this category if these
result from trading activities or derivative transactions that are not accounted for as
accounting hedges, or when the Group elects to designate a financial liability under this
category.
Included in this category are the Group’s derivative financial instruments with negative
fair values (Notes 12 and 27).
The carrying values of financial liabilities under this category amounted to P273 as of
December 31, 2008 (Notes 12 and 27).
Other Financial Liabilities. This category pertains to financial liabilities that are not held
for trading or not designated as at FVPL upon the inception of the liability. These
include liabilities arising from operations or borrowings.
Financial liabilities are recognized initially at fair value and are subsequently carried at
amortized cost, taking into account the impact of applying the effective interest method
of amortization (or accretion) for any related premium, discount and any directly
attributable transaction costs.
Included in this category are the Group’s accounts payable and accrued expenses and
long-term debt (Notes 12, 13 and 27).
The carrying values of financial liabilities under this category amounted to P41,174 as of
December 31, 2008 (Notes 12, 13 and 27).
Debt Issue Costs
Debt issue costs are shown as deduction against the related debt and are amortized over
the terms of the related borrowings using the effective interest method.
F-21
Derivative Financial Instruments and Hedge
Freestanding Derivatives
For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges
when hedging the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment (except for foreign currency risk); b) cash flow
hedges when hedging exposure to variability in cash flows that is either attributable to a
particular risk associated with a recognized asset or liability or a highly probable forecast
transaction or the foreign currency risk in an unrecognized firm commitment; or
c) hedges of a net investment in foreign operations.
At the inception of a hedge relationship, the Group formally designates and documents
the hedge relationship to which the Group wishes to apply hedge accounting and the risk
management objective and strategy for undertaking the hedge. The documentation
includes identification of the hedging instrument, the hedged item or transaction, the
nature of the risk being hedged and how the entity will assess the hedging instrument’s
effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash
flows attributable to the hedged risk. Such hedges are expected to be highly effective in
achieving offsetting changes in fair value or cash flows and are assessed on an on-going
basis to determine that they actually have been highly effective throughout the financial
reporting periods for which they were designated.
Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value
with corresponding change in fair value recognized in the pro forma consolidated
statement of income. The carrying amount of the hedged asset or liability is also adjusted
for changes in fair value attributable to the hedged item and the gain or loss associated
with that remeasurement is also recognized in the pro forma consolidated statement of
income.
When the hedge ceases to be highly effective, hedge accounting is discontinued and the
adjustment to the carrying amount of a hedged financial instrument is amortized
immediately.
As of December 31, 2008, the Group has no outstanding derivatives accounted for as fair
value hedges.
Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a
highly effective cash flow hedge are included in the pro forma consolidated statement of
changes in equity under the “Cumulative translation adjustments” account. The
ineffective portion is immediately recognized in the pro forma consolidated statement of
income.
If the hedged cash flow results in the recognition of an asset or a liability, all 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 net income in the same period or periods during which the
hedged forecasted transaction or recognized asset or liability affect the pro forma
consolidated statement of income.
F-22
When the hedge ceases to be highly effective, hedge accounting is discontinued
prospectively. In this case, the cumulative gain or loss on the hedging instrument that
has been reported directly in equity is retained in equity until the forecasted transaction
occurs. When the forecasted transaction is no longer expected to occur, any net
cumulative gain or loss previously reported in equity is recognized in the pro forma
consolidated statement of income.
As of December 31, 2008, the Group has outstanding commodity options designated as
effective cash flow hedges amounting to P59.
Net Investment Hedge. As of December 31, 2008, the Group has no hedge of a net
investment in a foreign operation.
For derivatives that do not qualify for hedge accounting, any gains or losses arising from
changes in fair value of derivatives are taken directly to profit or loss during the year
incurred.
Embedded Derivatives
The Group assesses whether embedded derivatives are required to be separated from host
contract when the Group becomes a party to the contract. An embedded derivative is
separated from the host contract and accounted for as a derivative if all of the following
conditions are met: a) the economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks of the host contract;
b) a separate instrument with the same terms as the embedded derivative would meet the
definition of a derivative; and c) the hybrid or combined instrument is not recognized at
FVPL. Reassessment only occurs if there is a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required.
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 similar financial assets) is derecognized when:
ƒ
the rights to receive cash flows from the asset have expired;
ƒ
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 ‘passthrough’ arrangement; or
ƒ
the Group has transferred its rights to receive cash flows from the asset and either
(a) has transferred substantially all the risks and rewards of the asset, or (b) has
neither transferred nor retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
When the 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 Group’s
continuing involvement in the asset.
Financial Liabilities. A financial liability is derecognized when the obligation under the
liability is discharged or cancelled or expired.
F-23
When 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 pro forma consolidated statement of income.
Impairment of Financial Assets
The Group assesses at balance sheet date whether a financial asset or group of financial
assets is impaired.
Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss
on loans and receivables carried at amortized cost has been incurred, the amount of 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) 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 shall be reduced either directly or through
use of an allowance account. The amount of loss shall be recognized in the pro forma
consolidated statement of income.
The 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 pro forma consolidated statement of income, to the
extent that the carrying value of the asset does not exceed its amortized cost at the
reversal date.
Assets Carried at Cost. If there is objective evidence of an impairment loss on an
unquoted equity instrument that is not carried at fair value because its fair value cannot
be reliably measured, or of a 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 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.
AFS Financial Assets. If an AFS financial asset is impaired, an amount comprising the
difference between the cost (net of any principal payment and amortization) and its
current fair value, less any impairment loss on that financial asset previously recognized
in the pro forma consolidated statement of income, is transferred from equity to the pro
forma consolidated statement of income. Reversals in respect of equity instruments
classified as AFS are not recognized in profit or loss. Reversals of impairment losses on
debt instruments are reversed through profit or loss, 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 pro forma consolidated statement of income.
F-24
Classification of Financial Instruments Between Debt and Equity
A financial instrument is classified as debt if it provides for a contractual obligation to:
ƒ
deliver cash or another financial asset to another entity; or
ƒ
exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the Group; or
ƒ
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.
If the Group does not have an unconditional right to avoid delivering cash or another
financial asset to settle its contractual obligation, the obligation meets the definition of a
financial liability.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the
pro forma 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 pro forma consolidated balance sheet.
Inventories
Finished goods, goods in process and materials and supplies are valued at the lower of
cost and net realizable value.
Costs incurred in bringing each inventory to its present location and conditions are
accounted for as follows:
Finished goods and goods in
process
-
Materials and supplies
-
cost includes direct materials and labor and a
proportion of manufacturing overhead costs
based on normal operating capacity but
excluding borrowing costs; cost is
determined using the moving-average
method;
at cost using the moving-average method.
Net realizable value of finished goods and goods in process is the estimated selling price
in the ordinary course of business, less the estimated costs of completion and the
estimated costs necessary to make the sale.
Net realizable value of materials and supplies is the current replacement cost.
Containers (i.e., returnable bottles and shells) are stated at deposit values. The excess of
the acquisition cost of the containers over their deposit value is presented under deferred
containers included under “Other noncurrent assets” account in the pro forma
consolidated balance sheet and is amortized over the estimated useful lives of ten (10)
years. Amortization of deferred containers is included under “Administrative and selling
expenses” account in the pro forma consolidated statement of income.
F-25
Property, Plant and Equipment
Property, plant and equipment, except land, are stated at cost less accumulated
depreciation and amortization and any accumulated impairment in value. Such cost
includes the cost of replacing part of the property, plant and equipment at the time that
cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day
servicing. Land is stated at cost less any impairment in value.
The initial cost of property, plant and equipment comprises of its purchase price,
including import duties, taxes and any directly attributable costs in bringing the asset to
its working condition and location for its intended use. Cost also includes any related
asset retirement obligation and interest incurred during the construction period on funds
borrowed to finance the construction of the projects. Expenditures incurred after the
asset has been put into operation, such as repairs, maintenance and overhaul costs, are
normally recognized as expense in the period the costs are incurred. In situations where
it can be clearly demonstrated that the expenditures have improved the condition of the
asset beyond the originally assessed standard of performance, the expenditures are
capitalized as an additional cost of property, plant and equipment.
Construction in progress represents structures under construction and is stated at cost.
This includes the costs of construction and equipment and other direct costs. Borrowing
costs that are directly attributable to the construction of property, plant and equipment are
capitalized during the construction period. Construction in progress is not depreciated
until such time that the relevant assets are ready for use.
Depreciation and amortization are computed using the straight-line method over the
following estimated useful lives of the assets:
Machinery and equipment
Buildings and improvements
Transportation equipment
Office equipment, furniture and fixtures
Tools and small equipment
Leasehold improvements
Number of Years
10 - 40
5 - 50
5-7
2-6
2-5
5 - 50
or term of the lease,
whichever is shorter
The remaining useful lives, residual values and depreciation and amortization method are
reviewed and adjusted, if appropriate, at each financial year-end to ensure that such
periods and method of depreciation and amortization are consistent with the expected
pattern of economic benefits from the items of property, plant and equipment.
The carrying values of property, plant and equipment are reviewed for impairment when
events or changes in circumstances indicate that the carrying value may not be
recoverable.
Fully depreciated assets are retained in the accounts until they are no longer in use and no
further depreciation and amortization is credited or charged to current operations.
When each major inspection is performed, its cost is recognized in the carrying amount
of the property, plant and equipment as a replacement if the recognition criteria are
satisfied.
F-26
An item of property, plant and equipment is derecognized when either it has been
disposed or when it is permanently withdrawn from use and no future economic benefits
are expected from its use or disposal. Any gains or losses arising on the retirement and
disposal of an item of property, plant and equipment (calculated as the difference
between the net disposal proceeds and the carrying amount of the asset) are included in
the pro forma consolidated statement of income in the period of retirement or disposal.
Business Combinations For Entities Under Common Control
Business combinations arising from transfers of interests in entities that are under the
control of the shareholder that controls the Group are accounted for as if the acquisition
had occurred at the beginning of the earliest comparative period presented or, if later, at
the date that common control was established. The assets and liabilities acquired are
recognized at the carrying amounts recognized previously in the Group controlling
shareholder’s consolidated financial statements.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost
of intangible assets acquired in a business combination is its fair value as at the date of
acquisition. Following initial recognition, intangible assets are carried at cost less
accumulated amortization and any accumulated impairment losses. Internally generated
intangible assets, excluding capitalized development costs, are not capitalized and
expenditure is charged against profits in the year in which the expenditure is incurred.
The useful lives of intangible assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic life and
assessed for impairment whenever there is an indication that the intangible asset may be
impaired. The amortization period and the amortization method for an intangible asset
with a finite useful life are reviewed at least at each balance sheet date. Changes in the
expected useful life or the expected pattern of consumption of future economic benefits
embodied in the asset is accounted for by changing the amortization period or method, as
appropriate, and treated as changes in accounting estimates. The amortization expense
on intangible assets with finite lives is recognized in the pro forma consolidated
statement of income in the expense category consistent with the function of the intangible
asset.
Amortization of computer software and licenses is computed using the straight-line
method of over 2-8 years.
The Group assessed the useful life of the trademarks and brand names to be indefinite
because based on an analysis of all the relevant factors, there is no foreseeable limit to
the period over which the asset is expected to generate cash inflows for the Group.
Intangible assets with indefinite useful lives, such as trademarks, brands and licenses, are
tested for impairment annually either individually or at the cash-generating unit level.
Such intangible assets are not amortized. The useful life of an intangible asset with an
indefinite life is reviewed annually to determine whether indefinite life assessment
continues to be supportable. If not, the change in the useful life assessment from
indefinite to finite is made on a prospective basis.
Gains or losses arising from disposition of an intangible asset are measured as the
difference between the disposal proceeds and the carrying amount of the asset and are
recognized in the pro forma consolidated statement of income when the asset is disposed.
F-27
Impairment of Non-financial Assets with Definite Useful Lives
The carrying values of property, plant and equipment, containers, intangible assets with
definite useful lives and idle assets are reviewed for impairment when events or changes
in circumstances indicate that the carrying value may not be recoverable. If any such
indication exists, and if the carrying value exceeds the estimated recoverable amount, the
assets or cash-generating units are written down to their recoverable amounts. The
recoverable amount of the asset is the greater of fair value less costs to sell or value in
use. The fair value less costs to sell is the amount obtainable from the sale of an asset in
an arm’s-length transaction less costs to sell. 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. For an asset that does not generate largely independent cash inflows, the
recoverable amount is determined for the cash-generating unit to which the asset belongs.
Impairment losses of continuing operations are recognized in the pro forma consolidated
statement of income in those expense categories consistent with the function of the
impaired asset.
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 profit or loss.
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.
Provisions
Provisions are recognized only when the Group has (a) a present obligation (legal or
constructive) as a result of 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 interest expense. Where the Group expects a provision to be reimbursed, the
reimbursement is recognized as a separate asset but only when the receipt of the
reimbursement is virtually certain.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will
flow to the Group and the revenue can be reliably measured. The following specific
recognition criteria must also be met before revenue is recognized:
Sales. Revenue is 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,
which is normally upon delivery.
Interest. Interest is recognized as the interest accrues, taking into account the effective
yield on the asset.
F-28
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.
Group as Lessee. Finance leases, which transfer to the Group substantially all the risks
and rewards 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 recognized in the pro forma
consolidated statement of income.
Capitalized leased assets are depreciated over the shorter of the estimated useful lives of
the assets or the respective lease terms, if there is no reasonable certainty that the Group
will obtain ownership by the end of the lease term.
Leases which do not transfer to the Group 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 pro forma consolidated statement of income on a
straight-line basis over the lease term. Associated costs such as maintenance and
insurance are expensed as incurred.
Group as Lessor. Leases where the Group does not transfer substantially all the risks and
benefits of ownership of the assets are classified as operating leases. Lease income from
operating leases is recognized as income on a straight-line basis over the lease term.
Initial direct costs incurred in negotiating an operating lease are added to the carrying
amount of the leased asset and recognized over the lease term on the same basis as rental
income. Contingent rents are recognized as revenues in the period in which they are
earned.
Borrowing Costs
Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if
they are directly attributable to the acquisition or construction of a qualifying asset.
Capitalization of borrowing costs commences when the activities to prepare the asset are
in progress and expenditures and borrowing costs are being incurred. Borrowing costs
are capitalized until the assets are substantially ready for their intended use. If the
carrying amount of the asset exceeds its recoverable amount, an impairment loss is
recognized.
Research and Development Costs
Research costs are expensed as incurred. Development cost incurred on an individual
project is carried forward when its future recoverability can reasonably be regarded as
assured. Any expenditure carried forward is amortized in line with the expected future
sales from the related project.
The carrying value of development cost is reviewed for impairment annually when the
related asset is not yet in use. Otherwise, this is reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
F-29
Share-based Transactions
Under SMC’s Employee Stock Purchase Plan (ESPP), employees of the Group receive
remuneration in the form of share-based payments transactions, whereby the employees
render services as consideration for equity instruments of SMC. Such transactions are
handled centrally by SMC.
Share-based transactions in which SMC grants option rights to its equity instruments
direct to the Group’s employees are accounted for as equity-settled transactions. SMC
charges the Group for the costs related to such transactions with its employees. The
amount is charged to operations by the Group.
The cost of ESPP is measured by reference to the market price at the time of the grant
less subscription price. The cumulative expense recognized for share-based transactions
at each reporting date until the vesting date reflects the extent to which the vesting period
has expired and SMC’s best estimate of the number of equity instruments that will
ultimately vest. Where the terms of a share-based 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 modification, which increases the total fair value of the share-based
payment agreement, or is otherwise beneficial to the employee 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.
Retirement Costs
The Parent Company has a funded, noncontributory retirement plan, administered by a
trustee, covering all permanent employees. Retirement costs are actuarially determined
using the projected unit credit method. This method reflects service rendered by
employees to the date of valuation and incorporates assumptions concerning employees’
projected salaries. Retirement cost includes current service cost, interest cost, expected
return on plan assets, amortization of unrecognized past service costs, recognition of
actuarial gains and losses, and effect of any curtailments or settlements. The past service
cost, if any, is recognized as an expense on a straight-line basis over the average period
until the benefits become vested. If the benefits are already vested immediately
following the introduction of, or changes to, the plan, past service cost is recognized
immediately as an expense. Actuarial gains and losses are recognized as income or
expense when the net cumulative unrecognized actuarial gains and losses of the plan at
the end of the previous reporting year exceed 10% of the higher of the present value of
the defined benefit obligation and the fair value of plan assets at that date. These gains or
losses are recognized over the expected average remaining working lives of the
employees participating in the plan.
The defined benefit liability is the aggregate of the present value of the defined benefit
obligation and actuarial gains and losses not recognized, reduced by past service cost not
yet recognized and the fair value of plan assets out of which the obligations are to be
settled directly. If such aggregate is negative, the resulting asset is measured at the lower
of such aggregate or the aggregate of 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.
F-30
If the asset is measured at the aggregate of 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, net actuarial
losses of the current period and past service cost of the current period are recognized
immediately to the extent that they exceed any reduction in the present value of those
economic benefits. If there is no change or an increase in the present value of the
economic benefits, the entire net actuarial losses of the current period and past service
cost of the current period are recognized immediately. Similarly, net actuarial gains of
the current period after the deduction of past service cost of the current period exceeding
any increase in the present value of the economic benefits stated above are recognized
immediately if the asset is measured at the aggregate of 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. If there is no change or a decrease in the present value of the economic
benefits, the entire net actuarial gains of the current period after the deduction of past
service cost of the current period are recognized immediately.
Foreign Currency Transactions and Translations
The Group’s pro forma consolidated financial statements are presented in Philippine
peso, which is also the Group’s functional and presentation currency. 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 recorded using the exchange rate at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are restated using the
closing rate of exchange at balance sheet date. All differences are taken to the pro forma
consolidated statement of income. Nonmonetary items that are measured in terms of
historical cost in a foreign currency are translated using the exchange rates as at the dates
of the initial transactions. Nonmonetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was
determined.
Taxes
Current tax. Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be recovered from or paid to the taxation authorities.
The tax rates and tax laws used to compute the amount are those that are enacted or
substantively enacted at balance sheet date.
Deferred tax. Deferred income tax is provided using the balance sheet liability method
on all temporary differences 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, except:
ƒ
where the deferred tax liability arises from the initial recognition of goodwill or of an
asset or liability in a transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable profit or loss; and
ƒ
with respect to taxable temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, where the timing of the
reversal of the temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future.
F-31
Deferred tax assets are recognized for all deductible temporary differences, carryforward
benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax
losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences, and
the carryforward benefits of MCIT and NOLCO can be utilized, except:
ƒ
where the deferred tax asset relating to the deductible temporary difference arises
from the initial recognition of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and
ƒ
with respect to deductible temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, deferred tax assets are
recognized only to the extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be available against which the
temporary differences can be utilized.
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 profit will be
available to allow all or part of the deferred tax asset 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 profit 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
to the year when the asset is realized or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at balance sheet date.
Income tax relating to items recognized directly in equity is recognized in equity and not
in the pro forma 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.
Value Added Tax (VAT).
amount of VAT, except:
Revenues, expenses and assets are recognized net of the
ƒ
where the tax incurred on a purchase of assets or services is not recoverable from the
taxation authority, in which case the tax is recognized as part of the cost of
acquisition of the asset or as part of the expense item as applicable; and
ƒ
receivables and payables that are stated with the amount of tax included.
The net amount of tax recoverable from, or payable to, the taxation authority is included
as part of receivables or payables in the pro forma consolidated balance sheet.
Related Parties
Parties are considered to be related if one party has the ability, directly or indirectly, to
control the other party or exercise significant influence over the other party in making
financial and operating decisions. Parties are also considered to be related if they are
subject to common control or common significant influence. Related parties may be
individuals or corporate entities. Transactions between related parties are on an arm’s
length basis in a manner similar to transactions with non-related parties.
F-32
Earnings Per Share (EPS)
Basic EPS is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period, with retroactive
adjustments for any stock dividends declared.
Contingencies
Contingent liabilities are not recognized in the pro forma consolidated financial
statements. They are disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote. Contingent assets are not recognized in the pro
forma consolidated financial statements but are 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
balance sheet date (adjusting events) are reflected in the pro forma consolidated financial
statements. Post year-end events that are not adjusting events are disclosed in the notes
to the pro forma consolidated financial statements when material.
4. Significant Accounting Judgments, Estimates and Assumptions
The Group’s pro forma consolidated financial statements requires management to make
judgments, estimates and assumptions that affect amounts reported in the pro forma
consolidated financial statements and related notes, at the reporting date. However,
uncertainty about these estimates and assumptions could result in outcome that could
require a material adjustment to the carrying amount of the affected asset or liability in
the future.
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 pro forma consolidated financial
statements:
Operating Leases. The Group has entered into various lease agreements as a lessee. The
Group has determined that the lessor retains all significant risks and rewards of
ownership of these properties which are leased out under operating lease arrangements.
Rent expense charged to operations amounted to P450 as of December 31, 2008
(Note 17).
Estimates
The key estimates and assumptions used in the pro forma consolidated financial
statements are based on management’s evaluation of relevant facts and circumstances as
of the date of the Group’s pro forma consolidated financial statements. Actual results
could differ from such estimates.
F-33
Allowance for Doubtful Accounts. Provisions are made for specific and groups of
accounts, where objective evidence of impairment exists. The Group evaluates these
accounts on the basis of factors that affect the collectibility of the accounts. These
factors include, but are not limited to, the length of the Group’s relationship with the
customers and counterparties, the customers’ current credit status based on third party
credit reports and known market forces, average age of accounts, collection experience,
and historical loss experience. The amount and timing of recorded expenses for any
period would differ if the Group made different judgments or utilized different
methodologies. An increase in allowance for doubtful accounts would increase the
recorded administrative and selling expenses and decrease current assets.
The allowance for doubtful accounts amounted to P647 as of December 31, 2008
(Note 6). The carrying value of trade and other receivables amounted to P3,662 as of
December 31, 2008 (Note 6).
Allowance for Inventory Losses. The Group provides allowance for inventory losses
whenever net realizable value becomes lower than cost due to damage, physical
deterioration, obsolescence, changes in price levels or other causes.
Estimates of net realizable value are based on the most reliable evidence available at the
time the estimates are made of the amount the inventories are expected to be realized.
These estimates take into consideration fluctuations of price or cost directly relating to
events occurring after balance sheet date to the extent that such events confirm conditions
existing at balance sheet date. The allowance account is reviewed periodically to reflect
the accurate valuation in the financial records.
The allowance for inventory losses amounted to P335 as of December 31, 2008. The
carrying value of inventories amounted to P3,279 as of December 31, 2008 (Note 7).
Estimated Useful Lives of Containers and Property, Plant and Equipment. The Group
estimates the useful lives of containers and property, plant and equipment based on the
period over which the assets are expected to be available for use. The estimated useful
lives of containers and property, plant and equipment are reviewed periodically and are
updated if expectations differ from previous estimates due to physical wear and tear,
technical or commercial obsolescence and legal or other limits on the use of the assets.
In addition, estimation of the useful lives of containers and property, plant and equipment
is based on collective assessment of industry practice, internal technical evaluation and
experience with similar assets. It is possible, however, that future results of operations
could be materially affected by changes in estimates brought about by changes in factors
mentioned above. The amounts and timing of recorded expenses for any period would be
affected by changes in these factors and circumstances. A reduction in the estimated
useful lives of containers and property, plant and equipment would increase recorded cost
of sales and administrative and selling expenses and decrease noncurrent assets.
Accumulated depreciation and amortization of property, plant and equipment amounted
to P15,682 as of December 31, 2008. Property, plant and equipment, net of accumulated
depreciation and amortization, amounted to P12,932 as of December 31, 2008 (Note 9).
Deferred containers, net of accumulated amortization, amounted to P4,537 as of
December 31, 2008 (Note 11).
F-34
Estimated Useful Lives of Intangible Assets with Finite Lives. The useful lives of
intangible assets are assessed at the individual asset level as having either a finite or
indefinite life. Intangible assets are regarded to have an indefinite useful life when, based
on analysis of all of the relevant factors, there is no foreseeable limit to the period over
which the asset is expected to generate net cash inflows for the Group.
Intangible assets with finite useful life amounted to P11 as of December 31, 2008
(Note 10).
Impairment of Brands and Other Intangible Assets with Indefinite Lives. The Group
determines whether brands, including trademarks, copyrights, patents and other
intellectual property rights and know- how are impaired at least annually. This requires
the estimation of the value in use of brands and other intangible assets. Estimating value
in use requires management to make an estimate of the expected future cash flows from
the cash-generating unit and from the brands and other intangible assets and to choose a
suitable discount rate to calculate the present value of those cash flows.
The carrying values of brands and other intangible assets amounted to P32,000 as of
December 31, 2008 (Note 10).
Realizability of Deferred Tax Assets. The Group reviews its deferred tax assets at each
balance sheet date and reduces the carrying amount to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the deferred
tax asset to be utilized. The Group’s assessment on the recognition of deferred tax assets
on deductible temporary difference and carryforward benefits of MCIT and NOLCO is
based on the projected taxable income in the following periods.
Deferred tax assets amounted to P312 as of December 31, 2008 (Note 14).
Impairment of Other Non-financial Assets. PFRS require that an impairment review be
performed on property, plant and equipment, containers and intangible assets with
definite useful lives when events or changes in circumstances indicate that the carrying
value may not be recoverable. Determining the net recoverable value of assets requires
the estimation of cash flows expected to be generated from the continued use and
ultimate disposition of such assets. While it is believed that the assumptions used in the
estimation of fair values reflected in the pro forma consolidated financial statements are
appropriate and reasonable, significant changes in these assumptions may materially
affect the assessment of recoverable values and any resulting impairment loss could have
a material adverse impact on the results of operations.
There were no impairment losses of property, plant and equipment and other nonfinancial assets recognized as of December 31, 2008. The aggregate amount of property,
plant and equipment, deferred containers and intangible assets with definite useful lives
amounted to P17,480 as of December 31, 2008 (Notes 9, 10 and 11).
Present Value of Defined Benefit Obligation. The present value of the retirement
obligation depends on a number of factors that are determined on an actuarial basis using
a number of assumptions. These assumptions are described in Note 23 to the pro forma
consolidated financial statements and include discount rate, expected return on plan
assets and salary increase rate. Actual results that differ from the assumptions are
accumulated and amortized over future periods and therefore, generally affect the
recognized expense and recorded obligation in such future periods.
F-35
The assumption of the expected return on plan assets is determined on a uniform basis,
taking into consideration the long-term historical returns, asset allocation and future
estimates of long-term investment returns.
The Group determines the appropriate discount rate at the end of each year. It is the
interest rate that should be used to determine the present value of estimated future cash
outflows expected to be required to settle the retirement obligations. In determining the
appropriate discount rate, the Group considers the interest rates on government bonds
that are denominated in the currency in which the benefits will be paid. The terms to
maturity of these bonds should approximate the terms of the related retirement liability.
Other key assumptions for retirement obligations are based in part on current market
conditions.
While it is believed that the Group’s assumptions are reasonable and appropriate,
significant differences in actual experience or significant changes in assumptions may
materially affect the Group’s retirement and other retirement obligations.
The Group has a net cumulative unrecognized actuarial losses amounting to P379 as of
December 31, 2008 (Note 23).
Financial Assets and Liabilities. The Group carries certain financial assets and liabilities
at fair value, which requires extensive use of accounting estimates and judgment.
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 Group utilized different valuation
methodologies and assumptions. Any change in the fair value of these financial assets
and liabilities would affect net income and equity.
Fair value of financial assets and liabilities are discussed in Note 27.
Asset Retirement Obligation. Determining asset retirement obligation requires estimation
of the cost of dismantling property, plant and equipment and other costs of restoring the
leased properties to their original condition. The Group determined that there are no
significant asset retirement obligations as of December 31, 2008.
Provisions and Contingencies. The Group, in the ordinary course of business, sets up
appropriate provisions for its present legal or constructive obligations, if any, in
accordance with its policies on provisions and contingencies. In recognizing and
measuring provisions, management takes risk and uncertainties into account.
5. Cash and Cash Equivalents
This account consists of:
Cash in banks and on hand
Short-term investments
P2,554
3,873
P6,427
Cash in banks earn interest at the respective bank deposit rates. Short-term investments
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.
F-36
6. Trade and Other Receivables
This account consists of:
Note
Trade - net
Receivables
Amounts owed by related parties
Nontrade
Amounts owed by related parties
Others - net
21
21
P2,340
569
149
604
P3,662
Trade receivables are non-interest bearing and are generally on 30 days credit term.
As at December 31, 2008, the aging of trade and other receivables and the related
allowance provided is as follows:
Current
Past due
Less than 30 days
30-60 days
61-90 days
Over 90 days
Trade
P2,685
Owed by
related
parties
P446
Non-trade
P582
Total
P3,713
Allowance
P340
22
67
6
150
P2,930
182
38
2
92
P760
2
35
P619
206
105
8
277
P4,309
23
67
6
211
P647
The movements in the allowance for doubtful accounts in 2008 are as follows:
Balance at beginning of year
Unused amounts reversed/reclassified
Balance at end of year
P693
(46)
P647
Allowance for doubtful accounts related to amounts owed by related parties as of
December 31, 2008 amounted to P42 (Note 21).
Various collaterals for trade receivables such as bank guarantees, time deposits and real
estate mortgage are held by the Group for credit limits exceeding P0.275.
F-37
7. Inventories
This account consists of:
Finished goods and goods in process - at cost
Containers - at net realizable value
Materials and supplies - at net realizable value
Total inventories at lower of cost and net realizable value
P866
1,093
1,320
P3,279
The cost of containers and materials and supplies as of December 31, 2008 amounted to
P1,413 and P1,335, respectively.
8. Prepaid Expenses and Other Current Assets
This account consists of:
Note
Prepaid taxes and licenses
Derivative assets
Prepaid insurance
Prepaid rentals
Others
26, 27
F-38
P274
28
6
3
68
P379
9. Property, Plant and Equipment
The movements in this account are as follows:
Machinery
and
Land
Cost:
January 1, 2008
Additions for the year
Disposals/reclassifications
December 31, 2008
Equipment
Buildings and
Improvements
Transportation
Equipment
Leasehold
Improvements
Office
Equipment,
Furniture and
Fixtures
Tools and
Small
Equipment
Construction in
Progress
Total
P7,068
-
P16,063
868
(60)
P3,533
52
(53)
P394
3
(24)
P81
(19)
P362
11
(4)
P9
-
P337
(7)
P27,847
934
(167)
7,068
16,871
3,532
373
62
369
9
330
28,614
-
13,003
1,419
340
42
351
8
-
15,163
19
(24)
4
(7)
-
-
15,682
P330
P12,932
Accumulated depreciation and
amortization:
January 1, 2008
Depreciation and amortization
for the year
Disposals/reclassifications
-
December 31, 2008
-
13,467
1,480
335
39
353
8
P7,068
P3,404
P2,052
P38
P23
P16
P1
529
(65)
101
(40)
6
(4)
659
(140)
Net book value:
December 31, 2008
Depreciation and amortization charged to operations amounted to P659 in 2008 (Note 18). No interest was capitalized in 2008.
F-39
10. Intangible Assets
This account consists of:
Brands and other intangible assets
Computer software - net
P32,000
11
P32,011
The value of brands represents the purchase price therefor of P32 billion, which was
agreed to by the Company after giving due consideration to various factors and valuation
methodologies including the independent valuation study and analysis prepared by UBS
Investments Philippines, Inc.
The Company, after considering said valuation
methodologies, viewed the royalty relief (based on commercial rates) and advertising
spend methodologies to be generally more relevant, compared to other methodologies
that may be used to value the SMB Brands, on the basis that such methodologies require
fewer assumptions and less reliance on subjective reasoning since key assumptions come
from primary sources based on the Company’s filings and projections, actual industry
precedents and industry common practice. The purchase price agreed upon is within the
value range yielded by said methodologies, which value range is P25-32 billion.
The movements in the brands and other intangible assets are as follows:
Note
Balance at beginning of year
Additions resulting from business
acquisition
Balance at end of year
P 2
32,000
P32,000
The recoverable amount of the brands and other intangible assets has been determined
based on a valuation using cash flow projections covering a five year period based on
long range plans approved by management. Cash flows beyond the five year period are
extrapolated using a determined constant growth rate. This growth rate is consistent with
the long-term average growth rate for the industry. The discount rate applied to after tax
cash flow projection is 12% in December 31, 2008.
Management believes that any reasonably possible change in the key assumptions on
which the recoverable amount of brands and other intangible assets is based would not
cause its carrying amount to exceed its recoverable amount.
The calculations of value in use are most sensitive to the following assumptions:
Gross Margins. Gross margins are based on average values achieved in period
immediately before the budget period. These are increased over the budget period for
anticipated efficiency improvements. Values assigned to key assumptions reflect past
experience, except for efficiency improvement.
Raw Material Price Inflation. Forecast consumer price are obtained from indices during
the budget period from which raw materials are purchased. Value assigned to key
assumption is consistent with external sources of information.
F-40
Management assessed that there is no impairment loss in value of brands and other
intangible assets in 2008.
11. Other Noncurrent Assets
This account consists of:
Note
Deferred containers - net
Bottles
Shells
Retirement asset
Others
23
22, 26
P3,187
1,350
4,537
41
316
P4,894
The movements in the deferred containers are as follows:
Note
Gross carrying amount:
Beginning balance
Additions
Ending balance
P4,814
939
5,753
Accumulated amortization:
Beginning balance
Amortization for the year
Ending balance
18
209
1,007
1,216
P4,537
12. Accounts Payable and Accrued Expenses
This account consists of:
Note
Trade
Payables
Amounts owed to related parties
Nontrade
Amounts owed to related parties
Derivative liabilities
Accrued payroll
Accrued utilities
Accrued materials
Others
21
21
26, 27
F-41
P1,250
622
327
273
234
44
15
235
P3,000
13. Long-term Debt
This account consists of the following obligations of the Parent Company:
Unsecured term notes peso-denominated:
Fixed interest rate of 8%
Fixed interest rate of 9%
Fixed interest rate of 10%
P14,881
18,620
4,946
P38,447
The amount represents unsecured long-term debt incurred by the Parent Company to
finance its acquisition of the shares of stocks of IBI and BPI. Unamortized debt issue
costs related to these long-term debt amounted to P353 as of December 31, 2008.
The debt agreements contain, among others, covenants relating to maintenance of certain
financial ratios and controlling interests of SMC in the Parent Company; redemption or
reduction of capital stock; and restrictions on payments of dividends, indebtedness, loans
and guarantees, encumbrances and liens on properties and disposal of all or substantially
all of the Parent Company’s assets.
As of December 31, 2008, the Group is in compliance with the covenants of the debt
agreements.
The movements in debt issue costs are as follows:
Balance at beginning of year
Addition
Less amortization
Balance at end of year
P 445
92
P353
Repayment Schedule
As of December 31, 2008, the annual maturities of the long-term debt are as follows:
Year
2010
2012
2017
Gross Amount
P15,000
18,800
5,000
P38,800
F-42
Debt Issue Cost
P119
180
54
P353
Net
P14,881
18,620
4,946
P38,447
14. Income Taxes
Deferred tax assets arise from the following:
Allowance for doubtful accounts
Allowance for inventory losses
Derivatives
Debt issue costs
Others
P194
101
113
(106)
10
P312
The components of the income tax expense are shown below:
Current
Deferred
P4,198
105
P4,303
The reconciliation of statutory income tax rate on income before income tax and the
Group’s effective income tax rates are as follows:
Statutory income tax rate
Increase (decrease) in income tax rate
resulting from:
Change in tax rate
Income subjected to final tax
Others
Effective income tax rate
35.00%
0.39
(2.93)
0.38
32.84%
15. Capital Stock
In their respective meetings on August 9, 2007 and September 7, 2007, at least a majority
of the BOD of the Company and stockholders owning or representing at least 2/3 of the
subscribed and outstanding capital stock approved the increase in the authorized capital
stock from P100 to P25,000, the decrease of the par value of its shares from P100 to P1
and the issuance of a total of 15,308,416,960 common shares, comprising of 75,000,000
common shares from its unissued authorized capital stock and 15,233,416,960 common
shares from the increase in its authorized capital stock in exchange for the net assets of
the domestic beer business of SMC as of June 30, 2007 with a net book value of P15,308.
The transfer of the net assets is pursuant to a Master Deed of Assignment of Domestic
Beer Assets dated August 23, 2007 between SMC and the Company with amendments
dated September 7, 2007.
F-43
On September 27, 2007, the SEC approved the increase in authorized capital stock and
decrease in par value of shares. As a standard condition of the SEC for approval of
applications for increase in authorized capital stock, where the payment for the shares
issued pursuant to such increase is made in the form of motor vehicles and receivables,
2,557,573,242 common shares that were issued by the Parent Company to SMC in
exchange for motor vehicles and receivables out of the 15,308,416,960 common shares
issued by the Parent Company were held in escrow by the SEC pending the transfer of
ownership of those motor vehicles in the name of the Parent Company and proof of
collection of receivables.
On November 5, 2008, the Parent Company submitted to the SEC the required
documentation for the transfer of ownership of motor vehicles and proof of collection of
receivables. As of January 30, 2009, this is being reviewed by the SEC.
Pursuant to the registration statement rendered effective by SEC on April 28, 2008 and
the listing approval of the PSE, 77,052,000 common shares were sold by the Company to
the public under a primary offering at P8.00 per share in April-May 2008.
The movements in the number of issued shares of capital stock are as follows:
Balance at beginning of year
Issuance during the year
Balance at end of year
15,333,426,960
77,052,000
15,410,478,960
16. Cost of Sales
This account consists of:
Note
Taxes and licenses
Inventories
Communications, light, fuel and water
Personnel
Depreciation and amortization
Repairs and maintenance
Others
19
18
P14,523
6,956
1,538
797
535
353
98
P24,800
17. Administrative and Selling Expenses
Administrative and selling expenses consist of:
Administrative
Selling
P3,768
3,520
P7,288
F-44
Administrative expenses consist of:
Depreciation and amortization
Personnel
Advertising and promotion
Management fees
Breakages and losses
Repairs and maintenance
Professional fees
Taxes and licenses
Communications, light, fuel and water
Rent
Others
Note
4, 18
19
4, 22
P1,173
903
389
295
172
149
144
106
80
35
322
P3,768
Selling expenses consist of:
Note
Freight, trucking and handling
Personnel
Advertising and promotion
Rent
Taxes and licenses
Communication, light, fuel and water
Repairs and maintenance
Depreciation and amortization
Others
19
4, 22
18
P1,485
691
436
415
103
102
71
50
167
P3,520
18. Depreciation and Amortization
Depreciation and amortization are distributed as follows:
Cost of sales:
Property, plant and equipment
Administrative and selling expenses:
Property, plant and equipment
Deferred containers
Others
P535
124
1,007
92
1,223
P1,758
F-45
19. Personnel Expenses
This account consists of:
Note
Salaries and wages
Retirement cost
Other employee benefits
23
P1,457
157
777
P2,391
Personnel expenses are distributed as follows:
Cost of sales
Administrative expenses
Selling expenses
P797
903
691
P2,391
20. Other Income (Expense)
This account consists of:
Note
Foreign exchange gain - net
Rental income
Gain on sale of property, plant and
equipment - net
Marked-to-market loss - net
Others
22
26
F-46
P62
15
17
(469)
(2)
(P377)
21. Related Party Disclosures
The Group, in the normal course of business, purchases products and services from and
sells products to related parties. Transactions with related parties are made at normal
market prices.
San Miguel Corporation
San Miguel Yamamura
Packaging Corporation
(formerly San Miguel
Packaging Specialists, Inc.)
San Miguel Rengo Packaging
Corporation
SMC Shipping and Lighterage
Corporation
SMITS, Inc. and a subsidiary
San Miguel Yamamura Asia
Corporation
Ginebra San Miguel, Inc. and a
subsidiary
San Miguel Beverages, Inc.
San Miguel International Ltd.
and subsidiaries
San Miguel Pure Foods
Company, Inc., and
subsidiaries
Others
Relationship
with Related
Parties
Revenue
From
Related
Parties
Purchases
From
Related
Parties
Amounts
Owed by
Related
Parties
Amounts
Owed to
Related
Parties
Parent Company
P2,020
P499
P606
P261
44
1,991
21
469
Under common
control
Under common
control
Under common
control
Under common
control
Under common
control
Under common
control
Under common
control
Under common
control
Under common
control
Under common
control
29
3
-
-
415
98
6
4
-
92
60
3
96
1
21
8
-
7
3
11
-
28
5
3
-
73
4
20
21
28
P2,120
1
16
P3,145
P760
7
P949
a. Purchases consist of purchase of materials, bottles, shells, cartons and services
rendered from related parties.
b. Amounts owed by related parties consist of trade receivables, share in expenses and
tolling services.
c. Amounts owed to related parties consist of trade payables, professional fees,
insurance and management fees.
d. The compensation of key management personnel of the Group, by benefit type,
follows:
Short-term employee benefits
Retirement costs
P81
6
P87
F-47
22. Leasing Agreements
Finance Leases
Leases as Lessor
The Group leases some of its machinery and equipment under finance lease agreements
to a third party logistics provider. The Group provides the lessee the option to purchase
the equipment at a beneficial price.
The current and noncurrent portion of finance lease receivables included under “Trade
and other receivables” and “Other noncurrent assets” accounts, respectively, in the
balance sheet are as follows:
Within one year
After one year but not more than five
years
Minimum
lease
receivable
P6
Interest
P1
Principal
P5
5
P11
P1
5
P10
23. Retirement Plan
The Parent Company has a funded, noncontributory retirement plan covering all of its
permanent employees. Contributions and costs are determined in accordance with the
actuarial studies made for the plan. Annual cost is determined using the projected unit
credit method. The Parent Company’s latest actuarial valuation date is December 31,
2008. Valuations are obtained on a periodic basis.
Retirement costs charged by the Parent Company to operations amounted to P157 in
2008. The Parent Company’s annual contribution to the retirement plan consists of
payments covering the current service cost and amortization of past service liability.
The components of retirement cost recognized in the pro forma consolidated statement of
income and the amounts recognized in the pro forma consolidated balance sheet are as
follows:
Interest cost
Current service cost
Net actuarial loss to be recognized
Expected return on plan assets
Net retirement cost
P295
179
24
(341)
P157
Actual return on plan assets
P243
F-48
The retirement cost is recognized in the following line items in the pro forma
consolidated statement of income:
Cost of sales
Administrative and selling expenses
P53
104
P157
The reconciliation of the assets and liabilities recognized in the pro forma consolidated
balance sheet is as follows:
Present value of defined benefit obligation
Fair value of plan assets
Unrecognized actuarial losses
Net retirement asset
P4,000
3,662
338
(379)
(P41)
The movements in the present value of the defined benefit obligation are as follows:
Beginning balance
Interest cost
Current service cost
Transfer from other plan
Actuarial gains
Benefits paid
Transfer to other plan
Ending balance
P4,175
295
179
47
(463)
(204)
(29)
P4,000
The movements in the fair value of the plan assets are as follows:
Beginning balance
Expected return on plan assets
Contributions by employer
Transfer from other plan
Benefits paid
Actuarial losses
Transfer to other plan
Ending balance
P3,407
341
198
47
(204)
(98)
(29)
P3,662
Plan assets consist of the following:
In Percentages
79
21
Fixed income portfolio
Stock trading portfolio
The overall expected rate of return is determined based on historical performance of
investments.
F-49
The principal actuarial assumptions used to determine retirement benefits are as follows:
In Percentages
8.1
6.0
9.0
Discount rate
Salary increase rate
Expected return on plan assets
The historical information of the amounts for the current and previous period is as
follows:
Present value of the defined benefit obligation
Fair value of plan assets
Deficit in the plan
Experience adjustments on plan liabilities
Experience adjustments on plan assets
P4,000
3,662
(338)
463
(98)
The Parent Company expects to pay P220 in contributions to the defined benefit plan in
2009.
24. Basic Earnings Per Share
Basic EPS is computed as follows:
Net income attributable to equity holders
of the Parent Company (a)
Weighted average number of shares
Outstanding (in millions) - basic (b)
Basic EPS (a/b)
P8,787
15,372
P0.57
As of December 31, 2008, the Group has no dilutive debt or equity instruments.
25. Employee Stock Purchase Plan
SMC offers shares of stocks to employees of SMC and its subsidiaries under the
Employee’s Stock Purchase Plan (ESPP). Under the ESPP, all permanent Philippinebased employees of SMC and its subsidiaries who have been employed for a continuous
period of one year prior to the subscription period will be allowed to subscribe at a price
equal to the weighted-average of the daily closing prices for three months prior to the
offer period less 15% discount. A participating employee may acquire at least 100 shares
of stock through payroll deductions.
The ESPP requires the subscribed shares and stock dividends accruing thereto to be
pledged to SMC until the subscription is fully-paid. The right to subscribe under the
ESPP cannot be assigned or transferred. A participant may sell his shares after the second
year from exercise date.
The ESPP also allows subsequent withdrawal and cancellation of participants’
subscriptions under certain terms and conditions.
F-50
Expenses for share-based payments charged to operations under “Management fees”
account amounted to P0.429 in 2008.
26. Financial Risk Management Objectives and Policies
Objectives and Policies
The Group’s principal financial instruments other than derivatives include cash and cash
equivalents, trade receivables, trade payables and long-term debt, which arise directly
from its operations. The main purpose of these financial instruments is to raise financing
for the Group’s operations.
The Group also enters into derivative transactions such as commodity options. The
Group uses derivatives to manage its exposures to commodity price risks arising from the
Group’s operations.
The main risks arising from the use of financial instruments are credit risk, liquidity risk
and market risk - interest rate risk, foreign currency risk and commodity price risk. The
BOD has the overall responsibility for the establishment and oversight of the Group’s
risk management framework. The Group’s risk management policies are established to
identify and analyze the risks faced by the Group, to set appropriate risk limits and
controls, and to monitor risks and adherence to limits. Risk management policies and
systems are reviewed regularly to reflect changes in market conditions and the Group’s
activities.
The Group’s accounting policies in relation to derivatives are set out in Note 3.
Interest Rate Risk
The Group’s exposure to changes in interest rates relates primarily to the Group’s longterm debt obligations.
The Group’s policy is to manage its interest cost using fixed rate debts.
In managing interest rate, the Group aims to reduce the impact of short-term fluctuations
and the Group’s earnings. Over the longer term, however, permanent changes in interest
rates would have an impact on consolidated earnings.
The sensitivity to reasonably possible 1% increase in the interest rates, with all other
variables held constant, would have decreased the Group’s profit before tax (through the
impact on floating rate borrowings) by P387 as of December 31, 2008. A 1% decrease in
the interest rate would have had the equal but opposite effect. There is no impact on the
Group’s equity.
As at December 31, 2008, the Group’s long-term debt, presented by maturity profile, are
as follows:
Fixed rate
Philippine peso
Interest rate
P15,000
8%
18,800
9%
5,000
10%
P38,800
1 - 3 years
> 3 - 5 years
> 5 years
F-51
Foreign Currency Risk
The Group’s exposure to foreign currency risk results from its business transactions and
purchase of materials denominated in foreign currency. The Group uses a combination
of natural hedges and derivative hedges to manage its foreign currency exposure. It uses
currency derivatives to reduce earnings volatility related to foreign exchange movements.
Information on the Group’s foreign currency-denominated monetary assets and liabilities
and their Philippine peso equivalents are as follows:
U.S. Dollar*
Assets
Cash and cash equivalents
Trade and other receivables
Liabilities
Accounts payable and accrued expenses
Net foreign currency-denominated
monetary assets
*
Peso Equivalent
$5
4
P243
181
2
77
$7
P347
U.S dollar equivalent of foreign currency-denominated balances as of balance sheet date.
With the translation of these foreign currency-denominated assets and liabilities, the
Group reported net foreign exchange gain amounting to P62 in 2008. These resulted from
the movements of the Philippine peso against the US dollar as shown in the following
table:
Peso to US Dollar
47.52
December 31, 2008
The following table demonstrates the sensitivity to a reasonably possible change in the
US dollar exchange rate, with all other 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 as of December 31, 2008 are as follows:
Cash and cash equivalents
Trade and other receivables
Derivative assets
Accounts payable and
accrued expenses
Derivative liabilities
P1 decrease in the US dollar
exchange rate
Effect on
Income before
Effect on
Income Tax
Equity
(P5)
P (4)
12
3
2
11
13
(P10)
F-52
P1 increase in the US dollar
exchange rate
Effect on
Income before
Effect on
Income Tax
Equity
P5
P 4
(11)
(2)
-
(1)
(1)
(2)
(13)
(15)
P1
P13
1
1
(P1)
Commodity Price Risk
The Group enters into various commodity derivatives to manage its price risks on
strategic commodities. Commodity hedging allows stability in prices, thus offsetting the
risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at
levels acceptable to the Group, thus protecting raw material cost and preserving margins.
For hedging transactions, if prices go down, hedge positions may show marked-to-market
losses; however, any loss in the marked-to-market positions is offset by the resulting
lower physical raw material cost.
SMC enters into commodity derivative transactions in behalf of the Group to reduce cost
by optimizing purchasing synergies within the SMC Group of Companies and managing
inventory levels of common materials.
Commodity Options. Commodity options are used to manage the Group’s exposures to
volatility in prices of certain commodities such as fuel oil.
Liquidity Risk
Liquidity risk arises from the possibility that the Group may encounter difficulties in
raising funds to meet commitments from financial instruments or that a market for
derivatives may not exist in some circumstances.
The Group’s objectives to manage its liquidity profile are: a) to ensure that adequate
funding is available at all times; b) to meet commitments as they arise without incurring
unnecessary costs; c) to access funding when needed at the least possible cost; and d) to
maintain an adequate time spread of refinancing maturities.
The table below summarizes the maturity profile of the Group’s financial liabilities as of
December 31, 2008 based on contractual undiscounted payments:
Non-derivative
financial liabilities
Accounts payable and
accrued expenses
Long-term debt, gross
of debt issue costs
Carrying
amount
Contractual
cash flow
1 year
or less
>1
year - 2
years
P2,727
P2,727
P2,679
P48
38,800
52,468
3,392
18,392
>2
years 5 years
P 23,684
Over
5 years
P 7,000
Credit Risk
Credit risk or the risk of counterparties defaulting is controlled by the application of
credit approvals, limits and monitoring procedures. It is the Group’s policy to enter into
transactions with a diversity of creditworthy parties to mitigate any significant
concentration of credit risk. The Group ensures that sales of products are made to
customers with appropriate credit history and has internal mechanism to monitor the
granting of credit and management of credit exposures. The Group has made provisions,
where necessary, for potential losses on credits extended. Where appropriate, the Group
obtains collateral or arranges master netting agreements.
With respect to credit risk arising from the other financial assets of the Group, which
comprise of cash and cash equivalents and certain derivative instruments, the Group’s
exposure to credit risk arises from default of the counterparty with a maximum exposure
equal to the carrying amount of these instruments, net of the value of collaterals, if any.
Financial information on the Group’s maximum exposure to credit risk as of
December 31, 2008, without considering the effects of collaterals and other risk
mitigation techniques is presented below.
F-53
Note
5
6
8
11
Cash and cash equivalents
Trade and other receivables - net
Derivative assets
Noncurrent receivables
P6,427
3,662
28
11
P10,128
The Group has no significant concentration of credit risk with any counterparty.
Capital Management
The primary objective of the 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 Group manages its capital structure and makes adjustments to it, in the light of
changes in economic conditions. To maintain or adjust the capital structure, the Group
may adjust the dividend payment to shareholders, return capital to shareholders or issue
new shares.
The Group defines capital as paid-in capital stock, additional paid-in capital, retained
earnings, both appropriated and unappropriated. Other components of equity such as
treasury stock and translation are excluded from capital for purposes of capital
management.
The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles
for capital ratios are set in the light of changes in the Group’s external environment and
the risks underlying the Group’s business, operation and industry.
The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as
total debt divided by total equity. Total debt is equivalent to current and noncurrent
liabilities. Total equity comprises of equity including capital stock, additional paid-in
capital, cumulative translation adjustments and retained earnings.
There were no changes in the Group’s approach to capital management during the year.
The Group is not subject to externally imposed capital requirements.
F-54
27. Financial Assets and Liabilities
The table below presents a comparison by category of carrying amounts and fair values
of all of the Group’s financial instruments as of December 31, 2008:
Assets
Cash and cash equivalents
Trade and other receivables - net
Derivative assets (included under “Prepaid
expenses and other current assets” account in the
balance sheet)
Noncurrent receivables and deposits - net
(included under “Other noncurrent assets”
account in the balance sheet)
Liabilities
Accounts payable and accrued expenses
Derivative liabilities (included under “Accounts
payable and accrued expenses” account in the
balance sheet)
Long-term debt
Carrying
Amount
Fair Value
P6,427
3,662
P6,427
3,662
28
28
11
11
2,727
2,727
273
38,447
273
42,481
The following methods and assumptions are used to estimate the fair value of each class
of financial instruments:
Cash and Cash Equivalents, Trade and Other Receivables and Noncurrent Receivables
and Deposits. The carrying amount of cash and cash equivalents and receivables
approximates fair value primarily due to the relatively short-term maturity of these
financial instruments. In the case of long-term receivables, the fair value is based on the
present value of expected future cash flows using the applicable discount rates.
Derivatives. The fair values of forward exchange contracts are calculated by reference to
current forward exchange rates.
The fair values of commodity derivatives are determined based on prices obtained from
the market and counterparties. Fair values are also based on standard valuation models.
Accounts Payable and Accrued Expenses. The carrying amount of accounts payable and
accrued expenses approximates fair value due to the relatively short-term maturity of
these financial instruments.
Long-term Debt. The fair value of the long-term debt is based on the discounted value of
expected future cash flows using the applicable rates for similar types of long-term debt
as of balance sheet date. As of December 31, 2008, discount rates used are from 8% to
10%.
F-55
Derivative Financial Instruments
The Group’s derivative financial instruments according to the type of financial risk being
managed and the details of freestanding and embedded derivative financial instruments
that are categorized into those accounted for as hedges and those that are not designated
as hedges are discussed as follows:
The Group enters into various commodity options to manage its exposure on commodity
price risk covering the Group’s requirement on fuel oil.
Derivative Instruments Accounted for as Hedges
Cash Flow Hedges
Commodity Options
As of December 31, 2008, the Group has outstanding option agreements covering its fuel
oil requirements with notional quantities of 3,391. The call and put options can be
exercised at various dates in 2009 with specific quantities on each calculation date. The
net unrealized fair value change (after tax) deferred under “Cumulative translation
adjustments” account on these call options as of December 31, 2008 amounted to P45.
Derivative Instruments Not Designated as Hedges
The Group enters into certain derivatives as economic hedges of certain underlying
exposures. These include freestanding and embedded derivatives found in host contracts,
which are not designated as accounting hedges. Changes in fair value of these
instruments are accounted for directly in the pro forma consolidated statement of income.
Details are as follows:
Freestanding Derivatives
Freestanding derivatives consist of commodity options entered into by the Group.
Commodity Options
As of December 31, 2008, the Group has outstanding bought and sold options covering
its fuel oil requirements with notional quantities of 10,174. These options can be
exercised at various calculation dates in 2009 with specific quantities on each calculation
date. The net negative fair value of these options as of December 31, 2008 amounted to
P212.
Embedded Derivatives
The Group’s embedded derivatives include currency derivatives (forwards) embedded in
nonfinancial contracts.
Embedded Currency Forwards
As of December 31, 2008, the total outstanding notional amount of currency forwards
embedded in nonfinancial contracts amounted to US$31. These nonfinancial contracts
consist mainly of foreign-currency denominated purchase orders, sales agreements and
capital expenditures. As of December 31, 2008, the net negative fair value of these
embedded currency forwards amounted to P33.
F-56
Fair Value Changes on Derivatives
The net movements in fair value changes of all derivative instruments are as follows:
Beginning balance
Net changes in fair value of derivatives:
Designated as accounting hedges
Not designated as accounting hedges
Less fair value of settled instruments
Ending balance
(P16)
(62)
(470)
(548)
(303)
(P245)
Hedge Effectiveness Results
The effective fair value changes, net of tax, on the Group’s cash flow hedges that were
deferred in equity as of December 31, 2008 amounted to P45.
28. Cash Dividends
Cash dividends declared and paid for the period ended December 31, 2008 amounted to
P0.41 per share.
29. Other Matters
a. Commitments
The outstanding purchase commitments of the Group as of December 31, 2008
amounted to P522.
Amount authorized but not yet disbursed for capital projects as of December 31,
2008 is approximately P238.
b. Foreign Exchange Rate
The foreign exchange rate of P47.52 was used in translating the U.S. dollar monetary
assets and liabilities to Philippine peso as of December 31, 2008.
F-57
Appendix A
Page 1 of 50
SAN MIGUEL BREWERY INC.
(A Subsidiary of San Miguel Corporation and Formerly the
Domestic Beer Division of San Miguel Corporation)
FINANCIAL STATEMENTS
December 31, 2008 and 2007
F-58
STATEMENT OF MANAGEMENT RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The Management of San Miguel Brewery Inc. is responsible for all information and
representations contained in the audited financial statements for the year ended December 31,
2008 and for the period from July 26, 2007 to December 31, 2007. The audited financial
statements have been prepared in conformity with generally accepted accounting principles in the
Philippines and reflect amounts that are based on the best estimates and informed judgment of
management with an appropriate consideration to materiality.
In this regard, management maintains a system of accounting and reporting which provides for
the necessary internal controls to ensure that transactions are properly authorized and recorded,
assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The
management likewise discloses to the Company’s audit committee and to its external auditor: (i)
all significant deficiencies in the design or operation of internal controls that could adversely
affect its ability to record, process, and report financial data; (ii) material weaknesses in the
internal controls; and (iii) any fraud that involves management or other employees who exercise
significant roles in internal controls.
The Board of Directors reviews the audited financial statements before such statements are
approved and submitted to the stockholders of the Company.
Manabat Sanagustin & Co., the independent auditors appointed by the stockholders, has
examined the financial statements of the Company in accordance with auditing standards
generally accepted in the Philippines and has expressed its opinion on the fairness of presentation
upon completion of such examination, in its report to the Board of Directors and stockholders.
(ORIGINAL SIGNED)
Ramon S. Ang
Chairman and President
(ORIGINAL SIGNED)
Ferdinand K. Constantino
Chief Finance Officer and Treasurer
SUBSCRIBED AND SWORN to before me this 4th day of February 2009, affiant exhibiting to
me their passports as follows:
Name
Ramon S. Ang
Ferdinand K. Constantino
Passport No.
ZZ202387
XX0167306
Doc. No. 179;
Page No. 37_;
Book No. I__;
Series of 2009.
Date/Place of Issue
December 20, 2006/Manila
November 24, 2007/Manila
(ORIGINAL SIGNED)
NOTARY PUBLIC
F-59
Appendix A
Page 2 of 50
Manabat Sanagustin & Co.
Certified Public Accountants
The KPMG Center, 9/F
6787 Ayala Avenue
Makati City 1226, Metro Manila, Philippines
Telephone
Fax
Internet
E-Mail
Branches · Subic · Cebu · Bacolod · Iloilo
PRC-BOA Registration No. 0003
SEC Accreditation No. 0004-FR-2
BSP Accredited
+63 (2) 885 7000
+63 (2) 894 1985
www.kpmg.com.ph
manila@kpmg.com.ph
REPORT OF INDEPENDENT AUDITORS
The Stockholders and the Board of Directors
San Miguel Brewery Inc.
No. 40 San Miguel Avenue
Mandaluyong City
We have audited the accompanying financial statements of San Miguel Brewery Inc.
[a subsidiary of San Miguel Corporation (SMC) and formerly the Domestic Beer Division of
SMC], which comprise the balance sheets as at December 31, 2008 and 2007, and the statements
of income, statements of changes in equity and statements of cash flows for the year ended
December 31, 2008 and for the period from July 26, 2007 to 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 auditors’
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 auditors consider
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.
Manabat Sanagustin & Co., certified public accountants, a professional partnership
established under Philippine law, is a member firm of the KPMG network of independent
member firms affiliated with KPMG International, a Swiss cooperative.
Appendix A
Page 3 of 50
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial
position of San Miguel Brewery Inc. as of December 31, 2008 and 2007, and its financial
performance and its cash flows for the year ended December 31, 2008 and for the period from
July 26, 2007 to December 31, 2007 in accordance with Philippine Financial Reporting
Standards.
MANABAT SANAGUSTIN & CO.
(ORIGINAL SIGNED)
JOSE P. JAVIER, JR.
Partner
CPA License No. 0070807
SEC Accreditation No.: 0678-A
Tax Identification No. 112-071-224
BIR Accreditation No. 08-001987-16-2007
Issued December 11, 2007; Valid until December 10, 2010
PTR No. 1564061MB
Issued January 5, 2009 at Makati City
January 30, 2009
Makati City, Metro Manila
F-61
Appendix A
Page 4 of 50
SAN MIGUEL BREWERY INC.
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
BALANCE SHEETS
(In Millions)
December 31
2007*
Note
2008
5, 24, 25
4, 6, 24, 25
4, 7
8, 25
P6,041
3,661
3,279
418
13,399
P5,262
3,676
2,447
180
11,565
4, 9
4
4, 12
4, 10, 25
5,864
11
427
4,933
11,235
5,616
3
398
5,026
11,043
P24,634
P22,608
P3,000
2,585
5,585
P3,243
1,710
4,953
39
12
ASSETS
Current Assets
Cash and cash equivalents
Trade and other receivables - net
Inventories - net
Prepaid expenses and other current assets
Total Current Assets
Noncurrent Assets
Plant and equipment - net
Intangible assets
Deferred tax assets
Other noncurrent assets - net
Total Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses
Income and other taxes payable
Total Current Liabilities
11, 24, 25
12
Noncurrent Liabilities
Equity
Capital stock
Additional paid-in capital
Cumulative translation adjustments
Retained earnings
Total Equity
13
25
15,410
515
(45)
3,130
19,010
P24,634
15,333
2,310
17,643
P22,608
*The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were
transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007.
See Notes to the Financial Statements.
F-61
Appendix A
Page 5 of 50
SAN MIGUEL BREWERY INC.
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
STATEMENTS OF INCOME
(In Millions, Except Basic Earnings Per Share)
Note
SALES
14
COST OF SALES
GROSS PROFIT
ADMINISTRATIVE AND SELLING
EXPENSES
15
INTEREST INCOME
OTHER INCOME (EXPENSE) - Net
18
INCOME BEFORE INCOME TAX
For the Year
Ended
December 31,
2008
For the Period
from July 26 to
December 31,
2007*
P48,787
P12,180
24,800
6,333
23,987
5,847
(8,366)
(2,349)
264
36
(377)
15
15,508
3,549
INCOME TAX EXPENSE
NET INCOME
12
5,466
P10,042
1,239
P2,310
Basic Earnings Per Share
22
P0.65
P0.15
*The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were
transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007.
See Notes to the Financial Statements.
F-62
Appendix A
Page 6 of 50
SAN MIGUEL BREWERY INC.
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
STATEMENTS OF CHANGES IN EQUITY
(In Millions, Except for Par Value and Number of Shares of Stock)
Note
CAPITAL STOCK - P1 par value
Authorized - 25,000,000,000 shares
Balance at beginning of period
Issuances during the period
Balance at end of period
For the Year
Ended
December 31,
2008
For the Period
from July 26 to
December 31,
2007*
13
P15,333
77
15,410
515
-
25
(45)
-
26
2,310
10,042
(9,222)
3,130
ADDITIONAL PAID-IN CAPITAL
CUMULATIVE TRANSLATION
ADJUSTMENTS
RETAINED EARNINGS
Balance at beginning of period
Net income for the period
Cash dividends
Balance at end of period
P 15,333
15,333
P19,010
2,310
2,310
P17,643
*The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were
transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007.
See Notes to the Financial Statements.
F-63
Appendix A
Page 7 of 50
SAN MIGUEL BREWERY INC.
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
STATEMENTS OF CASH FLOWS
(In Millions)
Note
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization
Interest income
Reversal of allowance for doubtful accounts,
inventory losses and others
Gain on sale of plant and equipment - net
Operating income before working capital changes
Decrease (increase) in:
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Income and other taxes payables
Cash generated from operations
Income taxes paid
Net cash flows from operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES
Increase in other noncurrent assets
Increase in intangible assets
Additions to plant and equipment
Proceeds from sale of plant and equipment
Interest received
Net cash flows used in investing activities
P15,508
16
18
9
Forward
F-64
For the Year
Ended
December 31,
2008
1,758
(264)
For the Period
from July 26 to
December 31,
2007*
P3,549
415
(36)
-
(127)
(17)
16,858
(8)
3,920
66
(751)
(238)
(930)
607
218
(307)
453
16,081
(5,054)
11,027
1,556
466
5,837
(6)
5,831
(1,002)
(12)
(934)
44
259
(1,645)
(448)
(208)
10
36
(610)
Appendix A
Page 8 of 50
Note
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in noncurrent liabilities
Proceeds from issuances of capital stock
Cash dividends paid
Net cash flows provided by (used in)
financing activities
13
26
NET INCREASE IN CASH AND CASH
EQUIVALENTS
For the Year
Ended
December 31,
2008
P27
592
(9,222)
P12
29
-
(8,603)
41
779
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS
AT END OF PERIOD
For the Period
from July 26 to
December 31,
2007*
5,262
-
5,262
5
P6,041
P5,262
*The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were
transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007.
See Notes to the Financial Statements.
F-65
Appendix A
Page 9 of 50
SAN MIGUEL BREWERY INC.
(A Subsidiary of San Miguel Corporation and
Formerly the Domestic Beer Division of San Miguel Corporation)
NOTES TO THE FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share and Number of Shares Data)
1. Reporting Entity
San Miguel Brewery Inc. (the “Company or SM Brewery”) [formerly the domestic beer
division of San Miguel Corporation (“SMC or the Parent Company”)] was registered
with the Philippine Securities and Exchange Commission (SEC) on July 26, 2007. The
Company is engaged in manufacturing, selling and distribution of fermented and maltbased beverages. The registered office address of the Company is 40 San Miguel
Avenue, Mandaluyong City, Philippines.
SMC is the ultimate parent company.
On July 24, 2007, the stockholders of SMC, during the annual stockholders’ meeting,
approved the transfer of SMC’s domestic Philippine beer business assets to a whollyowned subsidiary of SMC, the Company, in exchange for shares of stock. The assets
transferred to the Company comprise the domestic beer business’ net assets as of
June 30, 2007 excluding land, brands, and income and other taxes payable. The transfer
of SMC’s domestic beer business’ net assets to the Company is pursuant to the listing
with the Philippine Stock Exchange (PSE) and the public offering of the shares of the
Company. The actual transfer of the net assets in exchange for shares of stock took effect
on October 1, 2007.
On May 12, 2008, the Company’s shares were listed with the PSE.
The financial statements as of and for the year ended December 31, 2008 were approved
and authorized for issue by the Board of Directors (BOD) on January 30, 2009.
2. Basis of Preparation
The financial statements of the Company have been prepared on a historical cost basis,
except for derivative financial instruments which are measured at fair value.
The financial statements are presented in Philippine peso, which is the Company’s
functional and presentation currency, and all values are rounded to the nearest million
(P000,000), except when otherwise indicated.
Statement of Compliance
The financial statements have been prepared in compliance with Philippine Financial
Reporting Standards (PFRSs). PFRS includes statements named PFRS and Philippine
Accounting Standards (PAS), including Philippine Interpretations from International
Financial Reporting Interpretation Committee (IFRIC), issued by the Financial Reporting
Standards Council (FRSC).
F-66
Appendix A
Page 10 of 50
3. Significant Accounting Policies
The accounting policies set out below have been applied consistently by the Company to
all periods presented in the financial statements.
Adoption of New Standards, Amendments to Standards and Interpretations
The FRSC approved the adoption of new standards, amendment to standards, and
interpretations.
Amendments to Standard and Interpretation Adopted in 2008
Starting January 1, 2008, the Company adopted the following amendments to standard
and Philippine Interpretations from IFRIC:
ƒ
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share
Transactions: This interpretation describes how to apply PFRS 2, Share-based
Payment to share-based payment arrangements involving an entity’s own equity
instruments and share-based payment arrangements of subsidiaries involving equity
instruments of its parent company. The adoption of this interpretation did not have a
material effect on the Company’s financial statements.
ƒ
Philippine Interpretation IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction: This interpretation provides
general guidance on how to assess the limit in PAS 19, Employee Benefits, on the
amount of the surplus that can be recognized as an asset. It also explains how the
retirement asset or liability may be affected when there is a statutory or contractual
minimum funding requirement. The adoption of this interpretation did not have a
material effect on the Company’s financial statements.
ƒ
Amendments to PAS 39, Financial Instruments: Recognition and Measurement and
PFRS 7 Financial Instruments: Disclosures: This standard permits an entity to
reclassify non-derivative financial assets, other than those designated at fair value
through profit or loss upon initial recognition, out of the trading category in certain
circumstances. The amendments also permit an entity to transfer from the availablefor-sale category to the loans and receivables category a financial asset that otherwise
would have met the definition of loans and receivables, if the entity has the intention
and ability to hold that financial asset for the foreseeable future. The adoption of
these amendments to standard did not have an effect on the Company’s financial
statements.
New and Revised Standards and Amendments to Standards Not Yet Adopted
The following are the new and revised standards and amendments to standards which are
not yet effective for the year ended December 31, 2008, and have not been applied in
preparing these financial statements:
ƒ
PFRS 8, Operating Segments, becomes effective for financial years beginning on or
after January 1, 2009 and will replace PAS 14, Segment Reporting. This standard
introduces the “management approach” to segment reporting. It will require a change
in the presentation and disclosure of segment information based on the internal
reports regularly reviewed by the Company’s Chief Operating Decision Maker in
order to assess each segment’s performance and to allocate resources to them. The
Company has determined that this standard has no impact on its financial statements
since it operates as one segment only (both in terms of business and geography).
F-67
Appendix A
Page 11 of 50
ƒ
Revised PAS 1, Presentation of Financial Statements, becomes effective for
financial years beginning on or after January 1, 2009. The standard has been revised
to introduce the term total comprehensive income, which represents changes in
equity during a period other than those changes resulting from transactions with
owners in their capacity as owners. Total comprehensive income may be presented in
either a single statement of comprehensive income (effectively combining both the
income statement and all non-owner changes in equity in a single statement), or in an
income statement and a separate statement of comprehensive income. The Company
is currently assessing the impact of the revised standard on the financial statements
when it adopts the standard on January 1, 2009.
ƒ
Revised PAS 23, Borrowing Costs, becomes effective for financial years beginning
on or after January 1, 2009. The standard has been revised to require an entity to
capitalize borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset as part of the cost of that asset. The Company will
assess the impact of this revised standard on the financial statements when it adopts
the standard on January 1, 2009.
ƒ
Amended PFRS 1 and PAS 27, Cost of an Investment in a Subsidiary, Jointly
Controlled Entity or Associate, becomes effective for financial years beginning on or
after January 1, 2009. The amendments to PFRS 1 allow a first-time adopter, at its
date of transition to PFRSs in its separate financial statements, to use deemed cost to
account for an investment in a subsidiary, jointly controlled entity or associate. The
amendments to PAS 27 remove the definition of “cost method” currently set out in
PAS 27, and instead require all dividend from a subsidiary, jointly controlled entity
or associate to be recognized as income in the separate financial statements of the
investor when the right to receive the dividend is established. The Company will
assess the impact of this revised standard on the financial statements when it adopts
the standard on January 1, 2009.
ƒ
Improvements to PFRSs 2008 discusses 35 amendments and is divided into two
parts: a) Part I includes 24 amendments that result in accounting changes for
presentation, recognition or measurement purposes; and b) Part II includes 11
terminology or editorial amendments that the International Accounting Standards
Board expects to have either no or only minimal effects on accounting. These
amendments are generally effective for annual periods beginning on or after
January 1, 2009. The adoption of the amendments in 2009 is not expected to have
any material effect on the Company’s financial statements.
ƒ
Revised PFRS 3, Business Combinations, incorporates the following changes that are
likely to be relevant to the Company’s operations:
ƒ
The definition of a business has been broadened, which is likely to result in
more acquisitions being treated as business combinations.
ƒ
Contingent consideration will be measured at fair value, with subsequent
changes therein recognized in profit or loss.
ƒ
Transaction costs, other than share and debt issue costs, will be expensed as
incurred.
ƒ
Any pre-existing interest in the acquiree will be measured at fair value with
the gain or loss recognized in profit or loss.
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ƒ
Any non-controlling (minority) interest will be measured at either fair value,
or at its proportionate interest in the identifiable assets and liabilities of the
acquiree, on a transaction-by-transaction basis.
Revised PFRS 3 will be applied prospectively and therefore there will be no impact
on prior periods in the Company’s financial statements.
ƒ
Amended PAS 27, Consolidated and Separate Financial Statement, requires
accounting for changes in ownership interests by the Company in a subsidiary, while
maintaining control, to be recognized as an equity transaction. When the Company
loses control of a subsidiary, any interest retained in the former subsidiary will be
measured at fair value with the gain or loss recognized in profit or loss. The
amendments to PAS 27 are not expected to have a significant impact on the
Company’s financial statements.
ƒ
Amendments to PAS 39, Financial Instruments: Recognition and Measurement Eligible Hedged Items, becomes effective for financial years beginning on or after
July 1, 2009. The standard has been amended to provide for the following: a) new
application guidance to clarify the existing principles that determine whether specific
risks or portions of cash flows are eligible for designation in a hedge relationship;
and b) additional application guidance on qualifying items; assessing hedge
effectiveness; and designation of financial items as hedged items. The amendments
to PAS 39, which will become mandatory for the Company’s 2010 financial
statements, are not expected to have a significant impact on the financial statements.
ƒ
Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners,
becomes effective for financial years beginning on or after July 1, 2009. This
interpretation provides guidance on the accounting for non-reciprocal distributions of
non-cash assets to owners acting in their capacity as owners. It also applies to
distributions in which the owners may elect to receive either the non-cash asset or a
cash alternative. The liability for the dividend payable is measured at fair value of the
assets to be distributed. The Company will assess the impact of this interpretation on
the financial statements when it adopts the standard on July 1, 2009.
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 and are subject to an insignificant risk of change in
value.
Financial Assets and Liabilities
Date of Recognition. The Company recognizes a financial asset or a financial liability in
the balance sheets when it becomes a party to the contractual provisions of the financial
instrument. In the case of a regular way purchase or sale of financial assets, recognition
and derecognition, as applicable, are done using settlement date accounting.
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Initial Recognition of Financial Instruments. Financial instruments are recognized
initially at fair value, which is the fair value of the consideration given (in case of an
asset) or received (in case of a liability). The fair value of the consideration given or
received is determined by reference to the transaction price or other market prices. If
such market prices are not reliably determinable, the fair value of the consideration is
estimated as the sum of all future cash payments or receipts, discounted using the
prevailing market rate of interest for similar instruments with similar maturities. The
initial measurement of financial instruments, except for those designated at fair value
through profit and loss (FVPL), includes transaction costs.
Subsequent to initial recognition, the Company classifies its financial assets and
liabilities in the following categories: held-to-maturity (HTM) financial assets, availablefor-sale (AFS) investments, FVPL financial assets, and loans and receivables. The
classification depends on the purpose for which the investments are acquired and whether
they are quoted in an active market. Management determines the classification of its
financial assets at initial recognition and, where allowed and appropriate, re-evaluates
such designation at every reporting date.
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
quotation (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, options pricing models and other relevant valuation models.
Day 1 Profit. Where the transaction price in a non-active market is different from the fair
value of the other observable current market transactions for 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 statements of income unless it qualifies for recognition as some other type
of asset. In cases where use is made of data which are not observable, the difference
between the transaction price and model value is only recognized in the statements 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.
Financial Assets
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. Gains or losses on investments held for trading are recognized in
the statements of income.
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Financial assets may be designated by management at initial recognition as at FVPL,
when any of the following criteria is met:
ƒ
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
ƒ
the assets are part of a group of financial assets, financial liabilities or both which are
managed and the performance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy; or
ƒ
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 recognized.
Derivatives are also classified as held for trading unless they are designated as effective
hedging instruments.
The Company accounts for its derivative transactions (including embedded derivatives)
under this category with fair value changes being reported directly to profit or loss,
except when the derivative is treated as an effective accounting hedge, in which case the
fair value change is deferred in equity under the “Cumulative translation adjustments”
account.
The Company’s derivative assets are classified under this category (Notes 8 and 25).
The carrying values of financial assets under this category amounted to P28 and P66 as
of December 31, 2008 and 2007, respectively (Notes 8 and 25).
Loans and Receivables. Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active market. They are not
entered into with the intention of immediate or short-term resale and are not designated
as AFS or financial assets at FVPL. Loans and receivables are carried at cost or
amortized cost, less impairment in value. Amortization is determined using the effective
interest method.
The Company’s cash and cash equivalents, trade and other receivables and noncurrent
receivables and deposits are included in this category (Notes 5, 6 and 10).
The carrying values of financial assets under this category amounted to P9,752 and
P8,988 as of December 31, 2008 and 2007, respectively (Note 25).
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 classified as AFS investments. After initial measurement,
these investments are measured at amortized cost using the effective interest 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.
Gains and losses are recognized in the statements of income when the HTM investments
are derecognized or impaired, as well as through the amortization process.
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The Company has no investments classified as HTM investments as of December 31,
2008 and 2007.
AFS Investments. AFS investments are non-derivative financial assets that are designated
in this category or are not classified in any of the other categories. Subsequent to initial
recognition, AFS investments are carried at fair value in the balance sheets. Changes in
the fair value of such assets are reported in the equity section of the balance sheets until
the investment is derecognized or the investment is determined to be impaired. On
derecognition or impairment, the cumulative gain or loss previously reported in equity is
transferred to the statements of income. Interest earned on holding AFS investments is
recognized in the statements of income using effective interest rate.
The Company has no investments classified under this category as of December 31, 2008
and 2007.
Financial Liabilities
Financial Liabilities at FVPL. Financial liabilities are classified in this category if these
result from trading activities or derivative transactions that are not accounted for as
accounting hedges, or when the Company elects to designate a financial liability under
this category.
Included in this category are the Company’s derivative financial instruments with
negative fair values (Notes 11 and 25).
The carrying values of financial liabilities under this category amounted to P273 and P82
as of December 31, 2008 and 2007, respectively (Notes 11 and 25).
Other Financial Liabilities. This category pertains to financial liabilities that are not held
for trading or not designated as at FVPL upon the inception of the liability. These
include liabilities arising from operations or borrowings.
Financial liabilities are recognized initially at fair value and are subsequently carried at
amortized cost, taking into account the impact of applying the effective interest method
of amortization (or accretion) for any related premium, discount and any directly
attributable transaction costs.
Included in this category are the Company’s accounts payable and accrued expenses
(Notes 11 and 25).
The carrying values of financial liabilities under this category amounted to P2,727 and
P3,161 as of December 31, 2008 and 2007, respectively (Note 25).
Derivative Financial Instruments and Hedging
Freestanding Derivatives
For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges
when hedging the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment (except for foreign currency risk); b) cash flow
hedges when hedging exposure to variability in cash flows that is either attributable to a
particular risk associated with a recognized asset or liability or a highly probable forecast
transaction or the foreign currency risk in an unrecognized firm commitment; or
c) hedges of a net investment in foreign operations.
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At the inception of a hedge relationship, the Company formally designates and
documents the hedge relationship to which the Company wishes to apply hedge
accounting and the risk management objective and strategy for undertaking the hedge.
The documentation includes identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the entity will assess the hedging
instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair
value or cash flows attributable to the hedged risk. Such hedges are expected to be
highly effective in achieving offsetting changes in fair value or cash flows and are
assessed on an on-going basis to determine that they actually have been highly effective
throughout the financial reporting periods for which they were designated.
Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value
with corresponding change in fair value recognized in the statements of income. The
carrying amount of the hedged asset or liability is also adjusted for changes in fair value
attributable to the hedged item and the gain or loss associated with that remeasurement is
also recognized in the statements of income.
When the hedge ceases to be highly effective, hedge accounting is discontinued and the
adjustment to the carrying amount of a hedged financial instrument is amortized
immediately.
As of December 31, 2008 and 2007, the Company has no outstanding derivatives
accounted for as fair value hedges.
Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a
highly effective cash flow hedge are included in the statements of changes in equity
under the “Cumulative translation adjustments” account. The ineffective portion is
immediately recognized in the statements of income.
If the hedged cash flow results in the recognition of an asset or a liability, all 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 net income in the same period or periods during which the
hedged forecasted transaction or recognized asset or liability affect the statements of
income.
When the hedge ceases to be highly effective, hedge accounting is discontinued
prospectively. In this case, the cumulative gain or loss on the hedging instrument that
has been reported directly in equity is retained in equity until the forecasted transaction
occurs. When the forecasted transaction is no longer expected to occur, any net
cumulative gain or loss previously reported in equity is recognized in the statements of
income.
As of December 31, 2008, the Company has outstanding commodity options designated
as effective cash flow hedges amounting to P59. As of December 31, 2007, the Company
has no commodity options designated as effective cash flow hedges.
Net Investment Hedge. As of December 31, 2008 and 2007, the Company has no hedge
of a net investment in a foreign operation.
For derivatives that do not qualify for hedge accounting, any gains or losses arising from
changes in fair value of derivatives are taken directly to profit or loss during the year
incurred.
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Embedded Derivatives
The Company assesses whether embedded derivatives are required to be separated from
host contract when the Company becomes a party to the contract. 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. Reassessment only
occurs if there is a change in the terms of the contract that significantly modifies the cash
flows that would otherwise be required.
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 similar financial assets) is derecognized when:
ƒ
the rights to receive cash flows from the asset have expired;
ƒ
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 ‘passthrough’ arrangement; or
ƒ
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 substantially all the risks and rewards of the asset, but
has transferred control of the asset.
When the Company 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 Company’s
continuing involvement in the asset.
Financial Liabilities. A financial liability is derecognized when the obligation under the
liability is discharged or cancelled or expired.
When 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 statements of income.
Impairment of Financial Assets
The Company assesses at balance sheet date whether a financial asset or group of
financial assets is impaired.
Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss
on loans and receivables carried at amortized cost has been incurred, the amount of 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) 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 shall be reduced either directly or through
use of an allowance account. The amount of loss shall be recognized in the statements of
income.
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The Company 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 statements of income, to the extent that the carrying
value of the asset does not exceed its amortized cost at the reversal date.
Assets Carried at Cost. If there is objective evidence of an impairment loss on an
unquoted equity instrument that is not carried at fair value because its fair value cannot
be reliably measured, or of a 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 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.
AFS Financial Assets. If an AFS financial asset is impaired, an amount comprising the
difference between the cost (net of any principal payment and amortization) and its
current fair value, less any impairment loss on that financial asset previously recognized
in the statements of income, is transferred from equity to the statements of income.
Reversals in respect of equity instruments classified as AFS are not recognized in profit
or loss. Reversals of impairment losses on debt instruments are reversed through profit
or loss, 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 statements of income.
Classification of Financial Instruments Between Debt and Equity
A financial instrument is classified as debt if it provides for a contractual obligation to:
ƒ
deliver cash or another financial asset to another entity; or
ƒ
exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the Company; or
ƒ
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.
If the Company does not have an unconditional right to avoid delivering cash or another
financial asset to settle its contractual obligation, the obligation meets the definition of a
financial liability.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the
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, and the related assets and liabilities are presented gross in the balance sheets.
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Inventories
Finished goods, goods in process and materials and supplies are valued at the lower of
cost and net realizable value.
Costs incurred in bringing each inventory to its present location and conditions are
accounted for as follows:
Finished goods and goods in
process
-
Materials and supplies
-
cost includes direct materials and labor
and a proportion of manufacturing
overhead costs based on normal
operating capacity but excluding
borrowing costs; cost is determined
using the moving-average method;
at cost using the moving-average
method.
Net realizable value of finished goods and goods in process is the estimated selling price
in the ordinary course of business, less the estimated costs of completion and the
estimated costs necessary to make the sale.
Net realizable value of materials and supplies is the current replacement cost.
Containers (i.e., returnable bottles and shells) are stated at deposit values. The excess of
the acquisition cost of the containers over their deposit value is presented under deferred
containers included under “Other noncurrent assets” account in the balance sheets and is
amortized over the estimated useful lives of ten (10) years. Amortization of deferred
containers is included under “Administrative and selling expenses” account in the
statements of income.
Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation and amortization
and any accumulated impairment in value. Such cost includes the cost of replacing part
of the plant and equipment at the time that cost is incurred, if the recognition criteria are
met, and excludes the costs of day-to-day servicing.
The initial cost of plant and equipment comprises of its purchase price, including import
duties, taxes and any directly attributable costs in bringing the asset to its working
condition and location for its intended use. Cost also includes any related asset
retirement obligation and interest incurred during the construction period on funds
borrowed to finance the construction of the projects. Expenditures incurred after the
asset has been put into operation, such as repairs, maintenance and overhaul costs, are
normally recognized as expense in the period the costs are incurred. In situations where
it can be clearly demonstrated that the expenditures have improved the condition of the
asset beyond the originally assessed standard of performance, the expenditures are
capitalized as an additional cost of plant and equipment.
Construction in progress represents structures under construction and is stated at cost.
This includes the costs of construction and equipment and other direct costs. Borrowing
costs that are directly attributable to the construction of plant and equipment are
capitalized during the construction period. Construction in progress is not depreciated
until such time that the relevant assets are ready for use.
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Depreciation and amortization are computed using the straight-line method over the
following estimated useful lives of the assets:
Machinery and equipment
Buildings and improvements
Transportation equipment
Office equipment, furniture and fixtures
Tools and small equipment
Leasehold improvements
Number of Years
10 - 40
5 - 50
5-7
2-6
2-5
5 - 50
or term of the lease,
whichever is shorter
The remaining useful lives, residual values and depreciation and amortization method are
reviewed and adjusted, if appropriate, at each financial year-end to ensure that such
periods and method of depreciation and amortization are consistent with the expected
pattern of economic benefits from the items of plant and equipment.
The carrying values of plant and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Fully depreciated assets are retained in the accounts until they are no longer in use and no
further depreciation and amortization is credited or charged to current operations.
When each major inspection is performed, its cost is recognized in the carrying amount
of the plant and equipment as a replacement if the recognition criteria are satisfied.
An item of plant and equipment is derecognized when either it has been disposed or
when it is permanently withdrawn from use and no future economic benefits are expected
from its use or disposal. Any gains or losses arising on the retirement and disposal of an
item of plant and equipment (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) are included in the statements of income
in the period of retirement or disposal.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost
of intangible assets acquired in a business combination is its fair value as at the date of
acquisition. Following initial recognition, intangible assets are carried at cost less
accumulated amortization and any accumulated impairment losses. Internally generated
intangible assets, excluding capitalized development costs, are not capitalized and
expenditure is charged against profits in the year in which the expenditure is incurred.
The useful lives of intangible assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic life and
assessed for impairment whenever there is an indication that the intangible asset may be
impaired. The amortization period and the amortization method for an intangible asset
with a finite useful life are reviewed at least at each balance sheet date. Changes in the
expected useful life or the expected pattern of consumption of future economic benefits
embodied in the asset is accounted for by changing the amortization period or method, as
appropriate, and treated as changes in accounting estimates. The amortization expense
on intangible assets with finite lives is recognized in the statements of income in the
expense category consistent with the function of the intangible asset.
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Amortization of computer software and licenses is computed using the straight-line
method of over 2-8 years.
Intangible assets with indefinite useful lives, such as trademarks, brands and licenses, are
tested for impairment annually either individually or at the cash-generating unit level.
Such intangibles are not amortized. The useful life of an intangible asset with an
indefinite life is reviewed annually to determine whether indefinite life assessment
continues to be supportable. If not, the change in the useful life assessment from
indefinite to finite is made on a prospective basis.
Gains or losses arising from disposition of an intangible asset are measured as the
difference between the disposal proceeds and the carrying amount of the asset and are
recognized in the statements of income when the asset is disposed.
Impairment of Non-financial Assets with Definite Useful Lives
The carrying values of plant and equipment, containers, intangible assets with definite
useful lives and idle assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying value may not be recoverable. If any such
indication exists, and if the carrying value exceeds the estimated recoverable amount, the
assets or cash-generating units are written down to their recoverable amounts. The
recoverable amount of the asset is the greater of fair value less costs to sell or value in
use. The fair value less costs to sell is the amount obtainable from the sale of an asset in
an arm’s-length transaction less costs to sell. 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. For an asset that does not generate largely independent cash inflows, the
recoverable amount is determined for the cash-generating unit to which the asset belongs.
Impairment losses of continuing operations are recognized in the statements of income in
those expense categories consistent with the function of the impaired asset.
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 profit or loss.
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.
Provisions
Provisions are recognized only when the Company has (a) a present obligation (legal or
constructive) as a result of 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 interest expense. Where the Company expects a provision to be reimbursed, the
reimbursement is recognized as a separate asset but only when the receipt of the
reimbursement is virtually certain.
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Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will
flow to the Company and the revenue can be reliably measured. The following specific
recognition criteria must also be met before revenue is recognized:
Sales. Revenue is 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,
which is normally upon delivery.
Interest. Interest is recognized as the interest accrues, taking into account the effective
yield on the asset.
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.
Company as Lessee. Finance leases, which transfer to the Company substantially all the
risks and rewards 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 recognized in the
statements of income.
Capitalized leased assets are depreciated over the shorter of the estimated useful lives of
the assets or the respective lease terms, if there is no reasonable certainty that the
Company will obtain ownership by the end of the lease term.
Leases which do not transfer to the Company 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 statements of income on a straight-line basis over the
lease term. Associated costs such as maintenance and insurance are expensed as incurred.
Company as Lessor. Leases where the Company does not transfer substantially all the
risks and benefits of ownership of the assets are classified as operating leases. Lease
income from operating leases is recognized as income on a straight-line basis over the
lease term. Initial direct costs incurred in negotiating an operating lease are added to the
carrying amount of the leased asset and recognized over the lease term on the same basis
as rental income. Contingent rents are recognized as revenues in the period in which they
are earned.
Research and Development Costs
Research costs are expensed as incurred. Development cost incurred on an individual
project is carried forward when its future recoverability can reasonably be regarded as
assured. Any expenditure carried forward is amortized in line with the expected future
sales from the related project.
The carrying value of development cost is reviewed for impairment annually when the
related asset is not yet in use. Otherwise, this is reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
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Share-based Transactions
Under SMC’s Employee Stock Purchase Plan (ESPP), employees of the Company
receive remuneration in the form of share-based payments transactions, whereby the
employees render services as consideration for equity instruments of SMC. Such
transactions are handled centrally by SMC.
Share-based transactions in which SMC grants option rights to its equity instruments
direct to the Company’s employees are accounted for as equity-settled transactions. SMC
charges the Company for the costs related to such transactions with its employees. The
amount is charged to operations by the Company.
The cost of ESPP is measured by reference to the market price at the time of the grant
less subscription price. The cumulative expense recognized for share-based transactions
at each reporting date until the vesting date reflects the extent to which the vesting period
has expired and SMC’s best estimate of the number of equity instruments that will
ultimately vest. Where the terms of a share-based 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 modification, which increases the total fair value of the share-based
payment agreement, or is otherwise beneficial to the employee 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.
Retirement Costs
The Company has a funded, noncontributory retirement plan, administered by a trustee,
covering all permanent employees. Retirement costs are actuarially determined using the
projected unit credit method. This method reflects service rendered by employees to the
date of valuation and incorporates assumptions concerning employees’ projected salaries.
Retirement cost includes current service cost, interest cost, expected return on plan
assets, amortization of unrecognized past service costs, recognition of actuarial gains and
losses, and effect of any curtailments or settlements. The past service cost, if any, is
recognized as an expense on a straight-line basis over the average period until the
benefits become vested. If the benefits are already vested immediately following the
introduction of, or changes to, the plan, past service cost is recognized immediately as an
expense. Actuarial gains and losses are recognized as income or expense when the net
cumulative unrecognized actuarial gains and losses of the plan at the end of the previous
reporting year exceed 10% of the higher of the present value of the defined benefit
obligation and the fair value of plan assets at that date. These gains or losses are
recognized over the expected average remaining working lives of the employees
participating in the plan.
The defined benefit liability is the aggregate of the present value of the defined benefit
obligation and actuarial gains and losses not recognized, reduced by past service cost not
yet recognized and the fair value of plan assets out of which the obligations are to be
settled directly. If such aggregate is negative, the resulting asset is measured at the lower
of such aggregate or the aggregate of 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.
If the asset is measured at the aggregate of 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, net actuarial
losses of the current period and past service cost of the current period are recognized
F-80
Appendix A
Page 24 of 50
immediately to the extent that they exceed any reduction in the present value of those
economic benefits. If there is no change or an increase in the present value of the
economic benefits, the entire net actuarial losses of the current period and past service
cost of the current period are recognized immediately. Similarly, net actuarial gains of
the current period after the deduction of past service cost of the current period exceeding
any increase in the present value of the economic benefits stated above are recognized
immediately if the asset is measured at the aggregate of 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. If there is no change or a decrease in the present value of the economic
benefits, the entire net actuarial gains of the current period after the deduction of past
service cost of the current period are recognized immediately.
Foreign Currency Transactions and Translations
The Company’s financial statements are presented in Philippine peso, which is also the
Company’s functional and presentation currency. Transactions in foreign currencies are
recorded using the exchange rate at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are restated using the closing rate of
exchange at balance sheet date. All differences are taken to the statements of income.
Nonmonetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial transactions.
Nonmonetary items measured at fair value in a foreign currency are translated using the
exchange rates at the date when the fair value was determined.
Taxes
Current tax. Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be recovered from or paid to the taxation authorities.
The tax rates and tax laws used to compute the amount are those that are enacted or
substantively enacted at balance sheet date.
Deferred tax. Deferred income tax is provided using the balance sheet liability method
on all temporary differences 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, except:
ƒ
where the deferred tax liability arises from the initial recognition of goodwill or of an
asset or liability in a transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable profit or loss; and
ƒ
with respect to taxable temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, where the timing of the
reversal of the temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, carryforward
benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax
losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences, and
the carryforward benefits of MCIT and NOLCO can be utilized, except:
ƒ
where the deferred tax asset relating to the deductible temporary difference arises
from the initial recognition of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and
F-81
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Page 25 of 50
ƒ
with respect to deductible temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, deferred tax assets are
recognized only to the extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be available against which the
temporary differences can be utilized.
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 profit will be
available to allow all or part of the deferred tax asset 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 profit 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
to the year when the asset is realized or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at balance sheet date.
Income tax relating to items recognized directly in equity is recognized in equity and not
in the statements 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.
Value Added Tax (VAT).
amount of VAT, except:
Revenues, expenses and assets are recognized net of the
ƒ
where the tax incurred on a purchase of assets or services is not recoverable from the
taxation authority, in which case the tax is recognized as part of the cost of
acquisition of the asset or as part of the expense item as applicable; and
ƒ
receivables and payables that are stated with the amount of tax included.
The net amount of tax recoverable from, or payable to, the taxation authority is included
as part of receivables or payables in the balance sheets.
Related Parties
Parties are considered to be related if one party has the ability, directly or indirectly, to
control the other party or exercise significant influence over the other party in making
financial and operating decisions. Parties are also considered to be related if they are
subject to common control or common significant influence. Related parties may be
individuals or corporate entities. Transactions between related parties are on an arm’s
length basis in a manner similar to transactions with non-related parties.
Earnings Per Share (EPS)
Basic EPS is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period, with retroactive
adjustments for any stock dividends declared.
Contingencies
Contingent liabilities are not recognized in the financial statements. They 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 are disclosed when
an inflow of economic benefits is probable.
F-82
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Subsequent Events
Post year-end events that provide additional information about the Company’s position at
balance sheet date (adjusting events) are reflected in the financial statements. Post
year-end events that are not adjusting events are disclosed in the notes to the financial
statements when material.
4. Significant Accounting Judgments, Estimates and Assumptions
The Company’s financial statements prepared in accordance with PFRS requires
management to make judgments, estimates and assumptions that affect amounts reported
in the financial statements and related notes, at the reporting date. However, uncertainty
about these estimates and assumptions could result in outcome that could require a
material adjustment to the carrying amount of the affected asset or liability in the future.
Judgments
In the process of applying the Company’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 financial statements:
Operating Leases. The Company has entered into various lease agreements as a lessee.
The Company has determined that the lessor retains all significant risks and rewards of
ownership of these properties which are leased out under operating lease arrangements.
Rent expense charged to operations amounted to P638 and P175 as of December 31,
2008 and 2007, respectively (Note 15).
Estimates
The key estimates and assumptions used in the financial statements are based on
management’s evaluation of relevant facts and circumstances as of the date of the
Company’s financial statements. Actual results could differ from such estimates.
Allowance for Doubtful Accounts. Provisions are made for specific and groups of
accounts, where objective evidence of impairment exists. The Company evaluates these
accounts on the basis of factors that affect the collectibility of the accounts. These
factors include, but are not limited to, the length of the Company’s relationship with the
customers and counterparties, the customers’ current credit status based on third party
credit reports and known market forces, average age of accounts, collection experience,
and historical loss experience. The amount and timing of recorded expenses for any
period would differ if the Company made different judgments or utilized different
methodologies. An increase in allowance for doubtful accounts would increase the
recorded administrative and selling expenses and decrease current assets.
The allowance for doubtful accounts amounted to P647 and P693 as of December 31,
2008 and 2007, respectively (Note 6). The carrying value of trade and other receivables
amounted to P3,661 and P3,676 as of December 31, 2008 and 2007, respectively
(Note 6).
Allowance for Inventory Losses. The Company provides allowance for inventory losses
whenever net realizable value becomes lower than cost due to damage, physical
deterioration, obsolescence, changes in price levels or other causes.
F-83
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Estimates of net realizable value are based on the most reliable evidence available at the
time the estimates are made of the amount the inventories are expected to be realized.
These estimates take into consideration fluctuations of price or cost directly relating to
events occurring after balance sheet date to the extent that such events confirm conditions
existing at balance sheet date. The allowance account is reviewed periodically to reflect
the accurate valuation in the financial records.
The allowance for inventory losses amounted to P335 and P416 as of December 31, 2008
and 2007, respectively. The carrying value of inventories amounted to P3,279 and P2,447
as of December 31, 2008 and 2007, respectively (Note 7).
Estimated Useful Lives of Containers and Plant and Equipment. The Company estimates
the useful lives of containers and plant and equipment based on the period over which the
assets are expected to be available for use. The estimated useful lives of containers and
plant and equipment are reviewed periodically and are updated if expectations differ from
previous estimates due to physical wear and tear, technical or commercial obsolescence
and legal or other limits on the use of the assets.
In addition, estimation of the useful lives of containers and plant and equipment is based
on collective assessment of industry practice, internal technical evaluation and
experience with similar assets. It is possible, however, that future results of operations
could be materially affected by changes in estimates brought about by changes in factors
mentioned above. The amounts and timing of recorded expenses for any period would be
affected by changes in these factors and circumstances. A reduction in the estimated
useful lives of containers and plant and equipment would increase recorded cost of sales
and administrative and selling expenses and decrease noncurrent assets.
Accumulated depreciation and amortization of plant and equipment amounted to P15,682
and P15,163 as of December 31, 2008 and 2007, respectively (Note 9). Plant and
equipment, net of accumulated depreciation and amortization, amounted to P5,864 and
P5,616 as of December 31, 2008 and 2007, respectively (Note 9). Deferred containers,
net of accumulated amortization, amounted to P4,537 and P4,605 as of December 31,
2008 and 2007, respectively (Note 10).
Estimated Useful Lives of Intangible Assets with Finite Lives. The useful lives of
intangible assets are assessed at the individual asset level as having either a finite or
indefinite life. Intangible assets are regarded to have an indefinite useful life when, based
on analysis of all of the relevant factors, there is no foreseeable limit to the period over
which the asset is expected to generate net cash inflows for the Company.
Intangible assets with finite useful life amounted to P11 and P3 as of December 31, 2008
and 2007, respectively.
Realizability of Deferred Tax Assets. The Company reviews its deferred tax assets at
each balance sheet date and reduces the carrying amount to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the deferred
tax asset to be utilized. The Company’s assessment on the recognition of deferred tax
assets on deductible temporary difference and carryforward benefits of MCIT and
NOLCO is based on the projected taxable income in the following periods.
Deferred tax assets amounted to P427 and P398 as of December 31, 2008 and 2007,
respectively (Note 12).
F-84
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Page 28 of 50
Impairment of Other Non-financial Assets. PFRS require that an impairment review be
performed on plant and equipment, containers and intangible assets with definite useful
lives when events or changes in circumstances indicate that the carrying value may not be
recoverable. Determining the net recoverable value of assets requires the estimation of
cash flows expected to be generated from the continued use and ultimate disposition of
such assets. While it is believed that the assumptions used in the estimation of fair values
reflected in the financial statements are appropriate and reasonable, significant changes in
these assumptions may materially affect the assessment of recoverable values and any
resulting impairment loss could have a material adverse impact on the results of
operations.
There were no impairment losses of plant and equipment and other non-financial assets
recognized as of December 31, 2008 and 2007. The aggregate amount of plant and
equipment, deferred containers and intangible assets with definite useful lives amounted
to P10,412 and P10,224 as of December 31, 2008 and 2007, respectively (Notes 9 and
10).
Present Value of Defined Benefit Obligation. The present value of the retirement
obligation depends on a number of factors that are determined on an actuarial basis using
a number of assumptions. These assumptions are described in Note 21 to the financial
statements and include discount rate, expected return on plan assets and salary increase
rate. Actual results that differ from the assumptions are accumulated and amortized over
future periods and therefore, generally affect the recognized expense and recorded
obligation in such future periods.
The assumption of the expected return on plan assets is determined on a uniform basis,
taking into consideration the long-term historical returns, asset allocation and future
estimates of long-term investment returns.
The Company determines the appropriate discount rate at the end of each year. It is the
interest rate that should be used to determine the present value of estimated future cash
outflows expected to be required to settle the retirement obligations. In determining the
appropriate discount rate, the Company considers the interest rates on government bonds
that are denominated in the currency in which the benefits will be paid. The terms to
maturity of these bonds should approximate the terms of the related retirement liability.
Other key assumptions for retirement obligations are based in part on current market
conditions.
While it is believed that the Company’s assumptions are reasonable and appropriate,
significant differences in actual experience or significant changes in assumptions may
materially affect the Company’s retirement and other retirement obligations.
The Company has a net cumulative unrecognized actuarial losses amounting to P379 and
P768 as of December 31, 2008 and 2007, respectively (Note 21).
Financial Assets and Liabilities. The Company carries certain financial assets and
liabilities at fair value, which requires extensive use of accounting estimates and
judgment. 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 Company utilized different
valuation methodologies and assumptions. Any change in the fair value of these
financial assets and liabilities would affect net income and equity.
Fair value of financial assets and liabilities are discussed in Note 25.
F-85
Appendix A
Page 29 of 50
Asset Retirement Obligation. Determining asset retirement obligation requires estimation
of the cost of dismantling plant and equipment and other costs of restoring the leased
properties to their original condition. The Company determined that there are no
significant asset retirement obligations as of December 31, 2008 and 2007.
Provisions and Contingencies. The Company, in the ordinary course of business, sets up
appropriate provisions for its present legal or constructive obligations, if any, in
accordance with its policies on provisions and contingencies. In recognizing and
measuring provisions, management takes risk and uncertainties into account.
5. Cash and Cash Equivalents
This account consists of:
2008
P2,168
3,873
P6,041
Cash in banks and on hand
Short-term investments
2007
P803
4,459
P5,262
Cash in banks earn interest at the respective bank deposit rates. Short-term investments
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 short-term investment
rates.
6. Trade and Other Receivables
This account consists of:
Trade - net
Receivables
Amounts owed by related parties
Nontrade
Amounts owed by related parties
Others - net
Note
2008
2007
19
P2,340
569
P2,301
537
149
603
P3,661
476
362
P3,676
19
20
Trade receivables are non-interest bearing and are generally on 30 days credit term.
F-86
Appendix A
Page 30 of 50
As at December 31, 2008, the aging of trade and other receivables and the related
allowance provided is as follows:
Current
Past due
Less than 30 days
30-60 days
61-90 days
Over 90 days
Trade
P2,685
Owed by
related
parties
P446
Non-trade
P581
Total
P3,712
Allowance
P340
22
67
6
150
P2,930
182
38
2
92
P760
2
35
P618
206
105
8
277
P4,308
23
67
6
211
P647
As at December 31, 2007, the aging of trade and other receivables and the related
allowance provided is as follows:
Current
Past due
Less than 30 days
30-60 days
61-90 days
Over 90 days
Trade
P2,623
Owed by
related
parties
P947
Non-trade
P341
Total
P3,911
Allowance
P393
15
6
29
217
P2,890
63
31
56
P1,097
31
10
P382
109
47
29
273
P4,369
59
1
11
229
P693
The movements in the allowance for doubtful accounts in 2008 and 2007 are as follows:
Balance at beginning of period
Transferred from SMC
Unused amounts reversed/reclassified
Balance at end of period
2008
P693
(46)
P647
2007
P 693
P693
Allowance for doubtful accounts related to amounts owed by related parties as of
December 31, 2008 and 2007 amounted to P42 and P84, respectively (Note 19).
Various collaterals for trade receivables such as bank guarantees, time deposits and real
estate mortgage are held by the Company for credit limits exceeding P0.275.
7. Inventories
This account consists of:
Finished goods and goods in process - at cost
Containers - at net realizable value
Materials and supplies - at net realizable value
Total inventories at lower of cost and net
realizable value
F-87
2008
P866
1,093
1,320
2007
P689
1,291
467
P3,279
P2,447
Appendix A
Page 31 of 50
The cost of containers as of December 31, 2008 and 2007 amounted to P1,413 and
P1,677, respectively. The cost of materials and supplies as of December 31, 2008 and
2007 amounted to P1,335 and P497, respectively.
8. Prepaid Expenses and Other Current Assets
This account consists of:
Note
Prepaid taxes and licenses
Prepaid rentals
Derivative assets
Prepaid insurance
Others
24, 25
F-88
2008
P274
41
28
6
69
P418
2007
P42
40
66
11
21
P180
Appendix A
Page 32 of 50
9. Plant and Equipment
The movements in this account are as follows:
Machinery and
Equipment
Buildings and
Improvements
Transportation
Equipment
Leasehold
Improvements
Office
Equipment,
Furniture and
Fixtures
Tools and
Small
Equipment
Construction in
Progress
P212
125
-
Total
Cost:
Transferred from SMC
Additions for the year
Disposals/reclassifications
P16,083
62
(82)
P3,502
18
13
P401
2
(9)
P81
-
P362
1
(1)
P9
-
December 31, 2007
Additions for the year
Disposals/reclassifications
16,063
868
(60)
3,533
52
(53)
394
3
(24)
81
(19)
362
11
(4)
9
-
337
(7)
20,779
934
(167)
December 31, 2008
16,871
3,532
373
62
369
9
330
21,546
Accumulated depreciation
and amortization:
Transferred from SMC
Additions for the year
Disposals/reclassifications
12,923
151
(71)
1,391
25
3
343
6
(9)
41
1
-
350
2
(1)
8
-
-
15,056
185
(78)
December 31, 2007
Additions for the year
Disposals/reclassifications
13,003
529
(65)
1,419
101
(40)
340
19
(24)
42
4
(7)
351
6
(4)
8
-
-
15,163
659
(140)
December 31, 2008
13,467
1,480
335
39
353
8
-
15,682
Net book value:
December 31, 2007
P3,060
P2,114
P54
P39
P11
P1
P337
P5,616
December 31, 2008
P3,404
P2,052
P38
P23
P16
P1
P330
P5,864
P20,650
208
(79)
Depreciation and amortization charged to operations amounted to P659 and P185 in 2008 and 2007, respectively (Note 16). No interest was
capitalized in 2008 and 2007.
F-89
Appendix A
Page 33 of 50
10. Other Noncurrent Assets
This account consists of:
2008
2007
P3,187
1,350
4,537
41
39
316
P4,933
P3,110
1,495
4,605
39
382
P5,026
2008
2007
P4,814
939
5,753
P 4,422
392
4,814
209
1,007
1,216
209
209
P4,537
P4,605
Note
2008
2007
19
P1,250
622
P879
610
19
25
327
273
900
82
234
44
15
235
P3,000
290
23
54
405
P3,243
Note
Deferred containers - net
Bottles
Shells
Retirement asset
Amounts owed by related parties
Others
21
19
20, 24
The movements in the deferred containers are as follows:
Note
Gross carrying amount:
Beginning balance
Transferred from SMC
Additions
Ending Balance
Accumulated amortization:
Beginning balance
Amortization for the period
Ending Balance
16
11. Accounts Payable and Accrued Expenses
This account consists of:
Trade
Payables
Amounts owed to related parties
Nontrade
Amounts owed to related parties
Derivative liabilities
Accrued expenses
Payroll
Utilities
Materials
Others
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Appendix A
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12. Income Taxes
Deferred tax assets arise from the following:
2008
P194
101
113
19
P427
Allowance for doubtful accounts
Allowance for inventory losses
Derivatives
Others
2007
P242
146
3
7
P398
The components of the income tax expense are shown below:
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P1,249
P5,476
(10)
(10)
P1,239
P5,466
Current
Deferred
The reconciliation of statutory income tax rate on income before income tax and the
Company’s effective income tax rates are as follows:
Statutory income tax rate
Increase (decrease) in income tax rate
resulting from:
Change in tax rate
Interest income subjected to final tax
Others
Effective income tax rate
For the Year
Ended
December 31,
2008
35.00%
For the Period
from July 26 to
December 31,
2007
35.00%
0.43
(0.25)
0.06
35.24%
(0.12)
0.03
34.91%
13. Capital Stock
In their respective meetings on August 9, 2007 and September 7, 2007, at least a majority of
the BOD of the Company and stockholders owning or representing at least 2/3 of the
subscribed and outstanding capital stock approved the increase in the authorized capital stock
from P100 to P25,000, the decrease of the par value of its shares from P100 to P1 and the
issuance of a total of 15,308,416,960 common shares, comprising of 75,000,000 common
shares from its unissued authorized capital stock and 15,233,416,960 common shares from the
increase in its authorized capital stock in exchange for the net assets of the domestic beer
business of SMC as of June 30, 2007 with a net book value of P15,308. The transfer of the net
assets is pursuant to a Master Deed of Assignment of Domestic Beer Assets dated August 23,
2007 between SMC and the Company with amendments dated September 7, 2007.
F-91
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On September 27, 2007, the SEC approved the increase in authorized capital stock and
decrease in par value of shares. As a standard condition of the SEC for approval of
applications for increase in authorized capital stock, where the payment for the shares issued
pursuant to such increase is made in the form of motor vehicles and receivables,
2,557,573,242 common shares that were issued by the Company to SMC in exchange for
motor vehicles and receivables out of the 15,308,416,960 common shares issued by the
Company were held in escrow by the SEC pending the transfer of ownership of those motor
vehicles in the name of the Company and proof of collection of receivables.
On November 5, 2008, the Company submitted to the SEC the required documentation for the
transfer of ownership of motor vehicles and proof of collection of receivables. As of January
30, 2009, this is being reviewed by the SEC.
Pursuant to the registration statement rendered effective by the SEC on April 28, 2008 and the
listing approval of the PSE, 77,052,000 common shares were sold by the Company to the
public under a primary offering at P8.00 per share in April-May 2008.
The movements in the number of issued shares of capital stock are as follows:
2008
15,333,426,960
77,052,000
15,410,478,960
Balance at beginning of period
Issuance during the period
Balance at end of period
2007
15,333,426,960
15,333,426,960
14. Cost of Sales
This account consists of:
Note
Taxes and licenses
Inventories
Communications, light, fuel and water
Personnel
Depreciation and amortization
Repairs and maintenance
Others
17
16
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P3,918
P14,523
1,473
6,956
405
1,538
194
797
149
535
85
353
109
98
P6,333
P24,800
15. Administrative and Selling Expenses
Administrative and selling expenses consist of:
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P1,584
P4,846
765
3,520
P2,349
P8,366
Administrative
Selling
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Administrative expenses consist of:
Note
4, 16
Depreciation and amortization
Royalty
Personnel
Advertising and promotion
Management fees
Rent
Breakages and losses
Repairs and maintenance
Professional fees
Communications, light, fuel and water
Taxes and licenses
Others
17
4, 20
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P246
P1,173
243
974
183
903
421
389
159
295
73
223
172
28
149
52
144
16
80
151
22
12
322
P1,584
P4,846
Selling expenses consist of:
Note
Freight, trucking and handling
Personnel
Advertising and promotion
Rent
Taxes and licenses
Communication, light, fuel and water
Repairs and maintenance
Depreciation and amortization
Others
17
4, 20
4, 16
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P338
P1,485
158
691
25
436
102
415
22
103
27
102
29
71
20
50
44
167
P765
P3,520
16. Depreciation and Amortization
Depreciation and amortization are distributed as follows:
Cost of sales:
Plant and equipment
Administrative and selling expenses:
Plant and equipment
Deferred containers
Others
F-93
For the Year
Ended
December 31,
2008
For the Period
from July 26 to
December 31,
2007
P535
P149
124
1,007
92
1,223
P1,758
36
209
21
266
P415
Appendix A
Page 37 of 50
17. Personnel Expenses
This account consists of:
Note
Salaries and wages
Retirement cost
Other employee benefits
21
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P215
P1,457
42
157
278
777
P535
P2,391
Personnel expenses are distributed as follows:
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P194
P797
183
903
158
691
P535
P2,391
Cost of sales
Administrative expenses
Selling expenses
18. Other Income (Expense)
This account consists of:
Note
Foreign exchange gain (loss) - net
Rental income
Gain on sale of plant and equipment - net
Marked-to-market gain (loss) - net
Others
F-94
20
25
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
(P12)
P62
4
15
8
17
14
(469)
1
(2)
P15
(P377)
Appendix A
Page 38 of 50
19. Related Party Disclosures
The Company, in the normal course of business, purchases products and services from and
sells products to related parties. Transactions with related parties are made at normal market
prices.
Relationship
with Related
Parties
San Miguel Corporation
Parent
Company
San Miguel Yamamura
Packaging Corporation
(formerly San Miguel
Packaging Specialists, Inc.)
Under
common
control
San Miguel Rengo Packaging
Corporation
Under
common
control
SMC Shipping and Lighterage
Corporation
Under
common
control
SMITS, Inc. and a subsidiary
Under
common
control
San Miguel Yamamura Asia
Corporation
Under
common
control
Ginebra San Miguel, Inc. and a
subsidiary
San Miguel Beverages, Inc.
Under
common
control
Under
common
control
San Miguel International Ltd.
and subsidiaries
Under
common
control
San Miguel Pure Foods
Company, Inc. and subsidiaries
Under
common
control
Others
Under
common
control
Year
Revenue Purchases
From
From
Related
Related
Parties
Parties
Amounts
Owed by
Related
Parties
Amounts
Owed to
Related
Parties
2008
2007
P2,020
654
P1,660
450
P645
955
P298
892
2008
2007
44
55
1,991
499
21
62
469
497
2008
2007
-
-
6
10
2008
2007
-
415
102
-
92
53
2008
2007
-
98
26
-
60
27
2008
2007
-
29
10
3
2
4
3
96
29
1
1
21
21
2008
2007
8
2
-
7
20
-
2008
2007
11
3
-
2008
2007
3
25
-
2008
2007
28
24
2008
2007
-
3
28
18
5
7
73
60
4
-
1
1
20
16
21
1
16
2
2
7
11
5
2008
P2,120
P4,306
P799
P986
2007
P763
P1,124
P1,136
P1,519
F-95
Appendix A
Page 39 of 50
a. Purchases consist of purchase of materials, bottles, shells, cartons and services rendered
from related parties.
b. Amounts owed by related parties consist of trade receivables, share in expenses, tolling
services and rental. Amounts owed by related parties included under “Other noncurrent
assets” account amounted to P39 as of December 31, 2008 and 2007.
c. Amounts owed to related parties consist of trade payables, professional fees, insurance,
rental, royalties and management fees. Amounts owed to related parties included under
“Noncurrent liabilities” account amounted to P37 and P9 as of December 31, 2008 and
2007, respectively.
d. The compensation of key management personnel of the Company, by benefit type,
follows:
2008
P81
6
P87
Short-term employee benefits
Retirement costs
2007
P15
4
P19
20. Leasing Agreements
Finance Leases
Leases as Lessor
The Company leases some of its machinery and equipment under finance lease agreements to
a third party logistics provider. The Company provides the lessee the option to purchase the
equipment at a beneficial price.
The current and noncurrent portion of finance lease receivable included under “Trade and
other receivables” and “Other noncurrent assets” accounts, respectively in the balance sheets
are as follows:
December 31, 2008
Minimum
lease
receivable
Interest
Principal
P6
P1
P5
Within one year
After one year but not more than five
years
5
P11
P1
5
P10
December 31, 2007
Within one year
After one year but not more than five
years
F-96
Minimum
lease
receivable
P6
Interest
P1
Principal
P5
11
P17
1
P2
10
P15
Appendix A
Page 40 of 50
Operating Leases
Leases as Lessee
The Company leases the land where its breweries and some of its sales offices and a number
of offices and warehouses are situated under operating leases arrangements. The leases
typically run for a period of one to five years. The escalation clause for the lease of the land is
reviewed every five years. Some lease agreements provide an option to renew the lease at the
end of the lease term and are subject to review to reflect current market rentals.
Lease payments for the lease of the land are as follows:
Within one year
After one year but not more than five years
2008
P174
570
P744
2007
P158
744
P902
As of December 31, 2008 and 2007, the Company has no non-cancellable operating leases.
21. Retirement Plan
The Company has a funded, noncontributory retirement plan covering all of its permanent
employees. Contributions and costs are determined in accordance with the actuarial studies
made for the plan. Annual cost is determined using the projected unit credit method. The
Company’s latest actuarial valuation date is December 31, 2008. Valuations are obtained on a
periodic basis.
Retirement costs charged by the Company to operations amounted to P157 and P42 in 2008
and 2007, respectively. The Company’s annual contribution to the retirement plan consists of
payments covering the current service cost and amortization of past service liability.
The components of retirement cost recognized in the statements of income and the amounts
recognized in the balance sheets are as follows:
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P P295
42
179
24
(341)
P42
P157
Interest cost
Current service cost
Net actuarial loss to be recognized
Expected return on plan assets
Net retirement cost
Actual return on plan assets
P243
F-97
P0.531
Appendix A
Page 41 of 50
The retirement cost is recognized in the following line items in the statements of income:
For the Year For the Period
Ended from July 26 to
December 31,
December 31,
2007
2008
P12
P53
30
104
P42
P157
Cost of sales
Administrative and selling expenses
The reconciliation of the assets and liabilities recognized in the balance sheets included under
the “Other noncurrent assets” account is as follows:
Present value of defined benefit obligation
Fair value of plan assets
Unrecognized actuarial losses
Net retirement asset
2008
P4,000
3,662
338
(379)
(P41)
2007
P4,175
3,407
768
(768)
P -
The movements in the present value of the defined benefit obligation are as follows:
2008
P4,175
295
179
47
(463)
(204)
(29)
P4,000
Beginning balance
Interest cost
Current service cost
Transfer from other plan
Actuarial losses (gains)
Benefits paid
Transfer to other plan
Ending balance
2007
P 42
3,448
769
(84)
P4,175
The movements in the fair value of the plan assets are as follows:
2008
P3,407
341
198
47
(204)
(98)
(29)
P3,662
Beginning balance
Expected return on plan assets
Contributions by employer
Transfer from other plan
Benefits paid
Actuarial gains (losses)
Transfer to other plan
Ending balance
F-98
2007
P 42
3,448
(84)
1
P3,407
Appendix A
Page 42 of 50
Plan assets consist of the following:
In Percentages
2007
2008
100
79
21
Fixed income portfolio
Stock trading portfolio
The overall expected rate of return is determined based on historical performance of
investments.
The principal actuarial assumptions used to determine retirement benefits are as follows:
In Percentages
2007
2008
7.1
8.1
6.0
6.0
10.0
9.0
Discount rate
Salary increase rate
Expected return on plan assets
The historical information of the amounts for the current and previous period is as follows:
Present value of the defined benefit obligation
Fair value of plan assets
Deficit in the plan
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2008
P4,000
3,662
(338)
463
(98)
2007
P4,175
3,407
(768)
769
1
The Company expects to pay P220 in contributions to defined benefit plan in 2009.
22. Basic Earnings Per Share
Basic EPS is computed as follows:
Net income (a)
Weighted average number of shares
outstanding (in millions) - basic (b)
Basic EPS (a/b)
2008
P10,042
2007
P2,310
15,372
P0.65
15,333
P0.15
As of December 31, 2008, the Company has no dilutive debt or equity instruments.
F-99
Appendix A
Page 43 of 50
23. Employee Stock Purchase Plan
SMC offers shares of stocks to employees of SMC and its subsidiaries under the Employee’s
Stock Purchase Plan (ESPP). Under the ESPP, all permanent Philippine-based employees of
SMC and its subsidiaries who have been employed for a continuous period of one year prior
to the subscription period will be allowed to subscribe at a price equal to the weightedaverage of the daily closing prices for three months prior to the offer period less 15%
discount. A participating employee may acquire at least 100 shares of stock through payroll
deductions.
The ESPP requires the subscribed shares and stock dividends accruing thereto to be pledged
to SMC until the subscription is fully-paid. The right to subscribe under the ESPP cannot be
assigned or transferred. A participant may sell his shares after the second year from exercise
date.
The ESPP also allows subsequent withdrawal and cancellation of participants’ subscriptions
under certain terms and conditions.
Expenses for share-based payments charged to operations under “Management fees” account
amounted to P0.429 in 2008.
24. Financial Risk Management Objectives and Policies
Objectives and Policies
The Company’s principal financial instruments other than derivatives include cash and cash
equivalents, receivables and trade payables, which arise directly from its operations. The main
purpose of these financial instruments is to raise financing for the Company’s operations.
The Company also enters into derivative transactions such as commodity options. The
Company uses derivatives to manage its exposures to commodity price risks arising from the
Company’s operations.
The main risks arising from the use of financial instruments are credit risk, liquidity risk and
market risk - foreign currency risk and commodity price risk. The BOD has the overall
responsibility for the establishment and oversight of the Company’s risk management
framework. The Company’s risk management policies are established to identify and analyze
the risks faced by the Company, to set appropriate risk limits and controls, and to monitor
risks and adherence to limits. Risk management policies and systems are reviewed regularly
to reflect changes in market conditions and the Company’s activities.
The Company’s accounting policies in relation to derivatives are set out in Note 3.
Foreign Currency Risk
The Company’s exposure to foreign currency risk results from its business transactions and
purchase of materials denominated in foreign currency. The Company uses a combination of
natural hedges and derivative hedges to manage its foreign currency exposure. It uses
currency derivatives to reduce earnings volatility related to foreign exchange movements.
F-100
Appendix A
Page 44 of 50
Information on the Company’s foreign currency-denominated monetary assets and liabilities
and their Philippine peso equivalents are as follows:
December 31, 2008
U.S.
Peso
Dollar* Equivalent
Assets
Cash and cash equivalents
Trade and other receivables
Liabilities
Accounts payable and accrued expenses
Net foreign currency - denominated monetary
assets
December 31, 2007
Peso
Equivalent
U.S. Dollar
$5
4
P243
181
$ 3
P 127
2
77
1
29
$7
P347
$2
P98
*U.S. Dollar equivalent of foreign currency-denominated balances as of balance sheet date
With the translation of these foreign currency-denominated assets and liabilities, the
Company reported net foreign exchange gain (loss) amounting to P62 and (P12) in 2008 and
2007, respectively. These resulted from the movements of the Philippine peso against the US
dollar as shown in the following table:
Peso to US Dollar
41.28
47.52
December 31, 2007
December 31, 2008
The following table demonstrates the sensitivity to a reasonably possible change in the US
dollar exchange rate, with all other variables held constant, of the Company’s profit before
tax (due to changes in the fair value of monetary assets and liabilities) and the Company’s
equity as of December 31, 2008 and 2007 are as follows:
2008
Cash and cash equivalents
Trade and other
receivables
Derivative assets
Accounts payable and
accrued expenses
Derivative liabilities
P1 decrease in the US dollar
exchange rate
Effect on
Income before
Effect on
Income Tax
Equity
(P5)
P -
P1 increase in the US
dollar exchange rate
Effect on
Income before
Effect on
Income Tax
Equity
P5
P -
(4)
12
3
-
4
(11)
(2)
-
2
11
13
(1)
(1)
(2)
(13)
(15)
-
P1
P13
(P10)
F-101
1
1
(P1)
Appendix A
Page 45 of 50
2007
Cash and cash equivalents
Trade and other
receivables
Derivative assets
Accounts payable and
accrued expenses
Derivative liabilities
P1 decrease in the US dollar
exchange rate
Effect on
Income before
Effect on
Income Tax
Equity
P P -
P1 increase in the US dollar
exchange rate
Effect on
Income before
Effect on
Income Tax
Equity
P P -
(3)
(27)
(30)
-
3
(48)
(45)
-
1
(9)
(8)
-
(1)
9
8
-
(P22)
P -
(P53)
P -
Commodity Price Risk
The Company enters into various commodity derivatives to manage its price risks on strategic
commodities. Commodity hedging allows stability in prices, thus offsetting the risk of
volatile market fluctuations. Through hedging, prices of commodities are fixed at levels
acceptable to the Company, thus protecting raw material cost and preserving margins. For
hedging transactions, if prices go down, hedge positions may show marked-to-market losses;
however, any loss in the marked-to-market positions is offset by the resulting lower physical
raw material cost.
SMC enters into commodity derivative transactions in behalf of the Company to reduce cost
by optimizing purchasing synergies within the SMC Group of Companies and managing
inventory levels of common materials.
Commodity Options. Commodity options are used to manage the Company’s exposures to
volatility in prices of certain commodities such as fuel oil.
Liquidity Risk
Liquidity risk arises from the possibility that the Company may encounter difficulties in
raising funds to meet commitments from financial instruments or that a market for derivatives
may not exist in some circumstances.
The Company’s objectives to manage its liquidity profile are: a) to ensure that adequate
funding is available at all times; b) to meet commitments as they arise without incurring
unnecessary costs; c) to access funding when needed at the least possible cost; and d) to
maintain an adequate time spread of refinancing maturities.
F-102
Appendix A
Page 46 of 50
The table below summarizes the maturity profile of the Company’s financial liabilities as of
December 31, 2008 and 2007 based on contractual undiscounted payments:
2008
Non-derivative
financial liabilities
Accounts payable and
accrued expenses
1year > 1 year - >2 years
or less
2 years - 5 years
Carrying
Amount
Contractual
cash flow
P2,727
P2,727
P2,679
P48
Carrying
Amount
Contractual
cash flow
1year
or less
> 1 year 2 years
P3,161
P3,161
P3,161
Over
5 years
P -
P -
2007
Non-derivative
financial liabilities
Accounts payable and
accrued expenses
P -
>2 years
- 5 years
Over
5 years
P -
P -
Credit Risk
Credit risk or the risk of counterparties defaulting is controlled by the application of credit
approvals, limits and monitoring procedures. It is the Company’s policy to enter into
transactions with a diversity of creditworthy parties to mitigate any significant concentration
of credit risk. The Company ensures that sales of products are made to customers with
appropriate credit history and has internal mechanism to monitor the granting of credit and
management of credit exposures. The Company has made provisions, where necessary, for
potential losses on credits extended. Where appropriate, the Company obtains collateral or
arranges master netting agreements.
With respect to credit risk arising from the other financial assets of the Company, which
comprise of cash and cash equivalents and certain derivative instruments, 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, net of the value of collaterals, if any.
Financial information on the Company’s maximum exposure to credit risk as of
December 31, 2008 and 2007, without considering the effects of collaterals and other risk
mitigation techniques is presented below.
Note
5
6
8
10
Cash and cash equivalents
Trade and other receivables - net
Derivative assets
Noncurrent receivables
2008
P6,041
3,661
28
50
P9,780
2007
P5,262
3,676
66
50
P9,054
The Company has no significant concentration of credit risk with any counterparty.
Capital Management
The primary objective of the Company’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 Company manages its capital structure and makes adjustments to it, in the light of
changes in economic conditions. To maintain or adjust the capital structure, the Company
may adjust the dividend payment to shareholders, return capital to shareholders or issue new
shares.
F-103
Appendix A
Page 47 of 50
The Company defines capital as paid-in capital stock, additional paid-in capital, retained
earnings, both appropriated and unappropriated. Other components of equity such as treasury
stock and translation are excluded from capital for purposes of capital management.
The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles for
capital ratios are set in the light of changes in the Company’s external environment and the
risks underlying the Company’s business, operation and industry.
The Company monitors capital on the basis of debt-to-equity ratio, which is calculated as total
debt divided by total equity. Total debt is equivalent to current and noncurrent liabilities.
Total equity comprises of equity including capital stock, additional paid-in capital, cumulative
translation adjustments and retained earnings.
There were no changes in the Company’s approach to capital management during the year.
The Company is not subject to externally imposed capital requirements.
25. Financial Assets and Liabilities
The table below presents a comparison by category of carrying amounts and fair values of all
of the Company’s financial instruments as of December 31, 2008 and 2007:
2008
Carrying
Amount Fair Value
Financial Assets
Cash and cash equivalents
Trade and other receivables - net
Derivative assets (included under “Prepaid
expenses and other current assets” account in
the balance sheets)
Noncurrent receivables and deposits - net
(included under “Other noncurrent assets”
account in the balance sheets)
Financial Liabilities
Accounts payable and accrued expenses
Derivative liabilities (included under
“Accounts payable and accrued expenses”
account in the balance sheets)
2007
Carrying
Amount
Fair Value
P6,041
3,661
P6,041
3,661
P5,262
3,676
P5,262
3,676
28
28
66
66
50
50
50
50
2,727
2,727
3,161
3,161
273
273
82
82
The following methods and assumptions are used to estimate the fair value of each class of
financial instruments:
Cash and Cash Equivalents, Trade and Other Receivables and Noncurrent Receivables and
Deposits. The carrying amount of cash and cash equivalents and receivables approximates fair
value primarily due to the relatively short-term maturity of these financial instruments. In the
case of long-term receivables, the fair value is based on the present value of expected future
cash flows using the applicable discount rates.
Derivatives. The fair values of forward exchange contracts are calculated by reference to
current forward exchange rates.
The fair values of commodity derivatives are determined based on prices obtained from the
market and counterparties. Fair values are also based on standard valuation models.
F-104
Appendix A
Page 48 of 50
Accounts Payable and Accrued Expenses. The carrying amount of accounts payable and
accrued expenses approximates fair value due to the relatively short-term maturity of these
financial instruments.
Derivative Financial Instruments
The Company’s derivative financial instruments according to the type of financial risk being
managed and the details of freestanding and embedded derivative financial instruments that
are categorized into those accounted for as hedges and those that are not designated as hedges
are discussed as follows:
The Company enters into various commodity options to manage its exposure on commodity
price risk covering the Company’s requirement on fuel oil.
Derivative Instruments Accounted for as Hedges
Cash Flow Hedges
Commodity Options
As of December 31, 2008, the Company has outstanding option agreements covering its fuel
oil requirements with notional quantities of 3,391. The call and put option can be exercised at
various dates in 2009 with specific quantities on each calculation date. The net unrealized fair
value change (after tax) deferred under “Cumulative translation adjustments” account on
these call options as of December 31, 2008 amounted to P45.
As of December 31, 2007, the Company has no outstanding options designated as hedge on
the purchase of commodity.
Derivative Instruments Not Designated as Hedges
The Company enters into certain derivatives as economic hedges of certain underlying
exposures. These include freestanding and embedded derivatives found in host contracts,
which are not designated as accounting hedges. Changes in fair value of these instruments are
accounted for directly in the 2008 and 2007 statements of income. Details are as follows:
Freestanding Derivatives
Freestanding derivatives consist of commodity options entered into by the Company.
Commodity Options
As of December 31, 2008, the Company has outstanding bought and sold options covering its
fuel oil requirements with notional quantities of 10,174. These options can be exercised at
various calculation dates in 2009 with specific quantities on each calculation date. The net
negative fair value of these options as of December 31, 2008 amounted to P212.
As of December 31, 2007, the Company has no outstanding options on the purchase of
commodity.
Embedded Derivatives
The Company’s embedded derivatives include currency derivatives (forwards) embedded in
nonfinancial contracts.
F-105
Appendix A
Page 49 of 50
Embedded Currency Forwards
As of December 31, 2008 and 2007, the total outstanding notional amount of currency
forwards embedded in nonfinancial contracts amounted to US$31 and US$14, respectively.
These nonfinancial contracts consist mainly of foreign-currency denominated purchase
orders, sales agreements and capital expenditures. As of December 31, 2008 and 2007, the net
negative fair value of these embedded currency forwards amounted to P33 and P16,
respectively.
Fair Value Changes on Derivatives
The net movements in fair value changes of all derivative instruments are as follows:
2008
Beginning balance
Net changes in fair value of derivatives:
Designated as accounting hedges
Not designated as accounting hedges
Less fair value of settled instruments
Ending balance
2007
(P16)
(P2)
(62)
(470)
(548)
(303)
(P245)
(13)
(15)
1
(P16)
Hedge Effectiveness Results
The effective fair value changes, net of tax, on the Company’s cash flow hedges that were
deferred in equity as of December 31, 2008 amounted to P45. As of December 31, 2007, the
Company has no outstanding derivatives designated as hedge.
26. Cash Dividends
Cash dividends declared and paid for the period ended December 31, 2008 amounted to P0.60
per share.
On January 27, 2009, the Company declared cash dividends of P0.19 per share payable to
stockholders of record as of February 13, 2009 to be paid on February 23, 2009.
27. Subsequent Events
On January 27, 2009, the Company’s BOD approved the purchase of all the interests of SMC
in Iconic Beverages, Inc. (IBI), a wholly-owned subsidiary of SMC, after completion of the
transfer by SMC to IBI of certain Philippine beer and malt-based beverages brands, including
related trademarks, copyrights, patents and other intellectual property rights and know-how of
SMC (“IP Rights”) pursuant to a Deed of Assignment of Domestic Intellectual Property
Rights dated December 16, 2008 as supplemented by a Supplement to the Deed of
Assignment of Domestic Intellectual Property Rights dated January 23, 2009 executed
between IBI and SMC, in exchange for common shares in IBI. The purchase price is P32,000,
and the proposed acquisition will be financed by the Company through borrowings. The
transfer by SMC of the IP Rights to IBI in exchange for IBI common shares is pending
approval of the SEC. The sale of SMC’s interest in IBI to the Company will be implemented
after obtaining all required approvals from the appropriate regulatory agencies.
F-106
Appendix A
Page 50 of 50
On the same date, the Company’s BOD also approved the purchase of all the interests of
SMC in Brewery Properties Inc. (BPI) after (i) SMC has transferred certain land used in the
domestic beer operations of the Company to BPI in exchange for BPI common shares, and (ii)
San Miguel Brewery Inc. Retirement Plan has transferred its shares in Brewery Landholdings,
Inc. (BLI) to BPI in exchange for BPI preferred shares. The purchase price will be the
appraised value of the land transferred by SMC to BPI amounting to P6,829. The proposed
acquisition will be financed by the Company through borrowings. The sale of SMC’s interests
in BPI to the Company will be implemented after obtaining all the required approvals from
the appropriate regulatory agencies.
28. Other Matters
a. Commitments
The outstanding purchase commitments of the Company as of December 31, 2008 and
2007 amounted to P522 and P3,491, respectively.
Amount authorized but not yet disbursed for capital projects as of December 31, 2008 and
2007 is approximately P238 and P801, respectively.
b. Foreign Exchange Rate
The foreign exchange rate of P47.52 and P41.28 was used in translating the U.S. dollar
monetary assets and liabilities to Philippine peso as of December 31, 2008 and 2007,
respectively.
F-107