Document 254475

COVER SHEET
1 6 3 6 7 1
SEC Registration Number
P R I M E
O R I O N
P H I L I P P I N E S ,
I N C .
(Company’s Full Name)
2 0 / F
L K G
M A K A T I
T OW E R
6 8 0 1
A Y A L A
A V E N U E
C I T Y
(Business Address: No. Street City/Town/Province)
ATTY. DAISY L. PARKER
884-1106
(Contact Person)
(Company Telephone Number)
0 6
3 0
Month
Day
1 7 - A
(Form Type)
Month
(Fiscal Year)
Day
(Annual Meeting)
(Secondary License Type, If Applicable)
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
Foreign
To be accomplished by SEC Personnel concerned
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LCU
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Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-A, AS AMENDED
ANNUAL REPORT PURSUANT TO SECTION 17
OF THE SECURITIES REGULATION CODE AND SECTION 141
OF CORPORATION CODE OF THE PHILIPPINES
1. For the fiscal year ended
:
30 June 2007
2. SEC Identification Number :
163671
4. Exact name of registrant
PRIME ORION PHILIPPINES, INC.
:
5. Mandaluyong, Philippines
Province, Country or other jurisdiction of
incorporation or organization
3. BIR Tax Identification No.: 320-000-804-342
6.
(SEC Use Only)
Industry Classification Code:
7. 20/F LKG Tower, 6801 Ayala Avenue, Makati City
Address of principal office
8.
(632) 884-1106
Registrant's telephone number, including area code
9. N/A
Former name, former address, and former fiscal year, if changed since last report.
10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA
(As of 30 September 2007)
Title of Each Class
Number of Shares of Common Stock
Outstanding and Amount of Debt Outstanding
Common
Consolidated Loans Payable
2,366,444,383 shares
P1,747,779,911
11. Are any or all of these securities listed on a Stock Exchange.
Yes [ X ]
No [ ]
If yes, state the name of such stock exchange and the classes of securities listed therein:
Philippine Stock Exchange
Common Shares
12. Check whether the registrant:
(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17.1
thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder and Sections 26
and 141 of The Corporation Code of the Philippines during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports);
Yes [X]
No [ ]
(b) has been subject to such filing requirements for the past 90 days.
Yes [X]
No [ ]
13. Aggregate market value of the voting stock held by non-affiliates:
(as of 30 September 2007)
P819,111,172.95
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 2
PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Business
A.
Business Development
Prime Orion Philippines, Inc. (POPI/Company/Issuer), originally named Philippine Orion
Properties, Inc., was incorporated in 1989 as an investment holding company. The merger of the
Company with First Lepanto Corporation (FLC) paved the way for the entry of the Guoco Group*
of Hong Kong [through its affiliate, Guoco Assets (Philippines), Inc. (GAPI)] as principal
shareholder of the Company. Consequently, in 1994, the Company was renamed as Guoco
Holdings (Philippines), Inc. (GHPI). To enable then GHPI to better position itself in the
Philippines and capitalize on the local conditions existing at that time, GAPI and GHPI mutually
agreed to terminate their Management Contract effective 2 October 2001. Accordingly, GHPI
changed its name to Prime Orion Philippines, Inc. on 4 January 2002.
*(Guoco Group is a regional conglomerate with operations in Singapore, Malaysia, Indonesia and Hong Kong
and the United Kingdom, engaged in the businesses of real estate, manufacturing and financial services).
At present, POPI, as an investment holding company, has interests in real estate and property
development, manufacturing and retailing/distribution, financial services, other allied services
organized under the following intermediate holding companies:
(i)
(ii)
(iii)
(iv)
(v)
B.
(i)
Cyber Bay Corporation (formerly FLC), organized in 1989, with authority to carry on
the general business of dealing in real estate (including all improvements found
thereon);
Orion Land Inc., organized in 1996, with authority to purchase, own, hold, lease and
dispose of real properties;
Orion I Holdings Philippines, Inc., organized in 1993, with authority to engage in the
manufacture, importing, selling and dealing in wholesale of various products,
electronic equipment and materials/supplies used for the manufacture of said
products;
DHG Capital Holdings, Inc., organized in 1993, with authority to engage in investment
holding activities in properties of all kinds; and
OE Holdings, Inc., organized in 1993, with authority to engage in investment holding
activities.
Business of Issuer
Principal Products and Services
The principal products and services of POPI’s holding and operating companies as of 30
September 2007 are as follows:
Cyber Bay Corporation (CBC)
CBC, a 22.87%-owned affiliate of POPI, holds 100% interest in Central Bay Reclamation
and Development Corporation (CBRDC), the company tasked to reclaim and develop
some 750 hectares along the Manila Bay area earmarked for development into a worldclass integrated township to be called Cyber Bay City.
With the Supreme Court’s declaration with finality of the nullity of the Amended Joint
Venture Agreement (AJVA) between CBRDC and the Philippine Reclamation Authority
(PRA) (formerly Public Estates Authority) covering the said project, all project
development activities at the site have been suspended. CBRDC is working on its claim
for reimbursement of all its expenses for the project from the PRA.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 3
Orion Land Inc. (OLI)
•
Tutuban Properties, Inc. (TPI), a wholly-owned subsidiary, organized in 1990, holds the
lease and development rights over a 22-hectare market district in downtown Divisoria, the
country’s oldest and biggest trading district. On the property sits the Tutuban Center, an
integrated wholesale and retail complex recognized as the premier shopper’s bargain
district in the Philippines.
•
TPI Holdings Corporation (THC), organized in 2005 as a wholly-owned subsidiary of TPI,
holds the titles to certain parcels of lands in Calamba, Laguna.
•
Orion Property Development, Inc. (OPDI), another wholly-owned subsidiary, organized in
1993, handles property acquisition and horizontal development. Its landholdings include
a 33-hectare property in Sto. Tomas, Batangas (of which 18 hectares have been sold and
pending completion/transfer to a third party buyer) and 44-hectare raw land in Kay-Anlog,
Laguna.
Orion I Holdings Philippines, Inc. (OIHPI)
•
Lepanto Ceramics, Inc. (LCI), a wholly-owned subsidiary, is engaged in the manufacture
of ceramic floor and wall tiles under the brand name Lepanto. LCI is undergoing financial
restructuring.
DHG Capital Holdings, Inc. (DCHI)
•
Orion Solutions, Inc., a 96%-owned subsidiary, is engaged in the business of providing
business software solutions and management/information technology consultancy
services to individuals and corporations. (It was originally organized in 1994 as an
investment holding company; however, in 2002, the company amended its purpose to
providing management, technical and financial consultancy services.)
•
HLG Philippines, Inc. (HPI), a 100%-owned subsidiary, is engaged in investment holding.
It was incorporated in 1994.
•
BIB Aurora Insurance Brokers, Inc. (BAIBI), organized in 1960, a 20%-owned affiliate, is
in the business of insurance brokering. However, BAIBI suspended its operations in
2002 due to poor market conditions.
FLT Prime Insurance Corporation (FPIC)
FPIC, a 70%-owned subsidiary of POPI, was incorporated in 1977, and operates as a
non-life insurance company.
OE Holdings, Inc. (OEHI)
•
Orion Maxis Inc. (OMI), a wholly-owned subsidiary of OEHI, was incorporated in 2000 to
operate an on-line shopping website that offers a wide variety of gift and other items for
all occasions. In September 2004, OMI amended its primary purpose to engage in the
business of establishing, developing and providing management and logistical
infrastructure service and market incentive systems solutions, and other allied
businesses and services such as land title management and tile distribution.
Based on the Company’s Consolidated Statement of Income (Loss) for the past year, the
contribution of the above subsidiaries (on a per type of business basis) to the Company’s
consolidated net income is as follows:
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 4
Parent Co. (holding co.)
Real estate & property development
Financial Services
Manufacturing
Total Loss
(ii)
-
72.17%
-0.05%
0.30%
27.58%
-----------100.00%
Percentage of Sales Contributed by Foreign Sales
The target market for products of the Company and its subsidiaries is the domestic market. For
the period of 1999-2005, LCI ventured into exportation of its ceramic tile products to North
America, Australia, West Pacific, Middle East and some Asian countries but said operation was
small scale. With the many serious challenges in production and marketing at the local/domestic
front, LCI has shelved its export business. Hence, for 2007, LCI did not have any export sales.
Revenues from LCI’s exports for the past 3 years are as follows:
Total Export Sales
Percentage of Export
Sales to Total Sales
(iii)
Year 2005
P246,924.08
0.01%
Year 2006
None
None
Year 2007
None
None
Distribution Methods
Selling of real estate by OPDI is made either through: (i) direct selling to individual or corporate
buyers, or (ii) brokers. The tile products of LCI are distributed and sold through its authorized
distributors/dealers, consignees like Do-It-Yourself (DIY) stores and retail outlets.
Insurance products are sold through direct selling by agents and partners of FPIC.
(iv)
New Products or Services
There were no new products or services offered by POPI or its subsidiaries.
(v)
Competition
The Company competes with other investment holding companies in the Philippines in terms of
investment prospects. However, with the economic slowdown, the Company does not intend to
make any new investments.
The Company’s core businesses continue to compete in their respective industries. However,
competition is kept basically on a domestic level. The Company’s core businesses are as
follows:
1.
LCI - LCI competes in the ceramic tile manufacturing and distribution market. It faces
competition with the local brands as well as imported tiles. This year, LCI posted a
decrease in sales volume due to lower production attributable to the increase in operating
cost such as fuel and electricity and the influx of low-priced imported tiles. To remain
competitive, LCI needs to increase its production capacity and introduce new product
lines/designs and product innovation. To enhance its market presence, OMI has taken
over the sale and marketing functions of LCI to enable the latter to focus its efforts on tile
manufacturing. Also, LCI operates a retail showroom at Tutuban Prime Block Building.
2.
TPI - TPI operates the Tutuban Center in Manila, touted as the premier bargain center in
the country. Its competitors include other mall operators/lessors within Metro Manila. TPI
registered higher occupancy rate last fiscal year. TPI’s Night Market and Food Street
operations continue to draw customer traffic. To maintain its competitive edge, TPI has
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 5
launched an aggressive tri-media advertising and promotional campaign to enhance
customer awareness about Tutuban Center. In addition, TPI’s facilities are being
upgraded as part of its program to promote customer and tenant satisfaction.
4.
FPIC – FPIC competes with other non-life insurance companies. To further enhance its
market share and expand its customer base, FPIC opened branches in Cubao (Metro
Manila) and key cities in the provinces of Baguio, Davao, Iloilo and Legaspi. FPIC
continues to develop diverse and customized products which cater to the unique needs of
its target market, the retail market.
5.
OMI - OMI competes with other providers of services such as management of the
rewards program of other companies, operation of a commercial website and land title
management. As for tile distribution, OMI competes with distributors of other tile
manufacturers and importers.
(vi)
Purchases of Raw Materials and Supplies
The Company’s raw materials and supplies are purchased on a competitive basis from many
different sources and are readily available.
(vii)
Customers
POPI has a broad market base for its numerous product lines and is not dependent on a single
customer or a few customers.
For its real estate and property development operations, POPI’s potential customers include
middle to high-income home buyers; and real estate investors and developers.
For its manufacturing operations, the Company’s ceramic tile products cater to the construction
industry (including the renovation market) and its variety of products appeal to medium-end and
low-end consumers.
For its financial services, FPIC has non-life insurance products which cater to a variety of
customers - individual and/or corporate.
(viii)
Transactions with and/or Dependence on Related Parties
The Company has limited transactions and/or dependence on its shareholders and/or related
parties in view of existing laws on disclosure and/or requirement for prior approval of appropriate
government agencies.
(ix)
Franchise
The Company’s products are not covered by any franchise.
(x)
Government Approvals for Principal Services
The following subsidiary/affiliates of the Company have been granted the necessary government
approvals for their operations:
On 29 August 1980, BAIBI, a 20%-owned affiliate, was granted a license by the Insurance
Commission (IC) to operate as an insurance broker. BAIBI’s broking license has not been
renewed as it has not resumed operations.
On 9 March 1977, FPIC, a 70%-owned subsidiary, was also granted a license by the IC to
operate as a non-life insurance company, which license is renewed annually.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 6
Effect of Existing or Probable Governmental Regulations
(xi)
There are no existing or probable governmental regulations expected to materially affect the
operations or business of POPI and its subsidiaries, except (i) in the case of LCI, LCI together
with other local manufacturers and the Ceramic Tile Manufacturers Association filed safeguard
measures against the importation of ceramic floor and wall tiles with the Department of Trade and
Industry (“DTI”). On 11 April 2002, DTI issued a decision imposing a definitive general safeguard
duty on imports of ceramic floor and wall tiles. The safeguard measure, which was extended in
2004, will expire on 8 January 2008. Also, the soon-to-be implemented Bureau of Philippine
Standards product certification is expected to deter the flooding of the market with cheap
substandard tile products; and (ii) in the case of FPIC, the Department of Finance has proposed
to increase the paid-up capital requirement of non-life insurance companies (with 40% foreign
equity) as follows: from P50 million to P100 million by end of 2006, to P150 million by end of
2007, and to P200 million by 2008. The Philippine Insurers and Reinsurers Association has
requested the IC to defer the implementation of said order.
Research and Development Activities
(xii)
Except for the development of new tile designs by LCI, there are no other research and
development activities undertaken by the Company or its other subsidiaries. Budget for research
is minimal.
(xiii)
Costs and Effects of Compliance with Environmental Laws
Operations of its manufacturing company may be affected in the coming years with the passage
of the Clean Air Act and other environmental laws. Compliance with such environmental laws
may entail additional investments and/or upgrades in facilities.
(xiv)
Employees
As of 30 June 2007, the employees of POPI are as follows:
Executives
Managers
Supervisors*
Rank & File
Total
- 4
- 4
- 3
- 11
------22
*performs various clerical and administrative functions
At present, POPI has seconded all of its employees to its subsidiaries. Depending on its
requirements and that of its subsidiaries, POPI may hire additional employees for the ensuing
fiscal year.
The Company has no workers’ unions and is not bound under any Collective Bargaining
Agreement (CBA); neither are any of its employees involved in any strike or threatening to stage
a strike against the Registrant.
However, the Company’s subsidiaries, namely FPIC and LCI, have workers’ unions which have
existing CBAs. There is no threat of or impending strikes by the unions in said subsidiaries.
Item 2. Properties
The operations of the Company and most of its subsidiaries are conducted at the 20/F LKG
Tower, 6801 Ayala Avenue, Makati City. The Company and its subsidiaries lease said office at
the rate of P680.00 per sqm. (subject to annual escalation) which lease term will end on 14 April
2010, renewable under such terms acceptable to the parties.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 7
Ceramic tile manufacturing operations are conducted in a plant in LCI’s 14.28-hectare property in
Calamba, Laguna, which is presently mortgaged and placed in trust under a Mortgage Trust
Indenture (MTI) with several creditor-banks of LCI.
Other properties of the Company and its subsidiaries include: (i) a 232.98 sqm. condominium unit
at Eurovilla III at Valero St., Makati City, which is presently used as the residence of one of
the Company’s officers; (ii) Tutuban Center (comprised of Prime Block Mall, Cluster Buildings,
Center Mall I and II, Robinsons’ Supermarket and Department Store building and Parking Tower)
with a total area of about 165,000 square meters. The Tutuban Center sits on about 8.5 hectares
of the real property owned by the Philippine National Railways (PNR) and presently leased by
TPI. The said lease will expire in August 2014, subject to renewal by PNR, under certain terms
and conditions; The leasehold rights are subject of a Collateral Trust Indenture between TPI and
several creditor-banks; (iii) a 4.8 hectare lot in Mandaue City, currently mortgaged to United
Coconut Planters Bank (UCPB) (to secure the loan obligation of the Company). In June 2005,
UCPB sold the Company’s loan to a Special Purpose Vehicle (SPV), Asset Pool A (SPV-AMC),
Inc. (APA) [Refer to Item 3, Legal Proceedings (1)(g)]; and (iv) a 49.85 sqm. condominium unit at
Makati Prime Tower (subject to notice of lis pendens registered by Prime Tower Property Group,
Inc. in connection with its case against Titan-Ikeda Construction and Development Corporation).
OPDI, which handles property acquisition and horizontal development, has the following
properties/projects: (a) a 33-hectare property in Sto. Tomas, Batangas (about 18 hectares of
which have been sold and pending completion/transfer to a third party buyer); (b) 44-hectare raw
land in Kay-Anlog, Laguna (certain parcels of which are subject of mortgage in favor of UCPB,
which have been transferred/assigned by UCPB to APA); and (c) certain residential lots in
Calamba, Laguna, with a total area of about 3,822 sqm. have been mortgaged to a financing
company to secure the loans of the Company.
The Company does not have plans to acquire any real property within the next twelve (12)
months. The Company intends to dispose/sell certain real properties pursuant to its corporate
restructuring program.
Item 3. Legal Proceedings
(1)
Legal Proceedings
a.
C.A. G.R. CV No. 84170
“Far East Bank & Trust Co. (now merged with BPI) vs. LCI, et.al.”
[From Civil Case No. 01-165]
---------------------------------------------------------------------------------------------The Bank of the Philippine Islands (BPI) filed a collection case with the Makati RTCBranch 59 on 1 February 2001 against LCI and OIHPI in connection with a loan
granted by BPI (then Far East Bank and Trust Company). BPI is demanding payment
of principal amount of about P62 million plus litigation expenses and attorney’s fees in
the minimum amount of P500,000.
On 30 December 2003, the RTC rendered a decision in favor of BPI, which ordered
defendants to solidarily pay BPI P62,175,522.49 with 12% per annum legal interest
starting 5 February 2001, until the amount is fully paid. LCI/OIHPI filed an MR on 26
February 2004 while BPI filed a Motion for Execution Pending Appeal, which motions
were both denied by the RTC.
On 22 September 2004, LCI/OIHPI filed their Notice of Appeal and the case was elevated
to the CA. LCI/OIHPI filed their Appellants’ Brief with the CA on 27 June 2005.
On 25 April 2007, the CA denied LCI/OIHPI’s appeal and affirmed the decision in favor of
BPI. LCI/OIHPI filed an MR which was denied. LCI/OIHPI filed a motion for extension to
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 8
file their PR. LCI/OIHPI then filed a PR with the SC (1st Division) on 15 June 2007. On
17 July 2007, LCI/OIHPI received a Resolution of the SC dated 13 June 2007 denying
LCI’s Motion for Extension within which to File a PR on Certiorari for submitting an
affidavit of service of the motion which failed to comply with the 2004 Rules on Notarial
Practice regarding competent evidence of affiant’s identity. Whereupon, LCI/OIHPI filed
an MR of said resolution and a Supplement to the MR on 27 July 2007 and 28 August
2007, respectively. LCI/OIHPI also filed a Motion for Inhibition of Honorable SC Justice
Cancio Garcia to participate in the resolution of the PR on 10 August 2007. On 23 July
2007, the SC issued a Resolution denying LCI/OIHPI’s PR. LCI/OIHPI filed their MR on
26 September 2007. Said MR is still pending at the SC.
Pending appeal, BPI, on 26 July 2005, assigned its rights and interests over a portion of
LCI’s loan obligation (to the extent of P29.8 million) to an SPV, APA. Consequently, on
11 August 2005, APA filed a Motion for Substitution of BPI as Plaintiff-Appellee as well
as its Entry of Appearance. On 30 August 2005, LCI filed its Opposition to APA’s Motion
for Substitution and Entry of Appearance.
The CA (former 7th Division), in a Resolution dated 21 June 2006, denied APA’s Motion
for Substitution and expunged its Appellee’s Brief on the ground of non-compliance with
the SPV Act, Republic Act No. 9182. On 14 July 2006, APA filed an MR of the CA
Resolution dated 21 June 2006, to which LCI filed its Opposition dated 7 August 2006.
On 21 December 2006, the CA issued its Resolution denying APA’s MR. On 5 March
2007, APA filed a PR with the SC (2nd Division) questioning the CA Resolutions dated 21
June 2006 and 21 December 2006. LCI/OIHPI filed their Comment to the PR on 1 June
2007. APA then filed its Reply dated 19 June 2007. LCI/OIHPI filed a Motion to Admit
Attached Rejoinder dated 23 July 2007. The PR remains pending at the SC.
b.
Civil Case No. 03-239
“Lindberg vs. LCI”
-----------------------------A collection case was filed by Linberg Philippines, Inc. (Linberg), a power supplier of LCI,
on 28 February 2003 for alleged unpaid power bills. Linberg is asking for the principal
amount of about P53 million as payment for power bills plus 18% interest per annum.
In addition, it is asking for P500,000.00 as attorney’s fees and costs of suit.
LCI filed a counterclaim in the amount of about P92 million as actual damages and
P500,000.00 as attorney’s fees, plus costs of suit. The case was referred to the
Philippine Mediation Center for possible settlement. However, mediation was terminated
for failure of the parties to arrive at a settlement.
On 23 August 2004, Linberg filed with Makati RTC-Branch 148 a Motion to Allow the
Taking of Oral Deposition of one of its witnesses who is based in Singapore, to which LCI
filed its Opposition. The RTC, in an Order dated 15 August 2005, granted Linberg’s
motion. LCI has yet to receive the details on the arrangements for the deposition.
c.
Civil Case No. 68287
“Lavine Loungewear vs. First Lepanto-Taisho Insurance Corp. (now FPIC), et. al.”
------------------------------------------------------------------------------------------------------------------A complaint for sum of money (representing insurance proceeds) with issuance of TRO
and Injunction was filed on 24 January 2001 with the Pasig RTC-Branch 71, against the
Company’s subsidiary, FPIC, by its insured, Lavine Loungewear Mfg. Inc. (Lavine). Prior
to the filing of the suit, there was an intra-corporate dispute between two groups of
stockholders of Lavine, each group claiming to be the owner of Lavine and therefore
entitled to receive the insurance proceeds. Since FPIC could not determine which group
of Lavine stockholders to pay, FPIC only made partial payment on the claim.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 9
On 2 April 2001, the RTC rendered a Decision finding FPIC liable to pay Lavine the
amount of P18,250,000 with 29% interest per annum from October 1998 until full
payment. A Special Order for Execution Pending Appeal was also issued by the Court.
As a result, certain assets of FPIC were garnished/attached. FPIC then filed a Petition
with prayers for TRO and Injunction with the CA-10th Division, which reliefs were granted.
On 29 May 2003, the CA-10th Division, in its Consolidated Decision, ruled as follows: (1)
setting aside the RTC Decision dated 2 April 2001; (2) declaring null and void the Special
Order dated 17 May 2002 and the Writ of Execution dated 20 May 2002; (3) remanding
the case to the lower court for pre-trial conference on the Second Amended Answer-inIntervention; and (4) payment of proceeds to Lavine (if adjudged entitled to said
proceeds) be withheld until a decision on the rightful members of the Board of Directors
of Lavine is issued by the intra-corporate court. The Intervenors (a party to the intracorporate dispute) filed an MR with the CA-10th Division, to which FPIC filed its
Opposition dated 15 July 2003 together with a Motion for Immediate Lifting of
Garnishment.
On 20 April 2004, the CA resolved to lift the order of levy and notices of garnishment on
the real and personal properties and bank deposits of FPIC which were made pursuant to
the Special Order dated 17 May 2002 and Writ of Execution dated 20 May 2003 which
were declared null and void by the CA.
A PR was filed by Intervenors with the SC to set aside the CA Decision of 29 May 2003.
The SC, in its Decision dated 25 August 2005, affirmed the CA Decision dated 29 May
2003. Said SC Decision has become final and executory.
Separately, FPIC filed an appeal with the CA of the RTC Decision dated 1 April 2001. To
date, the case records have not been forwarded to the CA.
d.
Civil Case Nos. 02-586 [Makati RTC- Br. 62]/
02-587 [Makati RTC- Br. 59]/
02-588 [Makati RTC-Br. 61]
“Caltex Philippines, Inc. vs. FPIC, et.al.”
-------------------------------------------------------------Caltex Philippines, Inc. (“Caltex”) filed three civil cases against FPIC for recovery of sum
of money pursuant to the terms and conditions of the surety bonds issued by FPIC to
secure each of the obligations of Peakstar Oil Corporation (“Peakstar”), Fumitechniks
Corp. of the Philippines (“Fumitechniks”) and R.S. Cipriano Enterprises (“Cipriano”)
to Caltex. In all these cases, FPIC cited as its defense that in the absence of written
principal agreements (between Caltex and the three abovenamed obligors), the surety
bonds (issued by FPIC), which are mere accessory contracts, could not have come into
being or are void.
(i)
Peakstar account (Civil Case No. 02-856)- Caltex filed a claim against
FPIC for the recovery of the sum of P26,257,712.58 before Makati RTC-Branch
62.
FPIC filed a Motion to Strike Out Testimony and Evidence of Caltex’s
witnesses on grounds that they were in violation of the Parol Evidence Rule,
irrelevant and immaterial and unenforceable under the Statute of Frauds. The
RTC has granted FPIC’s Motion and the said testimonies and evidence were
stricken off the records. Meanwhile, the hearings for the presentation of FPIC’s
evidence have begun.
Caltex filed an MR of the Order striking out the testimonies of the plaintiffs’
witnesses which was denied by the court. Caltex then filed a petition for
certiorari with the CA. The parties have already filed their Memoranda and the
case is deemed submitted for resolution.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 10
(ii)
Fumitechniks account (Civil Case No. 02-857)- Caltex filed a claim in the amount
of P15,314,265.76 with Makati RTC-Branch 59. As in the Peakstar case, FPIC
has filed a Motion to Strike Out Testimony and Evidence of the Caltex’s
witnesses on grounds that they were in violation of the Parol Evidence Rule,
irrelevant and immaterial and unenforceable under the Statute of Frauds. The
case was submitted for decision upon filing by the parties of its memorandum.
On 5 August 2005, the RTC issued a Decision dismissing Caltex’s complaint as
well as the counterclaims of FPIC. Caltex then filed an appeal with the CA.
FPIC also interposed an appeal with the CA on the dismissal of its counterclaims.
Upon filing of FPIC has filed its Appellant’s Brief and Appellee’s Brief and Reply
(to plaintiff’s appellant’s brief), the case was deemed submitted for resolution.
The CA issued a Decision dated 20 November 2006 reversing the RTC Decision.
FPIC filed an MR on the CA Decision, which was subsequently denied by the
CA.
On 26 June 2007, FPIC filed a PR with the SC.
(iii)
e.
Cipriano account (Civil Case No. 02-858)- A case for recovery of sum of money
in the amount of P10 million was filed by Caltex with Makati RTC-Branch 61.
Again, FPIC filed its Motion to Strike Out Evidence on the grounds that they were
in violation of the Parol Evidence Rule, irrelevant and immaterial and
unenforceable under the Statute of Frauds, which was denied by the court. FPIC
then filed a MR of the Order denying FPIC’s Motion to Strike which has been
submitted for resolution. Meanwhile, FPIC has presented its last witness; crossexamination of the witness has been set in September 2007.
The following tax cases were filed by POPI’s subsidiaries and are pending:
(i)
“OLI vs. CIR” (Court of Tax Appeals (“CTA”) Case No. 7086)- This case was filed
on 20 October 2004 to contest the Bureau of Internal Revenue’s (“BIR”) claim for
P85,054,588.87 deficiency income tax (“DIT”) and P27,133,312.84 deficiency
Value Added Tax (“VAT”) against OLI (for FY ending 30 June 2001).
On 11 May 2005, the parties submitted the Joint Stipulation Facts and Issues
which was approved by the CTA in a Resolution dated 27 May 2005. OLI
presented its witnesses and made its FOE on 27 February 2006. Initial
presentation of BIR’s evidence was on 1 August 2006; the BIR presented its last
witness on 1 February 2007. BIR submitted its FOE on 1 March 2007 to which
OLI filed its Comments/Opposition. The case has been submitted for decision.
(ii)
“OPDI vs. CIR” (CTA Case No. 7000) - OPDI filed a PR with the CTA to contest
the BIR’s denial of its request for cash refund or tax credit certificate (TCC) in the
amount of P31,118,710.00 (for FY ending 30 June 2002) and the consequent
BIR deficiency assessment.
Pre-trial hearing was held on 29 October 2004. The Parties’ Joint Stipulation of
Facts and Issues was approved by the court on 6 January 2005.
OPDI presented its witness in February 2005. The CTA granted OPDI’s Motion
for Commissioning of an Independent Certified Public Accountant (CPA) who will
conduct the verification of the voluminous documents to be presented by OPDI.
The Final Report of the Independent CPA was submitted on 30 August 2005.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 11
On 7 August 2006, the BIR presented its witness who testified that there was a
pending assessment against OPDI. OPDI’s counsel objected to the admission
of said testimony as it had no bearing on the instant claim for refund/issuance of
TCC; moreover, the said assessments were not final. BIR rested its case and
was directed to file its FOE 30 days after. On 27 October 2007, the BIR filed a
Manifestation and Motion for Reconsideration and to Admit FOE. On 5 January
2007, the CTA granted the BIR‘s Motion to Admit FOE and gave OPDI until 31
January 2007 to file its Comments to BIR’s FOE. OPDI has filed its Comments
to BIR’s FOE. Case has been submitted for decision of the CTA.
(iii)
“OPDI vs. CIR” (Case No. 7455) – OPDI filed a petition for cancellation and
withdrawal of alleged DIT in the amount of P256,093,084.10 (for FY ending 30
June 2002) assessed against OPDI.
OPDI and BIR filed their Joint Stipulation of Facts and Issues on 11 October
2006, which was approved by the CTA on 18 October 2006. Commissioner’s
hearing was set for pre-marking of the exhibits on 31 January 2007. OPDI
presented its first witness on 7 March 2007. OPDI to continue presentation of its
witness on 21 November 2007.
(iv)
“TPI vs. CIR” (CTA Case No. 6570)- This is a petition for the cancellation and
withdrawal of the alleged DIT, expanded withholding tax and VAT for FY 1998 in
the amount of P485,522,807.70 claimed against TPI.
TPI’s witnesses testified that PNR has duly recorded and reported to the BIR the
income payments in the form of rentals made by TPI from July 1997-June 1998;
hence TPI could not be held liable for the alleged DIT. TPI filed its FOE on 10
October 2005 which was approved by the Court on 6 January 2006. The hearing
date for presentation of BIR’s evidence was set on 29 March 2006. BIR filed a
motion to reset said hearing to May. As the BIR failed to appear on said date,
OLI moved that BIR be declared to have waived its right to present evidence.
The court granted OLI’s Motion and directed submission by the Parties of their
respective Memoranda. TPI filed its Memorandum on 4 July 2006. BIR did not
file its Memorandum.
BIR filed an MR of the said Order, to which OPDI filed its Opposition. On 8
September 2006, the Court granted BIR’s MR. Presentation of BIR’s evidence
was set on 27 September 2006. BIR failed to appear on said hearing and TPI
moved that BIR be deemed to have waived its right to present evidence which
was granted by the CTA. BIR was ordered to submit its Memorandum on or
before 2 November 2006; however, the BIR was able to file its Memorandum
only on 4 December 2006. The case has been submitted for decision of the
CTA.
(v)
“TPI vs. CIR” (Case No. 7536) – This is a petition for cancellation and withdrawal
of alleged DIT in the amount of P68,706,056.94 (for FY ending 30 June 2002)
assessed against TPI.
TPI filed the petition on 30 October 2006. The BIR filed a Motion for Extension of
Time to file its Answer until 8 December 2006, which motion was granted by the
CTA.
BIR failed to file its Answer on the set deadline so TPI filed a Motion to Declare
BIR in Default. On 23 January 2007, the BIR files a Motion to Admit Answer. A
hearing was held on 2 February 2007 on BIR’s Motion to Admit and TPI’s Motion
to Declare BIR in Default. CTA resolved to admit BIR’s Answer. TPI presented
its first witness on 9 October 2007; next hearing set on 22 November 2007.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 12
f.
Civil Case. No. MAN-5407
“POPI vs. PNB , et.al.”
CA G.R. SP No. 02325 [CA, Cebu City-Special 12th Div.]
“POPI vs. Judge Ulric Canete, PNB, et.al.
Status: Case Dismissed with prejudice
---------------------------------------------------------------------------------A Petition for Extra-judicial Foreclosure (“Foreclosure”) against the Company, OPDI, LCI,
CBC and Mandaue Realty Resources Corp.(“MRRC”) was filed by PNB. Subject of the
extra-judicial foreclosure proceedings was a parcel of land located in Mandaue City,
registered in the name of MRRC (covered by Transfer Certificate of Title No. 38489, with
an area of 36,402 square meters), which was mortgaged to PNB as security for the
Company’s obligations.
The Company and OPDI filed a Complaint for Injunction with Prayer for TRO and/or
Injunction with Mandaue City RTC-Branch 55 against PNB, Sheriff Teofilo Soon, Jr. in his
capacity as ex-officio Sheriff of the Office of the Clerk of Court, RTC of Mandaue City,
and Atty. Marlo O. Cugtas in his official capacity as Registrar of Deeds of Mandaue City.
The action sought to enjoin PNB from proceeding with its extrajudicial foreclosure
through sale by public auction (set on 17 May and 29 May 2006) on the ground that the
Foreclosure was premature in the absence of a prior valid demand for payment from
PNB.
The RTC issued a 72-hour TRO upon showing of grave and irreparable damage and
injury to plaintiffs Company and OPDI if the foreclosure was not enjoined. Subsequently,
the TRO was extended to 20 days.
The hearing on the issuance of the Injunction was held on 1 June 2006 and submitted for
resolution of the court. In an Order dated 1 June 2006, the Court held that after the
expiration of the TRO, the parties agreed to maintain status quo (i.e., no foreclosure) until
the case is finally adjudicated by the court.
On 8 June 2006, the Company filed an Amended Complaint against PNB’s Foreclosure,
on the ground that the same is devoid of merit as it is anchored on promissory notes
which have been cancelled and extinguished by novation; the Company also raised the
issue of the application of payment and interest rates imposed by PNB which were
prejudicial to the Company.
PNB filed its Answer to the Amended Complaint on 7 July 2006. The Company filed its
Reply on 23 August 2006. Pre-trial conference of the case was set on 13 October 2006,
during which the parties were directed to submit their respective Memorandum in
support/opposition to the application for the issuance of the Injunction.
On 31 October 2006, the RTC, without waiting for the Company’s Memorandum, denied
the application for the issuance of an Injunction. The Company filed an MR which was
denied by the RTC on 6 December 2006. The Company then filed a PR with Urgent
Prayer for the Issuance of TRO and/or Injunction with the CA. On 19 March 2007, the
CA denied the Petition and affirmed the RTC Orders dated 31 October 2006 and 6
December 2006.
Meanwhile, a Second Amended Notice of Extrajudicial Foreclosure Sale (setting the
auction sale on 23 March 2007) was issued by the ex-officio Sheriff of the Office of the
Clerk of Court of the RTC of Mandaue. The auction sale proceeded on 23 March 2007
where PNB emerged as highest bidder.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 13
On 28 June 2007, the Company entered into a Memorandum of Agreement and Deed of
Assignment with PNB and Philippine Commercial Capital, Inc. for the settlement of the
Company’s obligation.
In view of the compromise settlement, on 17 August 2007, the parties filed a Joint Motion
to Dismiss With Prejudice with the RTC. During the hearing on 31 August 2007, the
RTC granted the parties’ Joint Motion to Dismiss with prejudice the case.
g.
Civil Case No. 06-424
“POPI vs. APA”
CA G.R. SP. No. 100514
“APA vs. Judge Rommel Baybay, et.al.”
--------------------------------------------------------The Company filed a Complaint for Injunction (with Application for a Writ of Preliminary
Injunction) (Injunction) with Makati RTC Branch 132 against APA to enjoin the latter from
enforcing its claim against the Company’s Convertible Note (Note) (covering a P1.25
billion obligation, inclusive of interest) under the Investment Agreement with UCPB
dated 4 March 2002. The Company stated in its Complaint that APA, being an SPV, has
no authority to acquire the Note from UCPB on 23 June 2005 since at that time the Note
has not matured yet. Hence, the acquisition was in violation of law and APA has nothing
to enforce against the Company. The Company sought to prevent damage to itself as
APA is acting as if it were a lawful creditor of the Company and the Note and therefore
runs the risk of being subjected to judicial action by an entity not legally permitted to do
so.
After due proceedings, on 26 June 2006, the RTC issued an Injunction against APA
preventing it from further enforcing the Note against the Company during the pendency of
the case. APA filed an MR on 11 July 2006, to which a Comment/Opposition was filed by
the Company on 7 August 2006. APA then filed its Reply to which the Company filed its
Rejoinder.
On 27 April 2007, APA filed a Motion to Inhibit RTC Judge Rommel O. Baybay to which
the Company filed its Comment. APA filed its Reply to the Comment and the Company
filed its Rejoinder.
On 25 July 2007, the RTC issued an Order granting the Motion to Inhibit subject to the
conformity of the Executive Judge. Subsequently, the Executive Judge issued an Order
dated 1 August 2007 disapproving the inhibition of Judge Baybay and directing him to
resume his office as presiding judge in this case.
On 14 August 2007, the RTC issued an Order denying the MR filed by APA and setting
the case for preliminary conference on 14 September 2007. The Company filed its Pretrial Brief on 11 September 2007; APA filed its Pre-trial Brief only on 13 September 2007
in violation of the Rules of Court. On 24 September 2007, the Company filed a Motion to
Strike Out (APA’s) Pre-trial Brief and to Allow Plaintiff to Present Evidence Ex-Parte.
The motion has been submitted for decision of the court.
Meanwhile, APA filed a Petition for Review (PR) on Certiorari with Urgent Prayer for TRO
and/or Injunction dated 10 September 2007 with the CA assailing the RTC Order dated
19 June 2006 granting the Company’s application for the issuance of an Injunction as
well as the Order dated 14 August 2007 denying APA’s MR. On 28 September 2007,
the CA issued a Resolution directing the Private Respondent to file a Comment to the PR
and to which APA may file a Reply; meantime action on APA’s prayer for the issuance of
a TRO was held in abeyance pending compliance with the resolution of the CA. On 11
October 2007, the Company filed its Comment (to the PR) with Opposition (to the
Application for TRO and/or Injunction).
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 14
h.
Civil Case No. 3911-06-C
“Fritta, S.L. vs. LCI”
-----------------------------------A case for collection of sum of money was filed by a supplier, Fritta, against LCI before
Calamba RTC-Br. 92. Plaintiff Fritta is demanding payment in the principal amount of
L332,452.73 (about P22,433,920.44), attorney’s fees of P500,000 plus costs of suit.
LCI filed a Motion to Dismiss the case on the grounds of lack of capacity to sue as Fritta
is a foreign corporation and plaintiff’s defective certification against forum shopping. The
RTC issued an Order on 8 June 2006 denying LCI’s Motion.
LCI filed an MR of said Order on 11 July 2006, to which Fritta filed its Opposition. LCI
filed a Reply on 11 August 2006. The RTC issued an Order dated 17 October 2007
denying LCI’s MR. LCI then filed its Answer Ad Cautelam dated 17 November 2006 to
which Fritta filed its Reply dated 12 December 2006.
Pre-trial was held on 29 May 2007. Fritta filed Motion to Take Deposition (of its 3
witnesses in Spain) dated 11 June 2007 to which LCI filed its Opposition dated 27 June
2007. The RTC, in its Order dated 17 July 2007, granted Fritta’s Motion to Take
Deposition upon written interrogatories of its witnesses who are based in Spain. LCI filed
an MR on the RTC Order dated 17 July 2007. LCI also filed a First Request for
Admission on 16 August 2007. The RTC denied the MR.
LCI then filed a Petition for Certiorari and Prohibition with prayer for the issuance of a
TRO and/or Injunction with the CA. The CA required respondents to file their Comment
to the Petition within ten (10) days from receipt of notice; LCI was given five (5) days to
file Reply from receipt of the Comment.
The CA rendered its Decision dated 17 May 2007 denying/dismissing LCI’s Petition. LCI
filed an MR dated 1 June 2007 of the CA Decision of 17 May 2007. Fritta filed its
Comment/Opposition to LCI’s MR to which LCI filed its Reply dated 4 September 2007.
The CA, in its Resolution dated 6 September 2007, denied LCI’s MR.
LCI will file a PR on Certiorari of the CA Decision with the SC.
i.
Civil Case No. 07-268
“APA vs. Orion I Holdings Philippines, Inc., et.al.”
CA G.R. SP. No. 99846
“APA vs. Hon. Zenaida Galapate-Laguilles, et.al.”
---------------------------------------------------------------------On 14 March 2007, APA filed a Complaint for rescission of the sale of shares of stock in
Pepsi-Cola Products Philippines, Inc. (PCPPI) against OIHPI, certain individual
defendants, OBII, Hong Way Holdings, Inc. (HWHI), Nassim Capital Pte. Ltd. (Nassim)
and OLI. APA claimed that it was a purchaser of LCI loans from BPI of which OIHPI was
the surety. APA alleged that the alienation of the PCPPI shares by OBII (a subsidiary of
OIHPI) was grossly undervalued and made in fraud of creditors to defeat the claim of
APA against OIHPI and LCI. APA likewise prayed for the issuance of a TRO and/or
Injunction freezing the proceeds of the sale and, after trial on the merits, the rescission of
the sale to OLI, HWHI and Nassim.
On 22 March 2007, OIHPI and the individual defendants filed their Opposition to the
application for TRO and/or Injunction. On 26 March 2007, OLI filed a Motion to Dismiss
(MTD) on grounds of lack of jurisdiction, legal personality of APA and lack of cause of
action. OLI also filed its Opposition Ex Abundanti Cautelam to APA’s Application for TRO
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 15
and/or Injunction. OBII also filed its Opposition to the application for TRO and/or
Injunction on 27 March 2007.
APA then filed a Manifestation with Amended Complaint dated 29 March 2007.
Thereafter, it filed a Motion to Admit Second Amended Complaint dated 3 April 2007.
Hearings on APA’s application for TRO were conducted. On 18 April 2007, the RTC
issued an Order denying APA’s application for TRO on the ground that APA has not yet
established its clear and existing right, based on the inadequate evidence it has
presented.
On 9 May 2007, a hearing on APA’s application for an Injunction was held. On even
date, APA made its Formal Offer of Evidence (FOE) as well as a Supplemental FOE.
Defendants filed their respective Opposition/Comments to the FOE and Supplemental
FOE.
The RTC issued an Omnibus Order dated 8 June 2007 which: (i) admitted APA’s Second
Amended Complaint; (ii) denied OLI’s MTD; (iii) ordered APA to pay the correct docket
fees; (iv) denied APA’s application for Injunction; and (v) ordered service of new
summons to all defendants.
HWHI, OBII and OIHPI filed their respective Answers to the Second Amended Complaint.
OLI filed an MR of the Omnibus Order of 8 June 2007. On 5 July 2007, OIHPI filed a
Motion for Partial Reconsideration of the Omnibus Order. On 12 and 27 July 2007,
respectively, OBII filed an MR of the Omnibus Order and a Supplement to MR with
Motion to Cite APA in Contempt. Subsequently, OLI filed an Omnibus Motion to:
(i) declare APA’s counsel in contempt of court; (ii) invalidate summons issued to OLI; and
(iii) dismiss APA’s Second Amended Complaint.
On 17 August 2007, APA filed its Consolidated Reply (to OIHPI’s Motion for Partial
Reconsideration, OBII’s MR/Supplement to MR and OLI’s Omnibus Motion).
APA filed a Motion to Admit Third Amended Complaint dated 19 July 2007. OIHPI and
OBII filed their respective Opposition to APA’s Motion to Admit Third Amended Complaint
dated 21 August 2007 and 23 August 2007, respectively. OLI filed its Comment Ex
Abundanti Cautelam dated 23 August 2007 (to APA’s Motion to Admit Third Amended
Complaint). APA filed its Consolidated Reply to Defendants’ Comments/Opposition on
21 September 2007.
Meanwhile, APA filed a PR (with Prayer for TRO and/or Injunction) with the CA. On 8
August 2007, the CA issued a Resolution denying the application for TRO. OIHPI filed its
Comment to the PR with Opposition (to the application for Injunction) on 21 August 2007.
OBII filed its Comment to PR/Opposition to the Issuance of Injunction on 21 August 2007.
OLI filed its Comment to the PR dated 21 August 2007. HWHI filed its Opposition to
APA’s application for Injunction on 21 August 2007 and its Comment (to APA’s PR) on 19
September 2007.
On 11 September 2007, the CA issued a Resolution denying the application for
Injunction and accepted OIHPI’s offer to post a bond to answer for damages that APA
may suffer as a result of the non-issuance of an Injunction. APA’s PR remains pending
at the CA.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders of the Company during the fourth
quarter of the fiscal year.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 16
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5. Market for Issuer’s Common Equity and Related Stockholder Matters
A.
Market Information
The Company’s Common Shares are listed and principally traded in the PSE.
The high and low sales prices* of the Company’s securities for each quarter are indicated in the
table below:
High
Low
Fiscal Year 2007 (July 2006-June 2007)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
(Jul.-Sept.)
(Oct.-Dec.)
(Jan.-Mar.)
(Apr.-Jun.)
P0.220
0.225
0.390
0.950
P0.160
0.180
0.190
0.300
P0.260
0.225
0.300
0.245
P0.170
0.190
0.190
0.155
Fiscal Year 2006 (July 2005-June 2006)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Stock price as of latest practicable trading date of 28 September 2007: P0.45 per share.
*provided by PSE Information Management Unit
B.
Holders
The number of shareholders of record as of 30 September 2007 was 1,061. Common shares
outstanding as of the same period were 2,366,444,383.
Top 20 stockholders* (as of 30 September 2007):
Name
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
PCD Nominee Corporation
PCD Nominee Corporation (non-Filipino)
Genez Investments Corporation
Lepanto Consolidated Mining Co.
F. Yap Securities, Inc.
Dao Heng Securities (Phils.), Inc.
Guoco Securities (Phils.), Inc.
Caridad Say
Cualoping Securities Corporation
YHS Holdings Corporation
David C. Go
Victor Say
Gilbert Dee
David Go Securities Corp.
G.D. Tan & Co., Inc.
Dao Heng Securities (Phils.), Inc. A/C# M0002-A
David Go Securities Corp. A/C # 1085
R.G. Palanca & Co., Inc.
Eleonor Go
No. of Shares Held
834,049,609
516,473,968
250,000,000
180,000,000
126,581,700
34,521,000
30,082,000
24,707,000
23,728,600
22,900,000
22,200,000
21,500,000
19,598,000
18,444,120
17,634,600
14,000,000
11,816,000
7,495,000
6,900,000
% to Total
35.24
21.82
10.56
7.61
5.35
1.46
1.27
1.04
1.00
0.97
0.94
0.91
0.83
0.78
0.74
0.59
0.50
0.32
0.29
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 17
20.
Coronet Property Holdings Corp.
Total
6,000,000
------------------2,188,631,597
===========
0.25
--------92.47
=====
*based on the report dated 30 September 2007 of Stock and Transfer Agent, Equitable PCIBank
C.
Dividends
There were no dividend declarations for the years 2005 to 2007.
D.
Recent Sales of Unregistered Securities
The Company has not sold any unregistered securities within the past three (3) fiscal years.
Item 6. Management's Discussion and Analysis or Plan of Operation
Fiscal Year 2007
a.
Results of Operations
Consolidated Results of Operations
POPI Group ended the fiscal year with a net income of P4.4 billion as compared to last year’s net
loss of P199 million. The acquisition by OBII and HPI of the various loans of POPI and LCI
during the year resulted in the recognition of consolidation gain amounting to P4.07 billion. Also,
OBII realized a gain from sale of shares of stocks of P519.3 million as the company sold its
remaining 17.64% stake in PCPPI.
Net sales from tile distribution increased by 8% from P657 million to P712 million due to improved
selling price. FPIC recorded a 38% increase in insurance premiums and commissions. However,
due to lower rental income and sale of leasehold rights of TPI, the Group posted a modest
increase in total revenue of 4%.
Total cost and expenses remained at P1.6 billion. Manufacturing cost was greatly affected by the
higher fuel cost, increased cost in factory supplies and repairs resulting from upgrading of
machineries and higher depreciation charged to manufacturing.. On the other hand, operating
expenses were reduced by 16% due to lower depreciation charged to operations.
Increased in Insurance underwriting deductions was greatly affected by the higher claims and
losses on Fire and Marine which were incurred during the year.
Equity in net income of associated companies was reduced by 54% as a result of the disposal of
17.64% share in PCPPI. The Group also recognized recovery from sale of investment in Zeus
Holdings, Inc. amounting to P91 million. With the settlement and acquisition of loans by affiliates,
financing cost and provision for probable losses were reduced by 31% and 95%, respectively.
LCI
The combined net sales from tile distribution showed a 10% increase compared to last year
attributed to the improvement in selling price resulting from discount rationalization and better
sales mix. Gross loss was affected by the higher manufacturing cost resulting from higher cost of
energy and depreciation charged to manufacturing.
In FY2007, LCI made a significant recovery on its net loss, a 52% decrease from last year’s P469
million to P226 million. The contributing factors to the reduction in net loss are the spin-off of the
sales and marketing functions to OMI and lower financing cost brought about by the acquisition of
loans by an affiliate, OBII, thereby reducing interest and bank charges by 89%.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 18
Operating expenses decreased by almost 50% due to lower depreciation and reduced personnel
cost arising from the spin-off of sales and marketing activities to OMI.
With the increased demand for LCI’s ceramic tiles due to the aggressive marketing efforts of OMI
and the overall improvement in the property and construction sectors, sales volume increased in
the latter part of the fiscal year and is expected to continue its expansion into the next fiscal year.
The main focus now is to boost productivity that will result in increased output and improved
distribution.
Taking stock of its current operational situation, LCI has come up with programs to improve and
increase productivity. Machinery rehabilitation and line upgrades and tighter preventive
maintenance schedule aimed to further increase output and minimize if not eliminate work
stoppages due to machine breakdowns, were implemented.
Introduction of new and contemporary designs are currently in the pipeline, such that by
December 2007, half of LCI offerings will be new. These designs are expected to fetch higher
selling prices in the market and improve LCI’s margins further.
LCI is now in the process of completing the requirements for product certification by the Bureau of
Product Standards (BPS). The BPS certification indicates that the tile conforms with the
standards set by BPS for product quality and consumer safety before any manufacturer or
importer is allowed to sell its products in the Philippine market. With the implementation of BPS
starting October 2007, we expect, that the smuggling of cheap but substandard tiles will be
abated and thus boost the sales performance of local tile manufacturers.
LCI hopes that the results from current developments and initiatives will contribute positively to
LCI’s performance in the following months so that it will be well-positioned to take advantage of
the anticipated increase in tile demand.
OMI
OMI bounced back from a net loss of P2.6 million in FY 2006 to a turnaround profit of P4.3 million
this fiscal year. With the expansion of its market coverage in the tile distribution, OMI generated a
1657% increase in revenues from P10 million last year to P177 million. Accordingly, cost and
expenses increased as additional personnel were hired to build up the organization. Marketing
and promotional programs were also implemented.
OMI’s profitability is mainly attributable to its Tile Distribution business that is able to strengthen
existing dealer relationship and penetrate previously unserved areas. OMI worked to establish a
stronger distribution network for LCI that began initially in the Luzon area. Its efforts have paid off
as the number of Lepanto tile dealers increased from 30 in June 2006 to 138 as of June 2007.
With the projected increase in demand, LCI’s capacity utilization is expected to increase and
contribute significantly to reduced costs and better margins.
As the LCI plant is capable of producing a higher volume, the objective of OMI is to ensure that
sales will grow at a sustainable rate to maximize plant output. To help achieve this, an incentive
program was rolled out in January 2007 to encourage LCI dealers to attain targeted volumes.
Additionally, the OMI sales team has been mandated to increase visibility in their respective
areas through more partnerships with local stores and increased product availability.
To further improve volume, OMI will introduce new designs of Lepanto tiles. A number of new
ones have already been offered to the market and acceptance has been very encouraging. New
designs are projected to comprise at least half of LCI’s total product offerings in the coming
months. This will further help improve the average selling price.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 19
OMI has also begun inroads in projects participation by forming strong alliances with specifiers
such as architects, contractors, and designers. This market is projected to have a strong impact
on OMI’s performance on the back of a recovering construction industry.
The other businesses of OMI, namely Rewards Management and Land Titling, have continued to
show progress. OMI is currently negotiating a tie-up with an overseas-based outfit to further
widen the customer reach of its Rewards business. Land Titling, on the other hand, has been
able to forge arrangements with various financial institutions and a property development
company for OMI to handle their land titling requirements.
Going forward, OMI’s businesses will continue their active marketing to further improve revenues.
In Tile Distribution, in particular, OMI will step up its aggressive sales and marketing programs to
expand distribution network and coverage of LCI products. It will also continue to increase store
partnerships in all areas as well as improve sales participation in every store. All of these efforts
are geared towards the financial recovery of LCI and OMI.
TPI
Amid the strong competition in the industry rental rates, and the seemingly shrinking purchasing
power of the “common tao”, which largely comprise Tutuban Center’s market, reported
occupancy for the year dropped to 88%, from 95% of the previous year. Consequently, Rental
Revenue, excluding other income, dropped by 5% or P23 million lower compared to P461 million
posted the previous year. In view of the decline in interest in long-term leases on account of the
remaining short leasehold term of the company with PNR, the company had to shift to short-term
rental schemes. Net Income from Long-term leases the previous year stood at P4 million.
TPI managed to control operating expenses during the year keeping it at P506 million, 1% lower
than P512 million in the same period last year, mainly by reduced electricity consumption. The
P5.3 million improvement in electricity cost was the complementary effect of the reduction in
average Meralco rates and lower consumption, resulting from energy conservation and reduction
measures implemented during the year.
Were it not for the P67 million depreciation on Revaluation Increments on its Investment
Properties, TPI would have reported a Net Income of P6.4 million. Comparative figures the
previous year, gross of depreciation for revaluation increments, was registered at P50 million.
Moving forward, TPI faces three main concerns: first, Occupancy, which creates the primary
revenue base and allows the company leverage amidst strong competition in rental rate pricing;
second, Advertising & Promotions, through its intensified year round activities which are needed
to sustain Tutuban Center’s market dominance in the area; and third, Power Cost Reduction,
which account for a significant portion of the Mall’s total operating expenses, all of which impact
greatly on the company’s financial profile.
FPIC
FPIC ended the fiscal year with a higher gross premium written of P148.8 million from the
previous year’s P136.9 million or an increase of 9% brought about by premiums generated by
new agents, branches, premiums from HDMF pools and due to implementation of new reduced
premium rates on motor car.
In terms of product lines, the growth emanated from fire, personal accident and general accident
which grew by 47%, 53% and 62% respectively, indicating that FPIC has gradually regained
competitiveness in the property market and in the predominantly retail personal accident market
and the small business segment of the miscellaneous casualty lines.
Retention Ratio improved to 59% from the previous year’s 54% which was driven by increased
personal accident and residential fire portfolio.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 20
Due to opening of branches in several key provinces and annual increase of office rentals,
operating expenses increased by 9% from P53.2 million of last year to P57.8 million. In terms of
claims, the company’s fortune took a sharp downturn as a succession of losses occurred towards
the end of the first semester of the fiscal year resulting to higher cumulative losses increasing
loss ratio to 47% from last year’s 37%. Consequently, the company realized a Net Loss after tax
in the amount of P29.7 million, compared to last year’s P8.6 million.
Regional reinsurers expect that the soft market will still persist in 2008. This will thus put
pressure on the industry’s market pricing policy as companies seek to maintain or increase
market share. The relatively good underwriting result in the past couple of years industry-wide
may cause prices to decline, even if other companies were hard hit by the recent disasters.
Reinsurers are also one in seeing growth areas in products that cater to labor migrants,
telecommunications, dwellings, agribusiness, liability and marine. FPIC’s direct competitors are
now eyeing the opportunities in the untapped retail market for personal lines and small business
insurance packages.
FPIC continues to develop its own niche market by focusing on Personal Lines and Small
Business insurance packages. These products have been in the forefront of FPIC’s thrust in the
branches and helped create market nationwide.
In the second half of 2006, FPIC had installed a new core system, which renders online
connectivity of its home office with all its branches nationwide. The success of this project will
pave the way for the eventual link-up with FPIC’s insurance agents country-wide that will facilitate
delivery of insurance services to policyholders which include issuance and delivery of insurance
policies, premium collections and payment of claims at the agent’s place of business.
FPIC intends to stay on course with this action plan. In summary this calls for: 1) keeping
focused on the products where it has developed its strength and expertise, i.e., personal lines
and small business packages; 2) extending market reach thru online connectivity with branches
and agents; and 3) reconstructing processes of doing business away from the traditional scheme
for a more efficient and coordinated operations.
b.
Financial Condition
As of 30 June 2007, total consolidated assets stood at P5.1 billion, 4% lower than total assets as
of end of FY2006 at P5.3 billion. The decline is attributable to the depreciation and amortization of
property, plant and equipment and leasehold rights. The reclassification of the remaining
investment in PCPPI to AFS contributed to the significant increase in current assets. Accordingly,
non-current assets decreased by 31% from P3.9 billion to P2.7 billion.
Due to proceeds from the sale of PCPPI shares, Cash and Cash equivalents increase by 319%.
Higher production volume increased inventories for the period. Allowance for doubtful accounts
on related parties also decline by 30%. Other current assets increased due to additional
creditable withholding and value added taxes while long-term fund placements of the Group
considered as Other Non-Current Assets as of 30 June 2006 matured during the year. Decrease
in investment properties, leasehold rights and property, plant and equipment is mainly attributable
to depreciation and amortization.
With the sale of PCPPI shares, the Group was able to settle and discharged significant portion of
its outstanding loan obligations through the acquisition by OBII and HPI of the loans of LCI and
POPI, respectively, thereby reducing total loan obligations by P4.55 billion.
The settlement of POPI and LCI’s loans together with the loan repayments by TPI reduced
consolidated loans by 49% from P3.4 billion to P1.8 billion. Accordingly, total liabilities decreased
by 48% from P9.7 billion to P5.0 billion as of end of the year.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 21
Net amount of Deferred Tax assets and liabilities showed a decrease of 14% as a result of
deferred income tax amortization of deferred costs and revaluation increment in properties.
Fiscal Year 2006
a.
Results of Operations
Consolidated Result of Operations
POPI Group was challenged during the fiscal year with decreased revenues brought about by the
slowdown in LCI sales coupled with moderate increase in rental and insurance premiums and
commissions. While revenues remained at P1.2 billion, operating expenses increased by 20%
thereby negating the increased revenues.
Cost of goods sold decreased by 7% in proportion with the decrease in sales. Cost of power, fuel
and taxes continue to affect the cost of operations. Insurance underwriting deductions decreased
by 20% because of lower claims during the year while cost of real estate sold increased in
proportion with the sale of real estate during the year.
The Company recognized income amounting to P624 million arising from the condonation of debt
by a creditor. For the fiscal year, POPI Group realized a consolidated net loss of P193 million.
The Philippine economy measured by the gross domestic product expanded by more than 5.5%
during the first half of 2006 given the strong performance of the agriculture and export sectors.
With the strong performance of the Philippine economy, POPI remained devoted to its
Restructuring Plan which was anchored on two major components, namely: 1) Rehabilitation of
LCI; and 2) Debt Restructuring of POPI loans.
On the rehabilitation of LCI, OBII is in the process of finalizing a repayment with a major creditor
of LCI.
TPI
TPI registered a revenue of P484 million compared to the previous year’s P476 million excluding
other income. The company also posted a higher occupancy rate of 95% compared to last year’s
91%.
While TPI has modest increase in revenue, the continuous increase in power rates and
maintenance costs increased operating expenses. Nevertheless, TPI ended the year with an
increase in net income from P4.1 million to P6.2 million this fiscal year.
To counter the increasing operating costs, TPI implemented towards the end of the year major
energy conservation and reduction measures and/or alternatives available in the industry which
includes the installation of energy saving devices that is expected to reduce energy costs by 20%.
TPI will also implement promotional activities congruent with its marketing efforts to retain TPI’s
competitive edge in the market as the preferred wholesale and retail shopping destination
providing the best value for money and excellent customer shopping convenience. TPI will
undertake the upgrading of its facilities and enhancement of customer and tenant services in
order to make shopping in Tutuban truly “The Pinoy Shopping Experience!”
LCI
LCI ended the year with a decrease in sales volume primarily due to lower production. Reduced
production is mainly attributable to slowdown in sales, due in part to the influx of lower-priced
imports. While there is a slowdown in volume, production costs like fuel and electricity continue
to rise.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 22
Plans and initiatives are being put in place for the renewal and recovery of its business. Foremost
of these initiatives is the spin-off of the sales function from LCI to OMI. The move is intended to
reduce overhead expenses of LCI to enable LCI to concentrate on its core competence --- tile
manufacturing. With the sales and marketing function ceded to OMI, LCI can now focus and
double its efforts on its cost reduction programs that will increase production output, improve
plant efficiency and induce product development and enhancement.
While LCI will focus on manufacturing, OMI will work to expand its market in the provincial areas
and penetrate new markets by launching various marketing and incentive program for local
distributors.
FPIC
FPIC ended the fiscal year with considerable increase in gross premiums of 20% to P137 million
from the previous year’s P114 million brought about by better market penetration through the
opening of branches and agencies. Retention ratio also improved to 54% from 49% of last year,
while loss ratio was controlled at 37% from 67% during the same period of last year.
With the aggressive marketing strategy, branches were opened in several key cities and
provinces, thereby increasing operating expenses by 22%.
Investment income dropped from P49.67 million to P30.21 million or a 39% reduction. The
reversal of bad debts in the previous fiscal year contributed to last year’s investment income;
without this reversal, investment income would have grown by 12%.
FPIC continues to focus on retail and institutional markets by forging stronger ties with existing
distribution channels and targeting a significant increase of such partnerships as an effective
means to come up and market its diverse products. This ability to diversify springs from its
competence in product customization, for which it is well-known in the industry.
Knowing its market, its strengths, and where it wants to go, FPIC is ready to forge ahead to
achieve its vision to be “the non-life insurance of choice that adapts to ever-changing institutional
and retail needs by offering customized and innovative products at affordable prices and through
service excellence and complete customer satisfaction.” This is the vision that will guide FPIC’s
actions in the years to come as it aims to establish its niche in the non-life insurance industry --one that is intended to result into increasingly improved performance over the years.
PCPPI
Despite rising inflation spurred by increased oil prices, intense competition and entry of lowerpriced beverage products into the market, PCPPI’s sales volume performed better on a year-toyear basis. Distribution was up 3% while market share improved by 2.8%.
Sales volume (in 8 oz. equivalent) grew by 11% versus its year-ago performance due to the 5%
growth in the carbonated softdrinks segment and a 6% increment from expansion of noncarbonated beverages.
The year saw the company sustaining enhancements on go-to-market strategies and the
establishment of various trade marketing infrastructures. It further sustained market inroads of its
three world-class non-carbonated brands of Gatorade, Tropicana and Lipton by introducing new
flavors and packages. The introduction of Pepsi Max also created excitement for the flagship
brand.
There was growth across PCPPI operating units as most plants registered business growth. By
providing performance-based incentive schemes, the company increased employee productivity.
Operating expenses were kept in check by strictly implementing operating expense plans and
responding to critical budget variances on a timely basis.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 23
Volume growth and increase in selling prices spurred a 23% increase in gross revenues versus
last year’s performance amidst intensifying competition. Operating costs, however, went up by
only 6% resulting in a 28% growth in operating profit versus last year.
The highly speculative price of sugar, low pricing strategies of new market players, and the
impending business restructuring of the major competitor will pose as major challenges for the
company.
However, by further improving go-to-market schemes, aggressive business development efforts,
cost control initiatives, and the implementation of a fully operational sales support system, the
company is bullish about sustaining its gains in the market.
The company will continue to create excitement in the market through product and marketing
innovations. Production capacity will be further enhanced to meet the increasing demand for
Pepsi products.
OMI
OMI has been slowly but surely establishing itself as a company well-equipped to take on
outsource services. Its venture was into on-line shopping via its website, 22ban.com, and since
then has broadened its service offerings to include rewards management, land title management
and tile distribution, the latter two being its latest ventures.
The tile distribution business developed in the early part of 2006 when OMI set up the tile
distribution network for LCI in Northern Luzon. By the end of the fiscal year, plans were firmed up
to add other regions as well to replicate the feat of Northern Luzon that saw its dealers grow into
30 in a span of five months. Subsequently, OMI was appointed to take over the sale and
marketing of Lepanto tiles in order to rationalize the costs of LCI while adding substantially to the
revenue base of OMI.
Land title management comprises the full spectrum of land titling services, from relocation
surveys, to issuance of titles to registration of ownership. Its clientele range from local clients to
Filipinos based in the United States. This service is also being offered to banks as this service
will be more cost-effective for them. so far, the response has been very encouraging.
OMI’s earnings increased from P3.4 million to P10 million this fiscal year. Expenses have gone
up though, as these were mainly due to start-up expenditures of its new businesses. OMI expects
to recover its cash outlays in the next fiscal year especially with focused sales initiatives in its tile
distribution and titling businesses.
b.
Financial Condition
The Group’s total assets decreased by 4% to P5.2 billion due to cash payments made for POPI’s
loan to PNB amounting to P97 million in order to secure the release of the mortgage over certain
parcels of land previously sold to a third party. Decreases in property, plant and equipment and
investment property were mainly from recorded depreciation and amortization during the year.
POPI’s convertible note matured during the fiscal year; also, capitalized interest increased
convertible notes by 3%; accordingly, the liability was reclassified as current liability. TPI repaid
its long-term loans amounting to P25 million during the year, funding from receivable collections
and sale of lease rights. Accounts payable and accrued expenses were further reduced by the
condonation of loans during the year.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 24
Fiscal Year 2005
a.
Results of Operations
Consolidated Result of Operations
FY 2005 marks the turn around for the POPI group as the company recorded a net income of
P858 million after a several years of losses. The Group realized a consolidation gain of P1.34
billion from the acquisition by OBII of the LCI loans from foreign creditors. In addition, the sale of
shares in PCPPI realized a consolidation gain of P271 million.
Total revenue increased by 17% as net sales from LCI grew by 33% to P721 million from P541
million. TPI’s rental revenue increased by 6% to P463 million from 437 million but was tempered
by the slowdown in sale of lease rights as the company focused its marketing strategy to shortterm leases.
Overall, cost and expenses increased by about 9%. Cost of sales increased in proportion to the
increase in sales of LCI while increase in operating expenses, specially taxes and marketing &
promotion was toned down by reduced shutdown cost as LCI increased plant utilization thereby,
reducing shutdown costs charged to operating expenses. Cost of operation is deeply challenged
by the increasing cost of power, fuel and taxes. Business and local taxes grew by 26% while rent
and utilities increased by 14% during the period.
Insurance underwriting deductions increase by 41% because of higher claims during the year.
Cost of real estate decreased by 72% because of the slowdown in the sale of mall space as TPI
shifted its strategy to short term leases.
The settlement of LCI loan coupled by the loan repayment by TPI during the period reduced
interest cost by 42%. Likewise, equity in net earnings of associated companies decreased by
59% as a result of the reduced ownership in PCPPI. The Group also recognized provision for
probable losses from non-operating investments of the company thus increasing provision by
about P174 million.
The Philippine economy improved with a growth in GDP by 6.1% for the year ended 2004
compared to 4.5% for the year ended 2003. As the government struggles for a better economy,
oil prices in the world market slowed down global economy, which influenced oil prices in the
local market to go up. In addition, the lingering political turmoil and ballooning fiscal deficit
curtailed the flow of foreign investments and have sidelined investors in the stock market.
Amidst a challenging business climate, POPI remained devoted to its Restructuring Plan. The
Restructuring Plan is anchored on two major components, namely: 1) Rehabilitation of LCI; and
2) Debt Restructuring of POPI Loans.
As part of the Group’s Restructuring Plan, OBII sold 14% of its shares of stock in PCPPI to HWHI
and 4% to OLI. thereby reducing POPI’s consolidated ownership in PCPPI to 22.16% from
35.98%. The proceeds of these sale transactions were used to pay inter-affiliate advances and
the acquisition of the loans of LCI from foreign creditors.
On the rehabilitation of LCI, the outstanding loan obligations to Hong Kong and Shanghai
Banking Corporation Ltd. and Dynamic Source Group Ltd. were acquired by OBII in May and
June 2005, respectively. The acquisition effectively settled the loans for the Group and
considerably reduced the Group’s consolidated loans and accrued interest.
In addition, debt-restructuring and repayment negotiations with major creditor banks are also
being undertaken which could involve dacion-en-pago of some collateralized assets to settle the
existing loan obligations.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 25
While the Company is in the course of business reformation, it is still implementing various cost
reduction and productivity enhancement programs to strengthen the core assets.
During the fiscal year, the core assets sustained its remarkable performance last year, posting
improvements in operating results.
TPI
TPI registered comparable revenues to last year of P476 million amid a more difficult operating
environment arising from economic and political uncertainties. Rental revenue grew by 6% mall
wide to P464 million from P438 million, as the company continue to expand and enhance shortterm rental operations, to strengthen its existing tenant base.
TPI continued to implement programs in strengthening its revenue base, maximize occupancy
and enhance exhibits and night market operations. Overall, mall occupancy rate slightly
improved to 89% from the previous year’s 87% as a result of the shift in marketing strategy which
further stretched the existing short-term base to complement its long-term tenant base.
Pursuant to its objective to strengthen revenue base, TPI launched the “Food Street” in
November 2004 to augment and complement night market operations. Night market operations
posted a 27% increase in revenues from the P13 million posted the prior year. It registered 330
exhibit operators surpassing the high-level records of 239 in 2002 and 240 in 2003.
Meanwhile, TPI operations are deeply challenged by high operating costs mainly from the
upsurge in electricity and local taxes. For the period, operating costs slightly grew by 3% from
P450 million to its current level of P458 million primarily because of the abovementioned costs.
To cushion the impact of increasing operating costs, TPI has taken on major energy conservation
and reduction measures and/or alternatives available in the industry. Thermal cooling systems
and Variable Frequency Drive facilities are currently being evaluated, which when implemented
are expected to bring down electricity costs. Further, TPI has allotted significant amounts for
promotional activities congruent with marketing efforts to expand its tenant base of short-term
lease occupants.
LCI
For this fiscal year, LCI registered a 34% increase in sales volume largely attributed to the
aggressive expansion of distribution networks and introduction of innovative product designs.
Similarly, production volume went up by 72 % during the period to support the expansion in sales
volume.
On the other hand, cost of production continued to improve as the company relentlessly pursued
cost reduction initiatives to enhance production efficiency and yields. Product reformulation using
alternative and cheaper raw materials, optimal utilization of plant, and the operation of the power
plant as an alternative source of power, were its main operational priorities.
The renewed efforts by the government, together with the Ceramic Tiles Manufacturers’
Association to curb illegal entry of imported tiles, have also contributed to volume improvement.
However, the threat of imported tiles and other construction finishing products still lingers. The
unabated spike in oil prices and renewed volatility of the peso is expected to increase prices of
raw materials, particularly fuel, which is the dominant raw material to manufacture tile. The
increase in fuel prices coupled with rising electricity costs is expected to affect production costs
and impede operating performance.
Given these daunting challenges, LCI will focus its marketing efforts on expanding its
distributorship networks particularly in areas with low product penetration. During the fiscal year,
the Company’s aggressive network expansion and development throughout the country
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 26
contributed to a 29% increase in territorial coverage. A total of twenty-four (24) new distribution
outlets were opened during the period covering various locations in Luzon, Visayas & Mindanao.
Furthermore, various programs have been lined up to increase sales volume and improve market
presence such as sales caravan, tie-ups with specifiers and architects, and participation of annual
trade exhibits. The programs also include business partnership with strategically located DIY
stores. This program will further enhance and improve product visibility and exposure, improved
selling price, and serve as showroom for product portfolios catered to the high-end market and
creation of venues for new product launching.
Moving forward, LCI aims to intensify its marketing campaign by re-introducing its image to the
domestic market. LCI recently launched a new brand logo, which aims to depict a stronger image
for Lepanto through its wide range of product offerings, innovations service and quality resulting
in total customer satisfaction.
FPIC
Despite the favorable macro economic fundamentals in 2004, the insurance industry was hardly
in tune with the growth of the economy. The expected increase in demand for capacity, which
outpaced supply in the region, was negated by fiercer competition, which kept the price of
insurance at generally depressed level.
Under this operating environment, the company improved its last year’s production; turning in a
P114.0 million of gross premiums compared to previous years P111.4 million.
Retention ratio was up at 49% compared to last year’s 42% due to the success of the shift in
business strategy of focusing on highly retained businesses. Net commission expense has been
kept lower at 10% against previous year’s 18%. However, loss ratio surged to 60% as if to
counterbalance last years fairly low loss ratio of 28%.
The company also recognized a P29 million provision for losses arising from the decline in value
of its investments in shares of stocks. The write down, however, has no impact on the equity of
FPIC as these losses were previously recognized as a reduction of equity. Accordingly, FPIC
incurred net loss of P27 million for the period.
For the next fiscal year, the company is projecting the insurance industry to achieve a slightly
tempered growth. Business scenario will not change a bit as cutthroat competition and still very
low rates will persist in the industry. Likewise, the vulnerability of the insurance market to natural
disasters, the harsh international reinsurance terms and conditions will also have a sobering
effect in the industry.
In light of this, FPIC will focus on the retail market consisting of personal lines and small and
medium enterprises.
Such strategy will lessen the company’s dependence on foreign
reinsurance and at the same time keep its focus on generating more retained premiums from
highly untapped segment of the market. Corollary to this strategy is the systematic approach of
more efficient agency recruitment and training using time-tested profiling techniques and
improved compensation management.
FPIC will also intensify development of its business through the expansion of its network of
intermediaries. Three branches will be opened in FY 2006 at strategically located areas to further
enhance the company’s business coverage.
Finally, the company undertook a change of corporate name from “First Lepanto-Taisho
Insurance Corp.” to “FLT Prime Insurance Corp.” and introduced a new corporate logo during the
period. The move aims to enhance brand image of the company and strengthen its market
presence in the industry.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 27
PCPPI
PCPPI sustained its outstanding performance in 2005 driven by the successful introduction of
NCBs and the continued product innovations and packaging improvement of carbonated
softdrinks beverages. Income from operations grew by 10% while sales volume registered a 7%
increase over that of fiscal year 2004.
However, net income dropped by 13% to P773 million
from P884 million in 2004 due mainly to the reduced tax benefit from NOLCO which were fully
utilized in 2004.
Despite economic difficulties and intense pricing competition, PCPPI stayed focused on
heightening its distribution rate and expanding its NCB portfolio in the beverage market.
b.
Financial Condition
The Group’s total assets dropped 6% to P5.5 billion mainly from the sale of PCPPI shares and
depreciation and amortization of operating assets. Current assets increased by 23% mainly
because of the increase in receivables and inventories (18% and 65%, respectively) which can
be attributed to the improved business operations of LCI.
Leasehold rights decreased by 11% representing amortization during the year. Other assets
decreased by 15% to P316.4 million from P372.3 million of the prior year.
The sale of PCPPI shares provided the Group with the opportunity to reduce debts through the
acquisition of the LCI loans and settlement of advances from affiliates. Accordingly, Investments
decreased by 18% to P1.39 billion and Payable to Affiliates decreased to P33.5 million from
P291.3 million.
The acquisition by OBII of the LCI loan resulted to the elimination of the loans and accrued
interest in the Consolidated Balance Sheet and the recognition of gain on loan restructuring
amounting to P1.6 billion and P1.3 billion, respectively. The settlement of LCI loan, coupled by
loan repayments by TPI, reduced consolidated loans by 33% to P2.2 billion from P3.3 billion.
The net amount of Deferred Tax assets and liability showed a decrease of 7% mainly from effect
on deferred income tax on amortization of deferred costs and revaluation increment in properties.
Overall, consolidated liabilities decreased by P1.2 billion mainly because of these transactions.
During the year, TPI paid P31.67 million of which P25 million represents principal repayments
with the remainder of P6 million representing interest payments.
Restatement of Prior Years’ Financial Statements
Effective July 1, 2004, the Group adopted the Statement of Financial Accounting Standards
(SFAS)/International Accounting Standards (IAS) No. 12, Income Taxes which provides for the
recognition of deferred tax liability on asset revaluation. The standard was adopted on a
retroactive basis and prior years’ financial statements were restated resulting to the decrease in
“Revaluation increment in properties” and increase in “Deferred tax liability in the Balance Sheets
by P329.7 million and P352.3 million as of June 30, 2005 and 2004, respectively. Consequently,
prior years’ Consolidated Statements of Income were also restated to recognize the income tax
effect on the amortization of revaluation increment in the amount of P23.6 million, and P12.8
million for FY 2004 and FY 2003, respectively.
Moreover, the Group also changed its accounting policy in accounting for retirement benefits.
Effective this fiscal year, retirement cost is determined using the projected unit credit method
which reflects services rendered up to valuation date and assumptions on employees’ salaries.
The change in accounting policy was also adopted on a retroactive basis. Based on the latest
actuarial valuation, prior years’ financial statements were restated to reflect the decrease in
accrued retirement and capital deficiency each by P43.3 million as of June 30, 2004. Con-
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 28
solidated Statements of Income were also restated to reflect the decrease in the estimated
retirement benefits in the amount of P10.9 million and P1.1 million in FY 2004 and FY 2003.
Key Variable and Other Qualitative and Quantitative Factors
The top 5 Performance Indicators of the Company are as follows:
Ratios
Formula
Current Ratio
Debt to Equity Ratio
Equity to Debt Ratio
Book Value per Share
Loss per Share
(i)
30-Jun-07
30-Jun-06
Current Assets
0.63:1
0.17:1
Current liabilities
2,456,780 / 3,922,589
1,430,840 / 8,579,512
Total Liabilities
68:1
(2.18):1
Equity
4,970,596 / 73,238
9,660,814 / (4,441,122)
Equity
0.015:1
(0.46):1
Total Liabilities
73,238 / 4,970,596
(4,441,122) / 9,660,814
Equity
0.0309
(1.876)
Total # of shares
73,238 /2,367,149
(4,441,122)/2,367,149
Net Income (Loss)
1.87
(0.08)
Total # of Shares
4,417,448 / 2,367,149
(198,717) / 2,367,149
Any known trends, demands, commitments, events or uncertainties that will have a
material impact on issuer’s liability.
There are no known trends or any known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the Company and
its subsidiaries liquidity increasing or decreasing in any material way.
(ii)
Events that will trigger direct or contingent financial obligation that is material to the
Company, including any default or acceleration of an obligation
There are no known events that will trigger direct or contingent financial obligation that is
material to the Company, including any default or acceleration of an obligation.
(iii)
Material off-balance sheet transactions, arrangements, obligations (including contingent
obligations), and other relationships with unconsolidated entities or other persons created
during the reporting period.
There are no known off-balance sheet transactions, arrangements, obligations (including
contingent obligations), during the period.
(iv)
Material Commitment for Capital Expenditure
The Company has not entered into any material commitment for capital expenditure.
(v)
There are no known trends, events or uncertainties that have material impact on net
sales/revenues/income from continuing operations.
(vi)
The Company did not recognize income or loss during the quarter that did not arise from
continuing operations.
(vii)
There are no known causes for material change (of material item) from period to period.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 29
(viii)
There are no known seasonal aspects that had a material effect on the financial condition
or results of operations.
Item 7. Financial Statements
The consolidated financial statements and schedules listed in the accompanying Index to
Financial Statements and Supplementary Schedules are filed as part of this Form 17-A.
Item 8.Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
1)
Information on Independent Accountant
(a)
Audit and Audit-Related Fees
(1)
(2)
(b)
The aggregate fees billed by the auditors for FY 2007 and 2006 amounted to P2.4
million and P2.2 million, respectively.
There are no known assurance and related services rendered by the external auditor
aside from the services stated above.
Tax Fees
External Auditor did not render tax services in FY 2007 and FY 2006.
(c)
All Other Fees
No known Other Services were rendered by external auditor aside from that stated
above.
Audit and Audit-Related Fees are as follows:
2007
Professional Fees
P2,116,500
Value Added Tax
253,980
TOTAL Audit Fees
2,370,480
2)
2006
P 1,971,600
236,592
2,208,192
There were no changes in or disagreements with the Company’s accountants/auditors on
accounting principles and practices or financial disclosures during the fiscal year and the
past two fiscal years. Neither was there any resignation, dismissal or cessation of service
of the external auditors of the Company for the past three fiscal years.
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9. Directors and Executive Officers of the Registrant
A.
List of Directors
The following list pertains to the directors of the Company for FY 2006-2007 (as of 30
September 2007) which includes the directorships/officerships held by the directors in
other corporations. Most of these directorships/officerships have been held by the
directors for the past five (5) years to the present.
The Company’s directors serve for a term of one year until the election and acceptance
of their qualified successors.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 30
Director (Age)-Citizenship
(As of 30 September 2007)
Felipe U. Yap (70) - Filipino
Chairman of the Board
and Chief Executive Officer
Position in the Company/
Other Directorships
Chairman (2000-Present)
Vice Chairman (1993-2000)
Lepanto Consolidated Mining Company
Lepanto Investment and Development Corp.
Diamant Boart Philippines, Inc.
Diamond Drilling Corporation of the Philippines
Far Southeast Gold Resources, Inc.
Manila Mining Corporation
Shipside, Inc.
Chairman of the Board/Director
FLT Prime Insurance Corporation
Orion Land Inc.
Tutuban Properties, Inc.
Orion I Holdings Philippines, Inc.
Lepanto Ceramics, Inc.
Orion Brands International, Inc.
Zeus Holdings, Inc.
Yapster e-Conglomerate
Director
Lepanto Condominium Corporation
Manila Peninsula Hotel, Inc.
Philippine Associated Smelting & Refining Corp.
Philippine Fire & Marine Insurance Corp.
Cyber Bay Corporation
Orion Property Development, Inc.
David C. Go (66) - Filipino
Vice Chairman (1992 to Present)
Director (1989 to Present)
Chairman
DHG Capital Holdings, Inc.
OE Holdings, Inc.
Orion Maxis Inc.
22Ban Marketing, Inc.
Kolin Philippines, Inc.
Chairman/President
Orion Property Development, Inc.
President
Orion Land Inc.
Tutuban Properties, Inc.
TPI Holdings Corporation
Director
Cyber Bay Corporation
ZHI Holdings, Inc.
Orion I Holdings Philippines, Inc.
Orion Brands International, Inc.
Orion Solutions, Inc.
ACA & Company
Yuen Po Seng (48) - Malaysian
President (11 January 2002 to Present)
Executive Vice President (1993 to 10 Jan. 2002)
Treasurer (1995 to 10 Jan. 2002)
Director (1995 to Present)
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 31
Chairman/President
ZHI Holdings, Inc.
Orion Solutions, Inc.
Genez Investments Corporation
Treasure-House Holdings Corporation
OE Enterprises Holdings, Inc.
Chairman
HLG Philippines, Inc.
President/Director
FLT Prime Insurance Corporation
Orion I Holdings Philippines, Inc.
Lepanto Ceramics, Inc.
Zeus Holdings, Inc.
Orion Maxis Inc.
Director/Treasurer
Guoco Assets (Philippines), Inc.
Hong Way Holdings, Inc.
Director
Cyber Bay Corporation
Central Bay Reclamation & Development Corp.
Orion Land Inc.
Tutuban Properties, Inc.
TPI Holdings Corporation
Orion Brands International, Inc.
DHG Capital Holdings, Inc.
BIB Aurora Insurance Brokers, Inc.
OE Holdings, Inc.
Guoco Securities (Phil.), Inc. (pending dissolution)
MAA Mutualife Philippines, Inc.
OTi Consulting Philippines, Inc.
Systems Components & Creative Productions, Inc.
Trustee
Malaysian Association of the Philippines, Inc.
Victor C. Say (62) - Filipino
Director (1989 to Present)
Director
Cualoping Securities Corporation
SEATO Trading Co., Inc.
San Juan Enterprises, Inc.
Kolin Philippines, Inc.
Cyber Bay Corporation
Tutuban Properties, Inc.
Member
Philippine Stock Exchange
Ricardo J. Romulo (74) - Filipino
(Independent Director)
Director (1997 to Present)
Senior Partner
Romulo Mabanta Buenaventura Sayoc &
delos Angeles
Chairman
Cebu Air, Inc.
BASF Coatings, Inc.
Digital Telecommunications Phils., Inc.
Federal Phoenix Assurance Co. Inc.
Sime Darby Pilipinas, Inc.
Vitacolor Industries, Inc.
Watson Wyatt Philippines, Inc.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 32
B.
Director
BASF Philippines, Inc.
Honda Philippines, Inc.
Johnson & Johnson (Phils.), Inc.
Kraft Foods (Phils.), Inc.
Maersk-Filipinas, Inc.
Philippine American Life and General Insurance Co.
SM Development Corporation
Zuellig Pharma Corporation
Trustee
Equitable Bank Foundation, Inc.
IBM Philippines, Inc. Pension Plan
Daisy L. Parker (43)- Filipino
Director (2000-Present)
Corporate Secretary (1995-Present)
Director/Corporate Secretary
Guoco Assets (Philippines), Inc.
Orion Land Inc.
Tutuban Properties, Inc.
TPI Holdings Corporation
Orion Property Development, Inc.
Orion I Holdings Philippines, Inc.
Orion Brands International, Inc.
Lepanto Ceramics, Inc.
Zeus Holdings, Inc.
ZHI Holdings, Inc.
FLT Prime Insurance Corp.
DHG Capital Holdings, Inc.
Orion Solutions, Inc.
HLG Philippines, Inc.
BIB Aurora Insurance Brokers, Inc.
OE Holdings, Inc.
OE Enterprises Holdings, Inc.
22Ban Marketing, Inc.
Director
Hong Way Holdings, Inc.
Corporate Secretary
Orion Maxis Inc.
Guoco Securities (Phil.), Inc. (pending dissolution)
Genez Investments Corporation
Treasure-House Holdings Corporation
Independent Director
Atty. Ricardo J. Romulo has been nominated and elected as independent director of the
Registrant, for the fiscal year ended 30 June 2007.
C.
Significant Employees
There are no non-executive officers who are expected by the Registrant to make a significant
contribution to the business.
D.
Family Relationships
There are no family relationships (up to fourth civil degree) either by consanguinity or affinity
among the abovenamed directors and executive officers.
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 33
E.
Involvement in Certain Legal Proceedings
The abovementioned directors and executive officers have not been involved in the following
events or legal proceedings that occurred during the past five (5) years up to the present date
which are material to an evaluation of the ability and integrity of the said directors and executive
officers:
a)
Any bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or within two
years prior to that time;
b)
Any conviction by final judgment in a criminal proceeding, domestic or foreign, or being
subject to a pending criminal proceeding, domestic or foreign, excluding traffic violations
and other minor offenses;
c)
Being subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement in any
type of business, securities, commodities or banking activities; and
d)
Being found by a domestic or foreign court of competent jurisdiction (in a civil action), the
Commission or comparable foreign body, or a domestic or foreign exchange or electronic
marketplace or self-regulatory organization, to have violated a securities or commodities
law, and the judgment has not been reversed, suspended, or vacated.
Item 10. Executive Compensation
A.
Information as to aggregate compensation paid or accrued during the last two fiscal years
and the ensuing fiscal year to the Company’s Chief Executive Officer and four other most
highly compensated executive officers.
Summary Compensation Table
Annual Compensation
Name
Fiscal Year
Salary
(in P000s)
Yuen Po Seng
(President)
2005-2006
2006-2007
2007-2008
2005-2006
2006-2007
2007-2008
2005-2006
2006-2007
2007-2008
2005-2006
2006-2007
2007-2008
2005-2006
2006-2007
2007-2008
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
2005-2006
2006-2007
2007-2008
(projected)
2005-2006
2006-2007
2007-2008
(projected)
P15,903.75
P16,078.82
P17,372.77
P1,884.16
P1,321.68
P1,594.92
P2,369.35
P2,546.77
P2,801.45
P15,903.75
P16,078.82
P17,686.71
P1,884.16
P1,321.68
P1,453.84
P2,769.35
P2,946.77
P3,201.45
Daisy L. Parker
(VP-Group Legal)
Ronald P. Sugapong
(VP-Group Financial Controller)
Ma. Rhodora P. dela Cuesta
(AVP-Legal Dept.)
Ariel T. Lopez *
(Senior Manager-Legal Dept.)
Edwin M. Silang
(Group HR Manager)
CEO and four most highly
compensated Exec. Officers
All officers and directors as a group
unnamed
* resigned effective 31 May 2007
Bonus
(in P000s)
Other
Compensation
(in (P000s)
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 34
B.
Compensation of Directors/Executive Officers
Members of the Board of Directors are elected for a term of one year until the election and
acceptance of their qualified successors. They receive no compensation except reasonable
director’s fee as fixed by the Board of Directors at the end of the fiscal year.
The members of the Board who are executive officers of the Registrant are remunerated with a
compensation package comprising of 13-month base pay. In addition, they may receive a
performance bonus at year-end which the Board extends to the rest of the managerial,
supervisory and rank and file employees.
C.
Employment Contracts/Termination of Employment/Change-in Control Arrangements –
No new executive was employed by the Company this year nor was there a change-in-control
arrangement last fiscal year.
There are no special terms or compensatory plans or arrangements resulting from the resignation
or termination of any executive officer’s employment or change-in control of Registrant.
D.
Options Outstanding
The Company has no outstanding warrants and options.
Item 11. Security Ownership of Certain Beneficial Owners and Management
A.
Security Ownership of Certain Record and Beneficial Owners (more than 5%)
(As of 30 September 2007)
Title of
Class
Common
Common
Common
Common
Common
Name & address of record
owner & relationship with
issuer
PCD Nominee Corp.*
G/F
Makati
Stock
Exchange, Ayala Ave.,
Makati City
PCD Nominee Corp.
G/F
Makati
Stock
Exchange, Ayala Ave.,
Makati City
Genez Investments Corp.
(GIC)**
20/F LKG Tower, 6801
Ayala Ave., Makati City
- Stockholder
Name of Beneficial
Owner & relationship
with record owner
Citizenship
No. of Shares
Held
Percent
(%)
Filipino
834,049,609
35.24%
NonFilipino
516,473,968
21.82%
GIC
20/F LKG Tower, 6801
Ayala Avenue,
Makati City
Filipino
267,734,038
11.31%
Lepanto
Consolidated
Mining
Co.
(Lepanto
Mining)***
21/F Lepanto Bldg., 8747
Paseo de Roxas, Makati
City
-Stockholder
F.Yap Securities, Inc.****
23/F Phil. Stock Exchange
Centre, Exchange Road,
Pasig City
-Broker
Total
Lepanto Mining
21/F Lepanto Bldg.,
8747 Paseo de Roxas,
Makati City
Filipino
180,000,000
7.61%
Filipino
126,581,700
5.35%
1,924,839,315
81.33%
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 35
*PCD Nominee Corp.-a private company and wholly-owned subsidiary of the Philippine Central Depository
Inc. (PCDI), is the registered owner of the POPI shares; however, beneficial ownership of such shares
pertain to the PCD participants (brokers) and/or their clients (corporations or individuals) in whose names
these shares are recorded in their respective books. As per PCD List of Beneficial Owners dated 30
September 2007, the following hold at least 5% of POPI’s voting stocks: (1) Guoco Assets (Philippines),
Inc. (GAPI)-451,256,181 (19.07%); (2) David Go Securities Corp.-137,833,725 (5.82%); and (3) Citibank
N.A. -129,204,000 (5.46%).
-There is no specific nominee to vote these shares as the shares are held by different brokers. Brokers
issue the proxy as per instructions of their principal-clients/beneficial owners of the shares.
- GAPI, a company organized under Philippine laws, is 96.45%-owned by Singapore-based Guoco Assets
Pte. Ltd.. The Board of Directors of GAPI has authority to decide how the POPI shares will be voted. At
present, GAPI lodged its 415,256,180 POPI shares with PCD, while 36,000,000 POPI shares were lodged
with RCBC Securities, Inc..
**GIC is wholly-owned by Treasure-House Holdings Corporation (THHC), which is 40%-owned by Mr. Yuen
Po Seng and his wife. The GIC Board of Directors has the power to decide how the POPI shares will be
voted.
***The Board of Directors of Lepanto Mining has the power to decide how the POPI shares will be voted.
****F.Yap Securities, Inc. holds the POPI shares in trust for its clients/beneficial owners and vote the POPI
shares in accordance with the instructions of such beneficial owners.
B.
Security Ownership of Management
Title of Class
Name of beneficial
owner
Amount and nature
of beneficial ownership
Citizenship
Percent
(As of 30 September 2007)
Common
Common
Common
Common
Common
Common
Common
Felipe U. Yap
David C. Go
Yuen Po Seng
Victor C. Say
Ricardo J. Romulo
Daisy L. Parker
Ronald P. Sugapong
Total Holdings of Directors
& Exec. Officers
C.
3,010,000 shares (b)
22,200,000
(b)
2,300,100
(b)
23,500,000
(b)
1
(r)
283,400
(b)
50,000
(b)
----------------51,343,501
=========
Filipino
Filipino
Malaysian
Filipino
Filipino
Filipino
Filipino
0.12%
0.98%
0.10%
0.99%
0.01%
0.002%
-------2.202%
=====
Voting Trust Holders of 10% or More
There are no voting trust holders of 10% or more of the common shares.
D.
Changes in Control of the Registrant since beginning of last Fiscal Year
There has been no change in control of the Registrant since the beginning of the last fiscal year.
Item 12. Certain Relationships and Related Transactions
(1)
There has been no transaction during the last two years, or proposed transactions, to
which the Company/Registrant was or is to be a party, in which any of the following
persons had or is to have a direct or indirect material interest:
a.
b.
c.
d.
Any director or executive officer of the Registrant;
Any nominee for election as a director;
Any security holder named in Sections 1.1 and 1.2 above; and
Any member of the immediate family (including spouse, parents, children,
siblings, and in-laws) of any of the persons named in the immediately preceding
subparagraphs (1), (2) and (3).
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 36
(2)
The Company does not have a parent company as no one stockholder owns more than
50% of the Company’s shares. As per the Company’s records, GAPI is the beneficial
owner of 451,256,181 shares representing 19.07% of the outstanding capital stock
of the Company. (GAPI lodged its 415,256,180 POPI shares with the PCD, while
36,000,000 POPI shares were lodged with RCBC Securities, Inc..) GIC is the beneficial
owner of 267,734,038 shares of the Registrant, equivalent to 11.31% equity (GIC lodged
17,734,037 of said POPI shares with David Go Securities Corp., while 1 share was
assigned to its nominee, Mr. Yuen).
PART IV-CORPORATE GOVERNANCE
Item 13. Corporate Governance
Compliance with Corporate Governance
Pursuant to the requirements of the Securities and Exchange Commission (SEC), the Company’s
Corporate Secretary/Compliance Officer has submitted the required yearly certification to the
SEC on the extent of compliance by the Company with its Manual of Corporate Governance. For
purposes of evaluating compliance with the Manual, the Corporation has adopted the self-rating
form prescribed by the SEC.
The Company has substantially complied with its Manual of Corporate Governance with the
election of an independent director to the Company’s Board for the past two (2) years; the
creation of the Audit, Compensation, and Nomination and Election Committees and the election
of the members of each committee; the regular conduct of meetings of the Board, attendance in
meetings of the directors and committee members; adherence to the written Code of
Conduct/Policy Manual prepared by its Human Resources Department, and adherence to
applicable accounting standards and disclosure requirements.
The Company and its operating subsidiaries respectively adhere to a business plan, budget and
marketing plan. The Management prepares and submits to the Board, on a regular basis,
financial and operational reports which enable the Board and Management to assess the
effectiveness and efficiency of the Company and its operating subsidiaries.
There has been no major deviations from the Company’s Manual of Corporate Governance.
Policies and procedures for the identification of potential conflicts of interests involving the
Company’s directors and officers are currently being developed. A Full Business Interest
Disclosure Form has been adopted and has been complied with by the directors and key officers
of the Company.
PART V - EXHIBITS AND SCHEDULES
Item 14. Exhibits and Reports on SEC Form 17-C
(a)
Exhibits
See accompanying Index to Exhibits
(b)
Reports on SEC Form 17-C
During the period covered by this report, the reports on Form 17-C (Current Report) filed with the
SEC cover the following:
(i)
Resignation of Mr. Micky Yong as director of the Company (25 August 2006);
Prime Orion Philippines, Inc.
SEC Form 17-A, as Amended
Page 37
(ii)
Setting the annual stockholders’ meeting of the Company on 20 November 2006 and the
record date for stockholders entitled to vote thereat on 19 October 2006. Validation of
proxies was set on 15 November 2006. The time, venue and agenda for the meeting
was also included (5 October 2006);
(iii)
Change in the time of the annual stockholders’ meeting (moved from 2:30 p.m. to 1:00
p.m. on 20 November 2006) (10 October 2006);
(iv)
Election of the directors of the Company for fiscal year 2006-2007 (including the
independent director), election of the officers of the Company for 2006-2007,
appointment of the Compliance Officer/Committee Members under the Company’s
Manual on Corporate Governance and the Compliance Officer as required under the
Company’s Anti-Money Laundering Manual (20 November 2006);
(v)
Receipt by POPI of the Amended Notice to Parties at Public Auction together with an
Amended Notice of Extrajudicial Foreclosure Sale dated 14 November 2006 issued by
Sheriff Teofilo C. Soon, Jr. of the RTC-Office of the Clerk of Court, Mandaue City in
connection with the case filed by PNB (EFJ Case No. 06-03-1469) and the filing by POPI
of an MR of the RTC Order dated 31 October 2006 which denied POPI’s application for a
writ of preliminary injunction (24 November 2006);
(vi)
Sale by OBII of its 584,283,294 common shares of stock of PCPPI to The Nassim Fund
for a cash consideration of US$21,163,362.00 (28 February 2007);
(vii)
Execution of a Deed of Assignment between OBII (a subsidiary of POPI) with Philippine
Investment One (SPV-AMC), Inc. (“PIO”) by virtue of which O BII acquired all the rights,
title and interest of PIO in the loans originally extended by Equitable PCI Bank to LCI (in
the principal amount of P462,677,750.20) for a cash consideration of P92,535,550 (15
March 2007);
(v)
Filing of a complaint by Asset Pool a (SPV-AMC), Inc. (“APA”), as alleged assignee of
LCI’s loan from BPI, against POPI’s subsidiaries namely, OIHPI, OBII (and their
directors), OLI and third parties, namely, HWHI, OLI and Nassim. The complaint prayed,
among others, for the: (i) issuance of TRO and/or writ of preliminary injunction to freeze
the proceeds of the sale of the PCPPI shares of stock; (ii) rescission of the sale of PCPPI
shares to HWHI and OLI made [dated 6 December 2004]; (iii) rescission of the sale of
PCPPI shares to Nassim [dated 28 February 2007] (20 March 2007);
(vi)
Filing by OIHPI (and its directors) of its Opposition to the Complaint of APA (22 March
2007);
(vii)
Sale by ZHI Holdings, Inc. (“ZHIHI”) (an indirect subsidiary of POPI) through a special
block sale of 2,555,788,753 common shares of stock in Zeus Holdings, Inc. (equivalent to
93.5% of the outstanding capital stock of Zeus) to F. Yap Securities, Inc. In Trust for
Various Clients for a total consideration of P85 million (20 June 2007);
(viii)
Submission on documents requested by the PSE re: special block sale of Zeus shares
(25 June 2007); and
(ix)
Acquisition by HPI (a subsidiary of POPI) through its investment manager, of PNB’s
rights, title and interest in the loans it extended to POPI and certain subsidiaries, for the
cash consideration of P400 million (28 June 2007).
PRIME ORION PHILIPPINES, INC.
Index to Financial Statements and Supplementary Schedules
Form 17-A, Item 7
--------------------------------------------------------------------------------------------------------------------------------Consolidated Financial Statements
Page No.
Statement of Management’s Responsibility for Financial Statements .
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 2007 and June 30, 2006
Consolidated Statements of Income and Retained Earnings for the
Years Ended 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Capital Deficiency . . . . . . . .
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .
40
41-42
43-44
45
46
47-48
49-93
Supplementary Schedules
Report of Independent Public Accountants on Supplementary
Schedules
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
Marketable Securities (Current Marketable Equity Securities
And Other Short-Term Cash Investments) . . . . . . . . . . . . . .
Amounts Receivable from Directors, Officers, Related Parties
And Principal Stockholders (Other than Affiliates) . . . . . . . .
Long-Term Investments in Securities (Non-Current Marketable
Equity Securities, Other Long-Term Investments in Stock and
Other Investments) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indebtedness of Unconsolidated Subsidiaries and Affiliates
Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . .
Accumulated Depreciation and Amortization . . . . . . . . . . . .
Intangible Assets-Other Assets . . . . . . . . . . . . . . . . . . . . .
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indebtedness to Affiliates and Related Parties (Long-Term
Loans from Related Companies) . . . . . . . . . . . . . . . . . . . .
Guarantees of Securities to Other Issuers . . . . . . . . . . . . .
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
95
96
97
N.A.
98
99
100
101
102
N.A.
103
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
- 41 -
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Prime Orion Philippines, Inc.
20th Floor, LKG Tower
6801 Ayala Avenue, Makati City
We have audited the accompanying consolidated financial statements of Prime Orion Philippines, Inc.
and Subsidiaries (the Group), which comprise the consolidated balance sheets as at June 30, 2007, and
2006 and the consolidated statements of income, consolidated statements of changes in equity (capital
deficiency) and consolidated statements of cash flows for the years ended June 30, 2007, 2006, and
2005 and a summary of significant accounting policies and other explanatory notes. We did not audit
the 2007, 2006, and 2005 financial statements of Pepsi-Cola Products Philippines, Inc. (PCPPI), an
associate until February 28, 2007, the investment which is carried in the consolidated financial
statements using the equity method of accounting. The equity in net income in PCPPI amounted to
=89.2 million, P
P
=192.3 million and P
=205.2 million in 2007, 2006 and 2005, respectively. The carrying
amount of the related investment amounted to P
=633.7 million as of June 30, 2006. Those financial
statements were audited by other auditors whose reports have been furnished to us and our opinion, in
so far as it relates to the amounts included for PCPPI, is based solely on the reports of the other
auditors.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
SGV & Co is a member practice of Ernst & Young Global
*SGVMC406506*
- 42 -
*SGVMC406506*
- 43 -
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Par Value and Number of Shares)
June 30
ASSETS
Current Assets
Cash and cash equivalents (Note 4)
Receivables - net (Note 5)
Inventories - net (Note 6)
Real estate held for sale and development (Note 7)
Amounts owed by related parties - net (Note 19)
Available-for-sale (AFS) investments (Note 9)
Other current assets - net (Note 8)
Total Current Assets
Noncurrent Assets
Investments in associates - net (Note 11)
Leasehold rights - net (Note 17)
Held-to-maturity (HTM) investments (Note 10)
Investment properties - net (Note 13)
Property, plant and equipment - net (Note 12)
At cost
At revalued amounts
Deferred income tax assets (Note 22)
Other noncurrent assets - net (Note 14)
Total Noncurrent Assets
TOTAL ASSETS
LIABILITIES AND EQUITY (CAPITAL DEFICIENCY)
Current Liabilities
Accounts payable and accrued expenses (Notes 7 and 18)
Loans payable (Notes 15 and 17)
Current portion of long-term debt (Note 17)
Convertible note (Note 16)
Amounts owed to related parties (Note 19)
Total Current Liabilities
Noncurrent Liabilities
Retirement obligation (Note 21)
Deferred income tax liabilities (Note 22)
Rental deposits and advances
Subscriptions payable (Note 11)
Long-term debt - net of current portion (Note 17)
Total Noncurrent Liabilities
2007
2006
P
=569,489
511,608
239,811
385,266
3,435
608,324
138,847
2,456,780
=135,943
P
509,725
185,906
388,794
4,903
94,342
111,227
1,430,840
530,549
57,799
9,925
981,993
1,164,103
66,726
57,388
1,131,406
172,932
676,453
108,415
116,667
2,654,733
P
=5,111,513
320,268
699,811
114,343
312,245
3,866,290
=5,297,130
P
P
=2,136,248
156,441
346,250
1,251,339
32,311
3,922,589
=5,133,651
P
1,423,615
738,378
1,251,339
32,529
8,579,512
49,500
278,682
191,355
528,470
–
1,048,007
4,970,596
37,746
313,392
195,444
528,470
6,250
1,081,302
9,660,814
(Forward)
*SGVMC406506*
- 44 June 30
2007
Equity (Capital Deficiency) Attributable to Equity Holders of the
Parent
Capital stock - P
=1 par value
Authorized - 2,400,000,000 shares
Issued and subscribed - 2,367,149,383 shares (net of subscriptions
receivable of =
P300,797)
Additional paid-in capital
Revaluation increment in property, plant and equipment (Note 12)
Revaluation reserve on investment properties at deemed cost (Note 13)
Unrealized valuation gain (loss) on AFS investments
Deficit
Minority interest
Total Equity (Capital Deficiency)
TOTAL LIABILITIES AND EQUITY (CAPITAL DEFICIENCY)
P
=2,066,352
829,904
208,135
324,989
111,305
(3,467,447)
73,238
67,679
140,917
P
=5,111,513
2006
=2,066,352
P
829,904
227,529
368,797
(238)
(7,933,466)
(4,441,122)
77,438
(4,363,684)
=5,297,130
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC406506*
- 45 -
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Earnings (Loss) Per Share)
Years Ended June 30
REVENUE
Merchandise sales - net
Rental (Note 13)
Insurance premiums and commissions
Real estate sales
COST AND EXPENSES
Cost of goods sold and services (Note 20)
Operating expenses (Note 20)
Rent and utilities (Note 25)
Insurance underwriting deductions
Cost of real estate sold
OTHER CHARGES (INCOME)
Gain on extinguishment of debt (Notes 15, 17 and 18)
Gain on sale of investments (Notes 9, 11 and 13)
Recovery from sale of investment (Note 2)
Equity in net income of associates (Note 11)
Reversal of allowance for impairment losses on
receivables (Note 5)
Interest income
Impairment loss on property, plant and equipment
(Note 12)
Provision for probable losses (Notes 15 and 17)
Foreign exchange losses (gains) - net
Interest and bank charges (Notes 15, 16 and 17)
Others - net
INCOME (LOSS) BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM)
INCOME TAX - net (Note 22)
NET INCOME (LOSS)
ATTRIBUTABLE TO:
Equity holders of the parent
Minority interests
EARNINGS (LOSS) PER SHARE (Note 23)
Basic, for income (loss) for the year attributable to
ordinary equity holders of the parent
2007
2006
2005
P
=711,799
438,299
98,336
634
1,249,068
=657,460
P
461,703
71,054
15,908
1,206,125
=721,359
P
463,437
68,513
4,583
1,257,892
806,308
472,052
239,287
86,578
488
1,604,713
726,362
560,153
232,189
50,500
11,802
1,581,006
778,088
464,695
218,843
63,062
5,989
1,530,677
(4,072,496)
(718,559)
(91,411)
(89,339)
(624,021)
–
–
(192,486)
(1,342,459)
(288,081)
–
(205,222)
(30,704)
(12,622)
(45,244)
(6,940)
–
(5,153)
8,392
9,249
22,457
298,907
(70,129)
(4,746,255)
(3,141,542)
35,984
295,788
4,907
420,132
(72,944)
(184,824)
1,396,182
–
465,147
(34)
312,961
(68,465)
(1,131,306)
399,371
4,390,610
(190,057)
858,521
12,617
22,139
(16,376)
P
=4,406,986
(P
=202,674)
=836,382
P
P
=4,417,448
(10,462)
P
=4,406,986
(P
=198,717)
(3,957)
(P
=202,674)
=866,698
P
(30,316)
=836,382
P
P
=1.87
(P
=0.08)
=0.37
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC406506*
- 46 -
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY (CAPITAL DEFICIENCY)
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(Amounts in Thousands)
Balances at June 30, 2004
Provision for fluctuation in value of investments
Revaluation
Increment in
Property
Plant and
Equipment
(Note 12)
Revaluation
Reserve on
Investment
Properties at
Deemed Cost
(Note 13)
Unrealized
Valuation
Gain (Loss) on
AFS Investments
Capital Stock
Additional
Paid-in
Capital
=2,066,352
P
=829,904
P
=243,641
P
=456,882
P
–
–
–
–
19,161
–
–
19,161
–
–
–
–
18,223
–
–
(P
=19,452)
Deficit
(P
=8,722,833)
Minority
Interest
=111,550
P
Total
(P
=5,033,956)
Transfer of realized portion of:
Revaluation increment on properties, net of tax
Revaluation reserve on investment properties at deemed cost, net
of tax
(18,223)
–
–
–
–
–
–
–
Balances at June 30, 2005
=2,066,352
P
=829,904
P
=225,418
P
=411,761
P
(P
=291)
(P
=7,792,791)
=81,234
P
(P
=4,178,413)
Balances at June 30, 2005
=2,066,352
P
=829,904
P
=225,418
P
=411,761
P
(P
=291)
(P
=7,792,791)
=81,234
P
(P
=4,178,413)
–
–
–
–
(340)
2,066,352
829,904
225,418
411,761
(631)
Valuation gain taken to equity
–
–
–
–
393
–
161
554
Share in increase in revaluation increment of an associate
–
–
238
–
–
–
–
238
–
–
(4,836)
–
–
4,836
–
–
–
43,794
–
–
–
–
–
7,539
Net income for the year
Effect of change in accounting for financial instruments (Note 16)
Balances at July 1, 2005
(45,121)
–
45,121
–
866,698
9,412
(7,783,379)
–
(30,316)
–
81,234
–
836,382
9,072
(4,169,341)
Transfer of realized portion of:
Revaluation increment on properties, net of tax
Revaluation reserve on investment properties at deemed cost, net
of tax
Effect of change in income tax rates
Net loss for the year
–
–
–
–
–
6,709
(43,794)
830
–
–
–
–
Balances at June 30, 2006
=2,066,352
P
=829,904
P
=227,529
P
=368,797
P
Balances at June 30, 2006
=2,066,352
P
=829,904
P
=227,529
P
=368,797
P
–
–
Revaluation increment on properties, net of tax
–
–
Revaluation reserve on investment properties at deemed cost, net
of tax
–
–
–
–
Valuation gain taken to equity
–
–
(198,717)
(3,957)
(202,674)
(P
=238)
(P
=7,933,466)
=77,438
P
(P
=4,363,684)
(P
=238)
(P
=7,933,466)
=77,438
P
(P
=4,363,684)
–
111,543
–
688
112,231
–
–
4,763
–
–
–
43,808
–
–
–
15
Transfer of realized portion of:
Disposal of a subsidiary and an associate (Notes 2 and 11)
Net income for the year
Balances at June 30, 2007
–
–
=2,066,352
P
=829,904
P
(4,763)
–
(14,631)
–
=208,135
P
(43,808)
–
–
=324,989
P
–
=111,305
P
–
(14,616)
4,417,448
(10,462)
4,406,986
(P
=3,467,447)
=67,679
P
=140,917
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC406506*
- 47 -
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Years Ended June 30
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Interest and bank charges
Depreciation and amortization (Notes 12, 13 and 17)
Provisions for (reversal of):
Probable losses
Impairment losses on receivables
Impairment loss on property, plant and equipment
(Note 12)
Unrealized foreign exchange losses (gains)
Interest income
Equity in net income of associates (Note 11)
Gain on sale of investments (Notes 9, 11 and 13)
Gain on extinguishment of debt (Notes 15, 17 and 18)
Operating income before working capital changes
Decrease (increase) in:
Receivables
Inventories
Real estate held for sale and development
Other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Rental deposits and advances
Net cash flows from (used in) operations
Interest received
Interest paid
Net cash flows from (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in:
Investments in associates
Other noncurrent assets
HTM investments
Proceeds from sale of assets
Dividends received from associates
Proceeds from sale of AFS investments (Note 9)
Acquisitions of property, plant and equipment
Net cash flows from investing activities
P
=4,390,610
298,907
305,474
9,249
5,764
2006
2005
(P
=190,057)
=858,521
P
420,132
333,993
312,961
327,217
295,788
(35,378)
465,147
492
8,392
(3,524)
(12,622)
(89,339)
(718,559)
(4,072,496)
121,856
35,984
3,094
(6,940)
(192,486)
–
(624,021)
40,109
–
(34)
(5,153)
(205,222)
(288,081)
(1,342,459)
123,389
(24,083)
(53,905)
1,206
(29,618)
(4,464)
(2,302)
9,819
(57,160)
(70,607)
(72,130)
1,478
34,534
107,447
(4,089)
118,814
11,043
(47,954)
81,903
15,665
(14,951)
(13,284)
6,940
(56,987)
(63,331)
(235,669)
1,976
(217,029)
6,400
(38,925)
(249,554)
–
30,302
47,463
991,719
22,024
11,542
(8,192)
1,094,858
(12,952)
(16,436)
–
–
66,072
–
(21,379)
15,305
41,696
(12,990)
–
542,186
22,024
–
(28,013)
564,903
(Forward)
*SGVMC406506*
- 48 -
Years Ended June 30
2007
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in amounts owed to related parties
Payments of:
Loans
Long-term debt
Net cash used in financing activities
2006
2005
(P
=2,588)
(P
=2,343)
=100,506
P
(623,092)
(117,535)
(743,215)
(12,809)
(25,000)
(40,152)
(14,600)
(253,032)
(167,126)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
433,546
(88,178)
148,223
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
135,943
224,121
75,898
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 4)
P
=569,489
=135,943
P
=224,121
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC406506*
- 49 -
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information and Status of Operations
Prime Orion Philippines, Inc. (the Parent Company) was incorporated and registered with the
Philippine Securities and Exchange Commission on May 19, 1989. The Company’s registered
office address is 20th Floor, LKG Tower, 6801 Ayala Avenue, Makati City. The Parent
Company’s primary purpose is to acquire by purchase, exchange, assign, donate or otherwise, and
to hold, own and use, for investment or otherwise and to sell, assign, transfer, exchange, lease, let,
develop, mortgage, pledge, traffic, deal in and with, and otherwise operate, enjoy and dispose of
any and all properties of every kind and description and wherever situated, as and to the extent
permitted by law, including but not limited to, buildings, tenements, warehouses, factories,
edifices and structures and other improvements, and bonds, debentures, promissory notes, shares
of capital stock, or other securities and obligations, created, negotiated or issued by any
corporation, association, or other entity, domestic or foreign.
Prime Orion Philippines, Inc. and Subsidiaries, collectively referred to as “the Group”, have
principal business interests in real estate, financial services and manufacturing (see Note 24). The
accompanying consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of the liabilities of the Group in
the normal course of business. As shown in the consolidated financial statements, the Group had a
deficit amounting to P
=3.5 billion and P
=7.9 billion as of June 30, 2007 and 2006, respectively.
Also, the Parent Company and a subsidiary have short-term and long-term interest-bearing
obligations to local banks totaling to P
=1.8 billion and P
=3.4 billion as of June 30, 2007 and 2006,
respectively.
Total interest expense on such obligations amounted to P
=296.5 million,
=466.4 million and P
P
=408.9 million in 2007, 2006 and 2005, respectively. Moreover, the Parent
Company and a subsidiary have experienced delays in the payment of principal and interest on
certain obligations. Also, the Parent Company and a subsidiary have not fully complied with the
conditions and requirements under the Restructuring Agreement with creditor banks (see Note 17).
These factors indicate the existence of a material uncertainty which may cast significant doubt
about the Group’s ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to
the recoverability and the classification of assets’ carrying amounts or the amounts and the
classification of liabilities that might be necessary should the Group be unable to continue as a
going concern.
The operations of the Parent Company and certain subsidiaries have been affected by the
continuing economic difficulty resulting in substantially lower sales and revenue, deterioration of
profitability and tight liquidity. Management is currently undertaking initiatives to address both
the operational and financial viability of the Parent Company and certain subsidiaries as follows:
a. Divestment of non-core and non-profitable assets, debt restructuring and reduction (including
dacion en pago arrangements and loan repayments) and additional capital infusion.
b. Strengthening of core assets through the implementation of operating programs such as
efficiency improvement, cost reduction, rightsizing and productivity enhancement.
In 2007, the Parent Company and a subsidiary were able to settle with creditor banks total
obligations amounting to P
=4.6 billion at a lower amount.
*SGVMC406506*
- 50 As discussed in Notes 15, 16 and 17, some of these initiatives were already completed or in their
advanced stage of implementation and awaiting final approval by the concerned parties.
Management believes that given proper time, full implementation of these initiatives could
translate to positive results for the Parent Company and certain subsidiaries.
The consolidated financial statements of the Group as of June 30, 2007 and 2006 and for the years
ended June 30, 2007, 2006 and 2005 were approved and authorized for issue by the Board of
Directors on October 19, 2007.
2. Summary of Significant Accounting Policies
Basis of Preparation
The consolidated financial statements have been prepared on a historical cost basis, except for
certain property, plant and equipment that are carried at revalued amounts and AFS investments
that are carried at fair values. The consolidated financial statements are presented in Philippine
peso, which is the Group’s functional and presentation currency.
Statement of Compliance
The financial statements of the Group have been prepared in compliance with Philippine Financial
Reporting Standards (PFRS).
Basis of Consolidation
The consolidated financial statements include the accounts of the Parent Company and its
subsidiaries as of June 30 of each year:
Effective Percentage
of Ownership
2007
2006
Orion Land Inc. (OLI) and Subsidiaries:
OLI
Tutuban Properties, Inc. (TPI)
22BAN Marketing, Inc.
TPI Holdings Corporation (TPIHC)
Orion Property Development, Inc. (OPDI) and
Subsidiary:
Orion Beverage, Inc. (OBI)*
Luck Hock Venture Holdings, Inc.
Orion I Holdings Philippines, Inc. (OIHPI) and Subsidiaries:
OIHPI
Lepanto Ceramics, Inc. (LCI)
Orion Brands International, Inc. (OBII) and Subsidiary:
OBII
OBI*
OYL Holdings, Inc.
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
60.00
100.00
–
60.00
100.00
100.00
100.00
100.00
100.00
–
60.00
100.00
100.00
60.00
Forward
*SGVMC406506*
- 51 -
ZHI Holdings, Inc. (ZHI) and Subsidiary:
Zeus Holdings, Inc. (ZEUS)**
DHG Capital Holdings, Inc. (DCHI) and Subsidiaries:
DCHI
HLG Philippines, Inc. (HPI)
Orion Solutions, Inc. (OSI)
OE Holdings, Inc. (OEHI) and Subsidiaries:
OEHI
OE Enterprises Holdings, Inc. (OEEHI)
Orion Maxis Inc.
FLT Prime Insurance Corporation (FPIC)
Effective Percentage
of Ownership
2006
2007
100.00
100.00
98.00
–
100.00
100.00
96.00
100.00
100.00
96.00
100.00
100.00
100.00
70.00
100.00
100.00
100.00
70.00
*OPDI acquired OBI from OBII on February 21, 2007.
**ZHI sold ZEUS on June 13, 2007.
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease
to be consolidated from the date on which control is transferred out of the Group.
Consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances. All significant intercompany transactions
and balances between and among the Group, including intercompany profits and unrealized
profits, have been eliminated in the consolidation.
Minority interests represent interests in certain subsidiaries not held by the Group. The equity and
net income attributable to minority interests are shown separately in the consolidated balance sheet
and consolidated statement of income, respectively.
Changes in Accounting Policies
The accounting policies are consistent with those of the previous financial year, except for the
adoption of the following amendments to PAS and Philippine Interpretation, based on
International Financial Reporting Interpretation Committee (IFRIC) interpretation, during the
year. Adoption of these standards and interpretation did not have any effect on the Group, except
for the additional disclosures required in the financial statements.
PAS 19, Employee Benefits
Additional disclosures are made to provide information about trends in the assets and liabilities in
the defined benefit plans and the assumptions underlying the components of the defined benefit
cost.
PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts (issued August 2005) - amended the scope of PAS
39 to require financial guarantee contracts that are not considered to be insurance contracts to be
recognized initially at fair value and to be remeasured at the higher of the amount determined in
accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, and the
amount initially recognized less, when appropriate, cumulative amortization recognized in
accordance with PAS 18, Revenue.
*SGVMC406506*
- 52 Amendment for cash flow hedges of forecast intra-group transactions (issued April 2005) amended PAS 39 to permit the foreign currency risk of a highly probable intra-group forecast
transaction to qualify as the hedged item in a cash flow hedge, provided that the transaction is
denominated in a currency other than functional currency of the entity entering into that
transaction and that the foreign currency risk will affect the consolidated statement of income.
Amendment for the fair value option (issued June 2005) - amended PAS 39 to prescribe the
conditions under which the fair value option on classification of financial instruments at fair value
through profit or loss (FVPL) may be used.
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease
This interpretation provides guidance in determining whether arrangements contain a lease to
which lease accounting must be implied.
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
This interpretation was issued in March 2006 and becomes effective for financial years beginning
on or after June 1, 2006. It establishes that the date to assess the existence of an embedded
derivative is the date an entity first becomes a party to the contract, with reassessment only if there
is a change to the contract that significantly modifies the cash flows.
Future Changes in Accounting Policies
The Group has not yet adopted the following standards, amendment or interpretations that have
been approved but are not yet effective:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative and quantitative information about exposure to risks arising
from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures
in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure
requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to
all entities that report under PFRS. This standard is effective for annual periods beginning on or
after January 1, 2007.
Complementary amendment to PAS 1, Presentation of Financial Statements
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. This amendment is effective for annual periods beginning on or after January 1,
2007.
The Group is currently assessing the impact of PFRS 7 and the amendment to PAS 1 and expects
that the main additional disclosures will be the sensitivity analysis to market risk and the capital
disclosures required by PFRS 7 and the amendment to PAS 1, respectively.
PFRS 8, Operating Segments
PFRS 8 will replace PAS 14, Segment Reporting, and adopts the management approach to
reporting segment information. The information reported would be that which management uses
internally for evaluating the performance of operating segments and allocating resources to those
segments. Such information may be different from that reported in the consolidated balance sheet
and consolidated statement of income and companies will need to provide explanations and
*SGVMC406506*
- 53 reconciliations of the differences. This standard is effective for annual periods beginning on or
after January 1, 2009.
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
This interpretation prohibits the reversal of impairment losses on goodwill and AFS equity
investments recognized in the interim financial reports even if impairment is no longer present at
the annual balance sheet date. The interpretation is effective for annual periods beginning on or
after November 1, 2006.
Philippine Interpretation IFRIC 11, PFRS 2 Group and Treasury Share Transactions
This interpretation requires arrangements whereby an employee is granted rights to an entity’s
equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the
entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another
party, or (b) the shareholders of the entity provide the equity instruments needed. It also provides
guidance on how subsidiaries, in their separate financial statements, account for such schemes
when their employees receive rights to the equity instruments of the parent. This interpreatation is
effective for annual periods beginning on or after March 1, 2007.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This interpretation covers contractual arrangements arising from entities providing public services.
This interpretation is effective for annual periods beginning on or after January 1, 2008.
Except for PFRS 7 and the amendment to PAS 1, the Group does not expect any significant
changes in its accounting policies when it adopts the above standards, amendment and
interpretations.
Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from dates of acquisition and that are subject to an insignificant risk of changes in
value.
Financial Assets and Liabilities
Financial assets and financial liabilities are recognized initially at fair value. Transaction costs are
included in the initial measurement of all financial assets and liabilities, except for financial
instruments measured at FVPL.
The Group recognizes a financial asset or a financial liability in the consolidated balance sheet
when it becomes a party to the contractual provisions of the instrument. In the case of a regular
way purchase or sale of financial assets, recognition and disposals or retirements, as applicable, is
done using settlement date accounting.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity (capital
deficiency), net of any related income tax benefits. Financial instruments are offset when there is
a legally enforceable right to offset and intention to settle either on a net basis or to realize the
asset and settle the liability simultaneously.
*SGVMC406506*
- 54 Financial assets are further classified into the following categories: financial assets at FVPL, loans
and receivables, HTM investments, and AFS financial assets. The Group determines the
classification at initial recognition and re-evaluates this designation at every reporting date. As of
June 30, 2007 and 2006, the Group has no financial assets at FVPL.
Loans and receivables. Loans and receivables are nonderivative financial assets with fixed or
determinable payments that are not quoted in an active market. Loans and receivables are carried
at cost or amortized cost in the consolidated balance sheet. Amortization is determined using the
effective interest rate method. Loans and receivables are included in current assets if maturity is
within 12 months of the balance sheet date. Otherwise, these are classified as noncurrent assets.
Gains and losses are recognized in the consolidated statement of income when the loans and
receivables are derecognized or impaired, as well as through the amortization process.
As of June 30, 2007 and 2006, the Group has loans and receivables composed of receivables and
amounts owed by related parties amounting to P
=515.0 million and P
=514.6 million, respectively
(see Notes 5 and 19).
HTM investments. HTM investments are quoted nonderivative financial assets with fixed or
determinable payments and fixed maturities for which the Group’s management has the positive
intention and ability to hold to maturity. Where the Group sells other than an insignificant amount
of HTM investments, the entire category would be tainted and reclassified as AFS investments.
Investments intended to be held for an undefined period are not included in this classification.
Other long-term investments that are intended to be HTM, such as bonds, are subsequently
measured at amortized cost using the effective interest rate method. This cost is computed as the
amount initially recognized minus principal repayments, plus or minus the cumulative
amortization using the effective interest rate method of any difference between the initially
recognized amount and the maturity amount and minus any reduction for impairment or
uncollectibility. This calculation includes all fees and points paid or received between parties to
the contract that are an integral part of the effective interest rate, transaction costs and all other
premiums and discounts. For investments carried at amortized cost, gains and losses are
recognized in the consolidated statement of income when the investments are derecognized or
impaired, as well as through the amortization process. HTM investments are included in current
assets if maturity is within 12 months of the balance sheet date. Otherwise, these are classified as
noncurrent assets.
As of June 30, 2007 and 2006, the Group has HTM investments amounting to P
=9.9 million and
=57.4 million, respectively (see Note 10).
P
AFS investments. AFS investments are those nonderivative financial assets that are designated as
AFS or are not classified in any of the three preceding categories. After initial recognition, AFS
investments are measured at fair value with gains or losses being recognized in the “Unrealized
valuation gain (loss) on AFS investments” account in the consolidated balance sheet until the
investment is derecognized or until the investment is determined to be impaired at which time the
cumulative gain or loss previously reported in equity (capital deficiency) is included in the
consolidated statement of income. AFS investments are classified as current if they are expected
to be realized within 12 months from the balance sheet date. Otherwise, these are classified as
noncurrent assets.
*SGVMC406506*
- 55 The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid prices at the close of business on the balance sheet date. For
investments where there is no active market, fair value is determined using valuation techniques.
Such techniques include using recent arm’s-length market transactions; reference to the current
market value of another instrument, which is substantially the same; discounted cash flow analysis
and option pricing models. Investments in unquoted equity securities are carried at cost, net of
impairment losses, if any.
As of June 30, 2007 and 2006, the Group has AFS investments classified as listed equity securities
carried at market and nonlisted equity securities carried at cost amounting to P
=608.3 million and
=94.3 million respectively (see Note 9).
P
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 where:
·
the contractual rights to receive cash flows from the asset have expired;
·
the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a ‘pass-through’ arrangement;
or
·
the Group has transferred its rights to receive cash flows from the asset and either (a) has
transfered 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.
Where 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. Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount of
consideration that the Group’ could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a
cash-settled option or similar provision) on the transferred asset, the extent of the Group’s
continuing involvement is the amount of the transferred asset that the Group may repurchase,
except that in the case of a written put option (including a cash-settled option or similar provision)
on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to
the lower of the fair value of the transferred asset and the option exercise price.
On derecognition of a financial asset in its entirety, the difference between the carrying amount
and the sum of (a) the consideration received (including any new asset obtained less any new
liability assumed) and (b) any cumulative gain or loss that has been recognized directly in equity
is recognized in the consolidated statement of income.
Financial liabilities. A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired.
*SGVMC406506*
- 56 Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in the consolidated
statement of income.
Embedded Derivatives
An embedded derivative is separated from the host contract and accounted for as a derivative if all
of the following conditions are met: a) the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks of the host contract; b) a
separate instrument with the same terms as the embedded derivative would meet the definition of a
derivative; and c) the hybrid or combined instrument is not recognized at FVPL.
Embedded derivatives are measured at fair value, with changes in fair value recognized
immediately in the consolidated statement of income.
Impairment of Financial Assets
The Group assesses at each 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 the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). The carrying amount of the asset shall be reduced either directly or through the use
of an allowance account. The amount of the loss shall be recognized in the 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 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 that an impairment loss on an unquoted
equity instrument that is not carried at fair value because its fair value cannot be reliably
measured, or on a derivative asset that is linked to and must be settled by delivery of such an
unquoted equity instrument has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows
*SGVMC406506*
- 57 discounted at the current market rate of return for a similar financial asset. Such impairment
losses are not reversed in subsequent periods.
AFS investments. For AFS investments, the Group assesses at each balance sheet date whether
there is objective evidence that a financial asset or group of financial assets is impaired.
In case of equity investments classified as AFS, this would include a significant or prolonged
decline in the fair value of the investments below its cost. When there is evidence of impairment,
the cumulative loss - measured as the difference between the acquisition cost and the current fair
value, less any impairment loss on that financial asset previously recognized in the consolidated
statement of income - is removed from equity and recognized in the consolidated statement of
income. Impairment losses on equity investments are not reversed through the consolidated
statement of income. Increases in fair value after impairment are recognized directly in the
consolidated statement of changes in equity (capital deficiency).
In the case of debt instruments classified as AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Interest continues to be accrued at the original
effective interest rate on the reduced carrying amount of the asset and is recorded as part of
“Interest income” account in the consolidated statement of income. If, in subsequent year, the fair
value of a debt instrument increased and the increase can be objectively related to an event
occurring after the impairment loss was recognized in the consolidated statement of income, the
impairment loss is reversed through the consolidated statement of income.
Interest-bearing Loans and Borrowings
All loans and borrowings are initially recognized at the fair value of the consideration received
less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at
amortized cost using the effective interest rate method. Amortized cost is calculated by taking into
account any related costs, discount or premium.
Gains and losses are recognized in the consolidated statement of income when the liabilities are
derecognized as well as through the amortization process.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Group and the amount of revenue can be measured reliably. The following specific recognition
criteria must also be met before revenue is recognized:
Sale of goods
Revenue from sale of merchandise is recognized upon passage of title which coincides with the
delivery of the goods.
Rental
Lease is recognized as income over the terms of the lease of mall spaces on a straight-line basis.
Sale of leasehold rights
Revenue from sale of Tutuban Center units for sale is recognized on the accrual basis when the
collectibility of sales price is reasonably assured. The development cost of the sold areas is
determined on the basis of actual development costs incurred.
*SGVMC406506*
- 58 Sale of real estate
Revenue from sale of real estate is recognized on an accrual basis in accordance with the terms
and conditions of the sales contract.
Premiums
Premiums from insurance contracts are recognized as revenue over the period of the contracts
using the 24th method. The portion of the premiums written that relates to the unexpired periods
of the policies at balance sheet dates is accounted for as Reserve for Unearned Premiums included
in the “Accounts payable and accrued expenses” account in the consolidated balance sheet. The
related insurance premiums ceded that pertain to the unexpired periods at balance sheet dates are
accounted for as Deferred Reinsurance Premiums shown as part of “Other noncurrent assets” in
the consolidated balance sheet. The net changes in these accounts between balance sheet dates are
charged or credited to income for the year.
Interest
Revenue is recognized as the interest accrues on a time proportion basis taking into account the
effective yield on the asset.
Inventories
Inventories are valued at the lower of cost or net realizable value (NRV).
Costs incurred in bringing each product to its present location are accounted for as follows:
·
·
Raw materials and supplies - purchase cost on a moving-average method;
Finished goods and work in progress - direct materials, labor, and proportion of manufacturing
overhead based on normal operating capacity.
The NRV is the selling price in the ordinary course of business, less costs of marketing and
distribution.
Real Estate Held for Sale and Development
Real estate held for sale and development is carried at the lower of cost and NRV. NRV is the
selling price in the ordinary course of business less the costs of completion, marketing and
distribution. Cost includes acquisition cost of the land plus development and improvement costs.
Borrowing costs incurred on loans obtained to finance the improvements and developments of real
estate held for sale and development are capitalized while development is in progress.
Investments in Shares of Stock
Investments in shares of stock in which the Group has an effective interest of at least 20% or
where it has, at least, ability to exercise significant influence over the investee’s operating and
financial policies are accounted for under the equity method of accounting. Under the equity
method, the investments are carried in the consolidated balance sheet at cost adjusted for the
equity in net income or losses and changes in the investee’s equity account since the date of
acquisition. Dividends received are treated as a reduction in the carrying value of the investments.
*SGVMC406506*
- 59 The effective percentages of ownership in investments in associates in 2007 and 2006 are as
follows:
Cyber Bay Corporation (Cyber Bay) and Subsidiary:
Cyber Bay
Central Bay Reclamation and Development
Corporation (Central Bay)
BIB Aurora Insurance Brokers, Inc. (BAIBI)
Pepsi-Cola Products Philippines, Inc. (PCPPI) and Subsidiary:
PCPPI
Nadeco Realty Corporation
Effective Percentage
of Ownership
2007
2006
22.87
22.87
22.87
20.00
22.87
20.00
–
–
22.16
22.16
Leasehold Rights
Leasehold rights are stated at cost and are amortized on a straight line basis over the remaining
term of the lease from the start of commercial operations.
Investment Properties
The Group’s investment properties include properties utilized in its mall operations, held for
rentals or for capital appreciation.
Investment properties are stated at cost. The carrying amount includes the cost of replacing part of
an existing investment property at the time that cost is incurred if the recognition criteria are met;
and excludes the costs of day-to-day servicing of an investment property.
Investment property is derecognized either when it has been disposed of or when the investment
property is permanently withdrawn from use and no future economic benefit is expected from its
disposal. Any gains or losses on the retirement or disposal of an investment property are
recognized in the consolidated statement of income in the period of retirement or disposal.
Transfers are made to investment property when, and only when, there is a change in use,
evidenced by ending of owner-occupation, commencement of an operating lease to another party
or ending of construction or development. Transfers are made from investment property when, and
only when, there is a change in use, evidenced by commencement of owner-occupation or
commencement of development with a view to sale.
Investment properties are carried at cost less accumulated depreciation and any accumulated
impairment losses. Leasehold improvements (including buildings and structures) on the leased
land, is carried at deemed cost, less any impairment in value, if any.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation and amortization
and any impairment in value, except for land and building, together with their improvements,
which are stated at appraised values as determined by an independent firm of appraisers. The
excess of appraised value over the acquisition costs of the properties is shown as “Revaluation
increment in property, plant and equipment” under the equity (capital deficiency) section of the
consolidated balance sheet and in the consolidated statement of changes in equity (capital
deficiency). An amount corresponding to the difference between the depreciation based on the
revalued carrying amount of the properties and depreciation based on the original cost is
transferred annually from “Revaluation increment in property, plant and equipment” to “Deficit”
*SGVMC406506*
- 60 account in the consolidated balance sheet. The amount transferred is net of the related deferred
income tax liability.
The initial cost of property, plant and equipment consists of its purchase price, including import
duties, taxes and any directly attributable costs of bringing the asset to its working condition and
location for its intended use. Expenditures incurred after the property, plant and equipment have
been put into operation, such as repairs and maintenance, are normally charged to operations in the
year in which the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be obtained
from the use of an item of property, plant and equipment beyond its originally assessed standard of
performance, the expenditures are capitalized as an additional cost of property, plant and
equipment.
When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation
and amortization and any impairment in value are removed from the accounts and any resulting
gain or loss is credited to or charged against current operations.
Depreciation and amortization is calculated on a straight-line basis over the estimated useful lives
of the assets as follows:
Land improvements
Buildings and improvements
Leasehold improvements
Machinery and equipment
Transportation equipment
Furniture, fixtures and equipment
Years
30
30
2
5-10
5
3-5
Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or
the term of the lease, whichever is shorter.
An item of property, plant and equipment is derecognized upon disposal or when no future
economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition
of the asset (calculated as the difference between the net disposal proceeds and the carrying
amount of the asset) is included in the consolidated statement of income in the year the asset is
derecognized.
The residual values, useful lives and depreciation method are reviewed and adjusted if appropriate,
at each financial year end.
Fully depreciated assets are retained in the accounts until these are no longer in use.
Impairment of Nonfinancial Assets
The Group assesses at each reporting date whether there is an indication that a nonfinancial asset
may be impaired when events or changes in circumstances indicate the carrying values may not be
recoverable. If any such indication exists or when annual impairment testing for a nonfinancial
asset is required, the Group makes an estimate of the nonfinancial asset’s recoverable amount. A
nonfinancial asset’s estimated recoverable amount is the higher of the nonfinancial asset’s or cashgenerating unit’s fair value less costs to sell and its value in use and is determined for an
individual nonfinancial asset, unless the asset does not generate cash inflows that are largely
*SGVMC406506*
- 61 independent of those from other assets or groups of assets. Where the carrying values exceed the
estimated recoverable amounts, the assets are considered impaired and are written down to their
estimated recoverable amounts. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Impairment losses of
continuing operations are recognized in the consolidated statement of income in those expense
categories consistent with the function of the impaired asset.
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 nonfinancial asset’s
recoverable amount since the last impairment loss was recognized. If that is the case, the carrying
amount of the nonfinancial asset is increased to its estimated recoverable amount. That increased
amount cannot exceed the carrying amount that would have been determined, net of depreciation,
had no impairment loss been recognized for the nonfinancial asset in prior years. Such reversal is
recognized in the consolidated statement of income unless the nonfinancial asset is carried at
revalued amount, in which case the reversal is treated as a revaluation increase.
Claims
The liabilities for unpaid claim costs (including incurred but not reported losses) and claim
adjustment expenses relating to insurance contracts are accrued when insured events occur. The
liabilities for unpaid claims are based on the estimated ultimate cost of settling the claims. The
method of determining such estimates and establishing reserves is continually reviewed and
updated. Changes in estimates of claim costs resulting from the continuous review process and
differences between estimates and payments for claims are recognized as income or expense for
the period in which the estimates are changed or payments are made. Estimated recoveries on
settled and unsettled claims are evaluated in terms of the estimated realizable values of the
salvaged recoverables and deducted from the liability for unpaid claims. The unpaid claim costs
are accounted as Claims Payable under “Accounts payable and accrued expenses” account in the
consolidated balance sheet.
Borrowing Costs
Borrowing costs are generally recognized as expense in the year in which these costs are incurred,
except those borrowing costs that are directly attributable to the acquisition, development,
improvement and construction of property, plant and equipment and real estate held for sale which
are capitalized as part of the cost of such property, plant and equipment and real estate held for
sale.
The capitalization of borrowing costs: (a) commences when the expenditures and borrowing costs
for the assets are being incurred and activities necessary to prepare the property, plant and
equipment for their intended use or sale are in progress; (b) is suspended during extended periods
when active development and construction of the property, plant and equipment is interrupted;
and, (c) ceases when substantially all the activities necessary to prepare the property, plant and
equipment for their intended use or sale are complete.
Income Taxes
Current income tax. Current income 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 balance sheet date.
*SGVMC406506*
- 62 Deferred income tax. Deferred income tax is provided using the balance sheet liability method on
temporary differences at the balance sheet date between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
·
where the deferred income 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
·
in respect of taxable temporary differences associated with investments in foreign subsidiaries
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 income tax assets are recognized for all deductible temporary differences, carryforward
benefits of unused tax credits in the form of minimum corporate income tax (MCIT) and unused
tax losses in the form of net operating loss carryover (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:
·
where the deferred income 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
·
in respect of deductible temporary differences associated with investments in foreign
subsidiaries and interests in joint ventures, deferred income 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 income 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 income tax asset to be utilized. Unrecognized deferred income tax
assets are reassessed at each balance sheet date and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred income tax assets to be recovered.
Deferred income 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 the balance sheet date.
Income taxes relating to the items recognized directly in equity is recognized in equity and not in
the consolidated statement of income.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists, to offset current income tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
*SGVMC406506*
- 63 Retirement Costs
The Group has a defined benefit pension plan which requires contributions to be made to
separately administered funds. The cost of providing benefits under the defined benefit plan is
determined using the projected unit credit actuarial valuation method. Actuarial gains and losses
are recognized as income or expense when the net cumulative unrecognized actuarial gains and
losses for each individual plan at the end of the previous reporting year exceeded 10% of the
higher of the defined benefit obligation and the fair value of plan assets at that date. These gains
or losses are recognized over the expected average remaining working lives of the employees
participating in the plan.
The past service cost 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, a pension plan, past service cost is recognized immediately.
The defined benefit liability is the aggregate of the present value of the defined benefit obligation
and actuarial gains and losses not recognized and 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 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.
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance
of the arrangement at inception date of whether the fulfillment of the arrangement is
dependent on the use of a specific asset or assets or the arrangement conveys a right to use the
asset. A reassessment is made after inception of the lease only if one of the following applies:
a. There is a change in contractual terms, other than a renewal or extension of the
arrangement;
b. A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;
c. There is a change in the determination of whether fulfilment is dependant on a specified
asset; or
d. There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of
renewal or extension period for scenario (b).
Group as a lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense in the
statement of income on a straight-line basis over the lease term.
*SGVMC406506*
- 64 Foreign Currency Transactions
The consolidated financial statements are presented in Philippine peso, which is the Group’s
functional and presentation currency. The Group determines its own functional currency and
items included in the consolidated financial statements are measured using that functional
currency. Transactions in foreign currencies are initially recorded in Philippine peso based on the
exchange rates prevailing at the dates of the transactions. Exchange rate differences arising from
the settlement of monetary items at rates different from those at which they were initially recorded
are recognized in the consolidated statement of income in the period in which they arise. At yearend, monetary assets and liabilities denominated in foreign currencies are restated at closing rate
and any exchange differentials are credited to or charged against 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.
Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing the net income (loss) for the year by the
weighted average number of common shares issued and outstanding during the year. The
weighted average number of common shares outstanding during the period and for all years
presented are adjusted for events, other than the conversion of potential common shares, that have
changed the number of common shares outstanding, without a corresponding change in resources.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as interest expense.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. Contingent assets are not recognized in the consolidated financial statements but are
disclosed in the notes to consolidated financial statements when an inflow of economic benefit is
probable.
Events After the Balance Sheet Date
Post year-end events that provide additional information about the Group’s financial position at
balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post
year-end events that are not adjusting events are disclosed in the notes to consolidated financial
statements when material.
*SGVMC406506*
- 65 -
3. Significant Accounting Judgments and Estimates
The preparation of the accompanying consolidated financial statements in conformity with PFRS
requires management to make judgments, estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The estimates and
assumptions used in the accompanying consolidated financial statements are based upon
management’s evaluation of relevant facts and circumstances as of the date of the consolidated
financial statements. Actual results could differ from such estimates.
Estimates and judgments are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under the
circumstances.
The following are the critical judgments and key assumptions that have a significant risk of
material adjustment to the carrying amounts of assets and liabilities within the next financial year:
Operating lease commitments - Group as lessor
The Group has entered into commercial property leases on its investment property portfolio. The
Group has determined that it retains all the significant risks and rewards of ownership of these
properties which are leased out under operating lease arrangements.
Operating lease commitments - Group as lessee
The Group has entered into a lease agreement for the corporate office space and a subsidiary’s
mall operations. The Group has determined that it does not obtain all the significant risks and
rewards of ownership of the assets under operating lease arrangements.
Impairment of AFS investments
The Group follows the guidance of PAS 39 in determining when an investment is other-thantemporarily impaired. This determination requires significant judgment. In making this judgment,
the Group evaluates, among other factors, the duration and extent to which the fair value of an
investment is less than its cost; and the financial health of and near-term business outlook for the
investee, including factors such as industry and sector performance, changes in technology and
operational and financing cash flows.
Estimated allowance for impairment losses
The Group maintains allowance for impairment losses at a level considered adequate to provide
for potential uncollectible receivables and advances. The level of this allowance is evaluated by
management on the basis of factors that affect the collectibility of the accounts.
The Group reviews the age and status of receivables and identifies accounts that are to be provided
with allowance on a continuing basis.
Receivables and amounts owed by related parties amounted to P
=515.0 million and P
=514.6 million
as of June 30, 2007 and 2006, respectively. Allowance for impairment losses amounted to
=404.0 million and P
P
=440.4 million as of June 30, 2007 and 2006, respectively (see Notes 5 and
19).
*SGVMC406506*
- 66 Estimated useful lives of property, plant and equipment and investment properties
The estimated useful lives used as bases for depreciating the Group’s property, plant and
equipment and investment properties were determined on the basis of management’s assessment
of the period within which the benefits of these asset items are expected to be realized taking into
account actual historical information on the use of such assets as well as industry standards and
averages applicable to the Group’s assets.
The Group estimated the useful lives of its property, plant and equipment and investment
properties based on the period over which the assets are expected to be available for use. The
estimated useful lives of property, plant and equipment and investment properties are reviewed, at
least, annually and are updated if expectations differ from previous estimates due to physical wear
and tear and technical or commercial obsolescence on the use of these assets. It is possible that
future results of operations could be materially affected by changes in these estimates brought
about by changes in the factors mentioned above. A reduction in the estimated useful lives of
property, plant and equipment and investment properties would increase depreciation expense and
decrease property, plant and equipment and investment properties.
Net book value of property, plant and equipment amounted to P
=849.4 million and P
=1.0 billion as
of June 30, 2007 and 2006, respectively (see Note 12). Net book value of investment properties
amounted to P
=982.0 million and P
=1.1 billion as of June 30, 2007 and 2006, respectively (see
Note 13).
Realizability of deferred income tax assets
The Group reviews the carrying amounts of deferred income tax assets at each balance sheet date
and reduces deferred income tax assets to the extent that it is no longer probable that sufficient
taxable income will be available to allow all or part of the deferred income tax assets to be
utilized. However, there is no assurance that the Group will generate sufficient taxable income to
allow all or part of its deferred income tax assets to be utilized.
Deferred income tax assets recognized in the books amounted to P
=108.4 million and
=114.3 million as of June 30, 2007 and 2006, respectively (see Note 22). Temporary differences
P
for which no deferred income tax asset was recognized amounted to P
=9.3 billion and P
=4.9 billion
as of June 30, 2007 and 2006, respectively (see Note 22).
Asset impairment
Internal and external sources of information are reviewed at each balance sheet date to identify
indications that the assets may be impaired or an impairment loss previously recognized no longer
exists or may be decreased.
If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss
is recognized whenever the carrying amount of an asset exceeds its estimated recoverable amount.
*SGVMC406506*
- 67 The Group assesses the impairment of assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the Group
considers important which could trigger an impairment review include the following:
· significant underperformance relative to expected historical or projected future operating
results;
· significant negative industry or economic trends; and
· deterioration in the financial health of the investee for investments in stocks, industry and
sector performance, changes in technology, and operational and financing cash flows.
Allowance for probable losses on investments amounted to P
=725.0 million as of June 30, 2007 and
2006 (see Note 11).
Pension and other retirement benefits
The determination of the Group’s obligation and retirement expense is dependent on the selection
of certain assumptions used by actuaries in calculating such amounts. Those assumptions include,
among others, discount rates, expected returns on plan assets and salary increase rates (see Note
21). In accordance with PFRS, actual results that differ from the Group’s assumptions, subject to
the 10% corridor tests, are accumulated and amortized over future periods and therefore, generally
affect the recognized expense and recorded obligation in such future periods. While the Group
believes that the assumptions are reasonable and appropriate, significant differences between
actual experiences and assumptions may materially affect the Group’s accrued retirement
obligation and annual retirement expense.
Retirement obligation amounted to P
=49.5 million and P
=37.7 million as of June 30, 2007 and 2006,
respectively (see Note 21).
Contingencies
The Parent Company and certain subsidiaries are currently involved in various legal proceedings.
The estimate of the probable costs for the resolution of these claims has been developed in
consultation with outside legal counsel handling the defense in these matters and is based upon an
analysis of potential results. It is possible, however, that future results of operations could be
materially affected by changes in estimates or in the effectiveness of the strategies relating to these
proceedings.
4. Cash and Cash Equivalents
Cash on hand and in banks
Short-term investments
2006
2007
(In Thousands)
=18,941
P
P
=61,269
117,002
508,220
=135,943
P
P
=569,489
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.
*SGVMC406506*
- 68 -
5. Receivables
Trade debtors (see Note 15)
Insurance receivables
Current portion of Manila Electric Company
(Meralco) refund
Others
Less allowance for impairment losses
2006
2007
(In Thousands)
=344,801
P
P
=298,669
178,866
224,623
5,674
268,568
797,534
285,926
P
=511,608
8,022
304,204
835,893
326,168
=509,725
P
Receivables from trade debtors amounting to P
=96.4 million and P
=213.5 million as of
June 30, 2007 and 2006, respectively, have been assigned by a subsidiary as security to certain
loans payable and long-term debt (see Note 15).
Other receivables include receivable of OLI from Cosco Land Corporation (CLC) amounting to
=223.0 million and P
P
=252.0 million as of June 30, 2007 and 2006, respectively. The receivable is
collateralized by the shares of stock of Cyber Bay owned by CLC. The receivable from CLC is
fully provided with allowance. The Group was able to collect P
=29.0 million and P
=8.0 million in
2007 and 2006, respectively.
As customers of Meralco, certain subsidiaries received refund for some previous billings under
Phase IV of Meralco’s refund scheme. The refund may be received through postdated checks of
equal amount over 5 years, starting on March 9, 2006 up to December 31, 2010. As a result, the
subsidiaries recognized a receivable from Meralco amounting to P
=24.8 million, net of unearned
interest income of P
=7.8 million in 2006. As of June 30, 2007, the carrying value of receivable
from Meralco amounted to P
=15.9 million, net of unearned interest income of P
=3.9 million. Interest
income from Meralco refund amounted to P
=3.9 million and P
=19.7 million in 2007 and 2006,
respectively.
6. Inventories
2006
2007
(In Thousands)
At NRV:
Finished goods
Work-in-process
Raw materials
Factory supplies and spare parts
Materials in-transit
P
=172,465
14,600
23,754
23,219
5,773
P
=239,811
=131,051
P
11,489
19,383
21,277
2,706
=185,906
P
Allowance for inventory losses amounted to P
=51.9 million and P
=44.7 million as of June 30, 2007
and 2006, respectively.
*SGVMC406506*
- 69 All of LCI’s inventories serve as securities under the Collateral Trust Indenture (CTI)
(see Note 15).
7. Real Estate Held for Sale and Development
A portion of real estate held for sale by the Parent Company and OPDI with a total area of
386,377 square meters and carrying value of about P
=114.3 million as of June 30, 2007 was
mortgaged to a local bank to partially secure the debt of the Parent Company (see Note 15).
In July 2003, OPDI entered into a Memorandum of Agreement with a counterparty to purchase a
portion of OPDI’s property in Sto. Tomas, Batangas. OPDI received P
=59.0 million which is
included under “Accounts payable and accrued expenses” account in the consolidated balance
sheets.
Capitalized interest included in this account amounted to P
=21.6 million as of June 30, 2007 and
2006, respectively.
8. Other Current Assets
2006
2007
(In Thousands)
Creditable withholding taxes - net of allowance
for probable losses amounting to P
=8,099 and
=6,284 in 2007 and 2006, respectively
P
Input value - added tax (VAT) - net of allowance
for probable losses amounting to P
=1,538 and
=1,410 in 2007 and 2006, respectively
P
Prepayments
P
=104,775
=87,344
P
31,734
2,338
P
=138,847
20,640
3,243
=111,227
P
9. Available-for-Sale (AFS) Investments
Listed equity securities - at market
Nonlisted securities - at cost
2006
2007
(In Thousands)
=7,861
P
P
=91,908
86,481
516,416
=94,342
P
P
=608,324
The Group recognized unrealized valuation gain taken to equity amounting to P
=111.3 million in
2007 and unrealized valuation loss amounting to P
=0.2 million in 2006.
In 2007, the Group sold certain AFS investments carried at cost for a total consideration of
=11.5 million resulting in the recognition of gain amounting to P
P
=6.2 million.
*SGVMC406506*
- 70 -
10. Held-to-Maturity (HTM) Investments
This account pertains to investments in government debt securities with interest rates ranging from
5.35% to 12.0% in 2007 and 2006. These investments have maturity dates starting from June
2009 to February 2010.
11. Investments
2006
2007
(In Thousands)
Investments in associates at equity:
Acquisition costs:
Balance at beginning of year
Investments written off
Reclassification to AFS
Sale of PCPPI shares
Balance at end of year
Accumulated equity in net income (losses)
of associates:
Balance at beginning of year
Sale of PCPPI shares
Equity in net income of associates
Reversal due to write-off
Dividends received
Reclassification to AFS
Balance at end of year
Share in revaluation increment in land of PCPPI:
Balance at beginning of year
Increase in revaluation increment
Effect of change in tax rate
Sale of PCPPI shares
Balance at end of year
Allowance for probable losses on investments
P
=2,201,882
–
(176,984)
(608,797)
1,416,101
=2,249,115
P
(47,233)
–
–
2,201,882
(327,387)
136,444
89,339
–
–
(58,925)
(160,529)
1,255,572
(434,403)
–
192,486
2,825
(88,295)
–
(327,387)
1,874,495
P
=14,631
–
–
(14,631)
–
1,255,572
(725,023)
P
=530,549
=12,731
P
238
1,662
–
14,631
1,889,126
(725,023)
=1,164,103
P
Summarized combined financial statement information of associates follow:
Current assets
Noncurrent assets
Current liabilities
Income
Costs and expenses
Net income (loss)
2006
2007
(In Thousands)
=13,041,378
P
P
=623,294
4,316,453
1,146
3,727,168
3,798,915
12,450,277
100,982
9,844,441
153,372
1,916,182
(52,558)
*SGVMC406506*
- 71 In August 2005, OLI executed Deeds of Pledge over its 4.5% equity interest in PCPPI to secure
the loans of the Parent Company with certain financial institutions.
On February 28, 2007, OBII and The Nassim Fund, a private investment company from Mauritius,
entered into a deed of sale of shares of stock representing of OBII’s 17.64% equity in PCPPI for a
consideration of US$21.2 million. The PCPPI sale resulted in the recognition of gain amounting
to P
=519.4 million in the 2007 consolidated statement of income. As a result of the sale, the
Group’s management determined that the remaining equity interest in PCPPI of 4.52% will be
classified as AFS investment.
On March 14, 2007, Asset Pool A (SPV-AMC), Inc. (APA) filed a Complaint for rescission of the
sale of shares of stock in PCPPI against OIHPI, certain individual defendants, OBII, Hong Way
Holdings, Inc. (HWHI), Nassim Capital Pte. Ltd. ( Nassim) and OLI. APA claimed that it was a
purchaser of LCI loans from Bank of the Philippine Islands (BPI) of which OIHPI was the surety.
APA alleged that the alienation of the PCPPI shares by OBII was grossly undervalued and made in
fraud of creditors to defeat the claim of APA against OIHPI and LCI. APA, likewise, prayed for
the issuance of a Temporary Restraining Order (TRO) and/or Writ of Preliminary Injunction
(Injunction) freezing the proceeds of the sale and, after trial on the merits, the rescission of the sale
to OLI, HWHI and Nassim.
On March 22, 2007, OIHPI and the individual defendants filed their Opposition to the application
for TRO and/or Injunction. On March 26, 2007, OLI filed a Motion to Dismiss (MTD) on grounds
of lack of jurisdiction, legal personality of APA and lack of cause of action. OLI also filed its
Opposition Ex Abundanti Cautelam to APA’s Application for TRO and/or Injunction. OBII also
filed its Opposition to the application for TRO and/or Injunction on March 27, 2007. APA then
filed a Manifestation with Amended Complaint dated March 29, 2007. Thereafter, it filed a Motion
to Admit Second Amended Complaint dated April 3, 2007.
Hearings on APA’s application for TRO were conducted. On April 18, 2007, the Regional Trail
Court (RTC) issued an Order denying APA’s application for TRO on the ground that APA has not
yet established its clear and existing right, based on the inadequate evidence it has presented.
The RTC then issued an Omnibus Order dated June 8, 2007 which: (i) admitted APA’s Second
Amended Complaint; (ii) denied OLI’s MTD; (iii) ordered APA to pay the correct docket fees;
(iv) denied APA’s application for Injunction; and (v) ordered service of new summons to all
defendants.
HWHI, OBII and OIHPI filed their respective Answers to the Second Amended Complaint. OLI
filed a Motion for Reconsideration (MR) of the Omnibus Order of June 8, 2007. On July 5, 2007,
OIHPI filed a Motion for Partial Reconsideration of the Omnibus Order. On July 12 and 27, 2007,
OBII filed an MR of the Omnibus Order and a Supplement to MR with Motion to Cite APA in
Contempt, respectively. Subsequently, OLI filed an Omnibus Motion to: (i) declare APA’s
counsel in contempt of court; (ii) invalidate summons issued to OLI; and (iii) dismiss APA’s
Second Amended Complaint.
On August 17, 2007, APA filed its Consolidated Reply (to OIHPI’s Motion for Partial
Reconsideration, OBII’s MR/Supplement to MR and OLI’s Omnibus Motion).
*SGVMC406506*
- 72 APA filed a Motion to Admit Third Amended Complaint dated July 19, 2007. OIHPI and OBII
filed their respective Opposition to APA’s Motion to Admit Third Amended Complaint dated
August 21, 2007 and August 23, 2007, respectively. OLI filed its Comment Ex Abundanti
Cautelam dated August 23, 2007 (to APA’s Motion to Admit Third Amended Complaint).
Meanwhile, APA filed a Petition for Review (PR) (with Prayer for TRO and/or Injunction with the
Court of Appeals (CA). On August 8, 2007, the CA issued a Resolution denying the application
for TRO. OIHPI filed its Comment to the PR with Opposition (to the application for Injunction)
on August 21, 2007. OBII filed its Comment to PR/Opposition to the Issuance of Injunction on
August 21, 2007. OLI filed its Comment to the PR dated August 21, 2007. HWHI filed its
Opposition to APA’s application for Injunction on August 21, 2007 and its Comment (to APA’s
PR) on September 19, 2007. APA filed its Consolidated Reply to Defendants’
Comments/Opposition on September 21, 2007.
On September 11, 2007, the CA issued a Resolution denying the application for Injunction and
accepted OIHPI’s offer to post a bond to answer for damages that APA may suffer as a result of
the non-issuance of an Injunction. APA’s PR remains pending at the CA.
Cyber Bay and Central Bay
On April 25, 1995, Central Bay, a wholly-owned subsidiary of Cyber Bay, entered into a Joint
Venture Agreement with the Philippine Reclamation Authority (PRA; formerly Public Estates
Authority) for the complete and entire reclamation and horizontal development of a portion of the
Manila-Cavite Coastal Road and Reclamation Project (the Project) consisting of three partially
reclaimed and substantially eroded islands (the Three Islands) along Emilio Aguinaldo Boulevard
in Parañaque and Las Piñas, Metro Manila with a combined total area of 157.8 hectares, another
area of 242.2 hectares contiguous to the Three Islands and, at Central Bay’s option as approved by
the PRA, an additional 350 hectares more or less to regularize the configuration of the reclaimed
area.
On March 30, 1999, the PRA and Central Bay executed an Amended Joint Venture Agreement
(AJVA) to enhance the Philippine Government’s share and benefits from the Project which was
approved by the Office of the President of the Philippines on May 28, 1999.
On July 9, 2002, the Supreme Court (SC) (in the case entitled “Francisco Chavez vs. Amari
Coastal Bay and Reclamation Corp.”) issued a ruling declaring the AJVA null and void.
Accordingly, PRA and Central Bay were permanently enjoined from implementing the AJVA. On
July 26, 2002, Central Bay filed an MR of said SC decision. On May 6, 2003, the SC En Banc
denied with finality Central Bay’s MR. On May 15, 2003, Central Bay filed a Motion for Leave to
Admit Second MR. In an En Banc Resolution of the SC dated July 8, 2003, the SC resolved to
admit the Second MR of Central Bay.
On November 11, 2003, the SC rendered a 7-7 split decision on Central Bay’s Second MR.
Because of the new issues raised in the SC’s latest resolution that were never tried or heard in the
case, Central Bay was constrained to file on December 5, 2003 a Motion for Re-deliberation of
the SC’s latest resolution which motion was denied with finality by the SC.
*SGVMC406506*
- 73 With the nullification of the AJVA, Central Bay has suspended all Project operations. On
August 10, 2007, in view of the failure by the PRA to comply with its obligations and
representations under the AJVA, Cyber Bay and Central Bay have filed their claims for
reimbursement of Project expenses with the PRA.
The carrying value of investment in Cyber Bay as of June 30, 2007 and 2006 amounting to
=528.5 million represents the Parent Company’s unpaid subscription in Cyber Bay. The related
P
liability is presented as “Subscriptions Payable” in the consolidated balance sheets.
12. Property, Plant and Equipment
As of June 30, 2007
Leasehold
Improvements
At cost:
At beginning of year
Additions
Disposals
Reclassification
At end of year
Accumulated depreciation and
amortization and allowance for
impairment:
At beginning of year
Depreciation and amortization
Disposals
Impairment loss
Reclassification
At end of year
Net book value
At revalued amounts:
At beginning and end of year
Accumulated depreciation and
amortization:
At beginning of year
Depreciation and amortization
At end of year
Net book value
Machinery and
Equipment
(In Thousands)
Transportation
Equipment
Furniture,
Fixtures and
Equipment
Total
=21,017
P
251
–
–
21,268
=2,042,050
P
3,254
–
(441)
2,044,863
=31,470
P
2,653
–
–
34,123
=87,099
P
2,034
(1,100)
441
88,474
=2,181,636
P
8,192
(1,100)
–
2,188,728
18,331
741
–
–
124
19,196
1,747,550
138,930
–
8,392
(349)
1,894,523
27,560
1,175
–
–
–
28,735
67,927
6,290
(1,100)
–
225
73,342
1,861,368
147,136
(1,100)
8,392
–
2,015,796
=2,072
P
=150,340
P
=5,388
P
=15,132
P
=172,932
P
Land and
Improvements
Buildings and
Improvements
(In Thousands)
Total
=307,580
P
=536,560
P
=844,140
P
9,388
1,280
10,668
=296,912
P
134,941
22,078
157,019
=379,541
P
144,329
23,358
167,687
=676,453
P
*SGVMC406506*
- 74 As of June 30, 2006
Leasehold
Improvements
At cost:
At beginning of year
Additions
Disposals
At end of year
Accumulated depreciation and
amortization and allowance for
impairment:
At beginning of year
Depreciation and amortization
Disposals
Impairment loss
At end of year
Net book value
At revalued amounts:
At beginning of year
Additions
At end of year
Accumulated depreciation and
amortization:
At beginning of year
Depreciation and amortization
At end of year
Net book value
Machinery and
Equipment
(In Thousands)
Transportation
Equipment
Furniture,
Fixtures and
Equipment
Total
=18,938
P
2,079
–
21,017
=2,036,107
P
17,549
(11,606)
2,042,050
=28,483
P
3,452
(465)
31,470
=76,554
P
10,545
–
87,099
=2,160,082
P
33,625
(12,071)
2,181,636
17,386
945
–
–
18,331
1,539,657
171,909
–
35,984
1,747,550
24,491
3,534
(465)
–
27,560
63,022
4,905
–
–
67,927
1,644,556
181,293
(465)
35,984
1,861,368
=2,686
P
=294,500
P
=3,910
P
=19,172
P
=320,268
P
Land and
Improvements
Buildings and
Improvements
(In Thousands)
Total
=307,580
P
–
307,580
=536,320
P
240
536,560
=843,900
P
240
844,140
8,108
1,280
9,388
=298,192
P
113,193
21,748
134,941
=401,619
P
121,301
23,028
144,329
=699,811
P
A substantial portion of a subsidiary’s property, plant and equipment, with a carrying value of
=885.1 million and P
P
=1.1 billion as of June 30, 2007 and 2006, respectively, was mortgaged to
secure a subsidiary’s outstanding long-term debt (see Note 17).
Had land and improvements, buildings and improvements been carried at cost, the net book values
of these assets would be P
=434.0 million and P
=449.7 million as of June 30, 2007 and 2006,
respectively.
As of June 30, 2007, a subsidiary continues to utilize fully depreciated property, plant and
equipment with an aggregate acquisition cost amounting to P
=632.8 million. As of June 30, 2007
and 2006, the Group recognized impairment losses amounting to about P
=8.4 million and P
=36.0
million, respectively.
*SGVMC406506*
- 75 -
13. Investment Properties
As of June 30, 2007
Building
Land and Land
Improvements
Machinery
and Equipment
Total
(In Thousands)
Cost:
Beginning balance
Reclassification
Disposals
Ending balance
Accumulated depreciation:
Beginning balance
Depreciation
Ending balance
Net book value
=2,087,081
P
2,322
–
2,089,403
=62,069
P
–
(25,682)
36,387
=17,378
P
–
–
17,378
=2,166,528
P
2,322
(25,682)
2,143,168
1,021,913
126,053
1,147,966
=941,437
P
–
–
–
=36,387
P
13,209
–
13,209
=4,169
P
1,035,122
126,053
1,161,175
=981,993
P
Building
Land and Land
Improvements
Machinery
and Equipment
Total
As of June 30, 2006
(In Thousands)
Cost:
Beginning balance
Disposals
Ending balance
=2,087,412
P
(331)
2,087,081
=62,069
P
–
62,069
=17,378
P
–
17,378
=2,166,859
P
(331)
2,166,528
Accumulated depreciation:
Beginning balance
Depreciation
Disposals
Ending balance
Net book value
900,619
121,419
(125)
1,021,913
=1,065,168
P
–
–
–
–
=62,069
P
13,209
–
–
13,209
=4,169
P
913,828
121,419
(125)
1,035,122
=1,131,406
P
On March 23, 2007, the Parent Company’s Mandaue Property with carrying amount of P
=25.7
million was foreclosed through a public auction. Philippine National Bank (PNB) emerged as the
highest bidder with a bid of P
=218.7 million. The foreclosure resulted in the recognition of gain
amounting to P
=193.0 million (see Note 15).
Rental revenue from investment properties amounted to P
=438.3 million and P
=461.7 million in
2007 and 2006, respectively. Expenses arising from investment properties amounted to P
=505.9
million and P
=511.7 million in 2007 and 2006, respectively.
Depreciation on revaluation reserve on investment properties at deemed cost amounted to about
=67.4 million and P
P
=66.4 million in 2007 and 2006, respectively.
*SGVMC406506*
- 76 -
14. Other Noncurrent Assets
Deferred reinsurance premiums
Meralco refund - net of current portion (see Note 5)
Fixed income deposits
Others
2006
2007
(In Thousands)
=32,169
P
P
=30,022
24,556
14,185
182,866
–
72,654
72,460
=
P
312,245
P
=116,667
Fixed income deposits have maturities of up to four years and earn interest annually from 4.5% to
12.0%. The fixed income deposits amounting to P
=11.7 million matured during the year and the
remaining balance of P
=171.2 was reclassified into AFS investments in 2007 (see Note 9).
15. Loans Payable
This account consists of short-term loans from various local banks and financial institutions which
bear interest at prevailing market rates ranging from 9% to 18%. The loans of the Parent
Company are secured by mortgages on certain properties owned by the Parent Company and a
subsidiary (see Notes 7 and 11). The LCI loans are secured by the receivables and inventory of
LCI under the CTI (see Notes 5 and 6).
On March 30, 2006, the Office of the Provincial Sheriff of Mandaue RTC issued the Notice of
Extra-Judicial Foreclosure of Real Estate Mortgage over the 36,452 square meters Mandaue
property which was mortgaged to Philippine National Bank (PNB) to secure the loan of the Parent
Company.
On March 23, 2007, the extrajudicial foreclosure through sale by public auction of the Mandaue
property was executed. PNB emerged as the highest bidder with a bid of P
=218.7 million. The
proceeds of the auction was used to partially settle the loan obligations with PNB.
On June 28, 2007, HPI, a wholly-owned subsidiary of the Parent Company through DCHI, entered
into an investment management agreement (IMA) with Philippine Commercial Capital, Inc.
(PCCI). Under the IMA, HPI directed PCCI to purchase from PNB the promissory note of the
Parent Company. On the same date, PNB, PCCI and the Parent Company entered into a deed of
assignment wherein PNB assigned, transferred and conveyed, without recourse, to PCCI the POPI
obligation including all the rights, powers, security, liens and interests thereto, as well as the
collateral documents securing the obligations for a consideration of P
=400.0 million.
As a result of the assignment and full settlement of the PNB loans, the Group recognized a gain of
=3.3 billion in 2007 consolidated statement of income.
P
LCI
On September 29, 2000, LCI unilaterally executed a CTI to secure short-term loans from local
banks. The CTI constituted a first mortgage over LCI’s entire trade receivables (see Note 5) and
inventories (see Note 6) in favor of the trustee for the prorata and pari passu benefit of the
creditors.
*SGVMC406506*
- 77 On July 13, 2001, LCI signed an agreement with its creditors for the restructuring of its long-term
and short-term loans into a 7-year term loan (see Note 17).
On December 12, 2006, Union Bank of the Philippines (UBP) and OEHI entered into a Deed of
Assignment wherein UBP assigned all its rights, title, interest to the loan, on a without recourse
basis to OEHI with a total obligation inclusive of interest and penalties amounting to P
=83.0
million. Subsequently, OEHI assigned the Loan to OBII. As a result of the assignment, the Group
recognized a gain of P
=74.5 million in the consolidated statement of income.
On June 29, 2007, China Banking Corporation (CBC) assigned its total loan obligations
amounting to P
=153.1 million including interests to OBII. Under the Deed of Assignment, CBC
assigned all its rights, title, interests to the loan, on a without recourse basis. The assignment of the
loan obligation resulted in the recognition of gain amounting to P
=113.7 million in the consolidated
statement of income.
On February 5, 2001, BPI filed a collection case with the Makati RTC against LCI and OIHPI (the
Surety) in connection with a loan granted by BPI (then Far East Bank and Trust Company). BPI is
demanding payment of principal amount of about P
=49.8 million plus litigation expenses and
attorney’s fees.
On December 30, 2003, the RTC rendered a decision in favor of BPI, which ordered defendants to
solidarily pay BPI P
=62.2 million with 12% per annum legal interest starting February 5, 2001,
until the amount is fully paid. On September 22, 2004, LCI and OIHPI then filed an Appeal with
the CA and in a decision dated January 16, 2007, the CA denied the appeal and affirmed the lower
Court’s judgment in favor of BPI. LCI and OIHPI, filed an MR. On April 25, 2007, the CA
denied the MR.
On May 17, 2007, LCI and OIHPI then filed a Motion for an Extension to File for PR with the SC.
On June 15, 2007, LCI and OIHPI filed a PR. On June 13, 2007, the SC denied LCI and OIHPI’s
Motion for an Extention to File a PR on Certiorari for submitting an affidavit of service of the
motion which failed to comply with the 2004 Rules on Notarial Practice regarding competent
evidence of affiant’s identity. LCI and OIHPI filed an MR and Supplement to the MR on July 27,
2007 and August 28, 2007, respectively.
On August 10, 2007, LCI and OIHPI filed with the SC a Motion for Inhibition of the Presiding
Justice in charge of the case.
In a Resolution dated July 23, 2007 which LCI and OIHPI received on September 20, 2007, the
SC denied LCI and OIHPI’s PR. On September 26, 2007, LCI and OIHPI filed their MR which is
pending at the SC.
On August 17, 2005, APA filed with the CA a Motion for Substitution (“MS”) of BPI as plaintiff
appellee with respect to the promissory note of LCI amounting to P
=29.8 million that BPI assigned
to APA under a purported Deed of Assignment dated July 26, 2005. On August 30, 2005, LCI
and OIHPI filed its Opposition to the MS of APA on the basis of, among others, that the
assignment is improper as BPI, the owner of the credit is not a party to the contract. Upon filing
by APA of its Reply, LCI and OIHPI filed a Motion to Admit Rejoinder. On June 21, 2006, the
CA denied the MS of BPI by APA and expunged APA’s Appellee’s Brief on ground of noncompliance with the SPV Act (RA No. 9182) and that the assignment was not made by BPI in
favor of APA.
*SGVMC406506*
- 78 APA filed its MR with the CA on July 21, 2006. LCI and OIHPI filed their Opposition on
August 7, 2006. On December 21, 2006, the CA issued a Resolution denying the MR of APA.
On March 5, 2007, APA filed with the SC a PR asking the SC to reverse and set aside the
Resolutions issued by the CA dated June 21, 2006 and December 21, 2006. LCI and OIHPI have
filed their Reply to the PR on June 1, 2007. APA filed its Reply on June 19, 2007 to which LCI
and OIHPI filed their Rejoinder on July 23, 2007. The case is now pending with the SC.
16. Convertible Note
On June 9, 2000, the Parent Company, together with OLI, OPDI and LCI entered into a MOA
with United Coconut Planters Bank (UCPB) for the settlement of the Parent Company’s and
LCI’s obligations to UCPB.
On December 11, 2000, the Parent Company entered into a Loan Agreement with UCPB to
refinance the Group’s remaining short-term obligations after the implementation of the MOA. On
May 4, 2002, the Parent Company executed an Investment Agreement with UCPB to
reform/supersede the Loan Agreement. The terms of the Investment Agreement include, among
others, the following:
·
Prior to Maturity Date (December 11, 2005), UCPB has the option to require the Parent
Company to redeem the Convertible Note (the “Note”) through the issuance of the Parent
Company’s common shares;
·
At any time on or before Maturity Date, the Parent Company has the option to redeem the
Note in cash and at 5% premium;
·
The Note is subject to an annual simple interest rate of ten percent (10%) which the Parent
Company shall have the option to pay on any interest payment date, the interest in cash or
through the issuance of the Parent Company’s common shares;
·
UCPB shall be entitled to one seat in the Parent Company’s BOD and shall designate its
nominee within 10 days from the execution of the Investment Agreement; and
·
The Note is to be secured by a first lien over a subsidiary’s investment in shares of stock of
TPI and shares of stocks of and/or subscription rights to Cyber Bay and real properties of the
Parent Company and a subsidiary, with a total carrying value of P
=170.0 million as of
June 30, 2007 and 2006.
In 2006, the Parent Company adopted PAS 39 which resulted to the bifurcation of derivatives
embedded in the Parent Company’s convertible note as of July 1, 2005. The convertibility options
were deemed derivative instruments because the conversion price is not fixed but is based on par
value and market value of the Parent Company’s shares as of date of conversion. Bifurcation of
the embedded derivatives reduced deficit by P
=9,411,852 as of July 1, 2005. As these embedded
derivatives expired during the year, the Parent Company’s net income decreased by the same
amount in 2006.
*SGVMC406506*
- 79 On June 24, 2005, UCPB notified the Parent Company that it has absolutely and irrevocably sold,
assigned and conveyed all its rights, title and interest in and to the Parent Company’s loans in favor
of APA, its successors and assigns pursuant to the Deed of Absolute Sale dated June 23, 2005.
On Maturity Date, the Parent Company did not redeem the Note through cash or issuance of its
shares.
The Parent Company filed a Complaint for Injunction (with Application for a Writ of Preliminary
Injunction) (Injunction) with Makati RTC against APA to enjoin the latter from enforcing its claim
against the Parent Company’s Convertible Note (Note) (covering a P
=1.25 billion obligation,
inclusive of interest) under the Investment Agreement with UCPB dated March 4, 2002. The
Parent Company stated in its Complaint that APA, being an SPV, has no authority to acquire the
Note from UCPB on June 23, 2005 since at that time the Note has not matured yet. Hence, the
acquisition was in violation of law and APA has nothing to enforce against the Parent Company.
The Parent Company sought to prevent damage to itself as APA is acting as if it were a lawful
creditor of the Parent Company and the Note and therefore runs the risk of being subjected to
judicial action by an entity not legally permitted to do so.
After due proceedings, on June 26, 2006, the RTC issued a Writ of Preliminary Injunction against
APA preventing it from further enforcing the Note against the Parent Company during the
pendency of the case. APA filed a MR on July 11, 2006 to which a Comment/Opposition was
filed by the Parent Company on August 7, 2006. APA then filed its Reply to which the Parent
Company filed its Rejoinder. On April 27, 2007, APA filed a Motion to Inhibit the RTC Judge
handling the case, to which the Parent Company filed its Comment. APA filed its Reply to the
Comment and the Parent Company filed its Rejoinder. On July 25, 2007, the RTC issued an order
granting the Motion to Inhibit subject to the conformity of the Executive Judge. Subsequently, the
Executive Judge disapproved the inhibition of the RTC Judge and directed the latter to resume his
duties as presiding judge of the case.
On August 14, 2007, the RTC issued an Order denying the MR filed by APA and setting the case
for preliminary conference on September 14, 2007. The Parent Company filed its Pre-trial Brief
on September 11, 2007. APA filed its Pre-trial Brief only on September 13, 2007 in vilation of the
Rules of Court. On September 24, 2007, the Parent Company filed a Motion to Strike Out (APA’s)
Pre-trial Brief and to Allow Plaintiff to Present Evidence Ex-Parte. The motion has been submitted
for the decision of the court.
Meanwhile, APA filed a PR with Urgent Prayer for TRO and/or Injunction dated
September 10, 2007 with the CA assailing the RTC Order dated June 19, 2006 granting the Parent
Company’s application for the issuance of an Injunction as well as the Order dated
August 14, 2007 denying APA’s MR. On September 28, 2007, the CA issued a Resolution
directing the Private Respondent to file a Comment to the PR and to which APA may file a Reply,
meantime action on APA’s prayer for the issuance of a TRO was held in abeyance pending
compliance with the resolution of the CA. On October 11, 2007, the Parent Company filed its
Comment (to the PR) with Opposition (to the Application for TRO and/or Injunction).
*SGVMC406506*
- 80 17. Long-term Debt
This account consists of term loans and syndicated loans from local banks for certain projects of
the Group:
2006
2007
(In Thousands)
Granito and Ceramic Tile Expansion Projects
of LCI
Tutuban development project of TPI
Less current portion
P
=340,000
6,250
346,250
346,250
P
=–
=713,378
P
31,250
744,628
738,378
=6,250
P
LCI
The loan for the Granito Tile expansion project, which was obtained under the Countryside Loan
Fund (CLF) facility, is payable in seventeen (17) equal and consecutive quarterly installments
with an annual interest rate equal to the average 91-day treasury bill rate plus 2%.
The loans obtained from Development Bank of the Philippines on September 24, 1998 for the
Ceramic Tiles Expansion Project are payable in three years after a two-year grace period.
Amortization ranges from six (6) equal semi-annual installments to twelve (12) equal quarterly
installments. Interest is computed based on LIBOR plus 1.5%. Another loan, obtained in 1999 to
finance the plant expansion of LCI, is payable in twelve (12) equal quarterly installments. Interest
is based on 91-day treasury bill rate plus 1.5% or the prevailing Philippine Interbank Offer Rate
plus 1.5%, whichever is higher.
The loans for the Granito and Ceramic Tile Expansion projects are collateralized by a mortgage
trust indenture (MTI) on LCI’s property and equipment with a carrying value of P
=885.1 million
and P
=1.1 billion as of June 30, 2007 and 2006, respectively.
On July 13, 2001, LCI, OIHPI and ZHI entered into a Restructuring Agreement (the Agreement)
with LCI’s creditor banks to restructure LCI’s outstanding loans. The Agreement has been signed
by the creditors owning at least 72% of the outstanding loans. LCI issued restructured promissory
notes to four creditor banks whose terms and conditions are in accordance with the conditions set
forth in the Agreement.
The Agreement provided, among others, the following:
i) restructuring of outstanding principal and capitalization of all unpaid interest as of
July 1, 2001;
ii) infusion of capital into LCI amounting to P
=400.0 million;
iii) redenomination of the US Dollar denominated loans of certain creditors and the notional
conversion of a US Dollar denominated loan from another creditor into Philippine pesos using
the best exchange rate available;
iv) repayment of restructured loans over a period of seven years inclusive of a 2-year grace period
and the deferral of interest on the first 12 months of the restructuring term payable at the end
of the term of the restructured loans;
*SGVMC406506*
- 81 v) interest accrual based on a formula computed at 50% of LCI’s earnings before interest and
taxes (EBIT) provided such amount shall be within the range of an effective interest rate of
9% to 12% per annum. Interest shall be paid based on the 50% of LCI’s EBIT but shall not be
lower than the amount of 3% of the outstanding restructured loans; and
vi) waiver of penalties and other charges.
The restructured loans from secured creditors are collateralized by the existing MTI on the plant
assets while the restructured loans from unsecured creditors are secured by the CTI, a second
mortgage on the MTI, a deed of assignment by way of security on the common shares of LCI
owned and to be owned by OIHPI and ZHI and the suretyship issued and to be issued by OIHPI.
The Agreement shall become effective upon fulfillment of certain conditions precedent which
includes, among others: (a) execution of the Agreement by the creditors owning at least 55% of
the restructured loans; (b) infusion of the P
=400.0 million new capital to the Company; (c) absolute
release from mortgage of a parcel of land and the subsequent inclusion of such land under the
MTI; (d) absolute and unconditional release from any lien or encumbrances of the PCPPI shares
owned by an affiliate; and (e) the appointment of a successor trustee and execution of the 7th and
8th supplement to the MTI.
Under the Agreement, the events of default include the following, among others: (a) default in the
payment of any interest or principal when due; (b) default by the Company and OIHPI in the
performance of any other term of any of the material obligations or covenants; (c) cessation to be
in full force and effect of the security document and collateral and no acceptable security can be
provided; and (d) default by the Company, OIHPI or any of OIHPI’s wholly owned subsidiaries in
the payment of any taxes, assessments or governmental charges if the failure to pay would have a
material adverse effect on the companies or their ability to perform respective obligations under
the Agreement.
As of October 19, 2007, LCI has not yet fully complied with certain conditions precedent to the
effectivity of the Agreement. LCI was also not able to pay the first principal amortization under
the restructured promissory notes in 2003.
Under the Agreement, if an event of default has occurred and such event is continuing, the
majority creditors may, by written notice to LCI, declare the entire unpaid principal, all interest
accrued and unpaid and all other amounts payable to be due and payable. As of October 19, 2007,
no declaration of default has been issued by the creditors.
Also, the loan agreements and the MTI securing the long-term debt from local banks of the Parent
Company and LCI provide for certain restrictions and requirements with respect to, among others,
changes in the Parent Company and its subsidiaries’ nature of business and business ownership,
declaration of dividends, major disposal and hypothecation of assets, material advances to
stockholders and officers, entering into mergers and consolidations, purchase or redemption of
capital stock, and maintenance of financial ratios at certain levels. As of June 30, 2007, the Parent
Company and LCI do not meet the financial ratios and certain requirements and conditions under
the loan agreements.
In view of the foregoing, the balance of the noncurrent portion of long-term debt is presented as
current.
*SGVMC406506*
- 82 On May 24, 2005 and June 23, 2005, OBII acquired the foreign currency-denominated loans of
LCI from its foreign creditors amounting to US$19.5 million for a total consideration of P
=228.0
million. Under the Deeds of Assignment executed by OBII with the creditors, all the terms and
conditions of the mortgage trust indenture, trust receipts, promissory notes, disclosure statements,
other loan documents, other collateral, security, accessory contracts and such other related
documents, agreements, or documents in relation to the loans which are not inconsistent with the
assignment shall continue to be in full force and effect as if the same were originally entered into
by OBII and LCI.
The acquisition by OBII of the LCI loans and the related accrued interest totaling P
=1.6 billion
resulted in the recognition of gain amounting to P
=1.3 billion in the 2005 consolidated statement of
income.
On March 15, 2007, OBII executed a Deed of Assignment with Philippine Investment One (SPVAMC), Inc. (PIO) by virtue of which OBII acquired all of the rights, title and interest of PIO in the
loans with a carrying book value of P
=690.8 million originally extended by Equitable PCI Bank to
LCI. As a result of the assignment, the Group recognized a gain of P
=598.3 million in the 2007
consolidated statement of income. As of June 30, 2007, LCI’s remaining loan obligations
amounted to P
=496.4 million.
TPI
On July 26, 2002, TPI entered into an agreement with a local bank to convert TPI’s P
=50.0 million
short-term loan into a term loan with interest based on the prevailing market rates. The term loan
is payable in sixteen (16) equal quarterly installments with a grace period of one year. In addition,
on September 27, 2002, TPI availed of a P
=50.0 million term loan from another bank pursuant to a
loan agreement. The loan bears interest at the 91-day treasury bill rate plus 5%. The term loan is
payable in sixteen (16) equal quarterly installments with a grace period of one year. These loans
are collateralized by CTI and by an assignment of TPI’s leasehold rights with a carrying value of
=57.8 million as of June 30, 2007 and the related rentals.
P
The loan agreements of TPI provide for certain restrictions and requirements with respect to
payment of advances to affiliates, officers and directors, and maintenance of financial ratios at
certain levels. TPI shall not likewise, sell, transfer, assign, mortgage, lease or otherwise encumber
any of its major assets. TPI has complied with the restrictions and requirements under these loan
agreements.
The current portion of the long-term debt amounted to P
=6.25 million and P
=25.0 million as of
June 30, 2007 and 2006, respectively. In July 2007, TPI fully settled its loan obligations.
18. Accounts Payable and Accrued Expenses
Trade payables
Accrued interest and penalties (see Notes 15,
16 and 17)
Nontrade payables
2006
2007
(In Thousands)
P
=287,230
=269,596
P
823,440
233,135
3,938,823
229,889
(Forward)
*SGVMC406506*
- 83 -
Claims payable
Reserve for unearned premiums
Due to reinsurers and ceding companies
Others
2006
2007
(In Thousands)
P
=231,447
=131,858
P
72,205
67,258
47,295
29,951
441,496
466,276
P
=2,136,248
=5,133,651
P
The Parent Company’s nontrade payable amounting to US$10.8 million (P
=624.0 million) was
condoned in November 2005. The condonation was recorded as “Gain on extinguishment of debt”
in the 2006 consolidated statement of income.
19. Related Party Transactions
Parties are considered to be related if one party has the ability to control, directly or indirectly, 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.
The Parent Company and its subsidiaries in their normal course of business, have entered into
transactions with related parties principally consisting of noninterest-bearing advances with no
fixed repayment terms and are due and demandable.
Account balances with related parties, other than intra-group balances which are eliminated in
consolidation, are as follows:
Amounts owed by related parties:
Cyber Bay and Subsidiary (see Note 11)
Hume Holdings, Inc.
Hume Philippines, Inc.
Guoman Philippines, Inc.
Guotrade Philippines, Inc.
Hong Way Holdings, Inc.
Zeus Holdings, Inc.
Others
Less allowance for impairment losses
2006
2007
(In Thousands)
P
=82,101
16,928
12,760
2,730
2,627
1,784
1,265
1,294
121,489
118,054
P
=3,435
=80,346
P
16,872
12,759
2,728
2,753
1,510
–
2,156
119,124
114,221
=4,903
P
2006
2007
(In Thousands)
Amounts owed to related parties:
OYL Overseas, Ltd.
Others
P
=2,673
29,638
P
=32,311
P2,673
=
29,856
=32,529
P
*SGVMC406506*
- 84 Compensation of key management personnel, including retirement and other benefits, amounted to
=51.5 million and P
P
=51.6 million in 2007 and 2006, respectively.
20. Cost of Goods Sold and Services and Operating Expenses
2007
Utilities and fuel
Depreciation and amortization
Personnel expenses
Material used and changes inventories
Supplies and repairs
Taxes and licenses
Marketing expenses
Professional and legal fees
Provision for doubtful accounts
Communication and transportation
Insurance
Representation
Accounts written off
Others
P
=354,522
305,706
219,711
141,183
76,661
49,104
32,134
23,126
16,169
14,671
13,643
2,393
–
29,337
P
=1,278,360
2006
2005
(In Thousands)
=329,440
P
=351,766
P
334,666
337,937
224,302
181,333
164,414
139,049
66,135
72,065
57,066
47,556
30,158
25,209
29,012
15,584
1,818
492
15,325
14,367
12,510
11,911
2,838
2,869
77
154
18,754
42,491
=1,286,515
P
=1,242,783
P
The cost of goods sold and services of LCI, a subsidiary, amounted to P
=789.2 million,
=712.3 million and P
P
=764.6 million in 2007, 2006 and 2005, respectively.
21. Retirement Costs
The Group has a funded, noncontributory retirement plan covering all its regular employees. The
plan provides for retirement, separation, disability and death benefits to its members. The normal
retirement benefit is based on a percentage of the employee’s final monthly salary for every year
of credited service.
The latest independent actuarial valuation dated August 10, 2007 was determined using the
projected unit credit method in accordance with PAS 19.
The following tables summarize the funded status and amounts recognized in the consolidated
balance sheets, and the components of the net retirement costs recognized in the consolidated
statements of income for the retirement plan:
2006
2007
(In Thousands)
Retirement obligation:
Present value of obligation
Fair value of plan assets
Unfunded obligation
Unrecognized actuarial gains (losses)
Unrecognized transitional liability
Unrecognized past service cost - non-vested
P
=82,845
(16,356)
66,489
(14,797)
(159)
(2,033)
P
=49,500
P58,749
=
(19,718)
39,031
1,157
(239)
(2,203)
=37,746
P
*SGVMC406506*
- 85 2007
Retirement costs:
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Transitional liability recognized
during the year
Past service cost - non-vested
Past service cost - vested benefits
P
=6,817
6,462
(1,775)
80
170
–
P
=11,754
2006
(In Thousands)
=5,732
P
2,618
(848)
80
170
25,851
=33,603
P
2005
=2,199
P
2,370
(710)
80
–
–
=3,939
P
Movements in the retirement obligation are as follows:
2006
(In Thousands)
=12,143
P
P
=37,746
33,603
11,754
(8,000)
–
=37,746
P
P
=49,500
2007
Beginning balance
Benefit expense
Actual contributions
Ending balance
Changes in the present value of obligation are as follows:
2006
(In Thousands)
=21,815
P
P
=58,749
5,732
6,817
2,618
6,462
2,373
–
26,211
–
–
13,053
–
(2,236)
=58,749
P
P
=82,845
2007
Beginning balance
Current service cost
Interest cost on benefit obligation
Past service cost - non-vested interest
Past service cost - vested benefits
Actuarial loss on obligation
Benefits paid
Ending balance
Changes in fair value of plan assets are as follows:
2006
(In Thousands)
=10,870
P
P
=19,718
848
1,775
8,000
–
–
(2,901)
–
(2,236)
=19,718
P
P
=16,356
2007
Beginning balance
Expected return on plan assets
Actual contribution
Actuarial loss on plan assets
Benefits paid
Ending balance
As of June 30, 2007, retirement plan assets of the Group include investments in government and
other securities with total fair value of P
=16.4 million.
*SGVMC406506*
- 86 The principal assumptions used to determine pension for the Group are as follows:
Discount rate
Expected return on assets
Salary increase
2007
8.0%
9.0%
7.0%
2006
12.0%
9.0%
8.0%
2005
13.0%
9.0%
8.0%
In 2006, the Group amended its retirement plan. Amounts for 2007 are as follows:
Defined benefit obligation
Change in actuarial assumption - loss
Experience adjustment on obligation - gain
=49,500
P
22,110
9,057
22. Income Taxes
Provision for (benefit from) income tax consists of:
2007
Current
Deferred
P
=8,050
(24,426)
(P
=16,376)
2006
(In Thousands)
=12,038
P
579
=12,617
P
2005
P38,232
=
(16,093)
=22,139
P
The reconciliation of the statutory income tax rate to the effective income tax rate follows:
At statutory tax rate
Additions to (reductions in) income taxes
resulting from:
Exempt income from extinguishment
of debt
Gain on sale of investments
Equity in net income of associates
Interest income subjected to final
taxes
Unrecognized deferred income tax
assets
At effective tax rates
2007
35.0%
2006
(34.0%)
2005
32.0%
(32.5)
(6.4)
(0.7)
(0.1)
(111.6)
–
(34.4)
(50.0)
(10.7)
(7.7)
(1.3)
(0.2)
188.0
6.7%
39.2
2.6%
4.3
(0.4%)
*SGVMC406506*
- 87 The significant components of the net deferred tax assets and liabilities of the Group are as
follows:
Deferred income tax assets on:
Unamortized deferred costs
Rent received in advance
Allowance for impairment losses on
receivables, probable losses, inventory
losses and others
Accrued retirement
MCIT
Others
2007
2006
(In Thousands)
P
=56,315
23,821
=63,682
P
28,146
10,768
5,679
1,637
10,195
P
=108,415
10,768
4,705
–
7,042
=114,343
P
2006
2007
(In Thousands)
Deferred income tax liabilities on:
Revaluation reserve on investment properties
at deemed cost
Revaluation increment in property, plant, and
equipment
Undepreciated capitalized rent, interest and
customs duties
Unrealized foreign exchange gains
Meralco refund
P
=146,588
=170,379
P
89,987
94,946
35,477
3,614
3,016
P
=278,682
39,993
4,372
3,702
=313,392
P
Deferred income tax assets are recognized only to the extent that taxable income will be available
against which the deferred income tax assets can be used. The Group will reassess the
unrecognized deferred income tax assets on the following deductible temporary differences and
will recognize a previously unrecognized deferred income tax asset to the extent that it has
become probable that future taxable income would allow the deferred income tax asset to be
recovered:
Allowance for impairment losses on receivables,
probable losses, inventory losses and others
NOLCO
Provisions for penalties and interests
Unrealized foreign exchange loss
Provisions for retirement
MCIT
Others
2007
2006
(In Thousands)
P
=5,247,619
1,620,775
2,019,108
391,720
36,448
1,218
1,810
P
=9,318,698
=444,139
P
2,286,564
1,778,511
391,843
27,869
1,438
1,810
=4,932,174
P
*SGVMC406506*
- 88 Details of the Group’s NOLCO and MCIT follow:
Year Incurred
Expiry date
June 2007
June 2006
June 2005
June 2010
June 2009
June 2008
NOLCO
(In Thousands)
=274,770
P
724,094
621,911
=1,620,775
P
MCIT
=1,899
P
478
478
=2,855
P
The following are the movements in NOLCO and MCIT of the Group:
NOLCO
Beginning balance
Additions
Applications / expirations
Ending balance
MCIT
Beginning balance
Additions
Applications / expirations
Ending balance
2006
2007
(In Thousands)
=2,366,681
P
P
=2,286,564
725,590
274,770
(805,707)
(940,559)
=2,286,564
P
P
=1,620,775
2006
2007
(In Thousands)
P
=1,438
1,899
(482)
P
=2,855
=1,411
P
558
(531)
=1,438
P
Republic Act (RA) No. 9337
RA No. 9337 was enacted into law amending various provisions in the existing 1997 National
Internal Revenue Code. Among the reforms introduced by the said RA, which became effective
on November 1, 2005, are as follows:
·
·
·
·
·
Increased the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Granted authority to the President of the Philippines to increase the 10% VAT rate to 12%,
effective January 1, 2006, subject to compliance with certain economic conditions;
Revised invoicing and reporting requirements for VAT;
Expanded scope of transactions subject to VAT; and
Provided thresholds and limitations on the amounts of VAT credits that can be claimed.
On January 31, 2006, the Bureau of Internal Revenue issued Revenue Memorandum Circular No.
7-2006 increasing the VAT rate from 10% to 12% effective February 1, 2006.
In November 2006, RA 9361 was enacted, repealing the thresholds on the amount of VAT credits
that can be claimed.
*SGVMC406506*
- 89 -
23. Earnings (Loss) Per Share
The following table presents information necessary to calculate earnings (loss) per share:
2007
Net income (loss) attributable to equity
holders of the Parent (in thousands)
b. Weighted average number of shares (in
thousands)
Earnings (loss) per share (a/b)
2006
2005
a.
P
=4,417,448
2,367,149
P
=1.87
(P
=198,717)
=866,698
P
2,367,149
(P
=0.08)
2,367,149
=0.37
P
There is no dilutive income (loss) per share as the effect of potential common shares arising from
the convertible note is anti-dilutive in 2005. In 2007 and 2006, there are no potential common
shares from the convertible note since the note has become due and was not converted.
24. Segment Information
Business Segments
The Group’s operating businesses are organized and managed separately according to the nature
of services provided and the different markets served, with each segment representing a strategic
business unit.
The industry segments where the Parent Company and its subsidiaries and associates operate are
as follows:
·
Financial services - insurance and related brokerage
·
Real estate - property development
·
Manufacturing and distribution - manufacture and distribution of beverage and ceramic tiles
Financial information about the operations of these business segments is summarized as follows:
2007
Holding
Company
Revenue
Net income (loss)
Depreciation and
amortization
Equity in net income of
associates
Total assets
Capital expenditures
Investment in associates
Total liabilities
=625
P
3,188,117
573
–
581,168
370
528,470
2,051,349
Real Estate
and Property
Development
=438,933
P
(2,216)
138,204
–
2,259,446
(686)
–
694,780
Manufacturing
and
Distribution
Total
=711,174
P
1,218,342
P
=1,249,068
4,417,448
3,012
163,685
305,474
111
662,135
3,389
2,079
716,076
89,228
1,608,764
5,119
–
1,508,391
89,339
5,111,513
8,192
530,549
4,970,596
Financial
Services
(In Thousands)
=98,336
P
13,205
*SGVMC406506*
- 90 2006
Holding
Company
Revenue
Net income (loss)
Depreciation and
amortization
Equity in net income of
associates
Total assets
Capital expenditures
Investment in associates
Total liabilities
Real Estate
and Property
Development
Financial
Services
(In Thousands)
=77,128
P
4,544
Manufacturing
and
Distribution
P640,485
=
(316,991)
Total
=11,172
P
74,930
=477,340
P
38,800
=1,206,125
P
(198,717)
3,272
132,925
2,092
195,704
333,993
–
610,041
269
528,470
5,888,077
–
2,269,779
7,337
–
732,461
210
552,814
5,871
1,968
754,918
192,276
1,864,496
20,388
633,665
2,285,358
192,486
5,297,130
33,865
1,164,103
9,660,814
Geographical Segments
The Group does not have geographical segments.
25. Long-term Lease
On August 28, 1990, a subsidiary, through a deed of assignment, acquired all the rights, titles,
interests and obligations of Gotesco Investment, Inc. on a contract of lease of the land owned by
Philippine National Railways for the Tutuban Terminal. The contract provided for a payment of a
guaranteed minimum annual rental plus a certain percentage of gross sales. The lease covers a
period of 25 years until 2014 and is automatically renewable for another 25 years subject to
compliance with the terms and conditions of the lease agreement. Rent expense charged to
operations amounted to about P
=97.5 million in 2007 and P
=95.6 million in 2006.
As of June 30, 2007, the aggregate annual commitments on these existing lease agreements for the
succeeding years are as follows:
Year
2007
2008
2009
2010 and thereafter
Annual Commitments
(In Millions)
=85.2
P
86.6
89.3
538.1
=799.2
P
26. Contingencies
The Parent Company and certain subsidiaries are contingently liable for lawsuits or claims, and
assessments, which are either pending decision by the courts or under negotiation. Management
and its legal counsels believe that the eventual outcome of these lawsuits or claims will not have a
material effect on the consolidated financial statements.
*SGVMC406506*
- 91 -
27. Financial Risk Management Objectives and Policies
The Group’s principal financial instruments comprise of cash and interest-bearing loans from
various banks. The main purpose of these financial instruments is to finance the Group’s
operations. The Group has various other financial instruments such as receivables, accounts
payable and accrued expenses, amounts owed by (to) related parties, AFS investments and HTM
investments which arise directly from operations.
The main purpose of the Group’s financial instruments is to fund its operations. The main risks
from the use of financial instruments are liquidity risk, interest rate risk, foreign currency risk and
credit risk.
Liquidity risk
In the management of liquidity, the Group monitors and maintains a level of cash deemed
adequate by the management to finance the Group’s operations and mitigate the effects of
fluctuations in cash flows.
Interest rate risk
The Group obtains additional financing through bank and related party borrowings. The Group’s
policy is to obtain the most favorable interest rates available without increasing its foreign
currency exposure.
The following table sets out the carrying amount, by maturity, of the Group’s financial
instruments that are exposed to interest rate risk for the year ended June 30, 2007:
2007
Fixed rate
Within 1 year
Convertible notes
Long-term debt
=1,251,339
P
340,000
1-2 years
(In Thousands)
=–
P
–
Total
=1,251,339
P
340,000
Floating rate
Within 1 year
Cash and cash equivalents
Loans payable
Long-term debt
=569,489
P
156,441
6,250
1-2 years
(In Thousands)
=–
P
–
–
Total
1-2 years
(In Thousands)
=–
P
–
Total
=569,489
P
156,441
6,250
2006
Fixed rate
Within 1 year
Convertible notes
Long-term debt
=1,251,339
P
713,378
=1,251,339
P
713,378
*SGVMC406506*
- 92 Floating rate
Within 1 year
Cash and cash equivalents
Loans payable
Long-term debt
=135,943
P
1,423,615
25,000
1-2 years
(In Thousands)
=–
P
–
6,250
Total
=135,943
P
1,423,615
31,250
Interest on financial instruments classified as fixed rate is fixed until the maturity of the
instrument. Interest on financial instruments classified as floating rate is repriced at intervals of
less than one year.
Foreign currency risk
The Group’s foreign currency risk results primarily from movements of the Philippine Peso
against the US Dollar. The Group’s foreign currency risk arises primarily from its borrowings.
The Group monitors and assesses cash flows from anticipated transactions and financing
agreements denominated in US dollars.
Information on the Group’s foreign currency-denominated monetary assets and liabilities and their
Philippine peso equivalent are as follows:
US Dollar Philippine Peso
(In Thousands)
Financial Asset
Cash and cash equivalents
Financial Liability
Accounts payable
Net foreign currency-denominated asset
$5,023
=232,264
P
600
$4,423
27,744
=204,520
P
Credit risk
The Group establishes credit limits at the level of the individual borrower, corporate relationship
and industry sector. It also provides for credit terms with the consideration for possible
application of intercompany accounts between affiliated companies. Also, the Group transacts
only with affiliated companies and recognized third parties, hence, there is no requirement for
collateral. In addition, receivable balances are monitored on an ongoing basis with the result that
the Group’s exposure to bad debts is not significant.
With respect to credit risk from other financial assets of the Group, which mainly comprise of
cash, amounts owed by related parties, AFS investments and HTM investments, the exposure of
the Group to credit risk arises from default of the counterparty, with a maximum exposure equal to
the carrying amount of these instruments.
There are no significant concentrations of credit risk in the Group.
*SGVMC406506*
- 93 -
28. Financial Instruments
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate such value:
2007
Carrying
Amounts
Financial assets
Cash and cash equivalents
Receivables
Amounts owed by related parties
AFS investments
HTM investments
Fixed income deposits
Financial liabilities
Accounts payable and accrued expenses
Loans payable
Convertible note
Long-term debt
Amounts owed to related parties
Subscription payable
2006
Carrying
Fair Values
Amounts
(In Thousands)
Fair Values
=569,489
P
511,608
3,435
608,324
9,925
–
=569,489
P
511,608
3,435
608,324
10,024
–
=135,943
P
509,725
4,903
94,342
57,388
182,866
=135,943
P
509,725
4,903
94,342
59,322
160,822
2,136,248
156,441
1,251,339
346,250
32,311
528,470
2,136,248
156,441
1,251,339
346,250
32,311
528,470
5,133,651
1,423,615
1,251,339
744,628
32,529
528,470
5,133,651
1,423,615
1,251,339
744,628
32,529
528,470
The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued
expenses, amounts owed to and by related parties, convertible notes and loans payable
approximate their fair value due to the short-term maturity of these financial instruments.
AFS equity investments that are listed are based on quoted prices.
investments are based on cost.
Nonlisted AFS equity
HTM investments are based on quoted prices. Long-term debt approximates its fair value because
its interest is at prevailing market rates.
The fair value of the subscriptions payable as of June 30, 2007 cannot presently be determined due
to the uncertainty of the timing of the call and the payment of the subscriptions.
29. Reclassification
Certain accounts in the 2006 consolidated financial statements were reclassified to conform to the
current year presentation.
*SGVMC406506*
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE A - MARKETABLE SECURITIES
(CURRENT MARKETABLE EQUITY SECURITIES AND
OTHER SHORT-TERM CASH INVESTMENTS)
AS OF JUNE 30, 2007
.
Name of Issuing Entity and
Description of each issue
Amount shown
in the
Balance Sheet
Principal Amount
Hongkong and Shanghai Banking Corp.
Bank of Commerce
Banco de Oro Universal Bank
United Coconut Planters Bank
Security Bank
Equitable PCIBank
East West Bank
GE Money
Chinatrust Bank
Philippine Commercial Capital, Inc.
Asiatrust Bank
Rizal Commercial Banking Corporation
Export & Industry Bank
Landbank
Development Bank of the Philippines
Philippine Savings Bank
P
181,807,533
100,338,170
77,335,617
27,931,206
25,023,187
20,775,018
20,515,499
10,564,698
10,517,801
10,000,000
8,567,852
5,616,443
5,019,258
2,117,376
1,087,709
1,003,273
508,220,639
P
181,807,533
100,338,170
77,335,617
27,931,206
25,023,187
20,775,018
20,515,499
10,564,698
10,517,801
10,000,000
8,567,852
5,616,443
5,019,258
2,117,376
1,087,709
1,003,273
508,220,639
Value at
Balance Sheet date
P
181,807,533
100,338,170
77,335,617
27,931,206
25,023,187
20,775,018
20,515,499
10,564,698
10,517,801
10,000,000
8,567,852
5,616,443
5,019,258
2,117,376
1,087,709
1,003,273
508,220,639
Income Received
and accrued
P
32,124
821,868
16,664
28,344
23,187
47,638
18,816
17,742
17,801
11,866
15,716
19,258
59,274
29,732
3,273
1,163,301
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE B - ADVANCES TO OFFICERS AND EMPLOYEES
RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES, RELATED
PARTIES AND PRINCIPAL STOCKHOLDERS (OTHER THAN RELATED PARTIES))
AS OF JUNE 30, 2007
Beginning
Balance
Name of Debtor
Various
P
1,110,142
Additions
P
Collections
-
P
NOTE: Advances amounting to less than a hundred thousand (P100,000) are excluded from this schedule
281,142
Ending Balance
Non-Current
Current
P
-
P
829,000
Total
P
829,000
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE C - LONG-TERM INVESTMENTS IN SECURITIES
(NONCURRENT MARKETABLE EQUITY SECURITIES,
OTHER LONG-TERM INVESTMENT IN STOCK,
INVESTMENT IN BONDS AND OTHER DEBT SECURITIES AND OTHER INVESTMENTS)
AS OF JUNE 30, 2007
Name of issuing
Entity and
Description of Investment
Investments in shares of stocks at equity
Cyber Bay Corp.
Bradstock Aurora Insurance Brokers, Inc.
Pepsi Cola Products Philippines, Inc.
Beginning Balance
Number of shares
Or principal amount
Amount in
of Bonds and notes
Pesos
(1)
1,372,434,990
10,000
734,124,796
Allowance for investment losses
(1) See note 2 to the Consolidated financial statements for % of ownership
(2) See note 11 to the Consolidated financial statements
Additions
Equity in
Earnings (losses)
for the period
1,253,493,148
1,968,011
633,663,880
111,251
89,227,977
1,889,125,039
(725,023,048)
89,339,228
-
1,164,101,991
89,339,228
Deductions
Distribution of
Earnings by
Investee
Others
Others
Ending Balance
Number of shares
Or principal amount
Amount in
of Bonds and notes
Pesos
(1)
1,372,434,990
10,000
-
1,253,493,148
2,079,262
-
-
-
722,891,857
-
-
722,891,857
-
1,255,572,410
(725,023,048)
-
-
722,891,857
530,549,362
Dividends received/
Accrued from investment
not accounted for
by the equity method
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE E - PROPERTY, PLANT AND EQUIPMENT
AS OF JUNE 30, 2007
Description
Beginning
Balance
Additions
at cost
Note: Please refer to Note 12 of the Notes to Consolidated Financial Statements.
Deductions/Amortizations
Charged to cost
Charged to
and expenses
Other accounts
Other chargesAdditions
(deductions)
Ending
Balance
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE F - ACCUMULATED DEPRECIATION
AS OF JUNE 30, 2007
Description
Beginning
Balance
Additions
at cost
Note: Please refer to Note 12 of the Notes to Consolidated Financial Statements.
Deductions/Amortizations
Charged to cost
Charged to
and expenses
Other accounts
Other chargesAdditions
(deductions)
Ending
Balance
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE G - OTHER ASSETS
AS OF JUNE 30, 2007
Beginning
Balance
Description
Fixed income deposits
Deductions/Amortizations
Charged to cost
Charged to
and expenses
Other accounts
Additions
at cost
Other chargesAdditions
(deductions)
Ending
Balance
182,866,000
-
-
(182,866,000)
-
Meralco refund - noncurrent
24,556,323
-
-
(10,370,844)
-
14,185,479
Deferred reinsurance premium
32,168,744
-
-
(2,146,633)
-
30,022,110
Miscellaneous deposits and others
72,654,234
-
-
(194,971)
-
72,459,263
(195,578,448) P
-
P
312,245,301 P
-
P
-
P
-
P
116,666,853
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE H - LONG-TERM DEBT
AS OF JUNE 30, 2007
Amount Authorize
by Indenture
Title of Issue and Type of Obligaiton
LONG-TERM DEBT FROM:
Long Term Loans
Bank of Commerce
United Coconut Planters Bank
Metropolitan Bank and Trust Company
Bank of the Philippine Islands
Development Bank of the Philippines
Amount Shown
as Current
3,125,000
3,125,000
57,647,059
82,352,941
200,000,000
346,250,000
Convertible Notes
Asset Pool A (SPV-AMC), Inc.
P
1,251,338,858
1,597,588,858
Amount Shown
as Long-term
3,125,000
3,125,000
57,647,059
82,352,941
200,000,000
346,250,000
P
346,250,000
Remarks
-
P
1,251,338,858
1,251,338,858
PRIME ORION PHILIPPINES, INC. AND SUBSIDIARIES
SCHEDULE I - INDEBTEDNESS TO AFFILIATES AND RELATED PARTIES
(LONG-TERM LOANS FROM RELATED COMPANIES)
AS OF JUNE 30, 2007
Name of affiliate
Beginning Balance
OYL Overseas, Ltd.
Others
Ending Balance
2,672,562
29,857,071
P
32,529,633
2,672,562
29,638,109
P
32,310,671
Remarks
PRIME ORION PHILIPPINES, INC.
SCHEDULE K - CAPITAL STOCK
AS OF JUNE 30, 2007
Title of Issue
Common shares
Issued
Subscribed
Number of
Shares
Authorized
Number of
Shares Issued
and Outstanding
Number of Shares
Reserved for
Options, Warrants,
Conversions,
and Other Rights
Number of Shares Held By
Affiliates
Directors, Officers,
and Employees
2,400,000,000
1,877,038,783
490,110,600
2,367,149,383
494,742,381
51,454,951
Others
- 104 -
INDEX TO EXHIBITS
Form 17 - A
--------------------------------------------------------------------------------------------------------------------------------Exhibit Number
Page No.
(3)
Plan of Acquisition, Reorganization, Arrangements, Liquidation or
Succession
*
(5)
Instruments Defining the Rights of Security Holders, including Indentures
*
(8)
Voting Trust Agreement
*
(9)
Material Contracts
*
(10)
Annual Report to Security Holders, Form 17-Q or Quarterly Report to
Security Holders
*
(13)
Letter re Change in Certifying Accountant
*
(16)
Report Furnished to Security Holders
*
(18)
Subsidiaries of the Registrant
105
(19) Published Report regarding Matters Submitted to Vote of Security Holders
*
(20)
Consent of Experts and Independent Counsel
*
(21)
Power of Attorney
*
(29)
Additional Exhibit
*
* These Exhibits are either not applicable to the Company or require no answer.
- 105 Exhibit (18)
Subsidiaries of the Issuer
-----------------------------------------------------------------------------------------------------------------------------As of 30 June 2007, POPI has the following wholly-owned subsidiaries:
Name
Jurisdiction
Orion Land Inc.
Tutuban Properties, Inc.
TPI Holdings Corporation.
Orion Property Development, Inc.
22Ban Marketing, Inc.
Orion I Holdings Philippines, Inc.
Lepanto Ceramics, Inc.
Orion Brands International, Inc.
Orion Beverage, Inc.
DHG Capital Holdings, Inc.
Orion Solutions, Inc.
HLG Philippines, Inc.
OE Holdings, Inc.
Orion Maxis Inc.
OE Enterprises Holdings, Inc.
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
- 106 Audited Financial Statements (for FY Ending 30 June 2007) of POPI’s Significant Subsidiaries:
1.
2.
3.
4.
5.
DHG Capital Holdings, Inc.
Tutuban Properties, Inc.
Orion Property Development, Inc.
Orion Solutions, Inc.
Orion Maxis Inc.
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
DHG Capital Holdings, Inc.
We have audited the accompanying financial statements of DHG Capital Holdings, Inc. (a wholly
owned subsidiary of Prime Orion Philippines, Inc.), which comprise the balance sheets as at
June 30, 2007 and 2006, and the statements of income, statements of changes in equity and statements
of cash flows for the years then ended, and a summary of significant accounting policies and other
explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC405458*
-2-
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of
DHG Capital Holdings, Inc. as of June 30, 2007 and 2006, and its financial performance and its cash
flows for the years then ended in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Jose Pepito E. Zabat III
Partner
CPA Certificate No. 85501
SEC Accreditation No. 0328-A
Tax Identification No. 102-100-830
PTR No. 0267401, January 2, 2007, Makati City
September 18, 2007
*SGVMC405458*
DHG CAPITAL HOLDINGS, INC.
(A Wholly Owned Subsidiary of Prime Orion Philippines, Inc.)
BALANCE SHEETS
June 30
2007
2006
P
=231,526
=242,911
P
261,640,000
49,651,290
–
261,871,526
45,992
49,940,193
174,893,000
P
=436,764,526
174,893,000
=224,833,193
P
P
=142,725
405,428,569
405,571,294
P193,545
=
193,360,020
193,553,565
100,000
31,093,232
31,193,232
P
=436,764,526
100,000
31,179,628
31,279,628
=224,833,193
P
ASSETS
Current Assets
Cash and cash equivalents (Note 4)
Amounts owed by related parties - net of allowance for doubtful
accounts of P
=125,000 in 2007 and 2006 (Note 6)
Other current assets - net of allowance for probable losses
of =
P73,361 in 2007 and P
=19,444 in 2006
Total Current Assets
Noncurrent Asset
Investments in shares of stock (Note 5)
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses
Amounts owed to related parties (Note 6)
Total Current Liabilities
Equity
Capital stock - P
=1 par value
Authorized and issued - 100,000 shares
Retained earnings
Total Equity
TOTAL LIABILITIES AND EQUITY
See accompanying Notes to Financial Statements.
*SGVMC405458*
DHG CAPITAL HOLDINGS, INC.
(A Wholly Owned Subsidiary of Prime Orion Philippines, Inc.)
STATEMENTS OF INCOME
Years Ended June 30
2006
2007
REVENUES
Interest - net
Dividend income
EXPENSES
Provision for probable losses
Professional fees
Taxes and licenses
Others
NET INCOME (LOSS)
P
=3,922
–
3,922
=1,875
P
200,000
201,875
53,917
16,000
13,490
6,911
90,318
19,444
60,000
12,850
6,506
98,800
(P
=86,396)
=103,075
P
See accompanying Notes to Financial Statements.
*SGVMC405458*
DHG CAPITAL HOLDINGS, INC.
(A Wholly Owned Subsidiary of Prime Orion Philippines, Inc.)
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
Balances at June 30, 2005
Net income for the year
Balances at June 30, 2006
Net loss for the year
Balances at June 30, 2007
Capital
Stock
Retained
Earnings
Total
P
=100,000
P
=31,076,553
P
=31,176,553
–
103,075
103,075
100,000
31,179,628
31,279,628
–
P
=100,000
(86,396)
P
=31,093,232
(86,396)
P
=31,193,232
See accompanying Notes to Financial Statements.
*SGVMC405458*
DHG CAPITAL HOLDINGS, INC.
(A Wholly Owned Subsidiary of Prime Orion Philippines, Inc.)
STATEMENTS OF CASH FLOWS
Years Ended June 30
2006
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments for:
Provision for probable losses
Dividend income
Interest income
Operating loss before in working capital changes
Increase in other current assets
Increase (decrease) in accounts payable and accrued expenses
Net cash used in operations
Interest received
Dividends received
Net cash from (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITY
Decrease (increase) in amounts owed by related parties
CASH FLOWS FROM FINANCING ACTIVITY
Increase in amounts owed to related parties
(P
=86,396)
53,917
–
(3,922)
(36,401)
(7,925)
(50,820)
(95,146)
3,922
–
(91,224)
=103,075
P
19,444
(200,000)
(1,875)
(79,356)
(2,739)
2,987
(79,108)
1,875
200,000
122,767
(211,988,710)
56,025
212,068,549
1,114
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(11,385)
179,906
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
242,911
63,005
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 4)
P
=231,526
=242,911
P
See accompanying Notes to Financial Statements.
*SGVMC405458*
DHG CAPITAL HOLDINGS, INC.
(A Wholly Owned Subsidiary of Prime Orion Philippines, Inc.)
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
DHG Capital Holdings, Inc. (the Company), a wholly owned subsidiary of Prime Orion
Philippines, Inc. (POPI), was registered with the Philippine Securities and Exchange Commission
on August 6, 1993 primarily as a holding company. The Company’s principal place of business is
20th Floor, LKG Tower, 6801 Ayala Avenue, Makati City.
The Company had no employees in 2007 and 2006. The accounting and administrative functions
were handled by a related party.
The financial statements of the Company as of and for the years ended June 30, 2007 and 2006
were approved and authorized for issue by the Board of Directors on September 18, 2007.
2. Summary of Significant Accounting Policies
Basis of Preparation
The financial statements have been prepared on the historical cost basis and are presented in
Philippine peso.
The Company, a wholly owned subsidiary of POPI, elected not to prepare consolidated financial
statements under the exemption provided under Philippine Accounting Standards (PAS) 27,
Consolidated and Separate Financial Statements. POPI, a company incorporated in the
Philippines, prepared the group’s consolidated financial statements which are in compliance with
PFRS and which may be obtained from its office address located at 20th Floor LKG Tower, 6801
Ayala Avenue, Makati City.
Statement of Compliance
The financial statements of the Company have been prepared in compliance with Philippine
Financial Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies are consistent with those of the previous financial year, except for the
adoption of the following amendments to PAS and Philippine Interpretation based on International
Financial Reporting Interpretation Committee (IFRIC) interpretation during the year. Adoption of
these standards and interpretation did not have any effect on the financial position of the
Company. These, however, required additional disclosures in the financial statements.
•
Amendment to PAS 19, Employee Benefits
Additional disclosures are made to provide information about trends in the assets and
liabilities in the defined benefit plans and the assumptions underlying the components of the
defined benefit costs.
*SGVMC405458*
-2-
•
Amendment to PAS 21, The Effects of Changes in Foreign Exchange Rates
All exchange differences arising from monetary items that form part of a company’s net
investment in a foreign operation are recognized in a separate component of equity in the
financial statements regardless of the currency in which the monetary item is denominated.
•
Amendments to PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts (issued August 2005) - amended the scope of
PAS 39 to require financial guarantee contracts that are not considered to be insurance
contracts to be recognized initially at fair value and to be remeasured at the higher of the
amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and
Contingent Assets, and the amount initially recognized less, when appropriate, cumulative
amortization recognized in accordance with PAS 18, Revenue.
Amendment for cash flow hedge accounting of forecast intra-group transactions (issued April
2005) - amended PAS 39 to permit the foreign currency risk of a highly probable intra-group
forecast transaction to qualify as the hedged item in a cash flow hedge, provided that the
transaction is denominated in a currency other than functional currency of the entity entering
into that transaction and that the foreign currency risk will affect the statement of income.
Amendment for the fair value option (issued June 2005) - amended PAS 39 to prescribe the
conditions under which the fair value option on classification of financial instruments at fair
value through profit or loss (FVPL) may be used.
•
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease
This interpretation provides guidance in determining whether arrangements contain a lease to
which lease accounting must be implied.
Future Changes in Accounting Policies
The Company has not yet adopted the following standards, amendments or interpretations that
have been approved but are not yet effective:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative and quantitative information about exposure to risks arising
from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures
in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure
requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to
all entities that report under PFRS. PFRS 7 is applicable on January 1, 2007.
Complementary amendment to PAS 1, Presentation of Financial Statements
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. This is effective on January 1, 2007.
The Company is currently assessing the impact of PFRS 7 and the amendment to PAS 1 and
expects that the main additional disclosures will be the sensitivity analysis to market risk and the
capital disclosures required by PFRS 7 and the amendment to PAS 1.
*SGVMC405458*
-3-
PFRS 8, Operating Segments
The Company will adopt PFRS 8, Operating Segments, effective January 1, 2009. PFRS 8 will
replace PAS 14, Segment Reporting, and adopts a management approach to reporting segment
information. The information reported would be that which management uses internally for
evaluating the performance of operating segments and allocating resources to those segments.
Such information may be different from that reported in the balance sheet and statement of income
and companies will need to provide explanations and reconciliations of the differences.
Philippine Interpretation IFRIC 7, Applying the Restatement Approach under PAS 29, Financial
Reporting in Hyperinflationary Economies
This interpretation provides guidance on how to apply PAS 29 when an economy first becomes
hyperinflationary, in particular the accounting for deferred income tax. The interpretation has no
impact on the financial statements of the Company. This interpretation is effective for annual
periods beginning on or after March 1, 2006.
Philippine Interpretation IFRIC 8, Scope PFRS 2
This interpretation requires PFRS 2 to be applied to any arrangements where equity instruments
are issued for consideration which appears to be less than fair value. The interpretation has no
impact on the financial statements of the Company. This interpretation is effective for annual
periods beginning on or after May 1, 2006.
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
This interpretation was issued in March 2006 and becomes effective for financial years beginning
on or after June 1, 2006. It establishes that the date to assess the existence of an embedded
derivative is the date an entity first becomes a party to the contract, with reassessment only if there
is a change to the contract that significantly modifies the cash flows.
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
This interpretation provides that the frequency of financial reporting does affect the amount of
impairment charge to be recognized in the annual financial reporting with respect to goodwill and
available-for-sale (AFS) equity investments. It prohibits the reversal of impairment losses on
goodwill and AFS equity investments recognized in the interim financial reports even if
impairment is no longer present at the annual balance sheet date.
Philippine Interpretation IFRIC 11, PFRS 2 Group and Treasury Share Transactions
This interpretation will be effective on January 1, 2008. This interpretation requires arrangements
whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an
equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity
instruments (e.g., treasury shares) from another party, or (b) the shareholders of the entity provide
the equity instruments needed. It also provides guidance on how subsidiaries, in their separate
financial statements, account for such schemes when their employees receive rights to the equity
instruments of the parent.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This interpretation will become effective on January 1, 2008. This interpretation which covers
contractual arrangements arising from entities providing public services.
*SGVMC405458*
-4-
Except for PFRS 7 and the amendments to PAS 1, the Company does not expect any significant
changes in its accounting policies when it adopts the above standards, amendments and
interpretations.
Cash and Cash Equivalents
Cash includes cash on hand and cash in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from date of acquisition and that are subject to insignificant risk of changes in
value.
Financial Assets and Liabilities
Financial assets and financial liabilities are recognized initially at cost, which is the fair value at
inception. Transaction costs are included in the initial measurement of all financial assets and
liabilities, except for financial instruments measured at FVPL.
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 instrument. In the case of a regular way
purchase or sale of financial assets, recognition and disposals or retirements, as applicable, is done
using settlement date accounting.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity, net of any
related income tax benefits.
Financial assets are further classified into the following categories: financial asset at FVPL, loans
and receivables, held-to-maturity (HTM) investments, and AFS financial assets. The Company
determines the classification at initial recognition and re-evaluates this designation at every
reporting date. As of June 30, 2007, the Company has no financial assets at FVPL, HTM
investments and AFS financial assets.
Financial asset at FVPL. A financial asset is classified in this category if acquired principally for
the purpose of selling or repurchasing in the near term or upon initial recognition, it is designated
by management at FVPL. Derivatives are also categorized as held at FVPL, except those
derivatives designated and considered as effective hedging instruments. Assets classified under
this category are carried at fair value in the balance sheet. Changes in the fair value of such assets
are accounted for in the statement of income.
Loans and receivables. Loans and receivables are nonderivative financial assets with fixed or
determinable payments that are not quoted in an active market. They arise when the Company
provides money, goods or services directly to a debtor with no intention of trading the receivables.
Loans and receivables are carried at cost or amortized cost in the balance sheet. Amortization is
determined using the effective interest rate method. Loans and receivables are included in current
assets if maturity is within twelve months of the balance sheet date. Otherwise, these are classified
as noncurrent assets.
*SGVMC405458*
-5-
HTM investments
Nonderivative financial assets with fixed or determinable payments and fixed maturity are
classified as HTM when the Company has the positive intention and ability to hold to maturity.
Investments intended to be held for an undefined period are not included in this classification.
Other long-term investments that are intended to be HTM, such as bonds, are subsequently
measured at amortized cost. This cost is computed as the amount initially recognized minus
principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between the initially recognized amount and the maturity amount. This
calculation includes all fees and points paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and all other premiums and discounts.
For investments carried at amortized cost, gains and losses are recognized in income when the
investments are derecognized or impaired, as well as through the amortization process.
AFS financial assets. AFS financial assets are those nonderivative financial assets that are
designated as AFS or are not classified in any of the three preceding categories. After initial
recognition, AFS financial assets are measured at fair value with gains or losses being recognized
in the “Unrealized valuation gains (losses) on AFS investments” account in equity until the
investment is derecognized or until the investment is determined to be impaired at which time the
cumulative gain or loss previously reported in equity is included in the statement of income.
The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid prices at the close of business on the balance sheet date. For
investments where there is no active market, fair value is determined using valuation techniques.
Such techniques include using recent arm’s length market transactions; reference to the current
market value of another instrument, which is substantially the same; discounted cash flow analysis
and option pricing models.
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 where:
•
the rights to receive cash flows from the asset have expired;
•
the Company retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third party under a ‘pass-through’
arrangement; or
•
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.
Where 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. Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount of
consideration that the Company could be required to repay.
*SGVMC405458*
-6-
Where continuing involvement takes the form of a written and/or purchased option (including a
cash-settled option or similar provision) on the transferred asset, the extent of the Company’s
continuing involvement is the amount of the transferred asset that the Company may repurchase,
except that in the case of a written put option (including a cash-settled option or similar provision)
on an asset measured at fair value, the extent of the Company’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the option exercise price.
On derecognition of a financial asset in its entirety, the difference between the carrying amount
and the sum of (a) the consideration received (including any new asset obtained less any new
liability assumed) and (b) any cumulative gain or loss that has been recognized directly in equity
is recognized in the statement of income.
Financial liabilities. A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired.
Where an existing financial liability is replaced by another 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 statement of
income.
Impairment of Financial Assets
The Company assesses at each 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 the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). The carrying amount of the asset shall be reduced either directly or through the use
of an allowance account. The amount of the loss shall be recognized in the statement of income.
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 statement of income to the extent that the carrying value of the asset does not
exceed its amortized cost at the reversal date.
*SGVMC405458*
-7-
Assets carried at cost. If there is objective evidence that an impairment loss on an unquoted
equity instrument that is not carried at fair value because its fair value cannot be reliably
measured, or on a derivative asset that is linked to and must be settled by delivery of such an
unquoted equity instrument has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset.
AFS financial assets. If an AFS asset is impaired, an amount comprising the difference between
its cost (net of any principal payment and amortization) and its current fair value, less any
impairment loss previously recognized in statement of income, is transferred from equity to the
statement of income. Reversals in respect of equity instruments classified as AFS are not
recognized in statement of income. Reversals of impairment losses on debt instruments are
reversed through statement of income, if the increase in fair value of the instrument can be
objectively related to an event occurring after the impairment loss was recognized in the statement
of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the balance sheet,
if and only if, there is a currently enforceable legal right to offset the recognized amounts and
there is an intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously. This is generally not the case with master netting agreements, and the related
assets and liabilities are presented gross in the balance sheet.
Investment in Subsidiaries and an Associate
The Company’s investments in subsidiaries and an associate are accounted for under the cost
method of accounting. A subsidiary is an entity, including an unincorporated entity such as
partnership that is controlled by another entity (known as the parent). An associate is an entity in
which the Company has significant influence and which is neither a subsidiary nor a joint venture.
Under the cost method, investment is recognized at cost. Income from the investment is
recognized only to the extent that the investor receives distributions from accumulated profits of
the subsidiary and associate arising after the date of acquisition. Distributions received in excess
of such profits are regarded as a recovery of investment and are recognized as a reduction of the
cost of the investment.
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.
Interest
Interest income is recognized as the interest accrues taking into account the effective yield on the
asset.
Dividend
Dividend income is recognized when the Company’s rights to receive payment is established.
*SGVMC405458*
-8-
Income Taxes
Current income tax
Current income 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 balance
sheet date.
Deferred income tax
Deferred income tax is provided using the balance sheet liability method on temporary differences
at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
•
where the deferred income 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
•
in respect of 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 income tax assets are recognized for all deductible temporary differences, carryforward
of unused tax credits in the form of minimum corporate income tax (MCIT) and unused tax losses
in the form of net operating loss carryover (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:
•
where the deferred income 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
•
in respect of deductible temporary differences associated with investments in subsidiaries,
associates and interests in joint ventures, deferred income 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 income 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 income tax asset to be utilized. Unrecognized deferred income tax
assets are reassessed at each balance sheet date and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred income tax asset to be recovered.
Deferred income 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 the balance sheet date.
*SGVMC405458*
-9-
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists to offset current income tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are discounted using a
current pre-tax rate that reflects, 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.
Contingencies
Contingent liabilities are not recognized in the financial statements. These are disclosed unless the
possibility of an outflow of resources embodying economic benefits is remote. Contingent assets
are not recognized in the financial statements but are disclosed when an inflow of economic
benefits is probable.
Events After the Balance Sheet Date
Post year-end events that provide additional information about the Company’s financial position at
the 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 financial statements when
material.
3. Significant Accounting Judgments and Estimates
The Company’s financial statements prepared in accordance with PFRS requires management to
make judgment, estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The estimates and assumptions used in the accompanying
financial statements are based upon management’s evaluation of relevant facts and circumstances
as of the date of the financial statements. Actual results could differ from such estimates.
Determining functional currency
Based on the economic substance of underlying circumstances relevant to the Company, the
functional currency of the Company has been determined to be the Philippine peso. The
Philippine peso is the currency of the primary economic environment in which the Company
operates and it is the currency that mainly influences the sale of services and the cost of providing
the services.
Estimating allowances for doubtful accounts and probable losses
The Company maintains an allowance for doubtful accounts and probable losses at a level
considered adequate to provide for potential uncollectible receivables and unused input tax. The
level of this allowance is evaluated by the Company on the basis of factors that affect the
collectibility of the accounts.
The Company reviews the age and status of receivables and identifies accounts that are to be
provided with allowance on a continuous basis.
*SGVMC405458*
- 10 -
Total allowance for probable losses on input VAT amounted to P
=27,369 and P
=19,444 as of
June 30, 2007 and 2006. Total allowance for probable losses on creditable withholding tax
amounted to P
=45,992 as of June 30, 2007. Total allowance for doubtful accounts with related
parties amounted to P
=125,000 as of June 30, 2007 and 2006 (see Note 6).
Realizability of deferred income tax assets
The Company reviews the carrying amounts of deferred income taxes at each balance sheet date
and reduces deferred income tax assets to the extent that it is no longer probable that sufficient
taxable income will be available to allow all or part of the deferred income tax assets to be
utilized. However, there is no assurance that the Company will generate sufficient taxable income
to allow all or part of its deferred income tax assets to be utilized.
Temporary differences for which no deferred income tax assets were recognized amounted to
=957,974 and P
P
=905,264 as of June 30, 2007 and 2006, respectively (see Note 7).
Estimating asset impairment
Internal and external sources of information are reviewed at each balance sheet date to identify
indications that the assets may be impaired or an impairment loss previously recognized no longer
exists or may be decreased.
If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss
is recognized whenever the carrying amount of an asset exceeds its estimated recoverable amount.
The Company assesses the impairment of assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the
Company considers important which could trigger an impairment review include the following:
•
•
significant underperformance relative to expected historical or projected future operating
results; and
significant negative industry or economic trends.
4. Cash and Cash Equivalents
Cash on hand and in banks
Cash equivalents
2007
P
=78,851
152,675
P
=231,526
2006
=242,911
P
–
=242,911
P
Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are made for
varying periods of up to three months depending on the immediate cash requirements of the
Company, and earn interest at the respective short-term deposit rates.
*SGVMC405458*
- 11 -
5. Investments in Shares of Stock
Acquisition costs and percentage of ownership in 2007 and 2006 follow:
Percentage of ownership
Acquisition costs:
Subsidiaries:
HLG Philippines, Inc. (HPI)
Orion Solutions, Inc. (OSI)
Associate:
BIB Aurora Insurance Brokers Inc. (BAIBI)
100%
96%
P
=141,433,000
27,500,000
20%
5,960,000
=174,893,000
P
The Company’s investments in an associate is accounted for under the cost method of accounting.
The above companies are private entities incorporated in the Philippines.
The table below illustrates the summarized financial information of BAIBI:
Total assets
Total liabilities
Revenues
Cost and expenses
Net income
2007
P
=12,217,888
819,977
2,952,762
2,229,114
556,253
2006
=11,747,820
P
906,163
1,647,192
203,760
1,048,464
6. Related Party Transactions
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.
In the ordinary course of business, the Company entered into transactions with related parties
consisting principally of noninterest-bearing advances with no fixed payment terms and are due
and demandable.
Account balances with related parties are as follows:
Amounts owed by related parties:
HPI
Others
Less allowance for doubtful accounts
2007
2006
P
=261,640,000
125,000
261,765,000
125,000
P
=261,640,000
=49,651,290
P
125,000
49,776,290
125,000
=49,651,290
P
*SGVMC405458*
- 12 -
Amounts owed to related parties:
POPI
OSI
2007
2006
P
=358,501,918
46,926,651
P
=405,428,569
=96,782,079
P
96,577,941
=193,360,020
P
7. Income Taxes
There is no provision for income tax in 2007 and 2006 since the Company is in a taxable loss
position and interest and dividend income has already been subjected to final tax.
The reconciliation of income tax computed at the statutory tax rate to provision for income tax
follows:
2007
At statutory income tax rates of 35% in
2007 and 34% in 2006
Additions to (reductions in) income tax
resulting from:
Unrecognized deferred income tax assets
Provision for probable losses on input tax
Interest income subjected to final tax
Tax exempt dividend income
(P
=30,239)
28,838
2,774
(1,373)
–
P
=–
2006
=35,046
P
26,981
6,611
(638)
(68,000)
=–
P
As of June 30, 2007 and 2006, deferred income tax assets have not been recognized on the
following deductible temporary differences because management believes that it is no longer
probable that sufficient taxable income and tax liabilities will be available to allow all or part of
the deferred income tax assets to be utilized.
2007
P
=780,982
125,000
45,992
6,000
P
=957,974
NOLCO
Allowance for doubtful accounts
Allowance for probable losses
MCIT
2006
=773,588
P
125,000
–
6,676
=905,264
P
The carryforward benefits of NOLCO and the excess MCIT over the regular corporate income tax,
which can be claimed by the Company against taxable income or tax liabilities for the next three
years from the year of incurrence, are as follows:
Year Incurred
2007
2006
2005
NOLCO
P
=36,401
79,356
665,225
=780,982
P
MCIT
P
=–
–
6,000
P
=6,000
Expiry Date
June 2010
June 2009
June 2008
*SGVMC405458*
- 13 -
The following are the movements in NOLCO and MCIT:
NOLCO
Beginning balance
Additions
Expirations
Ending balance
2007
P
=773,588
36,401
(29,007)
P
=780,982
2006
=5,702,942
P
79,356
(5,008,710)
=773,588
P
MCIT
Beginning balance
Expirations
Ending balance
2007
P
=6,676
(676)
P
=6,000
2006
P8,676
=
(2,000)
=6,676
P
Republic Act (R.A.) No. 9337 was enacted into law effective on November 1, 2005 amending
various provisions in the existing 1997 National Internal Revenue Code. Among the reforms
introduced by the said RA are as follows:
a. Increased the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
b. Granted authority to the Philippine President to increase the 10% value added tax (VAT) rate
to 12%, effective February 1, 2006;
c. Revised invoicing and reporting requirements for VAT;
d. Expanded scope of transactions subject to VAT; and,
e. Provided thresholds and limitations on the amounts of VAT credits that can be claimed.
On January 31, 2006, the Bureau of Internal Revenue issued Revenue Memorandum Circular
No. 7-2006 increasing the VAT rate from 10% to 12% effective February 1, 2006.
In November 2006, RA 9361 was enacted, repealing the thresholds on the amount of VAT credits
that can be claimed.
8. Financial Instruments
Financial Risk Management Objectives and Policies
The Company’s financial instruments are cash and cash equivalents, accounts payable and accrued
expenses, and amounts owed by and to related parties. The main purpose of the Company’s
financial instruments is to fund its operations. The main risks from the use of financial
instruments are liquidity risk and credit risk.
Liquidity risk
In the management of liquidity, the Company monitors and maintains a level of cash and cash
equivalents deemed adequate by the management to finance the Company’s operations and
mitigate the effects of fluctuations in cash flows.
*SGVMC405458*
- 14 -
Credit risk
The Company establishes credit limits at the level of the individual borrower, corporate
relationship and industry sector. It also provides for credit terms with the consideration for
possible application of intercompany accounts between affiliated companies. Also, the Company
transacts only with affiliated companies and recognized third parties, hence, there is no
requirement for collateral.
Fair Values
The Company has determined that the carrying amounts of its financial instruments, based on their
notional amounts, reasonably approximate their fair values because these are mostly short-term in
nature.
*SGVMC405458*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Tutuban Properties, Inc.
Tutuban Center
Claro M. Recto Avenue, Manila
We have audited the accompanying financial statements of Tutuban Properties, Inc. (a wholly owned
subsidiary of Orion Land, Inc.), which comprise the balance sheets as at June 30, 2007 and 2006, and
the statements of income, statements of changes in equity and statements of cash flows for the years
then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC406439*
-2-
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Tutuban Properties, Inc. as at June 30, 2007 and 2006, and its financial
performance and its cash flows for the years then ended in accordance with Philippine Financial
Reporting Standards.
SYCIP GORRES VELAYO & CO.
Jose Pepito E. Zabat III
Partner
CPA Certificate No. 85501
SEC Accreditation No. 0328-A
Tax Identification No. 102-100-830
PTR No. 026401, January 2, 2007, Makati City
October 11, 2007
*SGVMC406439*
TUTUBAN PROPERTIES, INC.
(A Wholly Owned Subsidiary of Orion Land, Inc.)
BALANCE SHEETS
June 30
2007
2006
ASSETS
Cash and Cash Equivalents (Note 4)
Accounts and Other Receivables - net (Note 5)
P
=84,127,907
102,057,722
P52,121,336
=
108,850,071
Advances to Affiliates (Note 16)
220,363,751
217,519,827
–
2,322,290
7,904,678
96,379,500
8,349,752
96,379,500
7,924,649
11,806,653
941,437,845
1,065,168,166
57,798,921
93,731,201
66,725,551
68,803,559
P
=1,611,726,174
=1,698,046,705
P
P
=180,607,577
=178,460,313
P
13,737,743
10,554,391
Customers’ and Other Deposits (Note 11)
189,688,266
193,455,297
Advances from Affiliates (Note 16)
Deferred Income Tax Liabilities - net (Note 15)
114,537,516
85,690,224
116,303,591
109,517,595
6,250,000
31,250,000
590,511,326
639,541,187
200,000,000
212,500,000
200,000,000
212,500,000
324,988,863
283,725,985
368,796,896
277,208,622
1,021,214,848
1,058,505,518
P
=1,611,726,174
=1,698,046,705
P
Tutuban Center Units for Sale
Inventories
Investments in Subsidiaries - at cost (Notes 2 and 6)
Property and Equipment - net (Note 8)
Investment Properties - net (Note 7)
Leasehold Rights - net (Notes 12 and 17)
Other Assets - net (Note 9)
TOTAL ASSET
LIABILITIES AND EQUITY
Accounts Payable and Accrued Expenses (Note 10)
Accrued Retirement Benefits (Note 18)
Long-term Debt (Note 12)
Total Liabilities
Equity
Capital stock - P
=1 par value
Authorized and issued - 200,000,000 shares
Additional paid-in capital
Revaluation reserve on investment properties at deemed cost
(Note 7)
Retained earnings
Total Equity
TOTAL LIABILITIES AND EQUITY
See accompanying Notes to Financial Statements.
*SGVMC406439*
TUTUBAN PROPERTIES, INC.
(A Wholly Owned Subsidiary of Orion Land, Inc.)
STATEMENTS OF INCOME
Years Ended June 30
2006
2007
REVENUE
Rent (Note 7)
Interest and penalties
Promotional activities
Sale of leasehold rights
Others (Note 5)
EXPENSES
Operating expenses (Notes 7 and 13)
Interest and bank charges (Note 12)
Cost of leasehold rights
P
=437,894,361
4,602,201
1,025,781
–
6,939,606
450,461,949
=461,414,633
P
6,989,517
1,487,302
14,087,457
51,745,693
535,724,602
505,905,405
2,021,037
–
507,926,442
511,734,088
5,204,547
9,804,424
526,743,059
INCOME (LOSS) BEFORE INCOME TAX
(57,464,493)
8,981,543
PROVISION FOR (BENEFIT FROM)
INCOME TAX (Note 15)
(20,173,823)
2,789,742
(P
=37,290,670)
=6,191,801
P
NET INCOME (LOSS)
See accompanying Notes to Financial Statements.
*SGVMC406439*
TUTUBAN PROPERTIES, INC.
(A Wholly Owned Subsidiary of Orion Land, Inc.)
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
Balance at June 30, 2005
Transfer of realized revaluation reserve on
investment property at deemed
cost - net of tax
Effect of change in tax rates
Net income for the year
Balance at June 30, 2006
Transfer of realized revaluation reserve on
investment property at deemed
cost - net of tax
Net loss for the year
Balance at June 30, 2007
Capital Stock
Additional
Paid-in
Capital
Revaluation
Reserve on
Investment
Property at
Deemed Cost
=
P200,000,000
P
=212,500,000
P
=411,760,978
–
–
–
200,000,000
–
–
–
212,500,000
–
–
=
P200,000,000
–
–
P
=212,500,000
(43,794,339)
830,257
–
368,796,896
Retained
Earnings
Total
P
=227,222,482 P
=1,051,483,460
43,794,339
–
6,191,801
277,208,622
–
830,257
6,191,801
1,058,505,518
(43,808,033)
43,808,033
–
–
(37,290,670)
(37,290,670)
P
=324,988,863 P
=283,725,985 P
=1,021,214,848
See accompanying Notes to Financial Statements.
*SGVMC406439*
TUTUBAN PROPERTIES, INC.
(A Wholly Owned Subsidiary of Orion Land, Inc.)
STATEMENTS OF CASH FLOWS
Years Ended June 30
2007
2006
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Depreciation of:
Investment properties (Note 7)
Property and equipment (Note 8)
Amortization of leasehold rights
Provisions for:
Probable losses (Note 13)
Retirement (Note 18)
Interest expense
Loss on sale of investment in a subsidiary (Note 13)
Gain on sale of AFS investments
Interest income
Operating income before working capital changes
Decrease (increase) in:
Accounts and other receivables
Tutuban Center units for sale
Inventories
Increase (decrease) in:
Accounts payable and accrued expenses
Customers’ and other deposits
Net cash generated from operations
Interest received
Income taxes paid
Interest paid
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Available-for-sale investments
Investment in a subsidiary
Investment properties
Additions to property and equipment
Increase in:
Advances to affiliates
Other assets
Investments in subsidiaries
Net cash used in investing activities
(P
=57,464,493)
=8,981,543
P
126,052,611
3,178,046
8,926,630
121,419,043
2,466,091
8,926,629
9,006,953
3,183,352
1,852,942
–
(378,571)
(2,725,883)
91,631,587
7,404,364
9,284,303
4,813,801
14,000,000
–
(3,902,253)
173,393,521
5,009,545
–
445,074
(19,467,996)
9,674,773
(974,983)
2,574,004
(3,767,031)
95,893,179
3,688,417
(422,404)
(2,481,216)
96,677,976
23,295,251
(15,543,668)
170,376,898
1,313,140
(745,393)
(5,438,641)
165,506,004
3,103,571
–
–
(1,946,042)
–
500,000
206,308
(7,244,132)
(2,843,924)
(37,039,205)
–
(38,725,600)
(31,639,892)
(59,484,413)
(96,354,500)
(194,016,629)
(Forward)
*SGVMC406439*
-2-
Years Ended June 30
2006
2007
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in advances from affiliates
Payment of long-term debt
Cash used in financing activities
(P
=945,805)
(25,000,000)
(25,945,805)
(P
=2,647,164)
(25,000,000)
(27,647,164)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
32,006,571
(56,157,789)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
52,121,336
108,279,125
P
=84,127,907
=52,121,336
P
CASH AND CASH EQUIVALENTS AT END OF
YEAR (Note 4)
See accompanying Notes to Financial Statements.
*SGVMC406439*
TUTUBAN PROPERTIES, INC.
(A Wholly Owned Subsidiary of Orion Land, Inc.)
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Tutuban Properties, Inc. (the Company) was incorporated on August 9, 1990 primarily to deal and
engage in real estate business in all its branches and ramifications; to purchase, hold, manage,
administer, acquire, sell, convey, mortgage, encumber, rent, lease or otherwise dispose of or deal
in, for itself or for others, for profit and advantage, residential, commercial, urban or other kinds of
real property, improve and unimproved, to such persons or entities and under such terms and
conditions as the corporation may deem proper and convenient; to acquire, purchase, subdivide,
hold, manage and sell, subdivision lots, with or without buildings or improvements, for such
consideration and in whatever manner and form as the corporation may determine or the law will
permit; and to erect, construct, alter, manage, operate, lease in whole or in part, buildings and
tenements of the corporation or of third persons. The Company’s principal place of business is
located at Tutuban Center, Claro M. Recto Avenue, Manila.
The financial statements of the Company as of and for the years ended June 30, 2007 and 2006
were approved and authorized for issue in accordance with a resolution by the Board of Directors
(BOD) on October 11, 2007.
2. Summary of Significant Accounting Policies
Basis of Preparation
The financial statements of the Company, which are prepared for submission to the Securities and
Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR), have been prepared in
compliance with Philippine Financial Reporting Standards (PFRS).
The Company, a wholly owned subsidiary of Orion Land, Inc. (OLI) whose ultimate parent
company is Prime Orion Philippines Inc. (POPI), elected not to prepare consolidated financial
statements under the exemption provided under Philippine Accounting Standards (PAS) 27,
Consolidated and Separate Financial Statements. POPI, a company incorporated in the
Philippines, prepared the group’s consolidated financial statements which are in compliance with
PFRS and which may be obtained from its office address located at 20th Floor, LKG Tower, 6801
Ayala Avenue, Makati City.
The financial statements are presented in Philippine peso, which is the Company’s functional and
presentation currency under PFRS.
Statement of Compliance
The financial statements of the Company have been prepared in compliance with PFRS.
*SGVMC406439*
-2-
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous year except for the
adoption of the following new and amended standards and Philippine Interpretations [based on
International Financial Reporting Interpretations Committee (IFRIC) interpretations] during the
period. Adoption of these standards and interpretations did not have any effect on the Company
except for the additional disclosures on the financial statements:
•
Amendment to PAS 19, Employee Benefits
Additional disclosures are made to provide information about trends in the assets and
liabilities in the defined benefit plans and the assumptions underlying the components of the
defined benefit costs.
•
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease
This interpretation provides guidance in determining whether arrangements contain a lease to
which lease accounting must be implied.
Cash and Cash Equivalents
Cash includes cash on hand and with 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 that are subject to an insignificant risk of changes in value.
Financial Instruments
Financial assets and financial liabilities are recognized initially at cost, which is the fair value at
inception. Transaction costs are included in the initial measurement of all financial assets and
liabilities, except for financial instruments measured at fair value through profit and loss (FVPL).
The Company recognizes a financial asset or a financial liability in the balance sheet when it
becomes a party to the contractual provisions of the instrument. In the case of a regular way
purchase or sale of financial assets, recognition and disposals or retirement, as applicable, is done
using settlement date accounting.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity, net of any
related income tax benefits. Financial instruments are offset when there is a legally enforceable
right to offset and intention to settle either on a net basis or to realize the asset and settle the
liability simultaneously.
Financial assets are further classified into the following categories: financial assets at FVPL, loans
and receivables, held-to-maturity (HTM) investments and available-for-sale (AFS) investments.
The Company determines the classification at initial recognition and re-evaluates this designation
at every reporting date. As of June 30, 2007 and 2006, the Company has no financial assets at
FVPL and HTM investments.
*SGVMC406439*
-3-
Loans and receivables
Loans and receivables are nonderivative financial assets with fixed or determinable payments that
are not quoted in an active market. They arise when the Company provides money, goods or
services directly to a debtor with no intention of trading the receivables. Loans and receivables are
carried at cost or amortized cost, less any allowance for impairment in the balance sheet.
Amortization is determined using the effective interest method.
As of June 30, 2007 and 2006, the Company has loans and receivables with carrying amounts of
=102.1 million and P
P
=108.8 million, respectively (see Note 5).
AFS investments
AFS investments are those nonderivative financial assets that are designated as AFS or are not
classified as financial assets at FVPL, loans and receivables and HTM investments. After initial
measurement, AFS investments are measured at fair value with gains or losses being recognized as
a separate component of equity until the investment is derecognized or until the investment is
determined to be impaired at which time the cumulative gain or loss previously reported in equity
is included in the statement of income.
The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid prices at the close of business on the balance sheet date. For
investments where there is no active market, fair value is determined using valuation techniques.
Such techniques include using recent arm’s-length market transactions; reference to the current
market value of another instrument, which is substantially the same; discounted cash flow analysis
and option pricing models.
As of June 30, 2007 and 2006, the Company has AFS investments with carrying amounts of
=1.9 million and P
P
=4.6 million, respectively (see Note 9).
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 where:
•
•
•
the rights to receive cash flows from the asset have expired;
the Company retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third party under a ‘pass-through’
arrangement; or
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.
Where 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. Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount of
consideration that the Company could be required to repay.
*SGVMC406439*
-4-
Where continuing involvement takes the form of a written and/or purchased option (including a
cash-settled option or similar provision) on the transferred asset, the extent of the Company’s
continuing involvement is the amount of the transferred asset that the Company may repurchase,
except that in the case of a written put option (including a cash-settled option or similar provision)
on an asset measured at fair value, the extent of the Company’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the option exercise price.
Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired.
Where an existing financial liability is replaced by another 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 statement of
income.
Impairment of Financial Assets
The Company assesses at each 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 the loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows (excluding future credit
losses that have not been incurred) discounted at the financial asset’s original effective interest rate
(i.e., the effective interest rate computed at the initial recognition). The carrying amount of the
asset shall be reduced either directly or through the use of an allowance account. The amount of
the loss shall be recognized in the statement of income.
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 statement of income to the extent that the carrying value of the asset does not
exceed its amortized cost at the reversal date.
*SGVMC406439*
-5-
In relation to accounts receivable, a provision for impairment is made when there is objective
evidence (such as the probability of insolvency or significant financial difficulties of the debtor)
that the Company will not be able to collect all of the amounts due under the original terms of the
invoice. The carrying amount of the receivable shall be reduced through the use of an allowance
account. Impaired debts shall be derecognized when they are assessed as uncollectible.
Assets carried at cost
If there is objective evidence that an impairment loss on an unquoted equity instrument that is not
carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that
is linked to and must be settled by delivery of such an unquoted equity instrument has been
incurred, the amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the current market rate of return
for a similar financial asset.
AFS investments
If an AFS investment is impaired, an amount comprising the difference between its cost (net of
any principal payment and amortization) and its current fair value, less any impairment loss
previously recognized in the statement of income, is transferred from equity to the statement of
income. Reversals in respect of equity instruments classified as AFS are not recognized in the
statement of income. Reversals of impairment losses on debt instruments are reversed through the
statement of income, if the increase in fair value of the instrument can be objectively related to an
event occurring after the impairment loss was recognized in the statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the balance sheet,
if and only if, there is a currently enforceable legal right to offset the recognized amounts and
there is an intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously. This is generally not the case with master netting agreements, and the related
assets and liabilities are presented gross in the balance sheet.
Tutuban Center Units for Sale
Tutuban Center units for sale are valued at the lower of cost and net realizable value and include
those costs incurred for the development and improvement of the properties. Net realizable value
is the estimated selling price in the ordinary course of business, less estimated marketing costs.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the
first-in-first-out method. Net realizable value of the saleable merchandise is the estimated selling
price in the ordinary course of business, less the estimated costs necessary to make the sale. Net
realizable value of engineering and maintenance supplies is the estimated replacement cost.
Investments in Subsidiaries
Investments in subsidiaries are accounted for under the cost method of accounting. A subsidiary is
an entity, including an unincorporated entity such as partnership that is controlled by another
entity (known as the parent).
*SGVMC406439*
-6-
Under the cost method, investment is recognized at acquisition cost. Income from the investment
is recognized only to the extent that the Company receives distributions from accumulated income
of the subsidiaries arising after the date of acquisition. Distributions received in excess of such
income are regarded as a recovery of investment and are recognized as a reduction of the cost of
the investment.
Property and Equipment
Property and equipment is stated at cost, excluding the costs of day-to-day servicing, less
accumulated depreciation and accumulated impairment in value. Such cost includes the cost of
replacing part of such property and equipment when that cost is incurred and if the recognition
criteria are met.
The initial cost of property and equipment consists of its purchase price, including import duties,
taxes and any directly attributable costs of bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by the Company. Expenditures
incurred after the property and equipment have been put into operation, such as repairs and
maintenance and overhaul costs, are normally charged to the statement of income in the period in
which costs are incurred. In situations where it can be clearly demonstrated that the expenditures
have resulted in an increase in the future economic benefits expected to be obtained from the use
of an item of property and equipment beyond its originally assessed standard of performance, the
expenditures are capitalized as an additional cost of property and equipment.
Each part of an item of property and equipment with a cost that is significant in relation to the total
cost of the item shall be depreciated separately.
Depreciation and amortization are computed using the straight-line method over the estimated
useful lives of the property and equipment as follows:
Office equipment
Furniture and fixtures
Machinery and equipment
Transportation equipment
Years
4
5
5
5
Leasehold improvements are amortized over the life of the improvements of two (2) years or the
term of the lease, whichever is shorter.
The assets’ residual values, useful lives and depreciation method are reviewed periodically to
ensure that the values, periods and method of depreciation are consistent with the expected pattern
of economic benefits from items of property and equipment at each balance sheet date.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising from the derecognition of
the asset (calculated as the difference between the net disposal proceeds and the carrying amount
of the asset) is included in the statement of income in the year the asset is derecognized. Fully
depreciated assets are retained in the books when still in use.
*SGVMC406439*
-7-
Investment Properties
Properties held for rentals or for capital appreciation or both are classified as investment property.
Investment properties are stated at cost. The carrying amount includes the cost of replacing part of
an existing investment property at the time that cost is incurred if the recognition criteria are met;
and excludes the costs of day-to-day servicing of an investment property. Leasehold
improvements (including buildings and structures) on the leased land, is carried at deemed cost,
less any impairment in value.
Investment property is derecognized when either it has been disposed of or when the investment
property is permanently withdrawn from use and no future economic benefit is expected from its
disposal. Any gains or losses on the retirement or disposal of an investment property are
recognized in the statement of income in the period of retirement or disposal.
Transfers are made to investment property when, and only when, there is a change in use,
evidenced by ending of owner-occupation, commencement of an operating lease to another party
or ending of construction or development. Transfers are made from investment property when, and
only when, there is a change in use, evidenced by commencement of owner-occupation or
commencement of development with a view to sale.
Depreciation on investment properties is computed using the straight-line method over the
remaining term of the lease or the estimated useful lives of the assets, whichever is shorter.
The Company transfers directly to retained earnings the realized portion of the revaluation reserve
on investment properties at deemed cost. Accordingly, an amount corresponding to the difference
between the depreciation based on the revalued carrying amount (deemed cost) of the properties
and depreciation based on the properties’ original cost is transferred annually from “revaluation
reserve on investment properties at deemed cost” account to “retained earnings” account in the
balance sheet. The amount transferred is net of the related deferred income tax liability.
Leasehold Rights
Leasehold rights are stated at cost less any impairment in value and are amortized over the
remaining term of the lease from start of commercial operations.
Impairment of Nonfinancial Assets
The Company assesses at each balance sheet date whether there is an indication that a nonfinancial
asset may be impaired. If any such indication exists, or when annual impairment testing for a
nonfinancial asset is required, the Company makes an estimate of the asset’s estimated recoverable
amount. A nonfinancial asset’s estimated recoverable amount is the higher of an asset’s or cashgenerating unit’s fair value less costs to sell and its value in use and is determined for an
individual asset, unless the asset does not generate cash inflows that are largely independent of
those from other assets or group of assets. Where the carrying amount of a nonfinancial asset
exceeds its estimated recoverable amount, the asset is considered impaired and is written down to
its estimated recoverable amount. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Fair value less costs to
sell is the amount obtainable from the sale of an asset or cash-generating unit in an arm’s-length
transaction, adjusted for incremental costs that would be directly attributable to the disposal of the
asset.
*SGVMC406439*
-8-
Impairment losses of continuing operations are recognized in the statement of income in those
expense categories consistent with the function of the impaired asset, except for any property
previously revalued where the revaluation was taken to equity. In this case, the impairment is also
recognized in equity up to the amount of any previous revaluation.
An assessment is made at each balance sheet 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 nonfinancial asset’s
estimated recoverable amount since the last impairment loss was recognized. If that is the case,
the carrying amount of the financial asset is increased to its estimated recoverable amount. That
increased amount cannot exceed the carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognized in the statement of income unless the
nonfinancial asset is carried at revalued amount, in which case the reversal is treated as a
revaluation increase. After such a reversal, the depreciation charge is adjusted in future periods to
allocate the nonfinancial asset’s revised carrying amount less any residual value, on a systematic
basis over its remaining useful life.
Interest-Bearing Loans and Borrowings
All loans and borrowings are initially recognized at the fair value of the consideration received
less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at
amortized cost using the effective interest method. Amortized cost is calculated by taking into
account any related costs, discount or premium.
Gains and losses are recognized in the statement of income when the liabilities are derecognized
as well as through the amortization process.
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:
Rental income
Lease is recognized as income as it accrues over the terms of mall spaces’ lease contracts. The
priority premium for long-term leases is considered as sale of leasehold rights.
Sale of leasehold rights
Revenue from the sale of leasehold rights represents sales of Tutuban Center Units for Sale. The
sale is recognized on the accrual basis when the collectibility of sales price is reasonably assured.
The development cost of the said areas is determined on the basis of actual development costs
incurred.
*SGVMC406439*
-9-
Interest
Revenue is recognized as the interest accrues taking into account the effective yield on the asset.
Retirement Costs
The Company has a defined benefit pension plan which requires contributions to be made to a
separately administered fund. The cost of providing benefits under the defined benefit plan is
determined separately for each plan using the projected unit credit actuarial valuation method.
Actuarial gains and losses are recognized as income or expense when the net cumulative
unrecognized actuarial gains and losses for each individual plan at the end of the previous
reporting year exceeded 10% of the higher of the defined benefit obligation and the fair value of
plan assets at that date. These gains or losses are recognized over the expected average remaining
working lives of the employees participating in the plans.
The past service cost 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, a pension plan, past service cost is recognized immediately.
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 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.
Borrowing Costs
Borrowing costs are generally recognized as expense in the year in which these costs are incurred,
except those borrowing costs that are directly attributable to the acquisition, development,
improvement and construction of property and equipment and real estate held for sale which are
capitalized as part of the cost of such property and equipment and real estate held for sale.
The capitalization of borrowing costs: (a) commences when the expenditures and borrowing costs
for the assets are being incurred and activities necessary to prepare the property and equipment for
their intended use or sale are in progress; (b) is suspended during extended periods when active
development and construction of the property and equipment is interrupted; and,
(c) ceases when substantially all the activities necessary to prepare the property and equipment for
their intended use or sale are complete.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of
the arrangement at inception date and involves an assessment of whether the fulfillment of the
arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a
right to use the asset. A reassessment is made after the inception of the lease only if one of the
following applies:
a. There is a change in contractual terms, other than a renewal or extension of the arrangement;
b. A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;
c. There is a change in the determination of whether fulfillment is dependent on a specified asset;
or
d. There is a substantial change to the asset.
*SGVMC406439*
- 10 -
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenario a, c or d and at the date of
renewal or extension period for scenario b.
For arrangements entered into prior to July 1, 2006, the date of inception is deemed to be
July 1, 2006 in accordance with the transitional requirements of Philippine Interpretation IFRIC 4.
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. Initial direct costs incurred in negotiating operating
leases are added to the carrying amount of the leased asset and recognized over the lease term on
the same bases as the rental income.
Company as lessee
Finance leases, which transfer to the Company substantially all the risks and benefits incidental to
ownership of the leased item, are capitalized at the inception of the lease at the fair value of the
leased property or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability. Finance charges are charged
directly against income.
Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets
or the respective lease terms.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense in the
statement of income based on the terms of the lease agreement.
Income Taxes
Current income tax
Current income 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 balance
sheet date.
Deferred income tax
Deferred income tax is provided using the balance sheet liability method on temporary differences
at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
•
where the deferred income 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 income nor taxable income or loss; and
•
in respect of taxable temporary differences associated with investments in subsidiaries and
interests in joint ventures, where the timing of the reversal of the temporary differences can be
*SGVMC406439*
- 11 -
controlled and it is probable that the temporary differences will not reverse in the foreseeable
future.
Deferred income tax assets are recognized for all deductible temporary differences, carryforward
of unused tax credits in the form of minimum corporate income tax (MCIT) and unused tax losses
in the form of net operating loss carryover (NOLCO), to the extent that it is probable that taxable
income will be available against which the deductible temporary differences and the carryforward
benefits of MCIT and NOLCO can be utilized, except:
•
where the deferred income 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 income nor taxable income
or loss; and
•
in respect of deductible temporary differences associated with investments in foreign
subsidiaries and interests in joint ventures, deferred income tax assets are recognized only to
the extent that it is probable that the temporary differences will reverse in the foreseeable
future and taxable income will be available against which the temporary differences can be
utilized.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable income will be available
to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income
tax assets are reassessed at each balance sheet date and are recognized to the extent that it has
become probable that future taxable income will allow the deferred income tax asset to be
recovered.
Deferred income tax assets and liabilities are measured at the tax 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 the balance sheet date.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists to offset current income tax assets against current income tax liabilities, and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
Income tax relating to items recognized directly in equity is recognized directly in equity and not
in the statement of income.
Foreign Currency Transactions
The financial statements are presented in Philippine peso, which is 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 at the functional currency rate of exchange ruling at the balance sheet date. Exchange
gains or losses arising from foreign currency denominated transactions are credited to or charged
against income as incurred. Non-monetary items that are measured in terms of historical cost in a
foreign currency are translated using the exchange rate at the dates of the initial transactions.
Non-monetary items measured at fair value in a foreign currency are translated using the exchange
rates at the date when the fair value was determined.
*SGVMC406439*
- 12 -
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money, and where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as interest expense.
Contingencies
Contingent liabilities are not recognized in the financial statements. These are disclosed unless the
possibility of an outflow of resources embodying economic benefits is remote. Contingent assets
are not recognized in the financial statements but are disclosed when an inflow of economic
benefits is probable.
Events After the Balance Sheet Date
Post year-end events that provide additional information about the Company’s financial position at
the 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 financial statements when
material.
Future Changes in Accounting Policies
The Company has not adopted the following standard and interpretations that have been approved
but are not yet effective:
PFRS 7, Financial Instruments: Disclosures
This standard will be effective for annual periods beginning on or after January 1, 2007. This
standard introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative and quantitative information about exposure to risks arising
from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, as well as sensitivity analysis to market risk.
It replaces
PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and
the disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is
applicable to all entities that report under PFRS.
PFRS 8, Operating Segments
This standard will be effective for annual periods beginning on or after January 1, 2009. This
standard will replace PAS 14, Segment Reporting, and adopts a management approach to
reporting segment information. The information reported would be that which management uses
internally for evaluating the performance of operating segments and allocating resources to those
segments. Such information may be different from that reported in the balance sheet and
statement of income and companies will need to provide explanations and reconciliations of the
differences.
Complementary Amendment to PAS 1, Presentation of Financial Statements
This amendment is effective for annual periods beginning on or after January 1, 2007. The
amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital.
*SGVMC406439*
- 13 -
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
The interpretation is effective for annual periods beginning on or after November 1, 2006. This
interpretation provides that the frequency of financial reporting does affect the amount of
impairment charge to be recognized in the annual financial reporting with respect to goodwill and
AFS equity investments. It prohibits the reversal of impairment losses on goodwill and AFS
equity investments recognized in the interim financial reports even if impairment is no longer
present at the annual balance sheet date.
Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions
The interpretation is effective for annual periods beginning on or after March 1, 2007. This
interpretation requires arrangements whereby an employee is granted rights to an entity’s equity
instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity
chooses or is required to buy those equity instruments (e.g., treasury shares) from another party,
or (b) the shareholder(s) of the entity provide the equity instruments needed. It also provides
guidance on how subsidiaries, in their separate financial statements, account for such schemes
when their employees receive rights to the equity instruments of the parent.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This interpretation will be effective for annual periods beginning on or after January 1, 2008.
This interpretation covers contractual arrangements arising from entities providing public
services.
Except for PFRS 7 and the amendment to PAS 1, the Company does not expect any significant
changes in its accounting policies when it adopts the above standards, amendments and
interpretations.
3.
Significant Accounting Judgments and Estimates
The preparation of the accompanying financial statements in conformity with PFRS requires
management to make judgments, estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The estimates and assumptions used in the
accompanying financial statements are based upon management’s evaluation of relevant facts and
circumstances as of the date of the financial statements. Actual results could differ from such
estimates.
PAS 1 requires disclosures about key sources of estimation, uncertainty and judgments that
management has made in the process of applying accounting policies. Management believes the
following represent a summary of these significant judgments and estimates:
Operating lease commitments - Company as lessor
The Company has entered into commercial property leases on its investment property portfolio.
The Company has determined that it retains all the significant risks and rewards of ownership of
these properties which are leased out on operating leases.
Operating lease commitments - Company as lessee
The Company has entered into a lease of the land on which the commercial property is situated.
The Company has determined that it does not obtain any significant risks and rewards of
ownership of the land which is leased on an operating lease.
*SGVMC406439*
- 14 -
Impairment losses on receivables
The Company reviews its loans and receivables at each reporting date to assess whether an
allowance for impairment should be recorded in the statement of income. In particular, judgment
by management is required in the estimation of the amount and timing of future cash flows when
determining the level of allowance required. Such estimates are based on assumptions about a
number of factors and actual results may differ, resulting in future changes to the allowance.
Allowance for impairment losses on receivables amounted to P
=30.8 million as of June 30, 2007
and 2006 (see Note 5).
Estimating useful lives of property, equipment, investment properties and software development
cost
The estimated useful lives used as a basis for depreciating the Company’s property and equipment
and investment properties were determined on the basis of management’s assessment of the
period within which the benefits of these assets are expected to be realized taking into account
actual historical information on the use of such assets as well as industry standards and averages
applicable to the Company’s assets.
Net book value of investment properties amounted to P
=0.9 billion and P
=1.1 billion as of
June 30, 2007 and 2006, respectively (see Note 7).
Net book value of property and equipment amounted to P
=7.9 million and P
=11.8 million and as of
June 30, 2007 and 2006, respectively (see Note 8).
Software development cost amounted to P
=7.4 million as of June 30, 2007.
Realizability of deferred income tax assets
The Company reviews the carrying amounts of deferred income taxes at each balance sheet date
and reduces deferred income tax assets to the extent that it is no longer probable that sufficient
taxable income will be available to allow all or part of the deferred income tax assets to be
utilized.
Deferred income tax assets of the Company amounted to P
=92.0 million and P
=97.0 million as of
June 30, 2007 and 2006, respectively (see Note 15).
Accrued retirement liability and retirement expense
The determination of the Company’s accrued retirement liability and annual retirement expense is
dependent on the selection of certain assumptions used in calculating such amounts. Those
assumptions include, among others, discount rates, expected returns on plan assets and salary
increase rates (see Note 18). In accordance with PFRS, actual results that differ from the
Company’s assumptions, subject to the 10% corridor test are accumulated and amortized over
future periods and therefore, generally affect the recognized expense and recorded obligation in
such future periods.
While the Company believes that the assumptions are reasonable and appropriate, significant
differences between actual experiences and assumptions may materially affect the Company’s
accrued retirement obligation and annual retirement expense.
The accrued retirement liability of the Company amounted to P
=13.7 million and
=10.6 million as of June 30, 2007 and 2006, respectively (see Note 18).
P
*SGVMC406439*
- 15 -
Asset impairment
Internal and external sources of information are reviewed at each balance sheet date to identify
indications that the following assets may be impaired or an impairment loss previously recognized
no longer exists or may be decreased.
If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss
is recognized whenever the carrying amount of an asset exceeds its estimated recoverable amount.
The Company assesses the impairment of assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the
Company considers important which could trigger an impairment review include the following:
•
•
significant underperformance relative to expected historical or projected future operating
results and
significant negative industry or economic trends.
Contingencies
The Company is currently involved in various legal proceedings. The estimate of the probable
costs for the resolution of these claims has been developed in consultation with outside counsel
handling the Company’s defense in these matters and is based upon an analysis of potential
results. The Company currently does not believe that these proceedings will have a material
adverse effect on its financial position. It is possible, however, that future results of operations
could be materially affected by changes in the estimates or in the effectiveness of the strategies
relating to these proceedings (see Note 19).
4. Cash and Cash Equivalents
Cash on hand and in banks
Short-term investments
2007
P
=12,413,238
71,714,669
P
=84,127,907
2006
=12,790,198
P
39,331,138
=52,121,336
P
Cash in banks earn interest at the respective bank deposit rates. Short-term investments are made
for varying periods of up to one month depending on the immediate cash requirements of the
Company and earn interest at the respective short-term investment rates.
5. Accounts and Other Receivables
Tenants
Contractors and suppliers
Manila Electric Company (Meralco) - net
Others
Less impairment losses on receivables
2007
P
=104,019,961
2,445,199
15,925,188
10,434,490
132,824,838
30,767,116
P
=102,057,722
2006
=108,060,960
P
3,616,676
19,360,928
8,578,623
139,617,187
30,767,116
=108,850,071
P
*SGVMC406439*
- 16 -
As a customer of Meralco, the Company received a refund for some of its previous billings under
Phase IV of Meralco’s refund scheme. As a result, it recognized a receivable from Meralco
amounting to P
=19.4 million, net of unearned interest income of P
=6.2 million in 2006. As of
June 30, 2007, the carrying value of receivable from Meralco amounted to P
=15.9 million, net of
unearned interest income of P
=3.9 million. Income from refund amounted to P
=2.4 million and
=14.3 million in 2007 and 2006, respectively. The receivable was discounted using an effective
P
interest rate of 12.4%.
The table below presents the breakdown of receivables by contractual maturity dates as of
June 30, 2007 and 2006, respectively.
Tenants
Contractors and
suppliers
Meralco
Others
Due Within
One Year
2007
Due Beyond
One Year
P
= 103,633
P
=387
2,445
3,436
10,434
P
= 119,948
–
12,489
–
P
=12,876
Due Within
One Year
Total
(Amounts in thousands)
=104,302
P
P
= 104,020
2006
Due Beyond
One Year
Total
P
=3,758
=
P108,060
–
19,860
–
P
=23,618
3,617
25,534
8,579
=
P145,790
3,617
5,674
8,579
=122,172
P
2,445
15,925
10,434
P
= 132,824
6. Investments in Subsidiaries
22Ban Marketing, Inc. (22Ban)
TPI Holdings Corporation (THC, formerly
OPDI Holdings Corporation)
Percentage
of Ownership
100%
100%
2007
P
=25,000
2006
=25,000
P
96,354,500
P
=96,379,500
96,354,500
=96,379,500
P
On February 8, 2006, the BOD authorized the sale of the Company’s entire shareholdings of
14.5 million shares (with par value of P
=1 per share) in Orion Maxis, Inc. (OMI) to OE Holdings,
Inc. (OEHI). On February 16, 2006, the Company entered into a Deed of Sale of Shares of Stock
with OEHI. As a result of the sale, the Company incurred a loss amounting to about P
=14.0 million
in 2006 (see Note 13).
7. Investment Properties
2007
Cost
Beginning balances
Disposals
Reclassification
At end of year
P
=2,087,080,927
–
2,322,290
2,089,403,217
2006
=2,087,412,153
P
(331,226)
–
2,087,080,927
(Forward)
*SGVMC406439*
- 17 -
2006
2007
Accumulated depreciation
Beginning balances
Depreciation for the year
Disposals
At end of year
Net book values
P
=1,021,912,761
126,052,611
–
1,147,965,372
P
=941,437,845
=900,618,636
P
121,419,043
(124,918)
1,021,912,761
=1,065,168,166
P
Investment properties of the Company substantially represent leasehold improvements on the land
leased from Philippine National Railways (PNR) which are utilized in the Company’s mall
operations and held for rentals. Upon adoption of PAS 40, the Company chose the cost model and
continues to carry these investment properties at deemed cost using their revalued amount as
allowed under PFRS. At June 30, 2007 and 2006, the net book values of the deemed cost of these
properties follow:
At net book value:
Original cost
Revaluation reserve
2007
2006
P
=467,336,739
471,778,816
P
=939,115,555
=525,992,374
P
539,175,792
=1,065,168,166
P
Revenue from investment properties amounted to P
=437.9 million and P
=461.4 million in 2007 and
2006, respectively. Expenses arising from investment properties amounted to P
=505.9 million and
=511.7 million in 2007 and 2006, respectively.
P
Depreciation on revaluation reserve on investment properties at deemed cost amounted to
=67.4 million and P
P
=66.4 million in 2007 and 2006, respectively.
8. Property and Equipment
As of June 30, 2007
Office
Equipment
Cost:
Beginning balances
Additions
Reclassification
At end of year
Accumulated depreciation
and amortization:
Beginning balances
Depreciation for the year
At end of year
Net book value
Furniture
Leasehold
Machinery
and Fixtures Improvements and Equipment
Transportation
Equipment
Total
=
P16,273,282
1,180,634
(2,650,000)
=
P461,049
4,464
–
P
=2,630,992
–
–
=
P5,922,077
760,944
–
=
P2,126,771
–
–
P
=27,414,171
1,946,042
(2,650,000)
14,803,916
465,513
2,630,992
6,683,021
2,126,771
26,710,213
8,103,773
2,150,385
427,433
12,358
2,630,992
–
4,268,089
589,949
177,231
425,354
15,607,518
3,178,046
10,254,158
=
P4,549,758
439,791
=
P25,722
2,630,992
=
P–
4,858,038
=
P1,824,983
602,585
=
P1,524,186
18,785,564
P
=7,924,649
*SGVMC406439*
- 18 -
As of June 30, 2006
Office
Equipment
Cost:
Beginning balances
Additions
At end of year
Accumulated depreciation
and amortization:
Beginning balances
Depreciation for the year
At end of year
Net book value
Furniture
Leasehold
Machinery
and Fixtures Improvements and Equipment
Transportation
Equipment
Total
=
P11,502,388
4,770,894
=
P437,779
23,270
P
=2,630,992
–
=
P5,598,880
323,197
=
P–
2,126,771
=
P20,170,039
7,244,132
16,273,282
461,049
2,630,992
5,922,077
2,126,771
27,414,171
6,410,350
1,693,423
408,970
18,463
2,630,992
–
3,691,115
576,974
–
177,231
13,141,427
2,466,091
8,103,773
=
P8,169,509
427,433
=
P33,616
2,630,992
=
P–
4,268,089
=
P1,653,988
177,231
=
P1,949,540
15,607,518
=
P11,806,653
9. Other Assets
2007
P
=51,886,221
17,307,349
7,820,988
7,450,000
1,903,171
7,363,472
P
=93,731,201
Creditable withholding tax
Deposits
Prepayments
Software development cost
AFS investments
Others
2006
=37,362,420
P
17,307,349
6,372,736
–
4,628,171
3,132,883
=68,803,559
P
Deposits include interest-bearing service/meter deposit with the electric company.
10. Accounts Payable and Accrued Expenses
Trade
Retention fee payable
Accrued expenses:
Rent (see Note 17)
Interest
Others
Other payables
2007
P
=16,519,383
16,004,782
2006
=15,069,920
P
15,737,964
84,241,751
127,774
41,840,356
21,671,997
P
=180,406,043
75,496,908
756,048
41,341,680
30,057,793
=178,460,313
P
As of June 30, 2007 and 2006, other payables are due within one year from respective balance
sheet dates except for the following:
Other payables
Due Within
One Year
2007
Due Beyond
One Year
P
= 21,672
P
=–
Due Within
One Year
Total
(Amounts in thousands)
=19,688
P
P
=21,672
2006
Due Beyond
One Year
Total
=
P10,370
=
P30,058
*SGVMC406439*
- 19 -
11. Customers’ and Other Deposits
The table below presents the breakdown of customers’ and other deposits by contractual maturity
dates as of June 30, 2007 and 2006.
Rental deposits
Security deposits
Customers’ deposits
Construction bond
Other deposits
Due Within
One Year
2007
Due Beyond
One Year
P
= 34,063
27,826
3,645
1,233
451
P
= 67,218
P
=52,375
53,409
4,168
5,784
6,734
P
= 122,470
Due Within
One Year
Total
(Amounts in thousands)
=30,955
P
P
=86,438
26,678
81,235
3,338
7,813
4,404
7,017
317
7,185
=65,692
P
P
= 189,688
2006
Due Beyond
One Year
Total
=
P57,961
56,925
4,278
2,310
6,289
=
P127,763
=
P88,916
83,603
7,616
6,714
6,606
P
=193,455
Deposits of tenants will be applied against rental payments and any outstanding obligations.
12. Long-term Debt
On July 26, 2002, the Company entered into an agreement with a local bank to convert the
Company’s =
P50.0 million short-term loan into a term loan with interest based on prevailing
market rates. The term loan is payable in sixteen (16) equal quarterly installments with a grace
period of one year.
On September 27, 2002, the Company availed another P
=50.0 million term loan from a bank
pursuant to a loan agreement entered into between the Company and the bank. The loan bears
interest at the 91-day treasury bill rate plus 5%. The term loan is payable in sixteen (16) equal
quarterly installments with a grace period of one year.
The above loans are secured by a Collateral Trust Indenture and an assignment of the Company’s
leasehold rights with a carrying value of about P
=57.8 million as of June 30, 2007 and the related
rentals.
The Company’s loan agreements provide for certain restrictions and requirements with respect to
payment of advances to affiliates, officers and directors, and maintenance of financial ratios at
certain levels. The Company shall not likewise sell, transfer, assign, mortgage, lease or otherwise
encumber any of its major assets.
The current portion of the long-term debt amounted to P
=6.2 million and P
=25.0 million as of
June 30, 2007 and 2006, respectively.
Interest expense amounted to P
=4.8 million and P
=1.8 million in 2007 and 2006, respectively.
*SGVMC406439*
- 20 -
13. Operating Expenses
Depreciation and amortization
Share in common utility service area expenses
Rent (see Note 17)
Personnel costs (see Note 14)
Taxes and licenses
Provision for probable losses
Advertising and promotion
Insurance
Professional fees
Management fee
Repairs and maintenance
Contracted services
Entertainment, amusement and representation
Commission
Loss from sale of investments in a subsidiary
(see Note 6)
Others
2007
P
=138,157,287
117,774,640
97,778,278
75,970,977
37,503,725
9,006,953
7,700,857
7,619,744
2,759,696
2,150,000
1,965,662
753,593
634,630
49,638
2006
=132,811,763
P
112,649,102
95,588,164
75,155,831
36,372,185
7,404,364
2,503,691
7,495,821
4,181,115
13,297,757
2,083,992
477,736
828,675
200,041
–
6,079,725
P
=505,905,405
14,000,000
6,683,851
=511,734,088
P
The Company has entered into an agreement with POPI appointing the latter as the “Manager” of
the Company for a fee based on a certain percentage of the Company’s net profit before tax,
before management fee and before depreciation of revaluation reserve on investment properties at
deemed cost. Management fee expense amounted to P
=2.2 million and P
=13.3 million in 2007 and
2006, respectively.
14. Personnel Costs
Salaries and wages
Employee benefits
Retirement costs (see Note 18)
2007
P
=63,750,058
9,037,567
3,183,352
P
=75,970,977
2006
=57,953,169
P
7,918,359
9,284,303
=75,155,831
P
15. Taxes
The Company’s current provision for income tax represents MCIT in 2007 and regular corporate
income tax in 2006.
Current
Final
Deferred
2007
P
=3,029,610
422,404
3,452,014
(23,625,837)
(P
=20,173,823)
2006
=11,033,091
P
745,393
11,778,484
(8,988,742)
=2,789,742
P
*SGVMC406439*
- 21 -
The components of deferred income tax are as follows:
Deferred income tax assets on:
Unamortized deferred costs
Rent received in advance
Impairment losses on receivables
Accrued retirement cost
Unamortized past service cost
MCIT
Others
Deferred income tax liabilities on:
Meralco refund
Undepreciated capitalized rent, interest
and customs duties
Revaluation reserve on investment
properties at deemed cost
2007
2006
P
=39,908,700
23,821,354
10,768,491
4,808,210
871,110
1,476,179
10,194,309
91,848,353
=46,330,789
P
28,145,852
10,768,491
3,694,037
1,011,288
–
7,041,520
96,991,977
(3,016,389)
(3,701,818)
(27,933,770)
(32,428,859)
(146,588,418)
(177,538,577)
(P
=85,690,224)
(170,378,895)
(206,509,572)
(P
=109,517,595)
As of June 30, 2007, the Company has available MCIT of P
=1.5 million which can be claimed as
tax credits against the regular income tax until 2010.
The reconciliation between the provision for income tax computed at the statutory income tax
rates to the provision for income tax as shown in the statements of income is as follows:
2007
Income tax at the statutory income tax rates of 35%
in 2007 and 34% in 2006
Additions to (reductions in) income taxes
resulting from:
Final tax
Nondeductible interest expense
Loss on sale of investment in a subsidiary
Effect of change in tax rates
Dividend income exempt from tax
Interest income subjected to final tax at
a lower rate
(P
=20,112,573)
2006
=3,053,725
P
422,404
311,163
–
–
(53,952)
745,393
524,917
4,760,000
(4,969,264)
(34,248)
(740,865)
(P
=20,173,823)
(1,290,781)
P2,789,742
=
Republic Act (R.A.) No. 9337 was enacted into law amending various provisions in the existing
1997 National Internal Revenue Code. Among the reforms introduced by the said R.A., which
became effective on November 1, 2005, are as follows:
•
•
Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Grant of authority to the Philippine President to increase the 10% value added tax (VAT) rate
to 12%, effective January 1, 2006, the BIR issued Revenue Memorandum Circular No.
7-2006 increasing the VAT rate from 10% to 12% effective February 1, 2006;
*SGVMC406439*
- 22 •
•
•
Revision of invoicing and reporting requirements for VAT;
Expansion of the scope of transactions subject to VAT; and
Provision of thresholds and limitations on the amounts of VAT credits that can be claimed.
On November 26, 2006, R.A. No. 9361 was issued replacing the threshold on the amount of VAT
credits that can be claimed, effective 15 days after the publication of the Act in the official Gazette
or in any two newspapers of general circulation, whichever comes earlier.
16. Related Party Transactions
Parties are considered to be related if one party has the ability to control, directly or indirectly,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.
In the ordinary course of business, the Company entered into transactions with related parties
consisting principally of noninterest-bearing advances which are due and demandable.
Account balances with related parties are as follows:
Advances to affiliates:
OLI
Orion Property Development, Inc. (OPDI)
THC
OMI
Orion Solutions, Inc. (OSI, formerly
HLG Asset Management)
Cyber Bay
Lepanto Ceramics, Inc. (LCI)
22Ban
POPI
OEHI
Pepsi-Cola Products Phils., Inc. (PCPPI)
Others
Advances from affiliates:
OLI
LCI
OSI
OMI
FLT Prime Insurance Corp. (FLT)
22Ban
POPI
Others
2007
2006
P
=199,618,536
15,852,733
1,920,959
1,227,128
=195,140,818
P
15,852,688
720,959
1,166,106
736,351
695,986
299,838
8,515
–
–
–
3,705
P
=220,363,751
1,401,528
297,150
287,796
8,515
1,325,652
500,000
814,964
3,651
=217,519,827
P
2007
2006
P
=112,353,086
840,998
734,732
424,441
140,175
18,750
–
25,334
P
=114,537,516
=–
P
900,597
440,856
356,448
140,175
18,750
114,424,161
22,604
=116,303,591
P
*SGVMC406439*
- 23 -
As mentioned in Note 1, POPI is the ultimate parent of OLI and the Company. Its subsidiaries
include OPDI, OSI, OMI, THC, OEHI, LCI, 22ban and FLT. PCPPI is an associate of POPI until
February 28, 2007.
Compensation of key management personnel, including retirement and other benefits, amounted to
=38.6 million and P
P
=37.5 million in 2007 and 2006, respectively.
17. Long-term Lease
On August 28, 1990, the Company, through a deed of assignment, acquired all the rights, titles,
interests and obligations of Gotesco Investment, Inc. on a contract of lease of the land owned by
PNR for the Tutuban Terminal. The contract provided for a payment of a guaranteed minimum
annual rental plus a certain percentage of gross sales. The lease covers a period of 25 years until
2014 and is
automatically renewable for
another
25
years subject to
compliance with the terms and conditions of the lease agreement. Rent expense charged to
operations amounted to P
=97.8 million in 2007 and P
=95.6 million in 2006 (see Note 13).
18. Retirement Plan
The Company has a funded, noncontributory retirement plan covering all its regular employees.
The plan provides for retirement, separation, disability and death benefits to its members. The
normal retirement benefit is based on a percentage of the employee’s final monthly salary for
every year of credited service.
The latest independent actuarial valuation of the plan was as of August 10, 2007 using the
projected unit credit method in accordance with PAS 19.
The following tables summarize the funded status and amounts recognized in the balance sheets,
and the components of the net benefit expense recognized in the statements of income for the
retirement plan:
2007
Retirement liability:
Present value of obligation (PVO)
Fair value of plan assets
Unfunded status
Unrecognized actuarial net gain (loss)
Unrecognized past service cost - non-vested
benefits
2006
P
=26,279,345
(8,281,291)
17,998,054
(2,866,754)
=18,734,683
P
(7,097,621)
11,637,062
427,016
(1,393,557)
P
=13,737,743
(1,509,687)
=10,554,391
P
*SGVMC406439*
- 24 -
2007
Net benefit expense:
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Past service cost - non-vested benefits
Past service cost - vested benefits
Actual return on plan assets
2006
P
=1,645,193
2,060,815
(638,786)
116,130
–
P
=3,183,352
=1,395,408
P
932,099
(173,198)
116,130
7,013,864
=9,284,303
P
P
=1,377,304
=173,198
P
Movements in the retirement liability are as follows:
Beginning balance
Net benefit expense
Actual contributions
Ending balance
2007
P
=10,554,391
3,183,352
–
P
=13,737,743
2006
=6,270,088
P
9,284,303
(5,000,000)
=10,554,391
P
2007
P
=18,734,683
1,645,193
2,060,815
4,032,288
–
–
(193,634)
P
=26,279,345
2006
=7,767,495
P
1,395,408
932,099
–
1,625,817
7,013,864
–
=18,734,683
P
2007
P
=7,097,621
638,786
738,518
–
(193,634)
P
=8,281,291
2006
=1,924,423
P
173,198
–
5,000,000
–
=7,097,621
P
Changes in the present value of obligation (PVO):
PVO at beginning of year
Current service cost
Interest cost on benefit obligation
Actuarial loss
Past service cost - non-vested interest
Past service cost - vested benefits
Benefits paid
PVO at end of year
Changes in the fair value of plan assets are as follows:
Beginning balance
Expected return on plan assets
Actuarial gain on plan assets
Actual contribution
Benefits paid
Ending balance
As of June 30, 2007, retirement plan assets of the Company mainly include investment in
government and other securities with total fair value of P
=16.4 million.
*SGVMC406439*
- 25 -
The principal assumptions used to determine retirement benefits for the Company are as follows:
Discount rate
Expected rate of return on plan assets
Salary increase rate
2007
8.00%
9.00%
8.00%
2006
12.00%
9.00%
8.00%
Amounts for the current year are as follows:
Defined benefit obligation
Plan assets
Experience adjustments on plan liabilities - gain
Experience adjustments on plan assets - gain
=
P26,279,345
8,281,291
637,541
738,518
In 2006, the Company amended its retirement plan.
19. Contingencies
The Company is contingently liable for claims or lawsuits, and assessments, which are currently
being contested by management and its legal counsels, relating to tax and other issues arising out
of the normal course of business. The related effects of these uncertainties will be reported in the
financial statements upon their final resolution. In the opinion of management and its legal
counsels, the eventual outcome under these lawsuits or claims, will not have a material effect on
the Company’s financial statements.
20. Financial Risk Management Objectives and Policies
The main purpose of the Company’s financial instruments is to fund its operations. The main
risks from the use of financial instruments are liquidity risk, interest rate risk, foreign currency risk
and credit risk.
Liquidity risk
In the management of liquidity, the Company monitors and maintains a level of cash deemed
adequate by the management to finance the Company’s operations and mitigate the effects of
fluctuations in cash flows.
Interest rate risk
The Company obtains additional financing through bank and related party borrowings. The
Company’s policy is to obtain the most favorable interest rates available without increasing its
foreign currency exposure.
*SGVMC406439*
- 26 -
The following table sets out the carrying amount, by maturity, of the Company’s financial
instruments that are exposed to interest rate risk:
Floating rate:
2007
Cash and cash equivalents
Long-term debt
Within 1 year
=
P84,127,907
6,250,000
1-2 years
P
=–
–
Total
=84,127,907
P
6,250,000
Cash and cash equivalents
Long-term debt
Within 1 year
=
P52,121,336
25,000,000
1-2 years
P
=–
6,250,000
Total
=52,121,336
P
31,250,000
2006
Interest on financial instruments classified as floating rate is repriced at intervals of less than one
year. The other financial instruments that are not included here are not subject to interest rate risk.
Foreign currency risk
The Company’s foreign currency risk results primarily from movements of the Philippine Peso
against the U.S. Dollar. It does not have any material foreign exchange risks as its revenues and
expenses are substantially denominated in Philippine peso.
Credit risk
The Company establishes credit limits at the level of the individual borrower, corporate
relationship and industry sector. It also provides for credit terms with the consideration for
possible application of intercompany accounts between affiliated companies. Also, the Company
transacts only with affiliated companies and recognized third parties, hence, there is no
requirement for collateral.
21. Financial Instruments
Set out below is a comparison by category of carrying amounts and fair values of all of the
Company’s financial instruments that are carried in the financial statements.
2007
Carrying
Amount
Financial Assets:
Cash and cash equivalents
Accounts and other receivables
Advances to affiliates
AFS investments
Financial Liabilities:
Accounts payable and accrued
expenses
Advances from affiliates
Long-term debt
Fair Value
2006
Carrying
Amount
Fair Value
P
=84,127,907
102,057,722
220,363,751
1,903,171
P
=84,127,907
102,057,722
220,363,751
1,903,171
P52,121,336
=
108,850,071
217,519,827
4,628,171
=
P52,121,336
108,850,071
217,519,827
4,628,171
180,406,043
114,537,516
6,250,000
180,406,043
114,537,516
6,250,000
178,460,313
116,303,591
31,250,000
178,460,313
116,303,591
31,250,000
*SGVMC406439*
- 27 -
Fair value is defined as the amount at which the financial instrument could be exchanged in a
current transaction between knowledgeable willing parties in an arm’s length transaction other
than in a forced liquidation or sale. Fair values are obtained from quoted market prices,
discounted cash flow models and option pricing models, as appropriate.
The carrying amounts of cash and cash equivalents, accounts and other receivables, accounts
payable and accrued expenses and advances to and from affiliates approximate their fair values
due to the short-term maturity of these financial instruments.
Long-term debt approximates its fair value due to quarterly repricing of interest.
*SGVMC406439*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Tutuban Properties, Inc.
Tutuban Center
Claro M. Recto Avenue, Manila
We have audited the financial statements of Tutuban Properties, Inc. (a wholly owned subsidiary of
Orion Land, Inc.) as of June 30, 2007, on which we have rendered the attached report dated
October 11, 2007.
In compliance with Securities Regulation Code Rule 68, we are stating that the above Company has
one (1) stockholder owning one hundred (100) or more shares.
SYCIP GORRES VELAYO & CO.
Jose Pepito E. Zabat III
Partner
CPA Certificate No. 85501
SEC Accreditation No. 0328-A
Tax Identification No. 102-100-830
PTR No. 026401, January 2, 2007, Makati City
October 11, 2007
SGV & Co is a member practice of Ernst & Young Global
*SGVMC400000*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Orion Solutions, Inc.
We have audited the accompanying financial statements of Orion Solutions, Inc., which comprise the
balance sheets as at June 30, 2007 and 2006, and the statements of income, statements of changes in
equity and statements of cash flows for the years then ended, and a summary of significant accounting
policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC406417*
-2-
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of
Orion Solutions, Inc. as of June 30, 2007 and 2006, and its financial performance and its cash flows
for the years then ended in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Jose Pepito E. Zabat III
Partner
CPA Certificate No. 85501
SEC Accreditation No. 0328-A
Tax Identification No. 102-100-830
PTR No. 4181286, January 2, 2006, Makati City
September 18, 2007
*SGVMC406417*
ORION SOLUTIONS, INC.
BALANCE SHEETS
June 30
2007
2006
Current Assets
Cash and cash equivalents (Note 4)
Accounts receivable (Note 8)
Amounts owed by related parties (Note 8)
Prepayments and other current assets (Note 5)
Total Current Assets
P
=12,884,120
2,580,940
109,058,338
1,109,865
125,633,263
=13,551,901
P
2,566,840
230,058,688
1,225,685
247,403,114
Noncurrent Assets
Available-for-sale (AFS) investments (Note 6)
Property and equipment - net (Note 7)
Other noncurrent assets (Note 14)
Total Noncurrent Assets
2,944,780
703,195
845,287
4,493,262
1,002,926
245,887
636,205
1,885,018
P
=130,126,525
=249,288,132
P
P
=1,329,450
60,270,749
61,600,199
=598,696
P
180,735,804
181,334,500
1,174,895
761,575
50,000,000
2,344,780
15,006,651
67,351,431
50,000,000
402,926
16,789,131
67,192,057
P
=130,126,525
=249,288,132
P
ASSETS
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses (Note 9)
Amounts owed to related parties (Note 8)
Total Current Liabilities
Noncurrent Liability
Retirement obligation (Note 12)
Equity
Capital stock - P
=1 par value
Authorized and issued - 50,000,000 shares
Unrealized valuation gain on AFS investments (Note 6)
Retained earnings
Total Equity
TOTAL LIABILITIES AND EQUITY
See accompanying Notes to Financial Statements.
*SGVMC406417*
ORION SOLUTIONS, INC.
STATEMENTS OF INCOME
Years Ended June 30
2006
2007
REVENUES
Service fees
Interest - net
Others
COST AND EXPENSES
Cost of services (Note 10)
Operating expenses (Note 11)
Foreign exchange losses - net
Provision for doubtful accounts (Note 8)
INCOME (LOSS) BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 13)
NET LOSS
P
=4,800,000
810,117
–
5,610,117
=2,749,919
P
805,715
4,459,484
8,015,118
3,991,239
1,549,876
1,810,302
16,738
7,368,155
5,131,468
2,857,687
–
–
7,989,155
(1,758,038)
25,963
24,442
50,869
P
=1,782,480
=24,906
P
See accompanying Notes to Financial Statements.
*SGVMC406417*
ORION SOLUTIONS, INC.
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
Unrealized
Valuation Gain
on AFS
Investments
(Note 6)
Capital Stock
Balances at June 30, 2005
Retained
Earnings
Total
P
=50,000,000
=
P380,465
=
P16,814,037
=
P67,194,502
Unrealized valuation gain on AFS investments
–
22,461
–
22,461
Net loss for the year
–
–
50,000,000
402,926
16,789,131
67,192,057
Unrealized valuation gain on AFS investments
–
1,941,854
–
1,941,854
Net loss for the year
–
–
P
=50,000,000
=
P2,344,780
Balances at June 30, 2006
Balances at June 30, 2007
(24,906)
(1,782,480)
=
P15,006,651
(24,906)
(1,782,480)
=
P67,351,431
See accompanying Notes to Financial Statements.
*SGVMC406417*
ORION SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
Years Ended June 30
2006
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Depreciation and amortization (Note 7)
Provision for doubtful accounts (Note 8)
Interest income
Operating loss before working capital changes
Decrease (increase) in:
Accounts receivable
Prepayments and other current assets
Increase (decrease) in accounts payable and accrued expenses
Net cash used in operations
Interest received
Net cash flows used in operating activities
(P
=1,758,038)
=25,963
P
131,143
16,738
(810,117)
(2,420,274)
230,833
–
(805,715)
(548,919)
(14,100)
91,378
1,144,074
(1,198,922)
810,117
(388,805)
(2,566,840)
136,111
(4,795,702)
(7,775,350)
805,715
(6,969,635)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in amounts owed by related parties
Decrease in investment in bonds
Decrease (increase) in other noncurrent assets
Additions to property and equipment (Note 7)
Net cash flows from investing activities
120,983,612
–
(209,082)
(588,451)
120,186,079
13,301,028
12,500,000
373,048
(221,930)
25,952,146
CASH FLOWS FROM A FINANCING ACTIVITY
Decrease in amounts owed to related parties
(120,465,055)
(8,779,675)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 4)
(667,781)
10,202,836
13,551,901
3,349,065
P
=12,884,120
=13,551,901
P
See accompanying Notes to Financial Statements.
*SGVMC406417*
ORION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Orion Solutions, Inc. (the Company), was registered with the Philippine Securities and Exchange
Commission (SEC) on October 12, 1994 primarily to engage in the business of providing business
software solutions and management/information technology (IT) consultancy services to
individuals, corporations, partnerships, associations, cooperatives and other institutions, which
include providing temporary contract manpower in order to meet on augment the IT requirements
in software development, training, operation of IT facilities, including hardware and networks, of
the aforementioned entities. These services and/or software may be delivered using web-based
services on the internet. The Company is 55% owned by DHG Capital Holdings, Inc. (DCHI) and
41% owned by HLG Philippines, Inc. (HPI). The Company’s ultimate parent is Prime Orion
Philippines, Inc. (POPI). The Company’s principal place of business is 20th Floor, LKG Tower,
6801 Ayala Avenue, Makati City.
The financial statements of the Company as of and for the years ended June 30, 2007 and 2006
were approved and authorized for issue by the Board of Directors on September 18, 2007.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying financial statements have been prepared on a historical cost basis, except for
available-for-sale (AFS) investments which are carried at fair value. The financial statements are
presented in Philippine peso, which is the Company’s functional and presentation currency.
Statement of Compliance
The financial statements of the Company have been prepared in compliance with Philippine
Financial Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year, except for
the adoption of the following amended Philippine Accounting Standards (PAS) and new
Philippine Interpretations based on International Financial Reporting Interpretation Committee
(IFRIC) during the year. Adoption of these standards and interpretation did not have any effect on
the financial position of the Company. These, however, required additional disclosures in the
financial statements.
•
PAS 19, Employee Benefits
Additional disclosures are made to provide information about trends in the assets and
liabilities in the defined benefit plans and the assumptions underlying the components of the
defined benefit costs.
•
PAS 21, The Effects of Changes in Foreign Exchange Rates
All exchange differences arising from monetary items that form part of a Company’s net
investment in a foreign operation are recognized in a separate component of equity in the
financial statements regardless of the currency in which the monetary item is denominated.
*SGVMC406417*
-2-
•
PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts (issued August 2005) - amended the scope of
PAS 39 to require financial guarantee contracts that are not considered to be insurance
contracts to be recognized initially at fair value and to be remeasured at the higher of the
amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and
Contingent Assets, and the amount initially recognized less, when appropriate, cumulative
amortization recognized in accordance with PAS 18, Revenue.
Amendment for cash flow hedge accounting of forecast intra-group transactions (issued April
2005) - amended PAS 39 to permit the foreign currency risk of a highly probable intra-group
forecast transaction to qualify as the hedged item in a cash flow hedge, provided that the
transaction and that the foreign currency risk will affect the statement of income.
Amendment for the fair value option (issued June 2005) - amended PAS 39 to prescribe the
conditions under which the fair value option on classification of financial instruments at fair
value through profit or loss (FVPL) may be used.
•
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease
This interpretation provides guidance in determining whether arrangements contain a lease to
which lease accounting must be implied.
Future Changes in Accounting Policies
The Company has not yet adopted the following PFRS and Philippine Interpretations which have
been issued but are not yet effective for annual period beginning June 1, 2006:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative and quantitative information about exposure to risks arising
from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures
in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure
requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to
all entities that report under PFRS. PFRS 7 is applicable on January 1, 2007.
Complementary Amendment to PAS 1, Presentation of Financial Statements
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. This is effective on January 1, 2007. The Company is currently assessing the
impact of PFRS 7 and the amendment to PAS 1 and expects that the main additional disclosures
will be the sensitivity analysis to market risk and the capital disclosures required by PFRS 7 and
the amendment to PAS 1.
PFRS 8, Operating Segments
PFRS 8 is effective for annual periods beginning on or after January 1, 2009. PFRS 8 will replace
PAS 14, Segment Reporting and is required to be adopted only by entities whose debt or equity
instruments are publicly traded, or are in the process of filling with class of instruments in a public
market. The information reported would be that which management uses internally for evaluating
the performance of operating segments and allocating resources to those segments. Such
information may be different from that reported in the balance sheet and statement of income and
companies will need to provide explanations and reconciliations of the differences.
*SGVMC406417*
-3-
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
This interpretation was issued in March 2006 and becomes effective for financial years beginning
on or after June 1, 2006. It establishes that the date to assess the existence of an embedded
derivative is the date an entity first becomes a party to the contract, with reassessment only if there
is a change to the contract that significantly modifies the cash flows.
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
This interpretation is effective for annual periods beginning on or after November 1, 2006. This
interpretation provides that the frequency of financial reporting does affect the amount of
impairment charge to be recognized in the annual financial reporting with respect to goodwill and
AFS equity investments. It prohibits the reversal of impairment losses on goodwill and AFS
equity investments recognized in the interim financial reports even if impairment is no longer
present at the annual balance sheet date.
Philippine Interpretation IFRIC 11, PFRS 2 Group and Treasury Share Transactions
This interpretation will be effective on March 1, 2007. This interpretation requires arrangements
whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an
equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity
instruments (e.g., treasury shares) from another party, or (b) the shareholders of the entity provide
the equity instruments needed. It also provides guidance on how subsidiaries, in their separate
financial statements, account for such schemes when their employees receive rights to the equity
instruments of the parent.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This interpretation will become effective on January 1, 2008. This interpretation which covers
contractual arrangements arising from entities providing public services.
Except for PFRS 7 and the amendments to PAS 1, the Company does not expect any significant
changes in its accounting policies when it adopts the above standards, amendments and
interpretations.
Cash and Cash Equivalents
Cash includes cash on hand and cash in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from date of acquisition and that are subject to insignificant risk of changes in
value.
Financial Assets and Liabilities
Financial assets and financial liabilities are recognized initially at cost, which is the fair value at
inception. Transaction costs are included in the initial measurement of all financial assets and
liabilities, except for financial instruments measured at FVPL.
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 instrument. In the case of a regular way
purchase or sale of financial assets, recognition and disposals or retirements, as applicable, is done
using settlement date accounting.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
*SGVMC406417*
-4-
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity, net of any
related income tax benefits. Financial instruments are offset when there is a legally enforceable
right to offset and intention to settle either on a net basis or to realize the asset and settle the
liability simultaneously.
Financial assets are further classified into the following categories: financial asset at FVPL, loans
and receivables, held-to-maturity (HTM) investments, and AFS investments. The Company
determines the classification at initial recognition and re-evaluates this designation at every
reporting date. As of June 30, 2007, the Company has no financial asset at FVPL and HTM
investments.
Financial asset at FVPL. A financial asset is classified in this category if acquired principally for
the purpose of selling or repurchasing in the near term or upon initial recognition, it is designated
by management at fair value through profit or loss. Derivatives are also categorized as held at
FVPL, except those derivatives designated and considered as effective hedging instruments.
Assets classified under this category are carried at fair value in the balance sheets. Changes in the
fair value of such assets are accounted for in the statement of income.
Loans and receivables. Loans and receivables are nonderivative financial assets with fixed or
determinable payments that are not quoted in an active market. They arise when the Company
provides money, goods or services directly to a debtor with no intention of trading the receivables.
Loans and receivables are carried at cost or amortized cost in the balance sheet. Amortization is
determined using the effective interest rate method. Loans and receivables are included in current
assets if maturity is within twelve months of the balance sheet date. Otherwise, these are classified
as noncurrent assets. As of June 30, 2007 and 2006, the Company has loans and receivables with
carrying amounts of about P
=111.6 million and P
=232.6 million, respectively.
HTM investments. Non-derivative financial assets with fixed or determinable payments and fixed
maturity are classified as HTM when the Company has the positive intention and ability to hold to
maturity. Investments intended to be held for an undefined period are not included in this
classification. Other long-term investments that are intended to be HTM, such as bonds, are
subsequently measured at amortized cost. This cost is computed as the amount initially
recognized minus principal repayments, plus or minus the cumulative amortization using the
effective interest method of any difference between the initially recognized amount and the
maturity amount. This calculation includes all fees and points paid or received between parties to
the contract that are an integral part of the effective interest rate, transaction costs and all other
premiums and discounts. For investments carried at amortized cost, gains and losses are
recognized in income when the investments are derecognized or impaired, as well as through the
amortization process.
AFS investments. AFS investments are those nonderivative financial assets that are designated as
AFS or are not classified in any of the preceding categories. After initial recognition, AFS
investments are measured at fair value with gains or losses being recognized in the “Unrealized
valuation gains (losses) on AFS investments” account in the equity until the investment is
derecognized or until the investment is determined to be impaired at which time the cumulative
gain or loss previously reported in equity is included in the statement of income.
*SGVMC406417*
-5-
The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid prices at the close of business on the balance sheet date. For
investments where there is no active market, fair value is determined using valuation techniques.
Such techniques include using recent arm’s length market transactions; reference to the current
market value of another instrument, which is substantially the same; discounted cash flow analysis
and option pricing models.
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 where:
•
the rights to receive cash flows from the asset have expired;
•
the Company retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third party under a ‘pass-through’
arrangement; or
•
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.
Where 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. Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount of
consideration that the Company could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a
cash-settled option or similar provision) on the transferred asset, the extent of the Company’s
continuing involvement is the amount of the transferred asset that the Company may repurchase,
except that in the case of a written put option (including a cash-settled option or similar provision)
on an asset measured at fair value, the extent of the Company’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the option exercise price.
On derecognition of a financial asset in its entirety, the difference between the carrying amount
and the sum of (a) the consideration received (including any new asset obtained less any new
liability assumed) and (b) any cumulative gain or loss that has been recognized directly in equity
is recognized in the statement of income.
Financial liabilities. A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired.
Where an existing financial liability is replaced by another 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 statement of
income.
*SGVMC406417*
-6-
Impairment of Financial Assets
The Company assesses at each 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 the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). The carrying amount of the asset shall be reduced either directly or through use of
an allowance account. The amount of the loss shall be recognized in the statement of income.
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 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 that an impairment loss on an unquoted
equity instrument that is not carried at fair value because its fair value cannot be reliably
measured, or on a derivative asset that is linked to and must be settled by delivery of such an
unquoted equity instrument has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset.
AFS investments. If an AFS investments is impaired, an amount comprising the difference
between its cost (net of any principal payment and amortization) and its current fair value, less any
impairment loss previously recognized in statement of income, is transferred from equity to the
statements of income. Reversals in respect of equity instruments classified as AFS are not
recognized in the statement of income. 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 statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount 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 generally not the case with master netting agreements, and the related
assets and liabilities are presented gross in the balance sheet.
*SGVMC406417*
-7-
Property and Equipment
Property and equipment are carried at cost, excluding the cost of day-to-day servicing, less
accumulated depreciation and any impairment in value.
The initial cost of property and equipment consists of its purchase price, including import duties,
taxes and any directly attributable costs of bringing the asset to its working condition and location
for its intended use. Expenditures incurred after the property and equipment have been put into
operation, such as repairs and maintenance and overhaul costs, are normally charged to income in
the period the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be obtained
from the use of an item of property and equipment beyond its originally assessed standard of
performance, the expenditures are capitalized as an additional cost of property and equipment.
Depreciation is computed on a straight-line basis over the estimated useful life of the assets of 3
years. Leasehold improvements are amortized over the terms of the lease or the estimated useful
lives of improvements, whichever is shorter.
The carrying values of property and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of
the asset) is included in the statement of income in the year the asset is derecognized.
The residual values, useful lives and depreciation method are reviewed periodically to ensure that
the values, periods and method of depreciation are consistent with the expected pattern of
economic benefits from items of property and equipment.
Fully depreciated property and equipment are retained in the accounts until these are no longer in
use.
Impairment of Nonfinancial Assets
The Company assesses at each reporting date whether there is an indication that a nonfinancial
asset may be impaired. If any such indication exists, or when annual impairment testing for a
nonfinancial asset is required, the Company makes an estimate of the nonfinancial asset’s
recoverable amount. A nonfinancial asset’s recoverable amount is the higher of a nonfinancial
asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined
for an individual nonfinancial asset, unless the nonfinancial asset does not generate cash inflows
that are largely independent of those from other nonfinancial assets or groups of nonfinancial
assets. Where the carrying amount of a nonfinancial asset exceeds its recoverable amount, the
nonfinancial asset is considered impaired and is written down to its recoverable amount. In
assessing value in use, the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the nonfinancial asset. Impairment losses of continuing operations are recognized
in the statement of income in those expense categories consistent with the function of the impaired
nonfinancial asset.
*SGVMC406417*
-8-
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 nonfinancial asset’s
recoverable amount since the last impairment loss was recognized. If that is the case, the carrying
amount of the nonfinancial asset is increased to its recoverable amount. That increased amount
cannot exceed the carrying amount that would have been determined, net of depreciation, had no
impairment loss been recognized for the nonfinancial asset in prior years. Such reversal is
recognized in profit or loss unless the nonfinancial asset is carried at revalued amount, in which
case the reversal is treated as a revaluation increase. After such a reversal, the depreciation charge
is adjusted in future periods to allocate the nonfinancial asset’s revised carrying amount, less any
residual value, on a systematic basis over its remaining useful life.
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:
Service fees
Service fees are recognized based on agreed rates upon completion of the service.
Interest income
Interest is recognized as 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 at inception date of whether the fulfillment of the arrangement is
dependent on the use of a specific asset or assets or the arrangement conveys a right to use the
asset. A reassessment is made after inception of the lease only if one of the following applies:
a. There is a change in contractual terms, other than a renewal or extension of the
arrangement;
b. A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;
c. There is a change in the determination of whether fulfilment is dependant on a specified
asset; or
d. There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of
renewal or extension period for scenario (b).
For arrangements entered into prior to January 1, 2005, the date of inception is deemed to be
January 1, 2005 in accordance with the transitional requirements of Philippine Interpretation
IFRIC 4.
Company as a lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense in the
statement of income on a straight-line basis over the lease term.
*SGVMC406417*
-9-
Retirement Costs
The Company has a defined benefit pension plan which requires contributions to be made to a
separately administered fund. The cost of providing benefits under the defined benefit plan is
determined using the projected unit credit actuarial valuation. Actuarial gains and losses are
recognised as income or expense when the net cumulative unrecognised actuarial gains and losses
for each individual plan at the end of the previous reporting period exceeded 10% of the higher of
the defined benefit obligation and the fair value of plan assets at that date. These gains or losses
are recognised over the expected average remaining working lives of the employees participating
in the plans.
The past service cost 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, a pension plan, past service cost is recognized immediately.
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 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.
Income Taxes
Current income tax
Current income 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 by the
balance sheet date.
Deferred income tax
Deferred income tax is provided using the balance sheet liability method on temporary differences
at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable
temporary differences, except:
•
•
where the deferred income 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
in respect of 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 income tax assets are recognized for all deductible temporary differences, carryforward
of unused tax credits in the form of minimum corporate income tax (MCIT) and unused tax losses
in the form of net operating loss carryover (NOLCO), to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences can be utilized except:
•
where the deferred income 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
*SGVMC406417*
- 10 -
and, at the time of the transaction, affects neither the accounting profit nor taxable profit or
loss; and
•
in respect of 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 income 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 income tax asset to be utilized. Unrecognized deferred income tax
assets are reassessed at each balance sheet date and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred income tax asset to be recovered.
Deferred income 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 the balance sheet date.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists to offset current income tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as an interest expense.
Contingencies
Contingent liabilities are not recognized in the financial statements. These are disclosed unless the
possibility of an outflow of resources embodying economic benefits is remote. Contingent assets
are not recognized in the financial statements but are disclosed when an inflow of economic
benefits is probable.
Foreign Currency Transactions
Transactions in foreign currencies are recorded in Philippine peso based on the exchange rates
prevailing at the dates of transactions. Monetary assets and liabilities denominated in foreign
currencies are restated at the functional currency rate of exchange ruling at the balance sheet date.
Exchange gain or losses arising from foreign currency dominated transactions are credited to or
charged against income as incurred.
Events After the Balance Sheet Date
Post year-end events that provide additional information about the Company’s financial position at
the 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 financial statements when
material.
*SGVMC406417*
- 11 -
3. Significant Accounting Judgments and Estimates
The Company’s financial statements prepared in accordance with PFRS requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
related notes thereto. The estimates and assumptions used in the accompanying financial
statements are based upon management’s evaluation of relevant facts and circumstances as of the
date of the financial statements. Actual results could differ from such estimates.
Determining functional currency
Based on the economic substance of underlying circumstances relevant to the Company, the
functional currency of the Company has been determined to be the Philippine peso. The
Philippine peso is the currency of the primary economic environment in which the Company
operates and it is the currency that mainly influences the sale of services and the cost of providing
the services.
Operating lease commitments - Company as lessee
The Company has entered into a commercial property lease on its office. The Company has
determined that it does not retain all the significant risks and rewards of ownership of the property
which is leased on an operating lease.
Estimating allowances for doubtful accounts and probable losses
The Company maintains an allowance for doubtful accounts at a level considered adequate to
provide for potential uncollectible receivables. The level of this allowance is evaluated by the
Company on the basis of factors that affect the collectibility of the accounts.
The Company reviews the age and status of receivables and identifies accounts that are to be
provided with allowance on a continuous basis.
Total allowance for doubtful accounts amounted to P
=16,738 as of June 30, 2007 (see Note 8).
Estimating useful lives of property and equipment
The estimated useful lives used as basis for depreciating the Company’s property and equipment
were determined on the basis of management’s assessment of the period within which the benefits
of these property and equipment items are expected to be realized taking into account actual
historical information on the use of such property and equipment as well as industry standards
and averages applicable to the Company’s property and equipment.
Net book value of property and equipment amounted to P
=703,195 and P
=245,887 as of
June 30, 2007 and 2006, respectively (see Note 7).
Realizability of deferred income tax assets
The Company reviews the carrying amounts of deferred income taxes at each balance sheet date
and reduces deferred income tax assets to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred income tax assets to be utilized.
However, there is no assurance that the Company will generate sufficient taxable profit to allow
all or part of its deferred income tax assets to be utilized.
*SGVMC406417*
- 12 -
Temporary differences for which no deferred income tax assets were recognized amounted to
about P
=12,134,919 and P
=20,642,683 as of June 30, 2007 and 2006 (see Note 13).
Estimating asset impairment
Internal and external sources of information are reviewed at each balance sheet date to identify
indications that the assets may be impaired or an impairment loss previously recognized no longer
exists or may be decreased.
If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss
is recognized whenever the carrying amount of an asset exceeds its estimated recoverable amount.
The Company assesses the impairment of assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the
Company considers important which could trigger an impairment review include the following:
•
•
significant underperformance relative to expected historical or projected future operating
results; and
significant negative industry or economic trends.
Pension and other retirement benefits
The determination of the obligation and cost of pension and other retirement benefits is dependent
on the selection of certain assumptions used by actuaries in calculating such amounts. Expected
returns that differ from the Company’s assumptions are accumulated and amortized over future
periods and therefore, generally affect the recognized expense and recorded obligation in such
future periods. While the Company believes that the assumptions are reasonable and appropriate,
significant differences in the actual experience or significant changes in the assumptions may
materially affect the pension and other retirement obligations.
Retirement expense recognized amounted to P
=413,320 and P
=282,058 in 2007 and 2006,
respectively. Accrued retirement obligations amounted to P
=1,174,895 and P
=761,575 as of
June 30, 2007 and 2006, respectively (see Notes 9 and 12).
4. Cash and Cash Equivalents
Cash on hand and in banks
Short-term deposits
2007
P
=966,790
11,917,330
P
=12,884,120
2006
P620,373
=
12,931,528
=13,551,901
P
Cash in banks earn interest at the respective bank deposit rates. Short-term deposits are made for
varying periods up to three months depending on the immediate cash requirements of the
Company and earn interest at the prevailing short-term deposit rates.
*SGVMC406417*
- 13 -
5. Prepayments and Other Current Assets
Creditable withholding tax
Input value added tax (VAT)
Prepaid rental
Accrued interest receivable
Advances to employees
2007
P
=896,424
183,762
29,679
–
–
P
=1,109,865
2006
=200,866
P
430,249
74,129
434,880
85,561
=1,225,685
P
2007
P
=2,850,000
2006
=975,000
P
94,780
P
=2,944,780
27,926
=1,002,926
P
6. AFS Investments
Investment in shares of stock of POPI
Investment in shares of stock of Cyber Bay
Corporation (CBC)
Shares of stock of POPI and CBC are both listed in the Philippine Stock Exchange. Both
investees are related parties. The unrealized valuation gain amounted to P
=2,344,780 and P
=402,926
as of June 30, 2007 and 2006, respectively, which is recorded in the equity section of the balance
sheets.
7. Property and Equipment
June 30, 2007
Cost:
Beginning balance
Additions
Ending balance
Accumulated depreciation:
Beginning balance
Depreciation
Ending balance
Net book values
Leasehold
Improvements
Office
Furniture and
Fixtures
Software
Total
=
P5,564,134
–
5,564,134
=
P575,049
588,451
1,163,500
=
P29,077
–
29,077
=
P6,168,260
588,451
6,756,711
=
P5,564,129
5
5,564,134
=–
P
=
P357,033
116,599
473,632
=689,868
P
=
P1,211
14,539
15,750
=
P13,327
=
P5,922,373
131,143
6,053,516
=
P703,195
*SGVMC406417*
- 14 -
June 30, 2006
Leasehold
Improvements
Office
Furniture and
Fixtures
Software
Total
=
P5,564,134
–
5,564,134
=
P382,196
192,853
575,049
=
P–
29,077
29,077
P
=5,946,330
221,930
6,168,260
5,409,576
154,553
5,564,129
=5
P
281,964
75,069
357,033
=218,016
P
–
1,211
1,211
=
P27,866
5,691,540
230,833
5,922,373
=
P245,887
Cost:
Beginning balance
Additions
Ending balance
Accumulated depreciation:
Beginning balance
Depreciation
Ending balance
Net book values
8. Related Party Transactions
Parties are considered to be related if one party has the ability to control, directly or indirectly, 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.
In the ordinary course of business, the Company entered into transactions with its related parties
consisting principally of noninterest-bearing advances with no fixed payment terms and are due
and demandable.
Account balances with related parties are as follows:
Amounts owed by related parties:
DHG Capital Holdings, Inc. (DCHI)
HLG Philippines, Inc. (HPI)
Orion Maxis Inc. (OMI)
FLT Prime Insurance Corporation (FLT)
CBC
Lepanto Ceramics, Inc. (LCI)
POPI
Others
Less allowance for doubtful accounts
2007
2006
P
=46,926,651
37,000,000
25,037,061
90,682
16,738
3,227
–
717
109,075,076
16,738
P
=109,058,338
=96,577,940
P
–
683,971
90,006
–
21,996,276
110,673,649
36,846
230,058,688
–
=230,058,688
P
*SGVMC406417*
- 15 -
Amounts owed to related parties:
POPI
Macario N. Naval Jr.
Guoco Securities (Philippines), Inc.
Tutuban Properties, Inc. (TPI)
HPI
2007
2006
P
=47,032,780
12,845,350
391,000
1,619
–
P
=60,270,749
=–
P
12,845,350
391,000
960,671
166,538,783
=180,735,804
P
As mentioned in Note 1, POPI is the Company’s ultimate parent. DCHI, LCI, OMI, FLT, TPI,
and HPI are subsidiaries of POPI.
In 2006, the Company entered into an agreement with TPI to develop the Customer’s Integrated
Collection and Billing System with a total service fee of about P
=14.0 million covering twenty
months with equal monthly payments of P
=698,137. As of June 30, 2007 and 2006, the receivable
from TPI amounted to P
=1.8 million.
Key Management Personnel Compensation
There was no compensation of key management personnel, including retirement and other
employment benefits for 2007. The compensation of key management personnel, including
retirement and other employment benefits, amounted to P
=3,159,982 in 2006.
9. Accounts Payable and Accrued Expenses
Accrued expenses
Accounts payable
2007
813,534
515,916
P
=1,329,450
2006
571,491
27,205
=598,696
P
2007
P
=3,423,600
413,320
154,319
P
=3,991,239
2006
=4,665,959
P
282,058
183,451
=5,131,468
P
2007
P
=457,006
343,593
170,066
143,667
131,143
2006
=1,199,331
P
172,146
146,599
561,534
230,833
10. Cost of Services
Salaries and wages
Retirement expense (see Note 12)
Other employee benefits
11. Operating Expenses
Rent (Note 14)
Professional fee
Postage, telephone and telegram
Membership fees and dues
Depreciation and amortization (Note 7)
forward
*SGVMC406417*
- 16 -
Repairs and maintenance
Light and power
Transportation and travel
Taxes and licenses
Supplies
Miscellaneous
2007
P
=37,888
33,690
29,620
26,760
17,937
158,506
P
=1,549,876
2006
P56,501
=
149,813
70,163
16,808
21,871
232,088
=2,857,687
P
12. Retirement Plan
The Company has unfunded, noncontributory retirement plan covering all its regular employees.
The plan provides for retirement, separation, disability and death benefits to its members. The
normal retirement benefit is based on a percentage of the employees’ final monthly salary for
every year of credited services.
The latest independent actuarial valuation of the plan was as of August 10, 2007 using the
projected unit credit method in accordance with PAS 19.
The following tables summarize the funded status and amounts recognized in the balance sheets,
and the components of the net pension benefit recognized in the statements of income for the
retirement plan:
2007
Net retirement obligation:
Present value of obligation
Unrecognized actuarial gains
Unrecognized past service cost - non-vested
Net retirement expense:
Current service cost
Interest cost on benefit obligation
Past service cost
P
=329,173
1,387,496
(541,774)
P
=1,174,895
2006
=1,324,667
P
23,830
(586,922)
=761,575
P
2007
2005
P
=222,459
145,713
45,148
P
=413,320
=182,227
P
54,683
45,148
=282,058
P
2007
P
=761,575
413,320
P
=1,174,895
2006
=479,517
P
282,058
=761,575
P
Movements in the retirement obligations are as follows:
Beginning balance
Retirement expense
Ending balance
*SGVMC406417*
- 17 -
Changes in present value of obligation (PVO) are as follows:
PVO at beginning of year
Current service cost
Interest cost on benefit obligation
Past service cost - vested
Actuarial loss on obligation
Ending balance
2007
P
=1,324,667
222,459
145,713
–
(1,363,666)
P
=329,173
2006
=455,687
P
182,227
54,683
632,070
–
=1,324,667
P
The principal assumptions used to determine retirement obligation for the Company are as follows:
Discount rate
Expected rate of return on plan assets
Salary increase rate
Amounts for 2007 are as follows:
Defined benefit obligation
Change in actuarial assumption
Experience adjustment on plan liabilities
2007
8.00%
9.00%
7.00%
2006
12.00%
9.00%
8.00%
=
P1,174,895
141,830
(1,505,496)
13. Income Taxes
The current provision for income tax represents the minimum corporate income tax in 2007 and
2006.
The reconciliation of income tax computed at the statutory tax rate to provision for income tax
follows:
2006
2007
At statutory income tax rates of 35%
in 2007 and 34% in 2006
=8,827
P
(P
=615,313)
Additions to (reductions in) income tax
resulting from:
Unrecognized deferred income tax assets
315,985
923,296
Interest income subject to final tax
(273,943)
(283,541)
=50,869
P
P
=24,442
As of June 30, 2007 and 2006, deferred income tax assets have not been recognized on the
following deductible temporary differences because management believes that it is no longer
probable that sufficient taxable income and tax liabilities will be available to allow or part of the
deferred income tax assets to be utilized.
*SGVMC406417*
- 18 -
2007
P
=10,815,054
1,174,895
128,232
16,738
P
=12,134,919
NOLCO
Accrued retirement
MCIT
Allowance for doubtful accounts
2006
=19,777,318
P
761,575
103,790
–
=20,642,683
P
The carryforward benefits of NOLCO and the excess MCIT over the regular corporate income tax,
which can be claimed by the Company against taxable income and tax liabilities for the next three
years from the year of incurrence, are as follows:
Year Incurred
2007
2006
2005
NOLCO
=2,125,360
P
497,694
8,192,000
=10,815,054
P
MCIT
P
=24,442
50,869
52,921
P
=128,232
Expiry Date
June 2010
June 2009
June 2008
2007
P
=19,777,318
2,125,360
(11,087,624)
P
=10,815,054
2006
=31,908,885
P
497,694
(12,629,261)
=19,777,318
P
The following are the movements in NOLCO and MCIT:
NOLCO
Beginning balance
Additions
Expirations
Ending balance
MCIT
Beginning balance
Additions
Ending balance
2007
P
=103,790
24,442
P
=128,232
2006
=52,921
P
50,869
=103,790
P
Republic Act (RA) No. 9337 was recently enacted into law amending various provisions in the
existing 1997 National Internal Revenue Code. Among the reforms introduced by the said RA,
which became effective on November 1, 2005, are as follows:
•
•
•
•
•
Increased the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Granted authority to the Philippine President to increase the 10% VAT rate to 12%,
effective January 1, 2006, subject to compliance with certain economic conditions;
Revised invoicing and reporting requirements for VAT;
Expanded scope of transactions subject to VAT; and
Provided thresholds and limitations on the amounts of VAT credits that can be claimed.
On January 31, 2006, the Bureau of Internal Revenue issued Revenue Memorandum Circular
No. 7-2006 increasing the VAT rate from 10% to 12% effective February 1, 2006.
*SGVMC406417*
- 19 -
In November 2006, RA 9361 was enacted, repealing the thresholds on the amount of VAT credits
that can be claimed.
14. Lease Commitment
The Company leases its office space for a period of five years until April 2007. On May 29, 2007,
the Company renewed its contract for a period of three years from April 15, 2007 to
April 14, 2010. Rent expense charged to operations amounted to P
=457,006 and P
=1,199,331 in
2007 and 2006, respectively (see Note 11).
Rental deposit is included in the “Other noncurrent assets” account in the balance sheets amounted
to P
=178,072 and P
=87,705 as of June 30, 2007 and 2006, respectively.
Future minimum rentals payable under non-cancellable operating lease as of June 30, 2007 and
2006 follows:
Within one year
After one year but not more than two years
2007
P
=773,424
1,385,719
P
=2,159,143
2006
=422,469
P
–
=422,269
P
15. Financial Risk Management Objectives and Policies
Financial Risk Management Objectives and Policies
The Company’s principal financial instruments are cash and cash equivalents, accounts receivable,
AFS investment, accounts payable and accrued expenses and amounts owed to and by related
parties. The main purpose of the Company’s financial instruments is to fund its operations. The
main risks from the use of financial instruments are liquidity risk, foreign currency risk and credit
risk.
Liquidity risk
In the management of liquidity, the Company monitors and maintains a level of cash and cash
equivalent deemed adequate by the management to finance the Group’s operations and mitigate
the effects of fluctuations in cash flows.
Foreign currency risk
The Company’s foreign currency risk result primarily from movements of the Philippine peso
against the US Dollar.
Credit risk
The Company establishes credit limits at the level of the individual borrower, corporate
relationship and industry sector. It also provides for credit terms with the consideration for
possible application of intercompany accounts between affiliated companies. Also, the Company
transacts only with affiliated companies, hence, there is no requirement for collateral.
Receivable balances are monitored on an ongoing basis with the result that the Company’s
exposure to bad debts is not significant. Provision for bad debts will also be made if the situation
so warrants subject to the BOD’s review and approval.
*SGVMC406417*
- 20 -
Fair Values
The Company has determined that the carrying amounts of its financial instruments, based on their
notional amounts, reasonably approximate their fair values because these are mostly short-term in
nature.
*SGVMC406417*
SGV & CO
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Orion Maxis Inc.
We have audited the accompanying financial statements of Orion Maxis Inc. (a wholly owned
subsidiary of OE Holdings, Inc.), which comprise the balance sheets as at June 30, 2007 and 2006,
and the statements of income, statements of changes in equity (capital deficiency) and statements of
cash flows for the years then ended, and a summary of significant accounting policies and other
explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC406406*
-2-
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of
Orion Maxis Inc. as of June 30, 2007 and 2006, and its financial performance and its cash flows for
the years then ended in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Jose Pepito E. Zabat III
Partner
CPA Certificate No. 85501
SEC Accreditation No. 0328-A
Tax Identification No. 102-100-830
PTR No. 0267401, January 2, 2007, Makati City
September 18, 2007
*SGVMC406406*
ORION MAXIS INC.
(A Wholly Owned Subsidiary of OE Holdings, Inc.)
BALANCE SHEETS
June 30
2007
2006
P
=11,492,538
82,765,800
20,576
36,299,924
533,220
131,112,058
=3,628,534
P
6,467,664
221,249
7,344,393
583,403
18,245,243
1,128,664
563,459
667,404
1,796,068
169,637
733,096
P
=132,908,126
=18,978,339
P
P
=2,833,723
118,995,979
121,829,702
P5,577,132
=
15,593,913
21,171,045
1,631,630
1,237,581
14,500,000
10,000,000
(15,053,206)
9,446,794
14,500,000
–
(17,930,287)
(3,430,287)
ASSETS
Current Assets
Cash and cash equivalents (Note 4)
Accounts receivable (Note 5)
Inventories - at cost
Amounts owed by related parties (Note 10)
Other current assets (Note 6)
Total Current Assets
Noncurrent Assets
Property and equipment - net (Note 7)
Other noncurrent assets - net of accumulated amortization of
= 12,819,333 in 2007 and =
P
P 12,803,036 in 2006 (Note 16)
Total Noncurrent Assets
TOTAL ASSETS
LIABILITIES AND EQUITY (CAPITAL DEFICIENCY)
Current Liabilities
Accounts payable and accrued expenses (Note 8)
Amounts owed to related parties (Note 10)
Total Current Liabilities
Noncurrent Liability
Retirement obligation (Note 14)
Equity (Capital Deficiency)
Capital stock- P
=1 par value
Authorized - 50,000,000 shares
Issued and outstanding - 14,500,000 shares
Deposit for future stock subscription (Note 9)
Deficit
Total Equity (Capital Deficiency)
TOTAL LIABILITIES AND EQUITY
(CAPITAL DEFICIENCY)
P
=132,908,126
=18,978,339
P
See accompanying Notes to Financial Statements.
*SGVMC406406*
ORION MAXIS INC.
(A Wholly Owned Subsidiary of OE Holdings, Inc.)
STATEMENTS OF INCOME
Years Ended June 30
2006
2007
REVENUES
Merchandise sales
Service fees
Interest - net
COST AND EXPENSES
Cost of sales and services (Note 11)
General and administrative (Note 12)
Foreign exchange losses - net
P
=173,463,670
3,296,799
270,748
177,031,217
=6,073,234
P
3,984,678
19,124
10,077,036
159,616,283
13,976,138
334,769
173,927,190
6,396,320
6,121,563
119,965
12,637,848
INCOME (LOSS) BEFORE INCOME TAX
3,104,027
PROVISION FOR INCOME TAX (Note 15)
226,946
NET INCOME (LOSS)
P
=2,877,081
(2,560,812)
73,232
(P
=2,634,044)
See accompanying Notes to Financial Statements.
*SGVMC406406*
ORION MAXIS INC.
(A Wholly Owned Subsidiary of OE Holdings, Inc.)
STATEMENTS OF CHANGES IN EQUITY (CAPITAL DEFICIENCY)
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
Capital Stock
Balances at June 30, 2005
Net loss for the year
P
=14,500,000
Deposit for
future stock
subscription
Deficit
Total
=
P– (P
=15,296,243)
(P
=796,243)
–
–
(2,634,044)
(2,634,044)
14,500,000
–
(17,930,287)
(3,430,287)
Deposit for future stock subscription (Note 9)
–
10,000,000
–
10,000,000
Net income for the year
–
–
2,877,081
2,877,081
=
P10,000,000 (P
=15,053,206)
=
P9,446,794
Balances at June 30, 2006
Balances at June 30, 2007
P
=14,500,000
See accompanying Notes to Financial Statements.
*SGVMC406406*
ORION MAXIS INC.
(A Wholly Owned Subsidiary of OE Holdings, Inc.)
STATEMENTS OF CASH FLOWS
Years Ended June 30
2006
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Provisions for retirement (Note 14)
Depreciation and amortization (Notes 7)
Unrealized foreign exchange losses - net
Provision for doubtful accounts
Interest income
Operating income (loss) before working capital changes
Decrease (increase) in:
Accounts receivable
Inventories
Other current assets
Increase (decrease) in accounts payable and accrued expenses
Cash used in operations
Interest received
Net cash flows used in operating activities
394,049
259,390
151,559
101,045
(270,748)
3,739,322
1,065,676
125,208
16,608
–
(19,124)
(1,372,444)
(76,298,136)
200,673
(176,763)
(2,743,409)
(75,278,313)
270,748
(75,007,565)
(5,168,511)
(221,249)
(506,474)
2,952,019
(4,316,659)
19,124
(4,297,535)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in amounts owed by related parties
Additions to property and equipment (Note 7)
Increase in other noncurrent assets
Cash flows used in investing activities
(29,056,576)
(808,298)
(514,064)
(30,378,938)
(7,116,848)
(572,984)
(151,248)
(7,841,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in amounts owed to related parties
Deposit for future stock subscription (Note 9)
Net cash flows from financing activities
103,402,066
10,000,000
113,402,066
14,195,547
–
14,195,547
8,015,563
2,056,932
NET INCREASE IN CASH AND CASH EQUIVALENTS
EFFECTS OF EXCHANGE RATE CHANGES
ON CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 4)
P
=3,104,027
(151,559)
(P
=2,560,812)
–
3,628,534
1,571,602
P
=11,492,538
=3,628,534
P
See accompanying Notes to Financial Statements.
*SGVMC406406*
ORION MAXIS INC.
(A Wholly Owned Subsidiary of OE Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Orion Maxis Inc. (the Company) was registered with the Philippines Securities and Exchange
Commission (SEC) on November 10, 2000 primarily to engage in and undertake the business of
establishing, developing, operating, maintaining and providing management and logistical
infrastructure service and technical support, with applications/access to commercial website for
facilitation of retail and wholesale operations of all types of merchandise, as well as the
management of enterprise and market incentive systems solutions, as well as to engage in other
allied businesses and services, and to acquire and dispose of any real property or personal property
as shall be deemed necessary or convenient for the conduct of business. The Company is a wholly
owned subsidiary of OE Holdings, Inc. (OEHI). The Company’s ultimate parent is Prime Orion
Philippines, Inc. (POPI). The Company’s principal place of business is 20th Floor LKG Tower,
6801 Ayala Avenue, Makati City.
The financial statements of the Company as of and for the years ended June 30, 2007 and 2006
were approved and authorized for issue by the Board of Directors (BOD) on September 18, 2007.
2. Summary of Significant Accounting Policies
Basis of Preparation
The financial statements have been prepared on the historical cost basis and are presented in
Philippine peso, which is the Company’s functional and presentation currency.
Statement of Compliance
The financial statements of the Company have been prepared in compliance with Philippine
Financial Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies are consistent with those of the previous financial year, except for the
adoption of the following amended Philippine Accounting Standards (PAS) and new Philippine
Interpretation based on International Financial Reporting Interpretation Committee (IFRIC) during
the year. Adoption of these standards and interpretation did not have any effect on the financial
position of the Company. These, however, required additional disclosures in the financial
statements.
•
PAS 19, Employee Benefits
Additional disclosures are made to provide information about trends in the assets and
liabilities in the defined benefit plans and the assumptions underlying the components of the
defined benefit costs.
*SGVMC405481*
-2•
PAS 21, The Effects of Changes in Foreign Exchange Rates
All exchange differences arising from monetary items that form part of a Company’s net
investment in a foreign operation are recognized in a separate component of equity in the
financial statements regardless of the currency in which the monetary item is denominated.
•
PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts (issued August 2005) - amended the scope of
PAS 39 to require financial guarantee contracts that are not considered to be insurance
contracts to be recognized initially at fair value and to be remeasured at the higher of the
amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and
Contingent Assets, and the amount initially recognized less, when appropriate, cumulative
amortization recognized in accordance with PAS 18, Revenue.
Amendment for cash flow hedge accounting of forecast intra-group transactions (issued April
2005) - amended PAS 39 to permit the foreign currency risk of a highly probable intra-group
forecast transaction to qualify as the hedged item in a cash flow hedge, provided that the
transaction and that the foreign currency risk will affect the statement of income.
Amendment for the fair value option (issued June 2005) - amended PAS 39 to prescribe the
conditions under which the fair value option on classification of financial instruments at fair
value through profit or loss (FVPL) may be used.
•
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease
This interpretation provides guidance in determining whether arrangements contain a lease to
which lease accounting must be applied.
Future Changes in Accounting Policies
The Company has not yet adopted the following PFRS and Philippine Interpretations that have
been issued but are not yet effective for annual period beginning June 1, 2006:
PFRS 7, Financial Instruments: Disclosures
PFRS 7 introduces new disclosures to improve the information about financial instruments. It
requires the disclosure of qualitative and quantitative information about exposure to risks arising
from financial instruments, including specified minimum disclosures about credit risk, liquidity
risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures
in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure
requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to
all entities that report under PFRS. PFRS 7 is applicable on January 1, 2007.
Complementary amendment to PAS 1, Presentation of Financial Statements
The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. This is effective on January 1, 2007. The Company is currently assessing the
impact of PFRS 7 and the amendment to PAS 1 and expects that the main additional disclosures
will be the sensitivity analysis to market risk and the capital disclosures required by PFRS 7 and
the amendment to PAS 1.
PFRS 8, Operating Segments
PFRS 8 is effective for annual periods beginning on or after January 1, 2009. PFRS 8 will replace
PAS 14, Segment Reporting and is required to be adopted only by entities whose debt or equity
*SGVMC406406*
-3-
instruments are publicly traded, or are in the process of filling with class of instruments in a public
market. The information reported would be that which management uses internally for evaluating
the performance of operating segments and allocating resources to those segments. Such
information may be different from that reported in the balance sheet and statement of income and
companies will need to provide explanations and reconciliations of the differences.
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
This interpretation was issued in March 2006 and becomes effective for financial years beginning
on or after June 1, 2006. It establishes that the date to assess the existence of an embedded
derivative is the date an entity first becomes a party to the contract, with reassessment only if there
is a change to the contract that significantly modifies the cash flows.
Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment
This interpretation is effective for annual periods beginning on or after November 1, 2006. This
interpretation provides that the frequency of financial reporting does affect the amount of
impairment charge to be recognized in the annual financial reporting with respect to goodwill and
available-for-sale (AFS) equity investments. It prohibits the reversal of impairment losses on
goodwill and AFS equity investments recognized in the interim financial reports even if
impairment is no longer present at the annual balance sheet date.
Philippine Interpretation IFRIC 11, PFRS 2 Group and Treasury Share Transactions
This interpretation will be effective on March 1, 2007. This interpretation requires arrangements
whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an
equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity
instruments (e.g., treasury shares) from another party, or (b) the shareholders of the entity provide
the equity instruments needed. It also provides guidance on how subsidiaries, in their separate
financial statements, account for such schemes when their employees receive rights to the equity
instruments of the parent.
Philippine Interpretation IFRIC 12, Service Concession Arrangements
This interpretation will become effective on March 1, 2007. This interpretation which covers
contractual arrangements arising from entities providing public services. Except for PFRS 7 and
the amendments to PAS 1, the Company does not expect any significant changes in its accounting
policies when it adopts the above standards, amendments and interpretations.
Cash and Cash Equivalents
Cash includes cash on hand and cash in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from date of acquisition and that are subject to insignificant risk of changes in
value.
Financial Assets and Liabilities
Financial assets and financial liabilities are recognized initially at cost, which is the fair value at
inception. Transaction costs are included in the initial measurement of all financial assets and
liabilities, except for financial instruments measured at FVPL.
*SGVMC406406*
-4-
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 instrument. In the case of a regular way
purchase or sale of financial assets, recognition and disposals or retirements, as applicable, is done
using settlement date accounting.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity, net of any
related income tax benefits.
Financial assets are further classified into the following categories: financial asset at FVPL, loans
and receivables, held-to-maturity (HTM) investments, and AFS investments. The Company
determines the classification at initial recognition and re-evaluates this designation at every
reporting date. As of June 30, 2007, the Company has no financial asset at FVPL, HTM
investments and AFS financial assets.
Financial asset at FVPL. A financial asset is classified in this category if acquired principally for
the purpose of selling or repurchasing in the near term or upon initial recognition, it is designated
by management at FVPL. Derivatives are also categorized as held at FVPL, except those
derivatives designated and considered as effective hedging instruments. Assets classified under
this category are carried at fair value in the balance sheet. Changes in the fair value of such assets
are accounted for in statement of income.
Loans and receivables. Loans and receivables are nonderivative financial assets with fixed or
determinable payments that are not quoted in an active market. They arise when the Company
provides money, goods or services directly to a debtor with no intention of trading the receivables.
Loans and receivables are carried at cost or amortized cost in the balance sheet. Amortization is
determined using the effective interest rate method. Loans and receivables are included in current
assets if maturity is within twelve months of the balance sheet date. Otherwise, these are classified
as noncurrent assets.
HTM investments. Nonderivative financial assets with fixed or determinable payments and fixed
maturity are classified as HTM when the Company has the positive intention and ability to hold to
maturity. Investments intended to be held for an undefined period are not included in this
classification. Other long-term investments that are intended to be HTM, such as bonds, are
subsequently measured at amortized cost. This cost is computed as the amount initially
recognized minus principal repayments, plus or minus the cumulative amortization using the
effective interest method of any difference between the initially recognized amount and the
maturity amount. This calculation includes all fees and points paid or received between parties to
the contract that are an integral part of the effective interest rate, transaction costs and all other
premiums and discounts. For investments carried at amortized cost, gains and losses are
recognized in income when the investments are derecognized or impaired, as well as through the
amortization process.
*SGVMC406406*
-5-
AFS investments. AFS investments are those nonderivative financial assets that are designated as
AFS or are not classified in any of the preceding categories. After initial recognition, AFS
financial assets are measured at fair value with gains or losses being recognized in the “Unrealized
valuation gains (losses) on AFS investments” account in the equity until the investment is
derecognized or until the investment is determined to be impaired at which time the cumulative
gain or loss previously reported in equity is included in the statement of income.
The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid prices at the close of business on the balance sheet date. For
investments where there is no active market, fair value is determined using valuation techniques.
Such techniques include using recent arm’s-length market transactions; reference to the current
market value of another instrument, which is substantially the same; discounted cash flow analysis
and option pricing models.
The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid prices at the close of business on the balance sheet date. For
investments where there is no active market, fair value is determined using valuation techniques.
Such techniques include using recent arm’s length market transactions; reference to the current
market value of another instrument, which is substantially the same; discounted cash flow analysis
and option pricing models.
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 where:
•
the rights to receive cash flows from the asset have expired;
•
the Company retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third party under a ‘pass-through’
arrangement; or
•
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.
Where 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. Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount of
consideration that the Company could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a
cash-settled option or similar provision) on the transferred asset, the extent of the Company’s
continuing involvement is the amount of the transferred asset that the Company may repurchase,
except that in the case of a written put option (including a cash-settled option or similar provision)
on an asset measured at fair value, the extent of the Company’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the option exercise price.
*SGVMC406406*
-6-
On derecognition of a financial asset in its entirety, the difference between the carrying amount
and the sum of (a) the consideration received (including any new asset obtained less any new
liability assumed) and (b) any cumulative gain or loss that has been recognized directly in equity
is recognized in the statement of income.
Financial liabilities. A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired.
Where an existing financial liability is replaced by another 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 statement of
income.
Impairment of Financial Assets
The Company assesses at each 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 the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). The carrying amount of the asset shall be reduced either directly or through use of
an allowance account. The amount of the loss shall be recognized in the statement of income.
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 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 that an impairment loss on an unquoted
equity instrument that is not carried at fair value because its fair value cannot be reliably
measured, or on a derivative asset that is linked to and must be settled by delivery of such an
unquoted equity instrument has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset.
*SGVMC406406*
-7-
AFS investments. If an AFS investments is impaired, an amount comprising the difference
between its cost (net of any principal payment and amortization) and its current fair value, less any
impairment loss previously recognized in statement of income, is transferred from equity to the
statement of income. Reversals in respect of equity instruments classified as AFS are not
recognized in the statement of income. 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 statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the balance sheet,
if and only if, there is a currently enforceable legal right to offset the recognized amounts and
there is an intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously. This is generally not the case with master netting agreements, and the related
assets and liabilities are presented gross in the balance sheet.
Inventories
Inventories are stated at lower of cost and net realizable value (NRV). Cost is determined using
the first-in, first-out method. NRV is the estimated selling price in the ordinary course of
business, less the estimated costs necessary to make the sale.
Project Cost
Project costs consist of expenditure on licenses, legal fees and other related costs to obtain website
for online shopping system. Project costs are stated at cost less accumulated amortization.
Amortization is computed on a straight-line method over three years which is the estimated useful
life of the project cost.
Property and Equipment
Property and equipment are carried at cost, excluding the cost of day-to-day servicing, less
accumulated depreciation and any impairment in value.
The initial cost of property and equipment consists of its purchase price, including import duties,
taxes and any directly attributable costs of bringing the asset to its working condition and location
for its intended use. Expenditures incurred after the property and equipment have been put into
operation, such as repairs and maintenance and overhaul costs, are normally charged to income in
the period the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be obtained
from the use of an item of property and equipment beyond its originally assessed standard of
performance, the expenditures are capitalized as an additional cost of property and equipment.
Depreciation is computed on a straight-line method over the estimated useful life of the property
and equiptment.
Estimated useful lives of property and equipment are as follows:
Transportation equipment
Furniture and fixtures
Office equipment
Years
5
3
2-3
*SGVMC406406*
-8-
Leasehold improvement are depreciated over their estimated useful life of three years or the term
of the lease, whichever is shorter.
The carrying values of property and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
property and equipment (calculated as the difference between the net disposal proceeds and the
carrying amount of the property and equipment) is included in the statement of income in the year
the property and equipment is derecognized.
The residual values, useful lives and depreciation method are reviewed periodically to ensure that
the values, periods and method of depreciation are consistent with the expected pattern of
economic benefits from items of property and equipment.
Fully depreciated property and equipment are retained in the accounts until these are no longer in
use.
Impairment of Nonfinancial Assets
The Company assesses at each reporting date whether there is an indication that a nonfinancial
asset may be impaired. If any such indication exists, or when annual impairment testing for a
nonfinancial asset is required, the Company makes an estimate of the nonfinancial asset’s
recoverable amount. A nonfinancial asset’s recoverable amount is the higher of a nonfinancial
asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined
for an individual nonfinancial asset, unless the nonfinancial asset does not generate cash inflows
that are largely independent of those from other nonfinancial assets or groups of nonfinancial
assets. Where the carrying amount of a nonfinancial asset exceeds its recoverable amount, the
nonfinancial asset is considered impaired and is written down to its recoverable amount. In
assessing value in use, the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the nonfinancial asset. Impairment losses of continuing operations are recognized
in the statements of income in those expense categories consistent with the function of the
impaired nonfinancial 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 nonfinancial asset’s
recoverable amount since the last impairment loss was recognized. If that is the case, the carrying
amount of the nonfinancial asset is increased to its recoverable amount. That increased amount
cannot exceed the carrying amount that would have been determined, net of depreciation, had no
impairment loss been recognized for the nonfinancial asset in prior years. Such reversal is
recognized in profit or loss unless the nonfinancial asset is carried at revalued amount, in which
case the reversal is treated as a revaluation increase. After such a reversal, the depreciation charge
is adjusted in future periods to allocate the nonfinancial asset’s revised carrying amount, less any
residual value, on a systematic basis over its remaining useful life.
*SGVMC406406*
-9-
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:
Sale of merchandise
Sale of merchandise is recognized upon passage of title, which coincides, with delivery of goods.
Service fees
Service fees are recognized when earned.
Interest income
Interest is recognized as 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 at inception date of whether the fulfillment of the arrangement is
dependent on the use of a specific asset or assets or the arrangement conveys a right to use the
asset. A reassessment is made after inception of the lease only if one of the following applies:
a. There is a change in contractual terms, other than a renewal or extension of the
arrangement;
b. A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;
c. There is a change in the determination of whether fulfilment is dependant on a specified
asset; or
d. There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of
renewal or extension period for scenario (b).
Company as a lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense in the
statement of income on a straight-line basis over the lease term.
Retirement Costs
The Company as a defined benefit pension plan which requires contributions to be made to a
separately administered fund. The cost of providing benefits under the defined plan is determined
using the projected unit credit actuarial valuation. Actuarial gains and losses are recognized as
income or expense when the net cumulative unrecognized actuarial gains and losses for each
individual plan at the end of the previous reporting period exceeded 10% of the higher 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 plans.
The past service cost 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, a pension plan, past service cost is recognized immediately.
*SGVMC406406*
- 10 -
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 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.
Income Taxes
Current income tax
Current income 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 by the
balance sheet date.
Deferred income tax
Deferred income tax is provided using the balance sheet liability method on temporary differences
at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable
temporary differences, except:
•
where the deferred income 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
•
in respect of 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 income tax assets are recognized for all deductible temporary differences, carryforward
of unused tax credits in the form of minimum corporate income tax (MCIT) and unused tax losses
in the form of net operating loss carryover (NOLCO), to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences can be utilized except:
•
where the deferred income 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
•
in respect of deductible temporary differences associated with investments in subsidiaries,
associates and interests in joint ventures, deferred income 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 income 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 income tax asset to be utilized. Unrecognized deferred income tax
*SGVMC406406*
- 11 -
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 income tax asset to be recovered.
Deferred income 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 the balance sheet date.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists to offset current income tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as an interest expense.
Contingencies
Contingent liabilities are not recognized in the financial statements. These are disclosed unless the
possibility of an outflow of resources embodying economic benefits is remote. Contingent assets
are not recognized in the financial statements but are disclosed when an inflow of economic
benefits is probable.
Foreign Currency Transactions
Transactions in foreign currencies are recorded in Philippine peso based on the exchange rates
prevailing at the dates of transactions. Monetary assets and liabilities denominated in foreign
currencies are restated at the functional currency rate of exchange ruling at the balance sheet date.
Exchange gain or losses arising from foreign currency dominated transactions are credited to or
charged against income as incurred.
Events After the Balance Sheet Date
Post year-end events that provide additional information about the Company’s financial position at
the 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 financial statements when
material.
3. Significant Accounting Judgments and Estimates
The Company’s financial statements prepared in accordance with PFRS requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
related notes thereto. The estimates and assumptions used in the accompanying financial
statements are based upon management’s evaluation of relevant facts and circumstances as of the
date of the financial statements. Actual results could differ from such estimates.
*SGVMC406406*
- 12 -
Determining functional currency
Based on the economic substance of underlying circumstances relevant to the Company, the
functional currency of the Company has been determined to be the Philippine peso. The
Philippine peso is the currency of the primary economic environment in which the Company
operates and it is the currency that mainly influences the sale of services and the cost of providing
the services.
Operating lease commitments - Company as lessee
The Company has entered into a commercial property lease on its office. The Company has
determined that it does not retain all the significant risks and rewards of ownership of the property
which is leased on an operating lease.
Estimating allowances for doubtful accounts and probable losses
The Company maintains an allowance for doubtful accounts at a level considered adequate to
provide for potential uncollectible receivables. The level of this allowance is evaluated by the
Company on the basis of factors that affect the collectibility of the accounts.
The Company reviews the age and status of receivables and identifies accounts that are to be
provided with allowance on a continuous basis.
Total allowance for probable losses amounted to P
=79,291 as of June 30, 2007 and 2006
(see Note 6).
Estimating useful lives of property and equipment and project cost
The estimated useful lives used as basis for depreciating the Company’s property and equipment
and project costs were determined on the basis of management’s assessment of the period within
which the benefits of these asset items are expected to be realized taking into account actual
historical information on the use of such assets as well as industry standards and averages
applicable to the Company’s assets.
Net book value of property and equipment amounted to P
=1,128,664 and P
=563,459 as of
June 30, 2007 and 2006, respectively (see Note 7).
Realizability of deferred income tax assets
The Company reviews the carrying amounts of deferred income taxes at each balance sheet date
and reduces deferred income tax assets to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred income tax assets to be utilized.
However, there is no assurance that the Company will generate sufficient taxable profit to allow
all or part of its deferred income tax assets to be utilized.
Deferred income tax assets were not recognized amounting to about P
=1,862,480 and
=3,918,020 as of June 30, 2007 and 2006 (see Note 15).
P
Estimating asset impairment
Internal and external sources of information are reviewed at each balance sheet date to identify
indications that the assets may be impaired or an impairment loss previously recognized no longer
exists or may be decreased.
*SGVMC406406*
- 13 -
If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss
is recognized whenever the carrying amount of an asset exceeds its estimated recoverable amount.
The Company assesses the impairment of assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the
Company considers important which could trigger an impairment review include the following:
•
•
significant underperformance relative to expected historical or projected future operating
results; and
significant negative industry or economic trends.
Pension and other retirement benefits
The determination of the obligation and cost of pension and other retirement benefits is dependent
on the selection of certain assumptions used by actuaries in calculating such amounts. Expected
returns that differ from the Company’s assumptions are accumulated and amortized over future
periods and therefore, generally affect the recognized expense and recorded obligation in such
future periods. While the Company believes that the assumptions are reasonable and appropriate,
significant differences in the actual experience or significant changes in the assumptions may
materially affect the pension and other retirement obligations.
Accrued retirement amounted to P
=1,631,630 and P
=1,237,581 as of June 30, 2007 and 2006,
respectively. Retirement expense recognized amounted to P
=394,049 and P
=1,065,676 in 2007 and
2006, respectively (see Note 14).
4. Cash and Cash Equivalents
Cash on hand and in banks
Short-term investments
2007
P
=6,790,246
4,702,292
P
=11,492,538
2006
=3,353,317
P
275,217
=3,628,534
P
Cash in banks earn interest at the respective bank deposit rates. Short-term investments are made
for varying periods up to three months depending on the immediate cash requirements of the
Company and earn interest at the prevailing short-term investment rates.
5. Accounts Receivable
Trade
Others
2007
P
=81,650,515
1,115,285
P
=82,765,800
2006
=6,067,758
P
399,906
=6,467,664
P
*SGVMC406406*
- 14 -
6. Other Current Assets
2006
=535,880
P
126,814
662,694
79,291
=583,403
P
2007
P
=543,080
69,431
612,511
79,291
P
=533,220
Creditable withholding tax
Prepayments
Less allowance for probable loss
7. Property and Equipment
June 30, 2007
Leasehold
Furniture
Improvements and Fixtures
Cost:
Beginning balance
Additions
Ending balance
Accumulated depreciation:
Beginning balance
Depreciation
Ending balance
Net book values
Office Transportation
Equipment
Equipment
Total
=
P1,104,810
104,240
1,209,050
P
=22,091
19,350
41,441
=
P790,483
204,708
995,191
P
=441,000 P
=2,358,384
480,000
808,298
921,000 =
P3,166,682
1,091,478
14,836
1,106,314
=
P102,736
22,091
–
22,091
P
=19,350
651,956
104,807
756,763
=
P238,428
29,400 1,794,925
123,450
243,093
152,850 2,038,018
P
=768,150 P
=1,128,664
June 30, 2006
Leasehold
Furniture
Improvements and Fixtures
Cost:
Beginning balance
Additions
Ending balance
Accumulated depreciation:
Beginning balance
Depreciation
Ending balance
Net book values
Office Transportation
Equipment
Equipment
=
P1,090,812
13,998
1,104,810
P
=22,091
–
22,091
=
P672,497
117,986
790,483
1,081,634
9,844
1,091,478
=
P13,332
22,088
3
22,091
=
P–
598,151
53,805
651,956
=138,527
P
Total
P
=– =
P1,785,400
441,000
572,984
441,000 2,358,384
–
29,400
29,400
P
=411,600
1,701,873
93,052
1,794,925
P
=563,459
8. Accounts Payable and Accrued Expenses
Accounts payable
Accrued expenses
Output value added tax (VAT) payable
Others
2007
P
=1,007,753
1,368,487
418,725
38,758
P
=2,833,723
2006
=5,354,746
P
182,492
14,612
25,282
=5,577,132
P
*SGVMC406406*
- 15 -
9. Deposit for Future Stock Subscription
On September1, 2006, the BOD approved the conversion of advances from Orion Brands
International, Inc. (OBII) amounting to P
=10.0 million into deposit for future stock subscription.
10. Related Party Transactions
Parties are considered to be related if one party has the ability to control, directly or indirectly, 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.
In the ordinary course of business, the Company entered into transactions with related parties
consisting of noninterest-bearing advances with no fixed payment terms and are due and
demandable.
Account balances with related parties are as follows:
Amount owed by related parties:
Lepanto Ceramics, Inc. (LCI)
FLT Prime Insurance Corporation
22ban Marketing, Inc.
2007
2006
P
=36,173,424
126,500
–
P
=36,299,924
=7,116,848
P
126,500
101,045
=7,344,393
P
OMI is also engaged in the distribution and marketing of Ceramic tiles. OMI sourced its product
=164.8 million and
from LCI, a related party. Total purchases from LCI amounted to P
=6.4 million in 2007 and 2006, respectively.
P
Amounts owed to related parties:
OBII
OEHI
Orion Solutions, Inc.
POPI
Tutuban Properties, Inc.
Orion Property Development, Inc.
2007
2006
P
=47,749,878
35,243,514
25,037,061
10,122,128
802,687
40,711
P
=118,995,979
P–
=
13,500,000
683,971
596,480
809,658
3,804
=15,593,913
P
All the companies mentioned above are subsidiaries of POPI, the ultimate parent company.
Key Management Personnel Compensation
Compensation of key management personnel of the Company, including retirement and other
benefits, amounted to P
=3,160,271 and P
=2,576,037 in 2007 and 2006, respectively.
*SGVMC406406*
- 16 -
11. Cost of Sales and Services
Tile sales
Merchandise and handling services
Services
2007
P
=155,470,970
3,289,211
856,102
P
=159,616,283
2006
=5,588,312
P
182,550
625,458
=6,396,320
P
2007
P
=9,997,306
863,374
558,600
396,903
304,528
268,084
259,390
191,523
170,269
160,000
159,449
101,702
545,010
P
=13,976,138
2006
=4,557,091
P
157,234
143,208
274,589
52,880
18,611
125,208
71,775
52,468
170,725
125,648
39,937
332,189
=6,121,563
P
2007
P
=8,790,650
812,607
394,049
P
=9,997,306
2006
=3,294,724
P
196,691
1,065,676
=4,557,091
P
12. General and Administrative Expenses
Personnel costs (see Note 13)
Rent (see Note 16)
Communications
Transportation and travel
Taxes and licenses
Membership fees and dues
Depreciation and amortization (see Note 7)
Entertainment, amusement and recreation
Supplies
Professional fee
Utilities
Contracted services
Miscellaneous
13. Personnel Costs
Salaries and wages
Other employee benefits
Retirement expense (see Note 14)
14. Retirement Plan
The Company has unfunded noncontributory retirement plan covering all its regular employees.
The plan provides for retirement, separation, disability and death benefits to its members. The
normal retirement benefit is based on a percentage of the employees’ final monthly salary for
every year of credited service.
*SGVMC406406*
- 17 -
The latest independent actuarial valuation of the plan was as of August 10, 2007 using the
projected unit credit method in accordance with PAS 19.
The following tables summarize the funded status and amounts recognized in the balance sheets,
and the components of the net benefit expense recognized in the statements of income for the
retirement plan:
2006
2007
Benefit liability:
Unfunded obligation
Unrecognized actuarial gains
Unrecognized transitional liability
Net retirement expense:
Current service cost
Interest cost on benefit obligation
Transitional liability recognized in year
Past service cost - vested benefits
P
=3,175,970
(1,384,804)
(159,536)
P
=1,631,630
=1,470,413
P
6,473
(239,305)
=1,237,581
P
2007
2006
P
=152,536
161,745
79,768
–
P
=394,049
=129,263
P
58,141
79,768
798,504
=1,065,676
P
2007
P
=1,237,581
394,049
P
=1,631,630
2006
P171,905
=
1,065,676
=1,237,581
P
2007
P
=1,470,413
1,391,276
161,745
152,536
–
P
=3,175,970
2006
=484,505
P
–
58,141
129,263
798,504
=1,470,413
P
Movements in the benefit liability are as follows:
Beginning balance
Benefit expense
Ending balance
Changes in the present value of obligation (PVO):
PVO at beginning of year
Actuarial loss
Interest cost on benefit obligation
Current service cost
Past service cost - vested benefits
The principal assumptions used to determine pension for the Company are as follows:
Discount rate
Expected return on assets
Salary increase rate
2007
8.00%
9.00%
7.00%
2006
12.00%
9.00%
8.00%
*SGVMC406406*
- 18 -
Amounts for 2007 are as follows:
Defined benefit obligation
Change in actuarial assumption
Experience adjustment on plan liabilities
=
P1,631,630
1,128,517
262,759
15. Income Taxes
Provision for current income tax in 2007 and 2006 pertains to regular corporate income tax.
The reconciliation of income tax computed at the statutory tax rate to provision for income tax
follows:
2007
At statutory income tax rates of 35%
in 2007 and 34% in 2006
Additions to (reductions in) income tax
resulting from:
Unrecognized deferred income tax assets
Nondeductible expenses
Unallowable EAR
Interest income subjected to final tax
Application of NOLCO
Application of MCIT
P
=1,086,409
185,150
35,366
–
(94,762)
(861,174)
(124,043)
P
=226,946
2006
(P
=870,676)
949,879
–
531
(6,502)
–
–
=73,232
P
As of June 30, 2007 and 2006, deferred income tax assets have not been recognized on the
following deductible temporary differences because management believes that it is no longer
probable that sufficient taxable income and tax liabilities will be available to allow or part of the
deferred income tax assets to be utilized.
Accrued retirement
Unrealized foreign exchange loss
Allowance for probable losses
MCIT
NOLCO
2007
P
=1,631,630
151,559
79,291
–
–
P
=1,862,480
2006
=1,237,581
P
16,608
79,291
124,043
2,460,497
=3,918,020
P
2007
P
=2,460,497
–
(2,460,497)
P
=–
2006
=8,254,490
P
1,496,090
(7,290,083)
=2,460,497
P
The following are the movements in NOLCO and MCIT:
NOLCO
Beginning balance
Additions
Expiration/Application
Ending balance
*SGVMC406406*
- 19 -
MCIT
Beginning balance
Additions
Applications
Ending balance
2007
P
=124,043
–
(124,043)
P
=–
2006
=50,811
P
73,232
–
=124,043
P
Republic Act (RA) No. 9337 was enacted into law amending various provisions in the existing
1997 National Internal Revenue Code. Among the reforms introduced by the said RA, which
became effective on November 1, 2005, are as follows:
•
•
•
•
•
Increased the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Granted authority to the Philippine President to increase the 10% VAT rate to 12%, effective
January 1, 2006, subject to compliance with certain economic conditions;
Revised invoicing and reporting requirements for VAT;
Expanded scope of transactions subject to VAT; and
Provided thresholds and limitations on the amounts of VAT credits that can be claimed.
On January 31, 2006, the Bureau of Internal Revenue issued Revenue Memorandum Circular
No. 7-2006 increasing the VAT rate from 10% to 12% effective February 1, 2006.
In November 2006, RA 9361 was enacted, repealing the thresholds on the amount of VAT credits
that can be claimed.
16. Lease Commitment
The Company leases its office space for a period of five years until April 2007. On May 29, 2007,
the Company renewed its contract for a period of three years from April 15, 2007 to
April 14, 2010. Rent expense charged to operations amounted to P
=863,374 and P
=157,234 in 2007
and 2006, respectively (see Note 13).
Rental deposit is included in the “Other noncurrent assets” account in the balance sheets amounted
to P
=399,187 and P
=151,248 as of June 30, 2007 and 2006, respectively.
Future minimum rentals payable under non-cancellable operating lease as of June 30, 2007 and
2006 follows:
Within one year
After one year but not more than two years
2007
P
=1,733,803
3,106,397
P
=4,840,200
2006
=468,865
P
–
=468,865
P
*SGVMC406406*
- 20 -
17. Financial Risk Management Objectives and Policies
Financial Risk Management Objectives and Policies
The Company’s principal financial instruments are cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and amounts owed to and by related parties. The main
purpose of the Company’s financial instruments is to fund its operations. The main risks from the
use of financial instruments are liquidity risk, interest rate risk, foreign currency risk and credit
risk.
Liquidity risk
In the management of liquidity, the Company monitors and maintains a level of cash and cash
equivalent deemed adequate by the management to finance the Company’s operations and mitigate
the effects of fluctuations in cash flows.
Interest rate risk
The Company obtains additional financing through bank and related party borrowings. The
Company’s policy is to obtain the most favorable interest rates available without increasing its
foreign currency exposure.
Foreign currency risk
The Company’s foreign currency risk result primarily from movements of the Philippine peso
against the US Dollar.
Credit risk
The Company establishes credit limits at the level of the individual borrower, corporate
relationship and industry sector. It also provides for credit terms with the consideration for
possible application of intercompany accounts between affiliated companies. Also, the Company
transacts only with affiliated companies, hence, there is no requirement for collateral.
Receivable balances are monitored on an ongoing basis with the result that the Company’s
exposure to bad debts is not significant. Provision for bad debts will also be made if the situation
so warrants subject to the BOD’s review and approval.
Fair Values
The Company has determined that the carrying amounts of its financial instruments, based on their
notional amounts, reasonably approximate their fair values because these are mostly short-term in
nature.
*SGVMC406406*
`