2007 Business Outlook - Chemical Industries of the Philippines

Transcription

Table Of Content
2006 Report on Operations ……………………………..
2007 Business Outlook …………………………………...
Statement of Management’s Responsibility ………...
For Financial Statements
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Consolidation Report
¾ Independent Auditors’ Report ……………….…….
¾ Balance Sheets ……………………………………….
¾ Statements of Income ……………………………….
¾ Statement of Changes in Stockholders’ Equity….
¾ Statements of Cash Flows …………………………..
¾ Notes to Financial Statements ……………………..
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Parent Company
¾ Independent Auditors’ Report ……………….…….
¾ Balance Sheets ……………………………………….
¾ Statements of Income ……………………………….
¾ Statement of Changes in Stockholders’ Equity…
¾ Statements of Cash Flows …………………………..
¾ Notes to Financial Statements ……………………..
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Board of Directors and Officers ………………….……..
CIP Management Support Services Group ……..……
Corporate Directory …………………………………..…..
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CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC.
2006 Annual Consolidated Report on Operations
In 2006, the Consolidated Gross Revenues of Chemical Industries of the Philippines,
Inc. (CIP) is PhP 479.43 million. This is 45% lower than the PhP 864.18 million
Consolidated Gross Revenues earned in 2005.
The Company realized a Consolidated Net Income from Operations of
PhP 32.65 million. This is a turn-around as the Company incurred a loss of
PhP 136.04 million in 2005.
CIP’s Subsidiaries: 2006 Performance Highlights
CAWC, INC.
The year 2006 was another low performance year for CAWC.
Net Sales generated in 2006 was only PhP 165.35 million versus the PhP499.34 million
in 2005. Net Loss of the Company in 2006, however, was reduced to PhP 74.28 million
versus the PhP 141.19 million Net Loss in 2005.
STPP, CAWC’s main product, continues to be threatened by stiff competition from
imports. Sales volume continued its downward trend, dropping by a significant 64.32 %,
compared to the sales performance in 2005.
Although the year 2006 was expected to be another difficult year, there was general
sentiment that market conditions would improve leading to a possible “turn-around” from
a depressing performance in 2005. The raised hopes were to come from the initiatives
taken towards the end of 2005. These were as follows:
•
The Company’s petition with the Department of Trade & Industry (DTI) for a
Safeguard Measure to put a stop to the surge and snowballing of STPP
importations. Safeguard Measure is a safety net provided by RA 8800 other wise
known as “Safeguard Measure Act” and recognized by the WTO Agreement on
Safeguards.
•
The continuation and the completion of the early retirement program that would
result in lower manpower costs. Additionally, the ensuing work force that will be
formed is expected to be better, more efficient, and more cost-effective.
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Early Retirement Initiative
As a consequence of the early retirement program initiated in 2005, the manpower
complement in operations went down from a total of 54 people to only 10 by the end
of 1st quarter of 2006. The entire workforce was either retrenched or retired.
However, the five (5) top managers were retained as consultants to preserve the plant
and processes expertise. Another four (4) managers and a technical assistant were
retained as regular employees comprising the “interim workforce” currently
managing the day-to-day operations of the plant.
Safeguard Measure Petition
DTI finally completed its study and preliminary evaluation of CAWC’s petition for a
safeguard measure. In July 2006, DTI came out with a positive ruling granting
CAWC a provisional safeguard measure of PhP14.15/kg to be imposed on
importations of STPP. The tariff would be in the form of a cash bond due and payable
upon release of goods from the Bureau of Customs.
The imposition of the provisional safeguard measure on imported STPP was in place
for 200 days from July 2006. During this period, the Tariff Commission also
conducted its formal investigation to finally determine whether a definitive general
safeguard measure is justified to be imposed on imports of STPP.
The provisional safeguard measure, however, proved to be ineffective in putting a
stop to the massive entry of imported STPP and in improving the sales of CAWC.
From the data provided by NSO, there were 12,792.6 MT of imported STPP which
entered the domestic market in 2006, cornering more than 70% of the total Philippine
demand for the product, not counting the rampant technical smuggling, the effect of
which could not be measured through official customs’ documents or publications.
Even with the provisional safeguard measure in place, some detergent manufacturing
companies still opted to import STPP and pose the bond rather than buy locally. They
also found ways of skirting the measure by sourcing STPP from countries that are not
covered by the provisional safeguard measure.
With the provisional safeguard measure in place, CAWC focused its attention to the
Tariff Commission’s formal investigation to ensure getting a positive determination
that the imposition of a definitive safeguard measure is justified. The long process of
the formal investigation started in July 2006. Tariff Commission was expected to
come out with its findings and recommendations before the 200-day provisional
safeguard measure expires in February 2007.
As update, in January 2007, the Tariff Commission concluded its investigation and
favorably recommended that the imposition of a definitive safeguard measure on
imported STPP is justified. The Commission, in its report, recommended a definitive
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safeguard measure of PhP 12.70/kg, slightly lower than the provisional safeguard
measure provided by the DTI.
Typhoon Milenyo
The typhoon Milenyo that hit the country in September 2006, wreaked havoc on
CAWC’s plant manufacturing facilities in Pasig. The typhoon caused significant
damages to infrastructure, major machinery & equipment and finished products.
MANUFACTURING
Production throughout 2006 was erratic. Since the plant was forced to shut down in
November 2005, it has not resumed normal activity. The plant operated only when there
were specific orders from customers. The continuous supply of the major raw materials
and other production utilities therefore, were affected due to strained working capital.
Finished product phosphoric acid TG imported from China was used throughout the year
to produce STPP. This was a shift from the combined use of merchant grade phosphoric
acid (MGPA) and Yellow Phosphorus (P4) in 2005.
As mentioned earlier, production run was managed by the “interim workforce” composed
of 4 shift managers, technical assistant and 5 consultants with the support of contract
labor from contractual service companies.
There was major improvement in the area of Company’s expenses. Manufacturing
overhead (excluding depreciation) improved by an encouraging 59.86% totaling
PhP 32.37 million compared to the PhP 80.64 million in 2005. The reduced
Manufacturing Overhead in 2006 was mainly due to two reasons: (1) the lower
production activity caused by low sales and, (2) the full implementation of a labor cost
restructuring program via the completion of the early retirement program initiated in
2005. General and Administrative expenses were also reduced by a significant 15%
compared to the year before. Gross contribution to partly cover overhead came mostly
from the sales of Phosphoric Acid Food and Technical Grades.
In October 2006, another research and development breakthrough was accomplished by
CAWC. With some modifications in the process, the plant was able to make hydrated
STPP, a new variant more acceptable in the production of powder detergents.
Commercial quantity was successfully produced and made available to a Filipino-owned
detergent producer beginning November 2006.
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SALES & MARKETING
STPP Technical Grade
In 2006, CAWC’s sales of STPP TG to detergent companies dropped considerably.
Sales volume was only 33% of the volume of sales generated in 2005.
Entry of imported STPP into the country at depressed prices dominated the supply.
Official records on imports, however, show that volume of STPP imports slowed
down by 37.4% at 12,792.6 MT in 2006 from the high of 20,439.9 MT in 2005. China
remained as the biggest source with 29.6% share. Other sources of imported STPP in
2006 were Spain, Thailand, Vietnam, Russia, Tunisia, and Belgium. Note that to
avoid the imposition of the provisional safeguard measure, STPP importers brought in
product from countries excluded from the imposition of the safeguard measure such
as Tunisia, Korea, and Thailand.
Prices of imported STPP remained low in 2006, ranging from a low of US$545/MT
CFR to a high of US$ 664/MT CFR.
Due to the reduced anti-dumping duty imposed on Chinese STPP, imports from
China continued to be disturbingly high. Meanwhile, China’s prices continued to be
unfairly low. With the disparity against parity prices, CAWC found it difficult to
compete against imported STPP. Additionally, technical smuggling, which kept
prices of STPP at depressed level, was a perennial occurrence.
In 2006, CAWC’s average price of STPP was 7% lower than the average price in
2005.
It is important to note that CAWC’s STPP were sold mainly to the Filipino detergent
manufacturing companies.
Phosphoric Acid Food & Technical Grade
Sales volume of Phosphoric Acid Food Grade was 76% higher in 2006 than in 2005.
CAWC was able to regain the acid supply business of a multinational company over
other international suppliers through an international bidding process conducted by its
Atlanta (USA) office in December 2005. The supply was awarded to CAWC in
January 2006. Sales in terms of value from Phosphoric Acid Food Grade were 26%
better than 2005.
Sale of Phosphoric Acid Technical Grade did not perform well due to stiff
competition coming from imported product from China.
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STPP / TSPP Food Grade
Sale of STPP/TSPP Food Grade was likewise affected by the on and off operation of
the plant. CAWC, however, continued to supply the requirements of Purefoods,
Jollibee, and the rest of the market despite competition from imported products.
The year ended with lower sale of STPP/TSPP Food Grade at only 44.79% of sales in
2005.
LMG CHEMICALS CORP.
LMG’s Consolidated Results of Operations:
The Consolidated Net Income of LMG in 2006 is PhP 27.2 million. This represents a
254% increase over the 2005 Net Income of PhP 7.7 million.
The Consolidated Gross Revenues in 2006 is PhP 308.7 million, 15% lower than the
PhP 362.4 million Gross Revenue in 2005.
LMG’s Stand-alone Operations:
In 2006, as a stand-alone company, from its own operation, LMG earned
PhP 17.7 million net profit after tax. This represents another major accomplishment, as
the increase over last year’s PhP 1.4 million is a stunning 1150%.
PASIG OPERATIONS
Manufacturing
The combined production output of the sulfuric acid and detergent sulfur plants for
2006 was 19.8% lower than last year’s production output.
Sulfuric Acid
In 2006, sulfuric acid production output dropped by 8% compared to that of 2005.
The acid plant operated at production rates which allowed it to generate enough
power to meet its internal requirements including the supply of power to its
sulfuric flaking plant and plant auxiliaries.
Production efficiency of the sulfuric acid plant continued to be high in 2006
resulting into a significant positive variance of PhP 3.4 million for the year.
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Detergent Sulfur Flaking
The production output of the Detergent Sulfur Flaking Plant (DSP) was 13%
lower than the 2006 budget. Export of sulfur flakes was limited to LMG’s
customers in Vietnam.
The continued efforts to reduce costs were effective as manufacturing overhead
was reduced by a significant 16%. Cost reduction activities include streamlining
of operational procedures to enhance efficiencies and improvement in the
scheduling of shutdowns/startups.
Sales and Marketing
Overall Volume Performance – Sales volume performance for the year is 2%
higher than last year. However, this is still 15% lower than sales budget for 2006.
Sulfuric Acid Technical Grade – Sales volume of Sulfuric Acid Technical
Grade in 2006 increased by a significant 23.1% over that of 2005, largely due to
recovery of market share.
Sulfuric Acid Chemically Pure – Similarly, Sulfuric Acid Chemically Pure or
CP exhibited better performance in 2006. Sales volume increased by 42%
compared to last year. However, CP sales volume was only 86% of budget.
Oleum – Oleum sales remained strong in 2006. The expected shift of raw
material from oleum to molten sulfur of LMG’s major oleum customer did not
materialize in 2006. As a result, sales volume was 192% of the year’s budget.
This is, however, 26% lower than sales performance in 2005.
Detergent Sulfur – Detergent sulfur sales in 2006 dropped from the previous
year’s volume by 38.8%. This was mainly due to lower molten sulfur supply. As a
result, export sales of sulfur flakes dropped by 19.9% in 2006 compared to last
year.
Traded Molten Sulfur – The volume of traded molten sulfur in 2006 compared
to 2005 increased by a significant 64.4%.
Strategic Material Purchasing
Sulfur Supply – In 2006, Pilipinas Shell continues to be LMG’s major supplier of
sulfur.
The limited supply of molten sulfur prevented the Company from expanding its
export market.
The average cost of molten sulfur however, increased by 58.56% in 2006.
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BATANGAS OPERATIONS
San Pascual
The Polymerization Plant equipment and spares were sold through auctions held
during the year resulting in sales proceeds amounting to PhP 3.6 million. The
remaining minor plant equipment and spares which were not sold during the auctions
are scheduled to be disposed off through another bidding process in 2007.
Pinamucan Bulk Chemical Terminal (PBCT)
Utilization of storage tanks in the tank farm in Pinamucan was reduced to 89% from
May to December 2006 due to the termination of the lease contract for the tank of
Basic Chemical Solutions (BCS). Revenues from tank rental decreased by 8.8% in
2006 compared to 2005. Revenues from throughput charges, however, increased by
10.4% in 2006 versus 2005, despite the decrease of 16.5% in the volume of shipments
handled in 2006 compared to 2005.
The two (2) tanks transferred from San Pascual were commissioned in 2006. The
tanks received the first shipment on 03 May 2006. This recovered part of the lost
revenues in 2006 due to the termination of BCS’ lease contract.
LMG’S SUBSIDIARIES
Kemwater Phil. Corp. (KPC)
KPC in 2006 registered a new record in Gross Sales Revenues at PhP153.5 million,
an increase of 17% compared to last year. Net Income for the year at PhP 10.7 million
grew by a significant 76% from 2005 level.
Efficiencies in plant operations improved further in 2006 as expenses continued to
decline by 3% versus 2005. Better operating practices are in place and performance
standards have been upgraded. As a result, plant downtimes and the production offspec products declined. Efforts for the improvement and building the skill level of the
plant organization continued. Despite a very lean organization, people were
responding positively to more responsibilities.
KPC has achieved the internationally accepted quality standard for its product. The
alumina content is now set at the international standard of 17% which is now the
Company’s standard for its alum products.
Total sales volume increased by 7% in 2006 over that of 2005. The growth was due
mainly to one of KPC’s key clients’ increasing the capacity of its old plant and the
starting up of its second plant. KPC also continued to deliver on the liquid alum
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supply contracts won in 2005 with Manila Water and Maynilad Water. Actual sales
volume for liquid alum, however, dropped by 5% versus last year, as the actual usage
of Manila Water in 2006 was very low due to overall good water turbidity and the
maximized use of raw water from the La Mesa. On another solid alum variant, sales
volume decreased by 32%. Main factors for the decrease are: a major dealer of KPC
decided to put up its own alum plant, the increase in the volume of alum imports, and
the entry of specialty chemicals for specific raw water conditions.
CHEMPHIL MARKETING CORP. (CMC)
CMC is another company which is 100 %-owned company by LMG. It is the trading
arm of LMG which trades liquid caustic soda (LCS) in the domestic market. It
sources its LCS from Basic Chemical Solutions (BCS) of Singapore.
In April 2006, the Agency Agreement between LMG and BCS expired and this was
no longer renewed. Hence, CMC only traded LCS in the period January-April 2006.
Despite the shortened period of only four (4) months to trade in 2006, CMC’s LCS
sale volume in 2006 only dropped by only 19.4% compared to the whole year trading
period of 2005.
PERFUMERIA ESPAÑOLA CORPORATION
For the year ending 2006, Perfumeria Española Corporation (PEC) recorded Gross
Revenues of PhP 86.14 million, a 7% rise from last year’s PhP 80.31 million.
The 10% climb in Cost of Sales was brought about by two factors - a rise in toll charges
and prices of packaging materials which pushed Cost of Sales by 7%, and a 3% increase
in sales volume.
An increase in price could have offset the rising Cost of Sales. However, a price increase
during the year would have been untimely as major competitors were holding their prices
at constant levels. A push in prices would have widened the gap between Heno products
and that of competitors, a move which may have rendered Heno uncompetitive in the
toilet soap market.
Net Income before and after taxes were both encouraging. Net income after tax was
PhP 6.61 million, up by 23%, a marked improvement from last year’s PhP 5.38 million.
Income before tax grew by 31%, from PhP7.66 million in 2005 to PhP 10.03 million in
2006. This translates to a 25% gain vis-à-vis budget. The marked improvement in the
Company’s bottom line was primarily due to the more efficient and focused promotions
and advertising campaigns, the cost of which was kept at 10% of sales, slightly below the
budget of 14%.
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Sales and Marketing
For 2006, sales revenues inched up by 7% but still fell short of target by 18%. The
shortfall may be attributed to the following:
1. Sales of Heno de Pravia soap was below budget in tons by 11%, mainly
because of SKUs decline in the 90 gram, skin whitener, and 25 gram soaps
2. The combined sales of PEC’s imported line that includes Barbie, Maja and
Vaselina GAL also fell short of budget by PhP 10.8 million. The presence of
local and foreign substitutes has made our target customer conscious about
both quality and cost.
The products that contributed to the sales growth were Heno de Pravia 135 gram and 180
gram soaps, the promotional packs and the brand DENENES, its baby cologne. Denenes’
contribution to the Company’s overall sales performance in 2006 was remarkable. It is
worth mentioning that Denenes was launched only in 2006, but in spite of that, it was
able to contribute a significant 11% to PEC’s business.
BUSINESS UNITS WITHIN THE CIP CORPORATE ORGANIZATION
OFFICE LEASING
In 2006, the Office Leasing Division continues to report relatively good performance.
The occupancy rate of the Chemphil Building in 2006 was 87%, up from 81% in 2005.
The increase was due to intensive marketing of vacant leasable spaces. The Ground and
Third Floors were fully leased by new tenants by the end of the year. The 8th Floor,
formerly used as function area by the Chemphil Group, was occupied by a new tenant by
the middle of the year. The new tenant occupies only 55% of the total floor area as the
balance is used as Canteen. The Second Floor remains unoccupied in 2006, though the
Leasing Division continues its efforts to offer this area. A draft space lease contract for
the Second Floor has been forwarded to a possible tenant for their review.
In 2006, another survey of rental rates was conducted in the vicinity where the Chemphil
Building is located to keep abreast of competition. The survey results showed that CIP’s
rental rates are still comparative and competitive with the other buildings of the same
type and age for lease in the area.
In 2005, in an effort to remain competitive, a 20% prompt payment discount was offered
to building tenants who paid rentals on the first day of each month. This discount
payment was maintained in 2006 and most of the tenants continued to avail of this offer.
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The Division maintained the overhead expenses in 2006 at the same level as 2005,
comprising mainly of preventive maintenance expenses. Major projects which require
capital expenditures were deferred in view of the financial strain still being experienced
by the Company. Some equipment however, has been updated and/or replaced. The cost
reduction measures to save on energy, power, and water consumption continued. Despite
the cost-cutting measures, however, the Division has kept the building relatively well
maintained.
The Management continues to look into other projects and developments related to
leasing and property developments for the growth and expansion of the Division.
CIP as Shared Services Provider
In 2006, the Management Support Services Organization (MSSO) continued to provide
services to support the business strategies of the Chemphil Group.
MSSO, through its Management Control and Information Systems Services Division
(MCISS) ensures that systems remain compliant with business and regulatory
requirements. Business enterprises cannot ignore the competitive forces of globalization.
Critical to achieving this, companies continuously find ways to stay lean and efficient.
Ultimately, information technology (IT) has become indispensable to helping companies
become competitive in this global economy.
In 2006, the MCISS was faced with pressing challenges and inevitable changes in the
organization. As a result of the Company’s continuing efforts to right size the
organization, MCISS manpower was reduced by almost 50%. In spite of this, operations
were not disrupted. The remaining IT staff ensured that systems and tasks were properly
turned over and systems’ documentations were updated. Besides, they optimized their
capabilities by expanding job scopes and accepting multiple roles and responsibilities.
The Division also took part in cost optimization, cash conservation and revenue
generating programs. Inventory related forms were standardized. Service functions have
been streamlined and consolidated. In-house trainings on productivity tools were
conducted. To increase its revenue, the IT group extended their services to an external
company by customizing HR application systems.
Computerized systems were maintained and updated. Several legacy DOS-based systems
were modified and migrated to Windows environment. There were some key changes in
the area of computerized systems, such as:
1. Consolidation of books of accounts of LMG Pasig and Batangas Operations as
well as Management and Investments Divisions of CIP, to simplify and expedite
the preparation of financial reports and processing of allocated expenses.
2. Full compliance on revenue regulations under reformed VAT law.
3. Consolidation template for Activity-based Cost (ABC) billing
4. Implementation of e-AWRIA (Approved Work Rendered in Advance)
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The Division continually improved and polished its own systems and procedures. Work
simplification programs such as PC Asset Tracking, e-CSR, MIS Billing system, AS/400
operations and other monitoring systems were developed to reduce the burden on the IT
department.
In order to grow and adapt to shifting business requirements, MCISS evaluated
Enterprise Resource Planning (ERP) systems and assessed existing IT hardware
infrastructure. The IT team also attended training seminars to improve its knowledge and
services.
2007 Business Outlook
CAWC, INC.
In view of the positive determination of the Tariff Commission (Commission) and with
subsequent recommendation of the Commission to the DTI that the imposition of a
definitive safeguard measure is justified, the Management of CAWC remains confident
that DTI will issue an Order adopting the Commission’s recommendation.
In the meantime, the Company will continue with the on-going negotiations with a major
multinational detergent company for a two-year STPP supply agreement.
The Company is committed to implement the planned reduction programs contained in
the Adjustment Plan submitted by CAWC to the Tariff Commission during the formal
investigation of the Safeguard Measure petition. In addition, the Management will
continue its efforts to cut down on manufacturing expenses, cost of raw materials,
utilities such as fuel usage and general and administrative expenses. Plans are being made
to immediately implement the change in fuel and usage, as these are major cost
components.
With these in place, the Management of CAWC remains hopeful that the company’s
performance will dramatically improve in 2007.
LMG CHEMICALS CORP.
The coming year will remain to be difficult and challenging for LMG.
While there was a slight recovery in market share in 2006, LMG is challenged to increase
its sales volume to at achieve, at the very least, breakeven in 2007.
Cost reduction and organizational re-structuring projects will be vigorously pursued to
bring down manufacturing overhead expenses. A management control system for plant
operating and overhead expenses shall be implemented to further ensure the effective
control of expenses in the plant operations.
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LMG will continue its partnership with Pilipinas Shell as its regular supplier of molten
sulfur. It will endeavor to secure other sources to complement the supply from Pilipinas
Shell.
The two (2) remaining storage tanks acquired from Napocor are being offered to
prospective lessees.
Thus, with the implementation of the strategies and major programs as reflected in the
Business Plan for 2007, LMG expects to improve its performance in 2007.
LMG’S Subsidiaries
Kemwater Phil. Corp.
The year 2007 presents more challenges as well as opportunities for KPC. In
manufacturing operations, there is still room for improvement in terms of increasing
production output and further reducing direct costs.
A more pressing concern for the Company is the significant increase in the volume of
alum imports from China at very competitive prices which could affect KPC’s
market. Other concerns include the entry of specialty chemicals for water treatment as
well as the recurring uncertainty of sulfuric acid supply. Note however, that KPC has
identified an alternative supply of sulfuric acid.
The opportunities for growth in sales volumes and incomes still abound. Demand for
solid alum is expected to at least maintain last year’s high level. There is huge
possibility of getting supply contracts with major utilities, given KPC’s more
competitive position. The expected improvements in the prices of the major raw
material, aluminum hydroxide, and a sustained peso would allow KPC to price its
products more competitively.
KPC management has high hopes in the trading of polymers, as the steps taken to
introduce the new product in the market have been encouraging.
Chemphil Marketing Corp. (CMC)
In the light of the expiration of the Agency Agreement with BCS in April 2006, the
objective of the Company for 2007 is to secure an agency agreement with other
chemical traders. The business plan includes the expansion of product lines in 2007 in
order to generate additional revenues for the trading business. The Company is now
negotiating with prospective suppliers for the possible trading of Vinyl Chloride
Monomer (VCM), acetic acid, linear alkyl benzene (LAB) and glycerin.
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PERFUMERIA ESPAÑOLA CORPORATION
The year 2007 poses various challenges for PEC. These are:
1. The Category Management (CATMAN) practice in the major retail trade will
make it more difficult for small and medium sized companies to get a fair share of
the shelf space for their products. The big players will dominate the major outlets,
with the volume and variety of their product offerings, backed up by financial
resources. Small players like Heno will find it more difficult and costly to
merchandise its products.
2. The distribution channels, particularly the major retail outlets will continue to
wield considerable power over suppliers. The unilateral terms and conditions
imposed by the retail outlets such as listing fee, anniversary and store opening
support etc. will make it doubly hard and expensive to get new products into
stores shelves.
3. The competition posed by substitutes, both local and foreign may eat up on
Heno’s market share. In addition to staple competitors such as P&G and Unilever,
inexpensive soaps from countries such as Indonesia, Malaysia and India are
increasingly attractive options to customers. The decline in the purchasing power
of the Filipino consumer, his preference for imported brands, and the impact of
globalization are all realities that must be faced not only in 2007 but also in the
coming years.
The Company however, has lined up plans and programs for 2007 to minimize the threats
looming in the business environment. PEC will undertake strategies central to its growth
and profitability. These are reflected in the Company’s Business Plan for 2007.
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Statement of Management’s
Responsibility for Financial Statement
The Management of Chemical Industries of the Philippines, Inc. is responsible for all
information and representations contained in the financial statements as of December 31,
2006 and 2005 and for the years ended December 31, 2006 and 2005. The financial
statements have been prepared in accordance with Philippine Financial Reporting
Standards and reflect amounts that are based on the best estimates and informed
judgment of Management with an appropriate consideration to materiality.
In this regard, Management maintains a system of accounting and reporting which
provides for the necessary internal controls to ensure that transactions are properly
authorized and recorded, assets are safeguarded against unauthorized use or disposition,
and liabilities are recognized. The Management likewise discloses to the Company’s
Audit Committee and to its external auditor: (1) all significant deficiencies in the design
or operation of internal controls that could adversely affect its ability to record, process,
and report financial data; (2) material weaknesses in the internal controls; and (3) any
fraud that involves Management or other employees who exercise significant roles in
internal controls.
The Board of Directors reviews the financial statements before such statements are
approved and submitted to the stockholders of the Company.
SyCip, Gorres, Velayo & Co., the independent auditors appointed by the stockholders
and the Board of Directors has examined the financial statements of the Company in
accordance with Philippine Standards on Auditing and has expressed its opinion on the
fairness of the presentation upon completion of such examination, in its report to the
Board of Directors and Stockholders.
ANA MARIA G. ORDOVEZA
President and Chief Executive Officer
JAIME Y. GONZALES
Treasurer and Chief Financial Officer
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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
Chemical Industries of the Philippines, Inc.
Chemphil Building, 851 A. Arnaiz Avenue
Legaspi Village, Makati City
Report on the Financial Statements
We have audited the accompanying financial statements of Chemical Industries of the Philippines,
Inc. and subsidiaries, which comprise the consolidated balance sheets as at December 31, 2006 and
2005, and the consolidated statements of income, consolidated statements of changes in stockholders’
equity and consolidated statements of cash flows for each of the three years in the period ended
December 31, 2006, 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.
SGV & Co is a member practice of Ernst & Young Global
15
-2We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Chemical Industries of the Philippines, Inc. and subsidiaries as of December 31, 2006 and
2005, and their financial performance and their cash flows for each of the three years in the period
ended December 31, 2006 in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Josephine H. Estomo
Partner
CPA Certificate No. 46349
SEC Accreditation No. 0078-AR-1
Tax Identification No. 102-086-208
PTR No. 0266550, January 2, 2007, Makati City
April 4, 2007
16
CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
2005
2006
ASSETS
Current Assets
Cash and cash equivalents (Note 4)
Receivables - net (Note 5)
Inventories (Note 6)
Due from related parties - net (Note 14)
Other current assets (Note 7)
Total Current Assets
P
=36,640,592
90,279,635
84,955,812
358,096
73,033,069
285,267,204
=20,728,306
P
76,121,670
146,360,585
2,945,111
70,495,461
316,651,133
12,940,101
13,073,499
237,235,868
1,146,673,746
72,360,484
1,469,210,199
P
=1,754,477,403
294,015,882
1,210,408,482
65,628,213
1,583,126,076
=1,899,777,209
P
Current Liabilities
Notes payable (Note 11)
Accounts payable and accrued expenses (Notes 12 and 28)
Liabilities under letters of credit and trust receipts (Note 6)
Income tax payable
Due to related parties (Note 14)
Current portion of long-term debt (Note 13)
Total Current Liabilities
P
=53,650,000
170,474,294
76,815,758
2,658,859
23,419,408
–
327,018,319
P79,600,000
=
211,731,780
109,391,809
683,432
24,239,912
10,481,544
436,128,477
Noncurrent Liabilities
Long-term debt - net of current portion (Note 13)
Accrued retirement benefits payable (Note 19)
Deferred tax liabilities - net (Note 21)
Total Noncurrent Liabilities
Total Liabilities
–
44,594,583
330,357,496
374,952,079
701,970,398
18,900,000
66,727,907
359,205,028
444,832,935
880,961,412
Noncurrent Assets
Investment in an associate (Note 8)
Property, plant and equipment (Notes 9 and 25)
At cost - net
At revalued amounts
Other noncurrent assets (Note 10)
Total Noncurrent Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
(Forward)
17
-2-
Stockholders’ Equity
Equity attributable to the Parent Company stockholders:
Capital stock - =
P10 par value
Authorized - 19,000,000 shares
Issued - 10,296,688 shares (held by 23 equity holders
in 2006 and 2005)
Additional paid-in capital
Net changes in fair value of available-for-sale investments
Revaluation increment in land, net of related deferred tax
(Notes 9 and 15)
Retained earnings (Note 15)
Less cost of 87 shares held in treasury
Minority interest
Total Stockholders’ Equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
2006
December 31
2005
P
=102,966,880
16,621,243
12,210,000
=102,966,880
P
16,621,243
–
444,013,124
256,137,804
831,949,051
870
831,948,181
220,558,824
1,052,507,005
484,770,294
196,095,415
800,453,832
870
800,452,962
218,362,835
1,018,815,797
P
=1,754,477,403
=1,899,777,209
P
See accompanying Notes to Consolidated Financial Statements.
18
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2006
2005
REVENUE
Net sales (Note 26)
Rental (Note 14)
COSTS OF GOODS SOLD (Notes 14, 16 and 26)
P
=475,525,469
3,905,336
479,430,805
480,339,844
2004
=862,321,968 =
P
P1,377,002,771
1,860,746
11,799,519
864,182,714 1,388,802,290
899,074,503
1,256,772,748
(909,039)
(34,891,789)
132,029,542
(90,474,225)
(22,673,532)
146,328,193
33,180,436
(115,944,085)
(29,625,756)
38,906,379
(106,663,462)
(106,183,270)
(27,578,097)
18,833,554
(114,927,813)
32,271,397
(141,555,251)
17,101,729
4,218,773
(9,730,253)
(5,511,480)
6,239,429
9,257,524
15,496,953
NET INCOME (LOSS)
=136,043,771)
P
=32,648,889 (P
P
=1,604,776
Attributable to:
Equity holders of the Parent
Minority interests
=139,377,367)
P
=22,631,900 (P
3,333,596
10,016,989
(P
=17,572,600)
19,177,376
NET INCOME (LOSS)
=136,043,771)
P
=32,648,889 (P
P
=1,604,776
(P
=13.5362)
(P
=1.7066)
GROSS PROFIT (LOSS)
Operating expenses (Note 17)
Interest expense (Note 18)
Other income - net (Note 18)
INCOME (LOSS) BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM) INCOME TAX
(Note 21)
Current
Deferred
BASIC/DILUTED EARNINGS (LOSS) PER SHARE
(Note 20)
11,436,632
(11,814,124)
(377,492)
P
=2.1980
19
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Capital Stock
Equity Attributable to the Parent Company Stockholders
Net Changes
Additional in Fair Values of Revaluation
Paid-in Available-forIncrement in
RetaineTreasury
Capital sale Investments
Land
Earning
Stocks
BALANCES AT DECEMBER 31, 2003
P
=102,966,880 P
=16,621,243
Net unrealized loss in value of investments in
noncurrent marketable securities (Note 10)
–
–
Net loss for the year
–
–
–
–
Total income and expense for the year
(P
=10,815,496) P
=582,880,158 P
=290,733,549
(602,500)
–
(602,500)
–
–
–
–
(17,572,600)
(17,572,600)
(P
=870)
–
–
–
Minority
Interest
Total
Total
Stockholders’
Equity
P
=982,385,464 P
=201,092,486 P
=1,183,477,950
(602,500)
(17,572,600)
(18,175,100)
–
19,177,376
19,177,376
(602,500)
1,604,776
1,002,276
(BEFORE EFFECT OF QUASI
REORGANIZATION)
Quasi reorganization (Note 15)
102,966,880 16,621,243
–
–
(11,417,996)
–
582,880,158 273,160,949
(73,729,829) 73,729,829
(870)
–
964,210,364
–
220,269,862
–
1,184,480,226
–
(AFTER EFFECT OF QUASI
REORGANIZATION)
102,966,880 16,621,243
(11,417,996)
509,150,329
346,890,778
(870)
964,210,364
220,269,862
1,184,480,226
Impairment of available-for-sale
investments (Note 10)
–
11,417,996
–
(11,417,996)
BALANCES AT JANUARY 1, 2005
Effect of change in income tax rates
(Notes 8 and 21)
102,966,880 16,621,243
–
509,150,329
335,472,782
–
–
–
–
–
–
(24,380,035)
–
– (139,377,367)
(24,380,035) (139,377,367)
Appraisal increase
Transfer to retained earnings of portion
of revaluation increment realized
through sale (Note 9)
Changes in fair values of available-for-sale
Total income and expense recognized directly
in equity
Net income for the year
Dividends declared - =
P2.1366 per share
(Note 15)
Cash dividends declared by a subsidiary
102,966,880 16,621,243
–
–
–
–
–
–
–
484,770,294
181,942
18,471,377
196,095,415
–
–
(59,410,489)
59,410,489
–
–
–
–
12,210,000
–
12,210,000
59,410,489
22,631,900
82,042,389
–
–
–
30,863,319
22,631,900
53,495,219
–
10,016,989
10,016,989
–
30,863,319
32,648,889
63,512,208
(22,000,000)
–
–
–
(22,000,000)
–
–
–
–
–
–
(870)
–
–
–
(870)
–
–
–
–
964,210,364
220,269,862
(24,380,035)
(139,377,367)
(163,757,402)
800,452,962
181,942
18,471,377
(5,240,623)
3,333,596
(1,907,027)
218,362,835
–
–
–
–
–
–
–
–
12,210,000
–
–
–
–
–
–
12,210,000
–
12,210,000
–
–
–
–
–
–
P
=102,966,880 P
=16,621,243
–
(40,757,170)
–
(40,757,170)
–
–
P
=12,210,000 P
=444,013,124 P
=256,137,804
(P
=870)
(7,821,000)
–
1,184,480,226
(29,620,658)
(136,043,771)
(165,664,429)
1,018,815,797
181,942
18,471,377
–
(22,000,000)
(7,821,000)
P
=831,948,181 P
=220,558,824 P
=1,052,507,005
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
2006
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Depreciation and amortization (Notes 9, 16 and 17)
Interest expense
Amortization of deferred license fee (Note 26)
Transfers of property, plant and equipment
Loss (gain) on sale of property, plant and equipment
Recovery from Petrocorp investments (Note 10)
Interest income
Equity in net earnings of an associate (Note 8)
Unrealized foreign exchange gain
Dividend income
Reversal of various accrued expenses
Proceeds from sale of nonmoving inventory
Write-off of inventories
Operating income (loss) before working
capital changes
Decrease (increase) in:
Receivables
Inventories
Due from related parties
Other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Liabilities under letters of credit
and trust receipts
Due to related parties
Accrued retirement benefits payable
Cash from (used in) operations
Interest paid
Interest received
Income taxes paid, including creditable withholding
and final tax
Net cash flows from (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (Note 9)
Additions to other investments
Proceeds from sale of:
Property, plant and equipment
Other noncurrent assets
Recovery received from Petrocorp investments (Note10)
Disposals of (additions to) other noncurrent assets
Dividends received (Note 8)
Net cash flows from (used in) investing activities
For Years Ended December 31
2004
2005
(P
=141,555,251)
P
=17,101,729
62,933,909
22,673,532
2,549,475
97,602
(82,182,792)
(31,881,194)
(2,444,053)
(3,238,292)
(4,833,805)
(17,778)
–
–
–
66,664,577
29,625,756
2,549,475
–
(4,712,101)
–
(392,251)
(2,639,061)
(162,840)
–
(4,070,882)
–
7,851,020
66,780,200
27,578,097
2,549,475
246,137
276,577
–
(913,557)
(2,411,753)
(12,825)
–
(8,037,425)
1,220,344
–
(4,071,999)
(46,841,558)
104,376,999
(23,984,091)
61,404,773
27,380,919
2,725,527
83,126,551
3,350,455
2,774,385
(6,872,126)
38,767,287
28,804,359
2,792,708
(4,964,134)
(45,399,628)
(47,172,165)
24,161,056
(32,576,052)
4,898,006
(21,034,014)
(30,656,559)
(24,734,125)
4,127,970
97,070,934
(447,914)
3,191,501
88,180,063
(32,633,894)
2,937,330
(38,411,573)
(1,145,474)
(4,713,831)
149,667,397
(27,438,957)
519,149
(14,918,461)
(66,181,175)
(5,171,410)
53,312,089
(6,186,676)
116,560,913
(6,302,873)
(425,123)
(34,115,506)
–
(67,273,777)
–
8,171,224
–
–
(8,405,646)
3,920,000
(30,429,928)
1,300,000
6,360,788
–
3,774,494
2,940,000
(52,898,495)
P
=32,271,397
138,385,802
8,500,000
31,881,194
5,538,773
17,778
177,595,551
(Forward)
21
-2-
2006
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable
Payments of:
Notes payable
Long-term debt
Dividends declared and paid
Net cash flows used in financing activities
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS
For Years Ended December 31
2004
2005
P
=19,150,000
=20,250,000
P
(45,100,000)
(43,102,780)
(26,449,310)
(95,502,090)
(16,908,913)
(23,182,848)
–
(19,841,761)
=
P–
(20,578,333)
(36,354,688)
–
(56,933,021)
–
146,974
12,825
NET INCREASE IN CASH AND CASH
EQUIVALENTS
15,912,286
3,187,374
6,742,222
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
20,728,306
17,540,932
10,798,710
CASH AND CASH EQUIVALENTS AT
END OF YEAR (Note 4)
P
=36,640,592
=20,728,306
P
=
P17,540,932
22
CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information and Status of Operations
Chemical Industries of the Philippines, Inc. (the Parent Company) and its subsidiaries
(collectively referred to as “the Group”) are incorporated in the Philippines and are primarily
engaged in the manufacture and distribution of industrial chemicals and leasing of office space to
related parties. The registered office address of the Group is Chemphil Building, 851 A. Arnaiz
Avenue, Legaspi Village, Makati City.
Subsidiaries
LMG Chemicals Corporation (LMG) is currently a 73.93%-owned subsidiary of the Parent
Company and has three domestic subsidiaries, Chemphil Marketing Corp. (CMC), Kemwater Phil.
Corp. (KPC) and LMG Land Development Corporation (Landco), a newly formed company which
was incorporated in the Philippines on December 15, 2006.
CMC is engaged, as an exclusive agent, in the sale and distribution of liquid caustic soda and other
industrial chemicals (see Note 28).
KPC is engaged in the manufacture and trade of chemicals such as water and sewage treatment
chemicals, inorganic coagulants for the paper industry and ground alum for the detergent industry.
Landco is engaged to own, use, improve, develop, subdivide, sell, exchange, lease and hold for
investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other
structures.
CAWC, Inc. (CAWC), a 99.67%-owned subsidiary of the Parent Company, is primarily engaged
in the manufacture and sale of industrial chemicals.
CAWC incurred recurring net losses of =
P74,278,404 and =
P141,186,874 for the years ended
December 31, 2006 and 2005, respectively, and, as of those dates, CAWC has reported deficit of =
P
213,919,840 and =
P139,641,436, respectively. These conditions indicate the existence of a material
uncertainty which may cast significant doubt about CAWC’s ability to continue as a going concern
(see Note 28).
The accompanying consolidated financial statements of the Group were authorized for issue by
the Board of Directors (BOD) on April 4, 2007.
2. Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation
The consolidated financial statements are prepared under the historical cost basis, except for
available-for-sale investments that have been measured at fair value and parcels of land classified
as property, plant and equipment, which are carried at revalued amounts. The consolidated
financial statements are presented in Philippine peso, which is the Parent Company’s functional
and presentation currency.
23
-2Statement of Compliance
The accompanying consolidated financial statements 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 year, except that the
Group has made changes in accounting policies resulting from the adoption of the following new
and revised standards and Philippine Interpretation International Financial Reporting
Interpretations Committee (IFRIC) effective beginning January 1, 2006:
•
Amendments to PAS 19, Employee Benefits - Actuarial Gains and Losses, Group Plans and
Disclosures, provides an additional option to recognize all actuarial gains and losses
immediately outside of profit or loss (i.e., in equity). The Group chose not to apply the new
option to recognize all actuarial gains and losses immediately outside of consolidated statement
of income.
•
Amendments to PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts requires 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 hedges of forecast intragroup transactions permits the foreign currency risk of
a highly probable intragroup forecast transaction to qualify as the hedged item in a cash flow
hedge, provided that the transaction is denominated in a currency other than the 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 restricts the use of the option to designate any financial
asset or any financial liability to be measured at fair value through the consolidated statement
of income.
•
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease,
provides guidance in determining whether arrangements contain a lease to which lease
accounting must be applied.
Adoption of the amendments to the accounting standards and interpretation has no effect on the
consolidated financial statements. Additional disclosures required by the revised standards and
interpretation were included in the consolidated financial statements, where applicable.
24
-3-
Future Changes in Accounting Policies
The Group has not applied the following PFRS and Philippine Interpretations which are effective
subsequent to December 31, 2006:
•
PFRS 7, Financial Instruments: Disclosures, and the complementary amendment to PAS 1,
Presentation of Financial Statements: Capital Disclosures (effective for annual periods
beginning on or after January 1, 2007), 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 of PAS 32, Financial
Instruments: Disclosure and Presentation. The amendment to PAS 1 introduces disclosures
about the level of an entity’s capital.
•
PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1,
2009), requires a management approach to reporting segment information. PFRS 8 will replace
PAS 14, Segment Reporting, and is required to be adopted only by entities whose debt or
equity instruments are publicly traded, or are in the process of filing with the Philippine
Securities and Exchange Commission for purposes of issuing any class of instruments in a
public market.
•
Philippine Interpretation IFRIC 7, Applying the Restatement Approach under PAS 29,
Financial Reporting in Hyperinflationary Economies (effective for annual periods beginning
on or after March 1, 2006), provides guidance on how to apply PAS 29 when an economy first
becomes hyperinflationary, in particular the accounting for deferred tax.
•
Philippine Interpretation IFRIC 8, Scope of PFRS 2 (effective for annual periods beginning on
or after May 1, 2006), requires PFRS 2 to be applied to any arrangements where equity
instruments are issued for consideration which appears to be less than fair value.
•
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives (effective for annual
periods beginning on or after June 1, 2006), 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 (effective for
annual periods beginning on or after November 1, 2006), prohibits the reversal of impairment
losses on goodwill and available-for-sale 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
(effective for annual periods beginning on or after March 1, 2007), 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
25
-4-
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 the
subsidiary’s employees receive rights to the equity instruments of the parent.
•
Philippine Interpretation IFRIC 12, Service Concession Arrangements, (effective for annual
periods beginning on or after January 1, 2008), covers contractual arrangements arising from
private entities providing public services.
The effects of the adoption of these standards and interpretations, if any, will be included in the
Group’s consolidated financial statements when these are adopted subsequent to 2006.
Principles of Consolidation
The consolidated financial statements include the accounts of the Parent Company and the
following subsidiaries which are all incorporated in the Philippines:
Subsidiaries
CAWC
LMG
CMC
Landco
KPC
Percentage of
Ownership
99.67
73.93
100.00
100.00
60.00
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease
to be consolidated from the date on which the control is transferred out of the Group. The control
is normally evidenced when the Parent Company owns, either directly or indirectly, more than 50%
of the voting rights of the subsidiary’s share in capital and/or is able to govern the financial and
operating policies of the subsidiary so as to benefit from its activities.
The consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances. Significant intercompany transactions and
balances, including intercompany profits and unrealized gains and losses are eliminated in full.
The equity and net income attributable to minority interests of the consolidated subsidiaries are
shown separately in the consolidated balance sheet and consolidated statement of income,
respectively.
Minority Interest
Minority interest represents the interest in a subsidiary, which is not owned, directly or indirectly
through subsidiaries, by the Company. If losses applicable to the minority interest in a subsidiary
exceed the minority interest’s equity in the subsidiary, the excess, and any further losses applicable
to the minority interest, are charged against the majority interest except to the extent that the
minority has a binding obligation to, and is able to, make good the losses. If the subsidiary
subsequently reports profits, the majority interest is allocated all such profits until the minority
interest’s share of losses previously absorbed by the majority interest has been
recovered.
26
-5-
Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of
three months or less and that are subject to an insignificant risk of changes in value.
Financial Assets and Financial Liabilities
Effective January 1, 2005, financial assets are classified as either financial assets at fair value
through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale
investments, as appropriate. Financial liabilities, on the other hand, are classified as either
financial liabilities through profit or loss or other liabilities, as appropriate. The Group determines
the classification of its financial assets and financial liabilities after initial recognition and, where
allowed and appropriate, re-evaluates this designation at each financial year-end.
Financial assets and liabilities are recognized initially at fair value. Transaction costs, if any, are
included in the initial measurement of financial assets and liabilities, except for any financial
instruments measured at fair value through profit or loss. The Group recognizes a financial asset or
liability in the consolidated balance sheet when it becomes a party to the contractual provision of
the instrument.
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.
All regular way purchases and sales of financial assets are recognized on the settlement date, (i.e.,
the date that the Group commits to purchase the asset). Regular way purchases or sales are
purchases or sales of financial assets that require delivery of assets within the period generally
established by regulation or convention in the marketplace.
Financial assets or financial liabilities at fair value through profit or loss
Financial assets or financial liabilities classified in this category are designated by management
on initial recognition when the following criteria are met:
• The designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets or recognizing gains or losses on them on a different
basis, or
• The assets and liabilities are part of a group of financial assets, financial liabilities, respectively,
or both financial assets and financial liabilities, which are managed and their performance is
evaluated on a fair value basis, in accordance with a documented risk management or
investment strategy, or
• The financial instrument contains an embedded derivative, unless the embedded derivative
does not significantly modify the cash flows or it is clear, with little or no analysis, that it would
not be separately recorded.
27
-6-
Financial assets classified as held for trading are included in the category “financial assets at fair
value through profit or loss”. Financial assets are classified as held for trading if they are acquired
for the purpose of selling in the near term. Derivatives are also classified as held for trading unless
they are designated as effective hedging instruments. Gains or losses on investments held for
trading are recognized in the consolidated statement of income.
The Group has not designated any financial assets or financial liabilities as financial assets or
liabilities at fair value through profit or loss as of December 31, 2006 and 2005.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments
and fixed maturities that are not quoted in an active market. Such assets are carried at amortized
cost using the effective interest rate method. 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. Loans and receivables are included in current assets if maturity
is within 12 months from the balance sheet date. Otherwise, these are classified as noncurrent
assets.
Classified as loans and receivables are the Group’s trade receivables, due from related parties,
receivable from Manila Electric Company (MERALCO) and other long-term receivables.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturities are
classified as held-to-maturity when the Group 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 held to maturity, 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 less allowance for impairment. 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. Assets under this category
are classified as current assets if maturity is within 12 months from the balance sheet date.
Otherwise, these are classified as noncurrent assets.
The Group has not designated any financial assets as held-to-maturity as of December 31, 2006 and
2005.
Available-for-sale investments
Available-for-sale investments are those non-derivative financial assets that are designated as
available-for-sale or are not classified in any of the three preceding categories. After initial
recognition, available-for-sale 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 consolidated statement of income.
Classified as available-for-sale investments are the Group’s investments in club shares and other
proprietary shares (see Note 10).
28
-7-
Other financial liabilities
Other financial liabilities pertain to financial liabilities that are not held for trading or not
designated as fair value through profit or loss upon the inception of the liability. These include
liabilities arising from operations (e.g., payables, accruals) and borrowings (e.g., bank loans, notes
payable).
The liabilities are recognized initially at fair value and are subsequently carried at amortized cost,
taking into account the impact of applying the effective interest method of amortization (or
accretion) for any related premium, discount and any directly attributable transaction costs.
Derecognition of Financial Assets and Financial Liabilities
Financial Assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar
financial assets) is derecognized when:
•
•
•
the rights to receive cash flows from the asset have expired; or
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
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 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.
Financial Liabilities
A financial liability is derecognized when the obligation under the liability is discharged,
cancelled or has expired.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange
or modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in the consolidated
statement of income.
29
-8-
Impairment of Financial Assets
The Group assesses at each balance sheet date whether or not 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 is reduced either directly or through 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 discounted at the current market rate of return
for a similar financial asset.
Available-for-sale Investments
If an available-for-sale 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 consolidated statement of income, is transferred from equity to the
consolidated statement of income. Reversals in respect of equity instruments classified as
available-for-sale are not recognized in consolidated statement of income. Reversals of impairment
losses on debt instruments are reversed through consolidated 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 consolidated statement of income.
30
-9-
Marketable Securities
Prior to January 1, 2005, marketable securities are stated at the lower of the aggregate cost and
market value, determined at the balance sheet date. The amount by which aggregate cost exceeds
market value is accounted for as a valuation allowance and changes in the valuation allowance are
included in the income. Realized gains and losses fro m the sale of marketable securities are
included in income.
The cost of marketable securities used for determining the gain or loss on the sale of such securities
is computed using the average method.
Offsetting of Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated
balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize the asset and settle the
liability simultaneously. This is not generally the case with master netting agreements, and the
related assets and liabilities are presented gross in the consolidated balance sheet.
Inventories
Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each
product to its present location and condition are accounted for as follows:
Raw materials, spare parts and factory
supplies
- Cost is determined on a moving-average
method.
Finished goods
- Cost includes direct materials and labor and a
proportion of manufacturing overhead costs
determined on a moving-average method
Net realizable value is the estimated selling price in the ordinary course of business, less
estimated costs of completion, marketing and distribution.
Investment in an Associate
The Parent Company carries its investment in an associate, where it holds 20% or more stock
ownership interest or where it has the ability to significantly influence their operating and
financial affairs, at cost plus post-acquisition changes in the Parent Company’s share of the net
assets of the associate, less any impairment in value. The carrying amount of investment in an
associate is increased or decreased to recognize the Parent Company’s share of the profits or losses
of the associate after the dates of acquisitions. Dividends received from associate reduce the
carrying amount of the investment. Adjustments are made to the carrying amount for changes in
the Parent Company’s proportionate interest in the associate arising from changes in the associate’s
equity that have not been included in the consolidated statement of income. Such changes include
proportionate adjustments arising from the revaluation of land.
If the Parent Company’s share of losses in the associate equals or exceeds the carrying amount of
an investment, the Parent Company ordinarily discontinues recognizing its share of further losses.
31
- 10 -
The investment is reported at zero value. Additional losses are provided for to the extent that the
Parent Company has incurred obligations or made payments on behalf of the associate to satisfy the
obligations of the associate that the Parent Company has guaranteed or otherwise committed. If the
associate subsequently report profits, the Parent Company resumes including its share of those
profits only after its share of the profits equals the share of net losses not recognized.
When an investment in an associate is sold or disposed of, the cost and the related accumulated
equity in earnings or losses and share in any recognized revaluation increment in property of the
associate and any impairment in value, are removed from the accounts and any resulting gain or
loss is taken to the consolidated statement of income.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment
in value, except for parcels of land which are carried at revalued amount as determined as of
December 31, 2006 by an independent firm of appraisers.
The net appraisal increment from revaluation is shown as “Revaluation increment in land” account
under the Stockholders’ Equity section of the consolidated balance sheet.
Revaluation is made with sufficient regularity such that the carrying amount does not differ
materially from that which would be determined using fair value at the balance sheet date. Any
resulting increase in the asset’s carrying amount as a result of the revaluation is credited directly to
“Revaluation increment in land”, net of related deferred tax liability. Any resulting decrease is
directly charged against any related revaluation increment to the extent that the decrease does not
exceed the amount of the revaluation increment in respect of the same asset.
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 and overhaul costs, are normally charged
to income in the period in which the costs are incurred. In situations where it can be clearly
demonstrated that the expenditures have resulted in an increase in the future economic benefits
expected to be obtained from the use of an item of property, plant and equipment beyond its
originally assessed standard of performance, the expenditures are capitalized as an additional cost
of property, plant and equipment.
Construction in progress is stated at cost. This includes cost of construction, equipment, and other
direct costs. Construction in progress is not depreciated until such time that the relevant assets are
completed and becomes available for use.
Depreciation and amortization is computed on a straight-line basis over the estimated useful lives
of the assets as follows:
Land improvements
Buildings, structures and improvements
Machinery and equipment
Transportation equipment
Standing crops
Office furniture and fixtures
Years
5-10
8-30
3-10
3-5
10
1-3
32
- 11 The residual values, estimated useful lives and depreciation and amortization method are
periodically reviewed and adjusted if appropriate at each balance sheet date.
When property and equipment carried at cost are retired or otherwise disposed of, the cost and the
related accumulated depreciation and amortization and impairment in value are removed from the
accounts and any resulting gain or loss is recognized in the consolidated statement of income.
Upon disposal of revalued land, the related revaluation increment realized in respect of the latest
valuation will be released from the revaluation increment directly to retained earnings.
Investment Property
Investment property, which is included under other noncurrent assets in the consolidated balance
sheet, pertains to a parcel of land not used in operation and stated at cost less any impairment in
value. This is used by the Group to earn rentals under operating lease arrangements or for capital
appreciation or both, rather than for use in the production or supply of goods or services, or for
administrative purposes, or sale in the ordinary course of business.
Investment property is derecognized when it has been either disposed of or when it 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 investment property is recognized in the consolidated
statement of income in the year 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 sell.
License Fee
License fee, presented as part of “Other noncurrent assets” in the consolidated balance sheet, is
accounted for under the cost model. Costs incurred for the license agreement have been capitalized
and are amortized over the period covered by the agreement of 10 years until November 2007 (see
Note 10). The carrying value of the license fee is reviewed for impairment and any impairment
loss is recognized in the consolidated statement of income.
Impairment of Non-financial Assets
The carrying values of property, plant and equipment and investment property are reviewed for
impairment when events or changes in circumstances indicate that the carrying values may not be
recoverable. If any such indication exists and where the carrying values exceed the estimated
recoverable amounts, the assets are written down to their recoverable amounts. An asset’s
recoverable amount is the greater of net selling price and value in use. In assessing value in use,
the estimated future cash flows are discounted to their present values using a pre-tax discount rate
that reflect current market assessments of the time value of money and the risks specific to the
asset. Any impairment loss is recognized in the consolidated statement of income.
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
reviewed only if there has been a change in the estimates used to determine the asset’s
33
- 12 -
recoverable amount since the last impairment loss was recognized. If that is the case, the carrying
amount of the asset is increased to its recoverable amount. That increased amount cannot exceed
the carrying amount that would have been determined, net of depreciation, had no impairment loss
been recognized for the asset in prior years. Such reversal is recognized in the consolidated
Treasury Shares
The Parent Company’s common shares which are reacquired (treasury shares) are deducted from
stockholders’ equity. No gain or loss is recognized in the consolidated statement of income on
the purchase, sale or cancellation of the Parent Company’s common shares.
Revenue
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Group and the revenue can be reliably measured. The following specific recognition criteria must
also be met before revenue is recognized:
Sales
Sales revenue is recognized when the significant risks and rewards of ownership of the goods
have passed to the buyer and the amount of revenue can be measured reliably.
Rental Income
Rental income is recognized on a straight-line basis over the term of the lease.
Interest Income
Interest income is recognized as the interest accrues taking into account the effective yield on the
asset.
Retirement Benefits Cost
Retirement benefits cost is actuarially computed using the projected unit credit method. This
method reflects services rendered by employees up to the date of valuation and incorporates
assumptions concerning employees’ projected salaries. Actuarial valuations are conducted with
sufficient regularity, with option to accelerate when significant changes to underlying
assumptions occur. Retirement benefits cost includes current service cost, interest cost, expected
return on any plan assets, actuarial gains and losses, past service cost and the effect of any
curtailment or settlement. Actuarial gains and losses are recognized as income or expense when
the net cumulative unrecognized actuarial gains and losses of the defined benefit 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 defined benefit plan.
The net retirement liability recognized by the Group in respect of the defined benefit retirement
plan is the aggregate of the present value of the defined benefit obligation and actuarial gains and
losses not recognized reduced by the past service cost not yet recognized and the fair value of plan
assets out of which the obligations are to be settled directly.
The net retirement asset recognized by the Group in respect of the defined benefit retirement plan is
the lower of: (a) the present value of the defined benefit obligation at the balance sheet date less the
fair value of the plan assets, together with adjustments for unrecognized actuarial gains or losses
and past service costs that shall be recognized in later periods or (b) the total of any
34
- 13 -
cumulative unrecognized net actuarial losses and past service cost and the present value of any
economic benefits available in the form of refunds from the plan or reductions in future
contributions to the plan.
The present value of the defined benefit obligation is determined by discounting the estimated
future cash outflows using risk-free interest rates of government bonds that have terms to maturity
approximating the terms of the related retirement liability.
Operating Lease
The determination of whether the 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 on 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 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 reassessment for scenarios (a), (c), or (d) and at the date of
renewal or extension period for scenario (b).
Leases where the Group, as lessor, retains substantially all the risks and benefits of ownership of
the asset are classified as operating leases.
Borrowing Costs
Borrowing costs are expensed as incurred.
Income Taxes
Current Tax
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that have been enacted or substantively enacted at the balance
sheet date.
Deferred Tax
Deferred 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 tax liabilities are recognized for all taxable temporary
differences. Deferred tax assets are recognized for all deductible temporary differences to the
extent that it is probable that taxable profit will be available against which the deductible temporary
differences and unused minimum corporate income tax (MCIT) and net operating loss carryover
(NOLCO) can be utilized.
35
- 14 -
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable profit will be available to allow all or
part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each
balance sheet date and are recognized to the extent that it has become probable that future taxable
profit will allow the deferred tax asset to be recorded.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year
when the asset is realized or the liability is settled based on the tax rates that have been enacted or
substantively enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set
off the deferred tax assets against the deferred tax liabilities and the deferred taxes relate to the
same taxable entity and the same taxation authority.
Income tax relating to items recognized directly in equity is recognized in equity and not in the
consolidated statement of income.
Foreign Currency Transactions and Translation
Transactions denominated in foreign currencies are recorded in Philippine peso based on the
exchange rates prevailing at the transaction dates. Outstanding foreign currency-denominated
monetary assets and liabilities are translated to Philippine peso at exchange rates prevailing at the
balance sheet date. Foreign exchange differentials between the rate at transaction date and the rate
at settlement date or balance sheet date of foreign currency-denominated monetary assets or
liabilities are reflected in the consolidated statement of income.
Provisions and Contingencies
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 assessment
of the time value of money and, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provision due to the passage of time is recognized as an
interest expense.
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent assets are not recognized in the consolidated financial statements but disclosed when an
inflow of economic benefit is probable.
Earnings (Loss) Per Share
Basic earnings or loss per share is computed by dividing net income or loss by the weighted
average number of common shares issued and outstanding after considering the retroactive effect,
if any, of stock dividends declared during the year.
Diluted earnings per share amounts are calculated by dividing the net income by the weighted
average number of ordinary shares outstanding during the year and adjusted for the effects of all
dilutive potential common shares, if any.
36
- 15 -
Events After the Balance Sheet Date
Post year-end events up to the date of the approval of the BOD that provide additional information
about the Group’s 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
the consolidated financial statements when material.
Segment Reporting
The Group’s operating businesses are organized and managed separately according to the nature of
the products and services provided, with each segment representing a strategic business unit that
offers different products and serves different markets. The Group’s asset-producing revenues are
located in the Philippines (i.e., one geographical location). Therefore, geographical segment
information is no longer presented.
3. Significant Accounting Judgments and Estimates
The preparation of the accompanying consolidated financial statements in compliance with PFRS
requires management to make judgments, estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The judgments,
estimates and assumptions used in the accompanying consolidated financial statements are based
upon management’s evaluation of relevant facts and circumstances that are believed to be
reasonable as of the date of the consolidated financial statements. While the Group believes that
the assumptions are reasonable and appropriate, differences in the actual experience or changes in
the assumptions may materially affect the estimated amounts. Actual results could differ from such
estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is revised if the revision
affects only that period, or in the period of the revision and future periods if the revision affects
both current and future periods.
Determination of Parent Company’s Functional Currency
The Parent Company, based on the relevant economic substance of the underlying circumstances,
has determined its functional currency to be the Philippine peso. It is the currency of the primary
economic environment in which the Parent Company and its subsidiaries operate.
Classification of Financial Instruments
The Group classifies a financial instrument, or its components, on initial recognition as a financial
liability, a financial asset or an equity instrument in accordance with the substance of the
contractual arrangement and the definitions of a financial liability, a financial asset or an equity
instrument. The substance of a financial instrument, rather than its legal form, governs its
classification in the Group’s consolidated balance sheet.
The Group determines the classification at initial recognition and re-evaluates this classification at
every reporting date.
The carrying value of financial assets amounted to =
P159,990,320 and =
P121,256,430 and the
carrying value of financial liabilities amounted to =
P324,359,460 and =
P452,863,222 as of December
31, 2006 and 2005, respectively (see Note 23).
37
- 16 -
Operating Lease
The Group has entered into property leases, where it has determined that the risks and rewards
related to those properties are retained by the Group. As such, these lease agreements are
accounted for as operating leases.
Estimation of Allowance for Doubtful Accounts
The Group maintains allowance for doubtful accounts based on the result of the individual and
collective assessment under PAS 39. Under the individual assessment, the Group is required to
obtain the present value of estimated cash flows using the receivable’s original effective interest
rate. Impairment loss is determined as the difference between the receivable’s carrying balance and
the computed present value. The collective assessment would require the Group to group its
receivables based on the credit risk characteristics (industry, customer type, customer location,
past-due status and term) of the customers. Impairment loss is then determined based on historical
loss experience of the receivables grouped per credit risk profile. The methodology and
assumptions used for the individual and collective assessments are based on management’s
judgment and estimate.
Therefore, the amount and timing of recorded expense for any period would differ depending on
the judgments and estimates made for the year. Receivables, net of allowance for doubtful
accounts, amounted to P
=90,279,635 and =
P76,121,670 as of December 31, 2006 and 2005,
respectively. Allowance for doubtful accounts amounted to P
=10,381,793 and =
P14,965,559 as of
December 31, 2006 and 2005, respectively (see Notes 5 and 10).
Impairment of Available-for-sale Investments
The Group treats available-for-sale investments as impaired when there has been a significant or
prolonged decline in the fair value below their cost or where other objective evidence of
impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment.
The Group treats ‘significant’ generally as 20% more of the original cost of investment, and
‘prolonged’, greater than 6 months. In addition, the Group evaluates other factors, including
normal volatility in share price for quoted equities and the future cash flows and the discount
factors for unquoted equities. Impairment loss amounting to P
=11,417,996 was recognized in 2004.
No impairment loss was recognized in 2006 and 2005.
Determination of Net Realizable Value of Inventories
The Group’s estimates of the net realizable values of inventories are based on the most reliable
evidence available at the time the estimates are made, of the amount that the inventories are
expected to be realized. These estimates consider the fluctuations of price or cost directly relating
to events occurring after the end of the period to the extent that such events confirm conditions
existing at the end of the period. A new assessment is made of net realizable value in each
subsequent period. When the circumstances that previously caused inventories to be written down
below cost no longer exist or when there is a clear evidence of an increase in net realizable value
because of change in economic circumstances, the amount of the write-down is reversed so that the
new carrying amount is the lower of the cost and the revised net realizable value. The Group’s
inventories as of December 31, 2006 and 2005 amounted to P
=84,955,812 and =
P146,360,585,
respectively (see Note 6).
38
- 17 -
Revaluation of Land
The Group’s parcels of land are carried at revalued amounts, which approximate their fair values at
the date of the revaluation, less any subsequent accumulated impairment losses. The valuations of
land are performed by professionally qualified appraisers. Revaluation is made with sufficient
regularity such that the carrying amount does not differ materially from that which would be
determined using fair value at the balance sheet date.
The resulting increase in the valuation of land, net of the related deferred tax liability based on the
2006 valuation, amounted to P
=181,942 and is presented under “Revaluation increment in land” in
the consolidated balance sheet. The carrying value of land amounts to P
=1,146,673,746 and P
=
1,210,408,482 as of December 31, 2006 and 2005, respectively (see Note 9).
Estimation of Useful Lives of Property, Plant and Equipment
The Group estimates the useful lives of its property, plant and equipment based on the period over
which the assets are expected to be available for use. The Group reviews annually the estimated
useful lives of property, plant and equipment based on factors that include asset utilization, internal
technical evaluation, technological changes, environmental and anticipated use of the assets
tempered by related industry benchmark information. It is possible that future results of operation
could be materially affected by changes in these estimates brought about by changes in factors
mentioned. A reduction in the estimated useful lives of property, plant and equipment would
increase depreciation expense and decrease noncurrent assets. The carrying values of property,
plant and equipment at cost amounted to =
P237,235,868 and =
P294,015,882 as of December 31, 2006
and 2005, respectively. Total depreciation expense charged to operations amounted to P
=
62,933,909 in 2006, P
=66,664,577 in 2005 and =
P66,780,200 in 2004 (see Notes 9, 16 and 17).
Impairment of nonfinancial assets
The Group determines whether its nonfinancial assets are impaired, at least on an annual basis.
This requires an estimation of the value in use of the cash-generating units to which the assets
belong. Estimating the value in use requires the Group to make an estimate of the expected future
cash flows from the cash-generating unit and also to choose an appropriate discount rate in order to
calculate the present value of those cash flows. The carrying values of property, plant and
equipment at cost amounted to =
P237,235,868 and =
P294,015,882 as of December 31, 2006 and
2005, respectively, of which no impairment of assets were recognized.
Estimation of Retirement Benefits
The determination of the obligation and cost of retirement benefits is dependent on the selection of
certain assumptions used by actuaries in calculating such amounts. Those assumptions are
described in Note 19 and include among others, discount rates, expected returns on plan asset and
salary increase rates. Actual results that differ from the Group’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 Group believes that the assumptions are reasonable
and appropriate, significant differences in the actual experience or significant changes in the
assumptions may materially affect the retirement obligations. Net retirement liability amounted to
=44,594,583 and =
P
P66,727,907 as of December 31, 2006 and 2005, respectively. Retirement
expense charged to operations amounted to =
P4,852,698 in 2006, =
P15,197,314 in 2005 and =
P
14,372,328 in 2004 (see Note 19).
39
- 18 Recognition of Deferred Tax Assets
The Group reviews the carrying amounts at each balance sheet date and adjusts the balance of
deferred 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 tax assets to be utilized. Deferred tax assets recognized
amounted to P
=42,550,143 and =
P34,261,545 as of December 31, 2006 and 2005, respectively (see
Note 21).
Provisions
The Group provides for present obligations (legal or constructive) where it is probable that there
will be an outflow of resources embodying economic benefits, that will be required to settle said
obligations. An estimate of the provision is based on known information at consolidated balance
sheet date, net of any estimated amount that may be reimbursed to the Group. If the effect of the
time value of money is material, provisions are discounted using a current pre-tax rate that
reflects the risks specific to the liability. The amount of provision is being re-assessed at least on
an annual basis to consider new relevant information. The Group has no provisions in 2006, 2005
and 2004.
4. Cash and Cash Equivalents
Cash on hand and in banks
Short-term investments
2006
P
=19,640,592
17,000,000
P
=36,640,592
2005
=20,728,306
P
–
=20,728,306
P
Cash in bank earns 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 respective short-term deposit rates.
5. Receivables
Trade
Receivable from stockholders
Insurance claim receivable
Officers and employees
Current portion of receivable from MERALCO - net
of deferred interest income (Note 10)
Others
Less allowance for doubtful accounts
2006
P
=53,623,205
27,218,040
10,206,172
1,256,544
2005
=51,718,601
P
23,158,084
–
186,919
1,627,882
6,195,052
100,126,895
9,847,260
P
=90,279,635
2,248,202
13,240,890
90,552,696
14,431,026
=76,121,670
P
Insurance claim receivable pertains to reimbursement for losses suffered by CAWC from typhoon
Milenyo in 2006.
40
- 19 6. Inventories
2005
2006
P
=22,479,663
7,036,392
1,523,269
P
=12,751,740
7,036,392
1,523,269
P
=12,751,740
7,036,392
1,523,269
=69,980,670
P
8,695,758
1,430,470
=
P57,552,231
8,695,758
1,430,470
At lower of
and NRV
V
=
P57,552,231
8,695,758
1,430,470
32,018,890
1,657,621
29,680,164
1,657,621
29,680,164
1,657,621
42,911,439
17,295
41,601,951
17,295
41,601,951
17,295
36,947,300
32,306,626
32,306,626
P
=84,955,812
40,389,577
37,062,880
37,062,880
=146,360,585
P
At cost
Finished goods
Semi-processed goods
Merchandise on hand
Raw materials:
On hand
In transit
Spare parts and factory
supplies in transit
At NRV
At lower of
cost and NRV
At cost
At NRV st
Under the terms of the trust receipt agreements covering liabilities under letters of credit, open
accounts and/or documents against payment, some raw materials amounting to P
=10,974,308 were
released to LMG and CAWC in trust for the banks. LMG and CAWC are accountable to the banks
for the trusteed raw materials or their sales proceeds.
7. Other Current Assets
Prepaid taxes
Input taxes
Prepaid expenses
Others
2006
P
=56,108,844
11,317,929
2,494,148
3,112,148
P
=73,033,069
2005
=50,651,588
P
11,317,537
6,623,928
1,902,408
=70,495,461
P
2006
2005
P
=119,240,806
=119,240,806
P
(106,167,307)
3,238,292
(3,371,690)
(106,300,705)
P
=12,940,101
(104,886,368)
2,639,061
(3,920,000)
(106,167,307)
=13,073,499
P
8. Investment in an Associate
Investment in an associate - at equity
Acquisition costs
Accumulated equity in net losses:
Balance at beginning of year
Equity in net earnings during the year
Dividends received
Balance at end of year
The Group’s investment in an associate accounted for under the equity method pertains to the
Parent Company’s 49% investment in Perfumeria Española Corp. (PEC).
The summarized financial information of PEC as of December 31, 2006 and 2005 are as follows:
Total assets
Total liabilities
Stockholders’ equity
Net income
2006
P
=46,209,022
19,755,084
26,453,938
6,608,761
2005
=46,897,200
P
20,171,023
26,726,177
5,385,839
41
- 20 -
9. Property, Plant and Equipment
2006
Buildings,
Land Structures and Machinery and Transportation
Improvements Improvements
Equipment
Equipment
At Cost:
Costs
Beginning balances
Additions
Disposals
Reclassifications
Ending balances
Accumulated Depreciation
Beginning balances
Additions (Notes 16 and 17)
Disposals
Ending balances
Net Book Values
P
=35,811,419
–
(2,906,219)
–
32,905,200
P
=212,408,640
–
(5,044,263)
–
207,364,377
P
=845,776,550
4,849,370
–
3,237,207
853,863,127
27,693,896
1,476,237
(2,906,217)
26,263,916
P
=6,641,284
167,851,314
11,682,238
(5,044,260)
174,489,292
P
=32,875,085
615,728,580
47,165,311
–
662,893,891
P
=190,969,236
Office
Standing
Furniture Construction
Crops and Fixtures in Progress
P
=34,210,922 P
=8,302,018 P
=56,276,982
61,448
–
95,072
(3,732,171) (8,302,018)
(5,563,717)
102,600
–
45,452
30,642,799
–
50,853,789
30,215,252
8,302,016
1,738,898
–
(3,732,168) (8,302,016)
28,221,982
–
P
=2,420,817
P
=–
54,768,690
871,225
(5,512,351)
50,127,564
P
=726,225
Total
P
=5,789,099 P
=1,198,575,630
1,296,983
6,302,873
–
(25,548,388)
(3,482,861)
(97,602)
3,603,221
1,179,232,513
–
–
–
–
P
=3,603,221
904,559,748
62,933,909
(25,497,012)
941,996,645
P
=237,235,868
2005
Land
Improvements
At Cost:
Costs
Beginning balances
Additions
Disposals
Reclassifications
Ending balances
Beginning balances
Additions (Notes 16 and 17)
Disposals
Reclassifications
Ending balances
Net Book Values
Buildings,
Structures and Machinery and
Improvements
Equipment
=
P35,467,359
344,060
–
–
35,811,419
=
P216,216,102
–
(3,807,462)
–
212,408,640
=
P887,787,414
6,297,472
(87,010,794)
38,702,458
845,776,550
26,231,102
1,462,794
–
–
27,693,896
=8,117,523
P
157,854,509
11,920,564
(1,921,613)
(2,146)
167,851,314
=
P44,557,326
651,324,057
49,926,218
(85,545,258)
23,563
615,728,580
=
P230,047,970
Transportation
Equipment
Standing
Crops
=
P38,962,311 =
P8,302,018
1,546,614
–
(6,298,003)
–
–
–
34,210,922
8,302,018
34,619,848
1,806,797
(6,211,393)
–
30,215,252
=
P3,995,670
8,302,016
–
–
–
8,302,016
=
P2
Office
Furniture Construction
and Fixtures
in Progress
=
P56,462,515 =
P19,802,580 =
P1,263,000,299
911,946
25,015,414
34,115,506
(1,073,916)
–
(98,190,175)
(23,563) (39,028,895)
(350,000)
56,276,982
5,789,099
1,198,575,630
54,294,691
1,548,204
(1,052,788)
(21,417)
54,768,690
=
P1,508,292
2006
Land
At revalued amount:
Beginning balances
Appraisal increase
Disposal
Ending balances
Cost
Total
–
–
–
–
–
=
P5,789,099
932,626,223
66,664,577
(94,731,052)
–
904,559,748
=
P294,015,882
2005
P1,210,408,482
P
=1,210,408,482 =
–
279,911
–
(64,014,647)
=1,210,408,482
P
=1,146,673,746 P
=73,568,106
P
P
=72,536,709
Land is carried at revalued amounts using the fair market value as determined by an independent
firm of appraisers in 2006.
Some parcels of land with a carrying value of P
=27,136,000 and =
P37,594,800 as of December 31,
2006 and 2005, respectively, are used as collaterals for bank loans and long-term debt (see Notes
11 and 13).
42
- 21 -
Property, plant and equipment include the following that are not used in operations:
Buildings,
Land Structures and
Costs
Beginning balances
Disposals
Ending balances
Beginning balances
Additions
Disposals
Ending balances
Net Book Values
Machinery
Office
and Transportation
Furniture
Equipment
Equipment and Fixtures
2005
Total
2006
Total
=
P2,037,100 P
=16,336,423
(2,037,100) (4,852,452)
– 11,483,971
P
=–
–
–
=
P2,338,102 P
=5,284,883
(2,338,102) (5,284,883)
–
–
P114,914,181
P
=25,996,508 =
(14,512,537) (88,917,673)
25,996,508
11,483,971
1,991,473
45,627
(2,037,100)
–
=–
P
–
–
–
–
P
=–
2,338,102
–
(2,338,102)
–
=
P–
20,286,280
1,902,570
(14,461,269)
7,727,581
P
=3,756,390
10,723,090
1,856,943
(4,852,452)
7,727,581
=
P3,756,390
5,233,615
–
(5,233,615)
–
=–
P
104,038,702
1,902,570
(85,654,992)
20,286,280
=5,710,228
P
The Parent Company’s land located in Cuyapo, Nueva Ecija (included as part of “Land at revalued
amount” account) with costs of P
=169,200 and appraised value of =
P19,355,146 is subject to the
Comprehensive Agrarian Reform Law (CARL) (see Note 25). In 2006, the Parent Company sold
this land for =
P85,497,415 resulting to a gain of =
P66,142,270, which was recognized in the
consolidated statement of income. The related revaluation increment transferred to retained
earnings amounted to =
P19,185,946.
In 2006, a parcel of land in Pinamucan, Batangas with cost amounting to =
P862,197 was sold. Its
revalued amount at the time of sale was P
=44,659,500. Proceeds from the sale amounted to
=59,546,000 resulting to a gain of =
P
P14,886,500 was recognized in the 2006 consolidated statement
of income. The related revaluation increment transferred to retained earnings amounted to =
P
40,224,543, net of deferred capital gains tax of =
P3,572,760.
10. Other Noncurrent Assets
Receivable from local government
Investment property - land not used in operations
Receivable from MERALCO - net of deferred
interest income
Other long-term receivables
License fee (Note 26)
Cash in bank restricted for use in operations
Refundable deposits
Other noncurrent assets
2006
P
=20,861,894
18,896,987
15,709,896
2005
=21,593,363
P
5,320,016
14,786,772
7,162,074
2,982,437
2,549,475
2,205,674
–
2,526,580
72,895,017
534,533
P
=72,360,484
9,207,330
1,661,196
5,098,950
2,171,578
2,803,297
3,520,244
66,162,746
534,533
=65,628,213
P
Receivable from Local Government
Receivable from local government represents the balance of the local tax credit from the
Municipality of San Pascual, Batangas which management believes is expected to be recovered in
due time but beyond one year. This will be offset against future tax liabilities of the Parent
Company to the Municipality of San Pascual, Batangas.
43
- 22 -
Available-for-sale investments consist of:
a. Investments in the following companies have been fully impaired and charged to profit and
loss in previous years.
Cost of investments are as follows:
All Asia Capital and Trust Corporation
Petrochemicals Corporation of Asia Pacific
(Petrocorp)
=108,437,500
P
724,761,279
In 2006, portion of investments in PetroCorp amounting to P
=31,881,194 was recovered and
received by the Group and recognized in the consolidated statement of income.
b. Other investments amounting to P
=18,896,987 in 2006 and =
P5,320,016 in 2005 represent club
shares and other proprietary shares.
Other investments are carried at fair value with net cumulative gain as of December 31, 2006 of
=12,210,000, net of deferred tax liability of =
P
P1,340,000, recognized as a separate component of
the stockholders’ equity.
Prior to January 1, 2005, these investments are classified in the 2004 consolidated balance sheet as
investments in shares of stock stated at the lower of the aggregate cost and market value,
determined at balance sheet date. In 2005, upon adoption of PAS 32 and 39, such investments
were classified as available-for-sale investments measured at fair value in the 2005 consolidated
balance sheet. The accumulated net unrealized loss in value of investments in noncurrent
marketable securities amounting to P
=11,417,996 as of December 31, 2004 was deemed significant
and was charged to retained earnings as of January 1, 2005.
Investment Property
Investment property-land not used operations is carried at cost. As of December 31, 2006 and
2005, the appraised value amounted to P
=430,642,944 as determined by independent appraisers on
January 14 and April 11, 2005. The excess of the appraised value of the land over their carrying
amount is not recognized in the financial statements.
Receivable from MERALCO
In 2005, MERALCO, informed the Company that in reference to the MERALCO Phase IV-B of
the refund approved by the Energy Regulatory Board, the Company’s electric service was qualified
for refund under Phase IV-B.
Under the MERALCO refund scheme, the refund may be received through postdated checks or as a
fixed monthly credit to bills with cash option. The Company intends to recover the refund through
postdated checks to be collected over 5.25 years and 1.5 years, starting in April 2006 up to July
2011 and April 2006 up to October 2007, respectively.
- 23 -
44
The Group recognized a receivable in 2005 from MERALCO amounting to P
=14,511,784, unearned
interest income of =
P3,056,252, and income from refund of =
P11,455,532. The receivable was
discounted using an effective interest rate of 9.57%. Breakdown of outstanding balance as of
December 31, 2006 and 2005 are as follows:
Collectible within one year and six months
Deferred interest income
Collectible within five years and three
months
Current
P
=175,412
3,592
Current
2006
Noncurrent
P
=–
–
Noncurrent
Current
=701,646
P
70,899
Current
2005
Noncurrent
=
P350,824
10,321
Noncurrent
2,239,291
783,229
8,417,870
1,255,796
2,563,679
946,224
10,895,635
2,028,808
The current portion of the refund receivable, net of deferred interest income is included under
“Receivable” account in the consolidated balance sheets (see Note 5).
Restricted Cash
Cash in bank restricted for use in operations consists of (a) time deposit which serves as a collateral
for a short-term loan with a local bank, (b) garnished bank accounts related to the lawsuit filed by
one of the Group’s stockholders and (c) bank accounts used for CMC’s operations with its supplier.
11. Notes Payable
The Parent Company’s short-term loans:
Partially secured loan obtained from a local
bank with interest rate of 12.25% in 2006
and 2005. The loan is collateralized by a
chattel mortgage over investments in club
shares of stock with carrying value of
=31,000,000 and =
P
P19,000,000 as of
December 31, 2006 and 2005, respectively.
Total interest paid amounted to =
P4,107,851
in 2006 and =
P3,125,699 in 2005.
Unsecured loan obtained from a local
association with interest rate of 8% per
annum, payable monthly. Total interest paid
amounted to P
=351,511 and =
P295,244 in
2006 and 2005, respectively.
Partially secured loan obtained from a local
bank with interest rate of 12% plus 3%
service fee in 2006 and 2005, respectively.
The loan is collateralized by a certificate of
time deposit amounting to P
=1,153,566 in
2006 and =
P1,121,901 in 2005. Total interest
paid amounted to =
P318,200 and =
P367,276 in
2006 and 2005, respectively.
2006
2005
P
=32,900,000
=32,900,000
P
3,650,000
3,650,000
2,600,000
2,700,000
(Forward)
- 24 45
Unsecured loan obtained from a local bank, with
interest rate equivalent to 91-day Treasury
Bill (T-bill) rate plus 2% to be repriced
monthly. Total interest paid amounted to
=232,258 and =
P
P584,892 in 2006 and 2005,
respectively.
Subsidiaries’ peso-denominated short-term loans
from local banks:
Secured loan with interest rate of 12.25% per
annum. Principal amount is payable in August
2007.
Unsecured loan with interest of 12% per annum.
The principal amount which was payable in
January 2006 was subsequently renewed in
2006.
Unsecured loan with interest of 12% per annum.
Secured loan with interest rate based on 91-day
T-Bill rate plus 2% with monthly repricing.
The principal amount is payable in
January 2006. This loan is collateralized by
a parcel of land with a carrying value
=37,594,800.
P
Unsecured loan with interest rate of 7.8%-12%.
The principal amount is payable in January
2006.
Others
2006
2005
=
P–
=6,800,000
P
6,000,000
6,000,000
5,500,000
3,000,000
5,500,000
5,000,000
–
12,800,000
–
–
P
=53,650,000
3,750,000
500,000
=79,600,000
P
In 2006, a portion of the LMG’s secured loan outstanding as of December 31, 2005 amounting to P
=
6,000,000 was renewed and was collateralized by a parcel of land with a carrying value of
=27,136,000. Moreover, the remaining notes payable amounting to P
P
=16,550,000 were fully paid in
2006.
12. Accounts Payable and Accrued Expenses
Trade
Accrued expenses
Output taxes
Unearned rental income
Others
2006
P
=133,235,163
30,369,753
1,046,445
81,440
5,741,493
P
=170,474,294
2005
=162,165,546
P
32,405,152
1,812,091
1,718,185
13,630,806
=211,731,780
P
46
- 25 13. Long-term Debt
CIP’s long-term promissory note with a local bank:
Unsecured loan with interest rate equivalent to
the prevailing lender rate subject to monthly
repricing, payable monthly starting
November 2001 until October 2006. The
Parent Company paid =
P12,800,000 and
=4,800,000 of the loan principal in 2006
P
and 2005, respectively. Interest expense
amounted to P
=843,307 and =
P2,571,891 in
2006 and 2005, respectively. Total interest
paid amounted to =
P843,307 and =
P1,789,929
in 2006 and 2005, respectively.
Subsidiary’s peso-denominated long-term
promissory notes with local banks:
Secured loan with interest rate based on
prevailing lender’s rate subject to monthly
repricing, payable monthly starting
September 2002 until August 2008. The
principal amount is payable in 20 equal
amortizations starting in December 2003
until August 2008. This loan is secured by a
parcel of land with a carrying value of
=22,000,000 and appraised value of
P
=172,704,000.
P
Secured loan with interest equivalent to 3-month
PHIBOR plus spread of 2.5% payable
monthly up to December 2006. The
principal amount is payable in 12 quarterly
installments starting in March 2003 until
December 2005. The maturity date of said
loan, however, is extended until
December 2006. This loan is collateralized
by a parcel of land with a carrying value and
appraised value of =
P4,032,205 and
=192,315,000, respectively.
P
Less current portion of long-term debt
2006
2005
P
=–
=12,800,000
P
–
11,990,000
–
–
–
P
=–
4,591,544
29,381,544
10,481,544
=18,900,000
P
In 2006, LMG made an early settlement of its long-term debt amounting to =
P18,445,327, including
interest of =
P1,863,783.
47
- 26 -
14. Related Party Transactions
The Group has the following significant transactions with its affiliates:
a. Service agreement with affiliates. The service fee consists of management fee and the shared
services fee. Management fee represents the related parties’ share in the general corporate
overhead incurred by the Group. The shared services fee is billed using an activity-based
costing, under which, services rendered are based on man hours spent or number of items
processed or output produced, as applicable. Management fee and shared services fee charged
to affiliates are as follows:
Management fee:
Vision Insurance Consultants, Inc. (VIC)
Others
Shared services fees:
PEC
VIC
Others
2006
2005
2004
P
=600,000
–
600,000
=600,000
P
–
600,000
P
=600,000
54,545
654,545
1,412,105
944,457
66,674
2,423,236
P
=3,023,236
1,611,989
1,216,877
280,000
3,108,866
=3,708,866
P
1,608,294
1,268,267
974,587
3,851,148
=
P4,505,693
b. Rental agreement with affiliates for one year, renewable at the option of both parties. Total
rental income amounted to =
P998,037 in 2006, =
P1,114,764 in 2005 and =
P1,861,031 in 2004.
c. LMG is a guarantor to Bataan Industrial Gases, Inc.’s P
=59.5 million loan to a local bank to the
extent of 20%. On January 17, 2005, the local bank issued a Release of Chattel Mortgage
certification releasing LMG from any liability as a result of the full settlement of the loan.
d. KPC purchases merchandise inventories from its stockholder, Kemira Chemicals Oy of Finland
(Kemira). Total purchases amounted to =
P2,399,644 in 2006, =
P4,237,463 in 2005 and =
P
1,535,919 in 2004.
e. KPC has a license agreement (Agreement) with Kemira, for 10 years until November 2007, to
manufacture and sell water treatment chemicals by using product technology developed and to
be developed by Kemira. Under the Agreement, KPC will pay US$550,000 covering license
fee, basic designs, commissioning and start-up of a new aluminum sulfate plant; management
and marketing; technical support; and production know-how. The fee was later reduced to
US$400,000.
Total payments made by KPC amounting to US$300,000 or
=11,331,000 (net of taxes) were deferred. The balance of deferred license fee of P
P
=2,549,475
and =
P5,098,950 as of December 31, 2006 and 2005, respectively, is included under the “Other
noncurrent assets” account in the consolidated balance sheets.
f.
VIC provides risk management services for the Group related to its production operations.
Amounts billed are based on actual charges. Risk management fees, included under share in
common services, charged to cost of sales amounted to =
P54,545 in 2004. No risk management
fee was billed in 2006 and 2005.
48
- 27 -
g. The Parent Company and its subsidiaries have noninterest and interest-bearing advances and
receive reimbursement of expenses from affiliates. The interest-bearing cash advances have
interest rates ranging from 8% to 12% in 2006 and 8% to 9.75% in both 2005 and 2004.
Related interest expense amounted to =
P2,934,296 in 2006, =
P1,120,630 in 2005 and
=1,257,109 in 2004.
P
h. Compensation of key management personnel consists of short-term employee benefits and
termination benefits amounting to =
P22,940,674 and =
P1,598,873, respectively, in 2006 and
=36,203,247 and =
P
P2,996,941, respectively, in 2005 and =
P38,094,268 and =
P1,600,227,
respectively, in 2004.
Outstanding net receivables from and payables to related parties are as follows:
Premiums Payable
2005
2006
Current:
Due from
Petrocorp
PEC
VIC
Less allowance for
doubtful accounts
Due to:
VIC
PEC
Other
Advances
Non interest-bearing
Interest-bearing
2005
2005
2006
2006
P
=–
–
–
–
=–
P
–
–
–
P
=25,473
–
–
25,473
=25,473
P
–
31,653
57,126
–
P
=–
–
=–
P
–
P
=25,473
–
=57,126
P
P9,699,482
P
=22,940,837 =
5,689
–
–
–
=9,705,171
P
=22,940,837 P
P
=101,460
–
–
P
=101,460
=10,911,740
P
50,894
–
=10,962,634
P
P
=–
–
–
–
–
P
=–
P
=–
–
–
P
=–
Interest
2006
2005
2006
Total
2005
Total
=1,026,861 P
P
P7,985,778
=7,485,778 =
–
–
332,623
–
–
–
1,026,861 7,818,401
7,985,778
P
=8,538,112
332,623
–
8,870,735
=9,038,112
P
–
31,653
9,069,765
6,124,654
=1,861,124
P
8,512,639
P
=358,096
6,124,654
=2,945,111
P
=– P
P
=23,393,762
646,921
–
–
25,646
=646,921 P
P
=23,419,408
=23,536,408
P
703,504
–
=24,239,912
P
2005
Others
2006
=–
P
–
–
–
P
=1,026,861
–
–
1,026,861
–
=–
P
1,026,861
P
=–
– 7,485,778
=1,026,861 P
P
=332,623
=1,033,946
P
–
–
=1,033,946
P
P
=351,465
–
–
P
=351,465
=1,891,240
P
–
–
=1,891,240
P
P
=–
–
25,646
P
=25,646
15. Stockholders’ Equity
Quasi-Reorganization of CAWC
On June 23, 2005, CAWC’s Board ExCom approved the quasi-reorganization of CAWC with the
objective of eliminating CAWC’s accumulated deficit as of December 31, 2004 amounting to
=73,973,943 by applying the revaluation increment in land as of such date.
P
On October 10, 2005, the SEC approved the quasi-reorganization. Pursuant to the SEC approval of
the foregoing, CAWC was subject to conditions that: (a) the remaining revaluation increment
of =
P58,730,787 as of December 31, 2005, after applying =
P73,973,943 to the Company’s deficit,
will not be used to wipe out losses that may be incurred in the future without prior approval of
SEC; (b) for purposes of dividend declaration, the retained earnings of CAWC shall be restricted to
the extent of the deficit wiped out by the appraisal increment in land; and (c) CAWC shall disclose
in its financial statements for a minimum period of three years the mechanics, purpose and effect of
such quasi-reorganization, on the financial condition of the CAWC.
On October 14, 2006, the Parent Company declared cash dividends in the sum of =
P22,000,000 as of
October 13, 2006. Total outstanding shares of stock as of the declaration date was 10,296,601
shares excluding treasury shares of 87, resulting to dividends of =
P2.1366 per share which was
directly charged to unappropriated retained earnings.
On October 14, 2006, LMG declared cash dividends in the sum of P
=30,000,000 as of October 13,
2006. Total outstanding shares of stock as of the declaration date was 193,544,176 shares
excluding treasury shares of 100,028, resulting to dividends =
P0.1550 per share which was directly
charged to unappropriated retained earnings.
49
- 28 16. Costs of Goods Sold
Raw materials used and changes in inventories
Depreciation (Note 9)
Personnel expenses (Note 19)
Merchandise
Supplies
Communication, light and water
Outside services
Taxes and licenses
Utilities
Repairs and maintenance
Insurance
Rent
Provision for inventory losses (Note 6)
Others
2006
P
=259,505,283
59,328,173
45,199,201
19,743,365
18,500,444
13,346,289
10,299,641
9,807,008
8,968,559
8,903,969
6,090,362
966,501
–
19,681,049
P
=480,339,844
2005
=485,520,527
P
62,482,593
63,870,488
76,761,250
74,175,576
38,895,320
12,689,241
18,731,236
6,344,362
19,299,945
8,826,058
3,429,965
11,919,914
16,128,028
=899,074,503
P
2004
=
P842,216,204
62,342,184
69,964,748
52,132,448
84,882,247
34,641,318
12,607,152
17,483,501
6,209,200
26,692,332
7,270,155
7,035,161
7,851,020
25,445,078
=
P1,256,772,748
17. Operating Expenses
Personnel expenses (Note 19)
Outside services
Taxes and licenses
Depreciation (Note 9)
Provision for doubtful accounts
Travel
Others
2004
2005
2006
=73,841,101 P
=68,620,380
P
=49,275,992 P
13,158,156
9,894,540
14,722,526
8,127,000
7,776,116
6,298,386
4,664,263
4,866,030
5,708,941
4,181,984
4,438,016
3,605,736
169,965
–
2,243,072
1,596,380
1,174,163
1,568,062
952,599
1,015,972
851,079
9,252,637
8,398,053
6,200,431
P115,944,085 P
=106,183,270
P
=90,474,225 =
18. Interest Expense and Other Income
a. Interest Expense
Interest expense consists of:
Short-term loans and trust receipts
Long-term debt
2006
P
=18,686,947
3,986,585
P
=22,673,532
2004
2005
=
P24,730,185 =
P22,702,628
4,895,571 4,875,469
=
P29,625,756 =
P27,578,097
50
- 29 -
b. Other Income - net
Other income consists of:
Gain (loss) on sale of property, plant and
equipment (Note 9)
Recovery from Petrocorp investments
(Note 10)
Gain on insurance claims
Foreign exchange gain (loss) - net
Dividend income
Equity in net earnings of an associate (Note 8)
Interest income
Reversal of various accrued expenses
Income from MERALCO refund (Note 10)
Land lease
Others - net
2006
2005
P
=81,209,644
=
P4,712,101
31,881,194
8,556,496
4,871,191
3,565,818
3,238,292
2,445,108
–
–
–
10,560,450
P
=146,328,193
2004
(P
=276,577)
–
–
–
–
1,855,729
(303,380)
3,920,000
2,940,000
2,639,061
2,411,753
392,251
913,557
4,070,882
8,037,425
11,455,532
–
–
1,530,303
9,860,823
3,580,473
=
P38,906,379 =
P18,833,554
Breakdown of interest income as to source are as follows:
2006
P
=1,427,985
1,017,124
–
P
=2,445,109
Interest income from banks
Interest income from Meralco
Interest income from affiliates - net
2005
=
P392,250
–
–
=
P392,250
2004
=
P568,340
–
345,217
=
P913,557
19. Personnel Expenses and Retirement Benefits Cost
a. Personnel expenses consists of:
Salaries and wages
Retirement benefits cost
Other employee benefits
2006
P
=72,430,161
4,852,698
17,192,334
P
=94,475,193
2005
=
P106,087,829
15,197,314
16,426,446
=
P137,711,589
2004
=
P107,031,891
14,372,328
17,180,909
=
P138,585,128
b. Retirement benefit cost
The Group has a funded, noncontributory defined benefit retirement plan covering
substantially all permanent employees, which requires contributions to be made to separately
administered funds.
The following tables summarize the components of net retirement benefits cost recognized in
the consolidated statements of income and the funded status and amounts recognized in the
consolidated balance sheets.
51
- 30 Net retirement benefits cost recognized in the consolidated statements of income are as
follows:
Current service cost
Interest cost
Expected return on plan assets
Net actuarial loss (gain)
Retirement benefits cost for the year
Actual loss on plan assets
2006
P
=3,030,010
14,746,323
(5,100,564)
(7,823,071)
P
=4,852,698
P
=12,921,335
2005
P7,424,093
=
12,877,699
(5,156,851)
52,373
=15,197,314
P
2004
=
P7,276,806
11,616,030
(4,646,302)
125,794
=
P14,372,328
=2,157,426
P
=
P5,232,488
Accrued retirement benefits payable recognized in the consolidated balance sheets are as
follows:
Present value of the obligation
Fair value of plan assets
Unrecognized actuarial losses
Asset ceiling limit
2006
P
=78,559,573
17,079,123
61,480,450
(20,260,650)
3,374,783
P
=44,594,583
2005
=123,896,308
P
51,005,647
72,890,661
(6,162,754)
–
=66,727,907
P
Changes in the present value of the defined benefit obligation are as follows:
Balances at beginning of year
Interest cost
Benefits paid
Actuarial gain
Balances at end of year
2006
P
=123,896,308
3,030,010
14,746,323
(50,116,405)
(12,996,663)
P
=78,559,573
2005
=103,594,516
P
7,424,093
12,877,699
–
–
=123,896,308
P
2006
P
=51,005,647
5,100,565
29,323,948
(50,116,405)
(18,234,632)
P
=17,079,123
2005
=42,984,053
P
5,156,851
2,864,743
–
–
=51,005,647
P
Changes in fair value of plan assets are as follows:
Actual contributions
Benefits paid
Actuarial loss
52
- 31 -
The major categories of plan assets of the Company as a percentage of the fair value of the plan
assets as of December 31, 2006 are as follows:
Investment in government securities
Investment in shares of stocks
Other investments
Other assets
58%
12%
25%
5%
The overall expected return on the plan assets is determined based on the market prices prevailing
on the date applicable to the period over which the obligation is to be settled.
The principal assumptions used in determining retirement benefits costs for the Group’s plan are as
follows as of January 1 of each year:
2006
158
12%
12%
6%
Number of employees
Discount rate per annum
Expected annual rate of return on plan assets
Future annual increase in salary
2005
241
12%
12%
6%
2004
227
12%
12%
6%
As of December 31, 2006, the following are the assumptions: discount rate of 8%, expected annual
rate of return on plan assets of 10% and future annual increase in salary of 6%.
Amount for the current and previous years are as follows:
Defined benefit obligations
Unfunded liability
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2005
2004
2006
P123,896,308 P
=103,594,516
P
=78,559,573 =
51,005,647
42,984,053
17,079,123
72,890,661
60,610,463
61,480,450
–
–
11,769,609
–
–
17,199,527
The Group expects to contribute P
=11,157,111 to the retirement fund in 2007.
20. Basic/Diluted Earnings Per Share
Basic/diluted earnings per share attributable to the Parent Company were computed as follows:
2006
a. Net income (loss) attributable to the parent
company stockholders
b. Weighted average number of shares issued
c. Weighted average number of shares held in
the treasury
d. Weighted average number of shares
outstanding (b - c)
e. Earnings (loss) per share (a / d)
2005
2004
P
=22,631,900
10,296,688
(P
=139,377,367)
10,296,688
(P
=17,572,600)
10,296,688
87
87
87
10,296,601
P
=2.1980
10,296,601
(P
=13.5362)
10,296,601
(P
=1.7066)
53
- 32 The Group has no dilutive potential common shares as of December 31, 2006, 2005 and 2004.
Thus, the basic and diluted earnings per share as of those dates are the same.
21. Income Taxes
a. The components of the Group’s provision for income tax-current are as follows:
RCIT
MCIT
Capital gains tax
Final tax on interest income
2006
P
=6,062,057
1,005,720
4,082,760
286,095
P
=11,436,632
2005
=2,770,451
P
1,356,768
–
91,554
=4,218,773
P
2004
=
P6,068,233
17,593
–
153,603
=
P6,239,429
b. The components of the deferred tax assets and liabilities are as follows:
Deferred tax assets on:
Accrued retirement benefits
Deferred gain on sale of land
Allowance for doubtful accounts and
probable losses
Allowance for probable inventory losses
Unamortized past service cost
Interest from MERALCO refund
Accrued expenses and others
NOLCO
MCIT
Deferred tax liability on:
Revaluation increment in land
Others
2006
2005
P
=15,987,852
4,985,647
=19,470,636
P
4,985,647
4,926,902
1,216,318
6,841,785
241,344
902,885
5,262,409
2,185,001
42,550,143
5,297,722
1,216,318
646,420
377,034
644,620
443,867
1,179,281
34,261,545
371,463,411
1,444,228
372,907,639
P
=330,357,496
393,409,579
56,994
393,466,573
=359,205,028
P
Deferred gain on sale of land pertains to unrealized gain on sale of LMG’s parcel of land to
KPC which will only be realized if sold to outside parties.
c.
As of December 31, 2006, the Group’s NOLCO and MCIT available for deduction from future
taxable income and regular corporate income tax due, respectively, are as follows:
NOLCO
Year
NOLCO
Incurred
Incurred
2006
P117,457,238
=
2005
144,349,318
2004
45,025,747
2003
49,214,159
=356,046,462
P
Applied
P
=–
–
–
(3,624,402)
(P
=3,624,402)
Expired
P
=–
–
–
(45,589,757)
(P
=45,589,757)
Ending
Balance
P
=117,457,238
144,349,318
45,025,747
–
=
P306,832,303
Available
Until
2009
2008
2007
2006
54
- 33 MCIT
Year
Incurred
2006
2005
2004
2003
MCIT
Incurred
=1,020,305
P
1,304,661
153,279
559,789
=3,038,034
P
Applied
P
=–
–
–
(163,664)
(P
=163,664)
Expired
P
=–
–
–
(396,125)
(P
=396,125)
Ending
Balance
P
=1,020,305
1,304,661
153,279
–
=
P2,478,245
Available
Until
2009
2008
2007
2006
d. The deductible temporary differences, MCIT and NOLCO for which no deferred tax assets
were recognized are as follows:
NOLCO
Allowance for inventory obsolescence
Allowance for doubtful accounts
Unamortized portion of past service cost
Unrealized foreign exchange losses - net
Deferred interest income - MERALCO
Accrued expenses
MCIT
2005
2006
P233,696,631
P
=291,706,847 =
14,631,724
13,913,921
10,151,017
–
6,485,510
4,558,057
3,402,800
2,417,131
–
–
1,979,008
1,349,575
–
656,578
674,784
293,244
2004
P
=92,220,372
10,562,831
9,998,210
6,315,547
4,191,725
3,759
–
–
742,768
The deferred tax assets on these deductible temporary differences, MCIT and NOLCO were
not recognized because management believes that the Group may not have sufficient taxable
profits available to allow all or part of these deferred tax assets to be utilized in the near future.
e. The reconciliation of the income taxes computed at the statutory income tax rate to the
provision for income tax as shown in the consolidated statements of income follows:
Statutory income tax
Additions to (reductions in) income tax
resulting from:
Deferred tax assets not recognized
Expired NOLCO and MCIT
Capital gains on disposal of assets
Gain on insurance claims
Gain on sale of shares of stock
Gain on sale of tax-exempt bonds
Interest income already subjected to
final tax
Temporary difference for which no
deferred tax assets were recognized
in previous years but recognized in
current year
Effect of change in income tax rate
Others
Provision for (benefit from) income tax
2006
P
=11,294,989
17,657,483
13,968,679
(27,850,069)
(11,158,416)
(2,994,774)
(634,725)
(334,071)
2005
(P
=46,005,457)
2004
=
P5,472,553
57,932,051
–
–
–
–
–
–
15,881,291
–
–
–
–
–
–
(209,575)
(49,031)
(114,195)
–
798,334
(915,347)
(P
=377,492)
(7,053,369)
(9,578,362)
(757,312)
(P
=5,511,480)
(6,112,830)
–
370,134
=
P15,496,953
55
- 34 f.
On May 24, 2005, the new Expanded-Value Added Tax (E-VAT) law was signed as Republic
Act (RA) No. 9337 or the E-VAT Act of 2005. The E-VAT law took effect on November 1,
2005 following the approval on October 19, 2005 of Revenue Regulations 16-2005 which
provides for the implementation of the rules and regulations of the new E-VAT law. Among
the relevant provisions of the new E-VAT law are:
i.
change in corporate income tax rate from 32% to 35% for the next three years effective on
November 1, 2005, and 30% starting on January 1, 2009 and thereafter;
ii. a 70% cap on the input VAT that can be claimed against output VAT;
iii. the amount of interest paid or incurred within taxable year on indebtedness in connection
with the taxpayer’s profession, trade or business shall be allowed as a deduction from gross
income, provided that, the taxpayer’s otherwise allowable deduction for interest expense
shall be reduced by 42% of the interest income subject to final tax, provided that, effective
January 1, 2009, the rate shall be 33%; and
iv. increase in the VAT rate imposed on goods and services from 10% to 12% effective
January 1, 2006 provided that the VAT collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds 2.8% or the Philippine national government
deficit as a percentage of GDP of the previous year exceeds 1.5%.
On January 31, 2006, the Philippine President, upon recommendation of the Secretary of
Finance, approved the 2% increase in VAT rate effective on February 1, 2006.
On November 21, 2006, the President signed into law RA No. 9361 which amends Section
110 (B) of the Tax Code. This law, which became effective on December 13, 2006,
provides that if the input tax, inclusive of the input tax carried over from the previous
quarter exceeds the output tax, the excess input tax shall be carried over to the succeeding
quarter or quarters. The Department of Finance through the Bureau of Internal Revenue
(BIR), issued Revenue Regulations (RR) No. 2-2007 to implement the provisions of the
said law. Based on the regulation, the amendment shall apply to the quarterly VAT returns
to be filed after the effectivity of RA No. 9361 except VAT returns covering taxable
quarters ending earlier than December 2006.
22. Financial Risk Management Objectives and Policies
The Group’s principal financial instruments comprise of cash and cash equivalents, receivable from
MERALCO, available-for-sale investments, notes payable and long-term debt. The main purpose
of these financial instruments is to raise financial assistance for the Group’s operations. The Group
has various other financial assets and liabilities such as trade receivables and payables and due
to/from related parties, which arise directly from its operations.
It is, and has been throughout the year under review, the Group’s policy that no trading in financial
instruments shall be undertaken.
The main risks arising from the Group’s financial instruments and policies for managing each of
these risks, which the BOD reviews and approves, are as follows:
56
- 35 Cash Flow Interest Rate Risk
The Group’s exposure to the risk for changes in market interest rates relates primarily to the
Group’s long-term debt obligations with a floating interest rate. The Group also avails of bank
loans with fixed interest rates in order to manage its interest cost.
Foreign Currency Risk
The Group has transactional currency exposures. Such exposure arises from purchases in
currencies other than the Philippine peso. Approximately 1.77% of the Group’s purchases are
denominated in currencies other than the Philippine peso. The Group, however, does not enter into
transactions to hedge its foreign currency risk.
Credit Risk
Credit risks are minimized and monitored by limiting the Group’s associations to business parties
with high creditworthiness. Receivables are monitored on an ongoing basis through the Group’s
management reporting procedures. The Group does not have any significant exposure to any
individual customer or counterparty. With respect to credit risk arising from cash and cash
equivalents, receivables and available-for-sale investments, the Group’s exposure to credit risk
arises from default of the counterparty, with a maximum exposure equal to the carrying amount of
these instruments. The Group deals only with financial institutions duly evaluated and approved
by the BOD.
Liquidity Risk
The Group’s exposure to liquidity risk is managed by using internally generated funds and
proceeds from loans. Further, the Group maintains open credit lines with local banks in order to
review and revolve maturing short-term loans.
23. Financial Instruments
Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s
financial instruments that are carried in the consolidated financial statements.
Carrying Amount
2005
2006
Financial assets:
Cash and cash equivalents
Receivables
Financial liabilities:
Notes payable
Accounts payable and accrued
expenses
Liabilities under letters of credit and
trust receipts
Long-term debt
P
=36,640,592
90,279,635
358,096
10,832,573
18,896,987
2,982,437
P
=159,990,320
Fair Value
2005
2006
=20,728,306
P
P
=36,640,592
76,121,670
90,279,635
2,913,458
358,096
14,511,784
11,526,490
5,320,016
18,896,987
1,661,196
2,982,437
=121,256,430 P
P
=160,684,237
=20,728,306
P
76,121,670
2,913,458
14,511,784
5,320,016
1,661,196
=121,256,430
P
P
=53,650,000
=79,600,000
P
P
=53,650,000
=79,600,000
P
170,474,294
211,731,780
170,474,294
211,731,780
109,391,809
76,815,758
22,758,089
23,419,408
–
29,381,544
=452,863,222 P
P
=324,359,460
109,391,809
22,758,089
29,381,544
=452,863,222
P
76,815,758
23,419,408
–
P
=324,359,460
57
- 36 The carrying amounts of cash and cash equivalents, trade receivables and payables, due to/from
related parties, current portion of notes payable, liabilities under letters of credit and trust receipts
and current portion of long-term debt approximate their fair values either because of their shortterm nature or the interest rates that they carry which approximate the interest rate for comparable
instruments in the market.
The fair value of “Receivable from MERALCO” was determined using the effective interest rate of
5.93% in 2006 and computed based on the remaining receivable balance as of
December 31, 2006.
Market values, based on quoted prices, have been used to determine the fair value of available-forsale investments.
24. Registration with the Board of Investments (BOI)
LMG is registered with the BOI as an operator of its 3.0 megawatts energy co-generating plant,
while KPC is registered as a preferred nonpioneer enterprise for the Aluminum Sulfate
Modernization Project. Under the terms of the registrations, LMG and KPC, subject to certain
requirements, are entitled to certain tax and non-tax incentives.
There were no incentives availed in 2006, 2005 and 2004.
25. Comprehensive Agrarian Reform Law (CARL)
The CARL (Executive Order No. 229 and Republic Act No. 6657) provides, among others, the
redistribution of all private and agricultural lands regardless of tenurial arrangements and
commodity produced, subject to certain terms and conditions.
The Parent Company owns several parcels of land with a total land area of 220.4403 hectares
located in Cuyapo, Nueva Ecija that are subjected to CARL as follows:
a. 25.4181 hectares, costing =
P628,154, under the Voluntary Offer to Sell (VOS) scheme. The
Parent Company filed a just compensation case against Land Bank of the Philippines (Land
Bank) before the Regional Trial Court of Guimba. The Parent Company has accepted Land
Bank’s offer to amicably settle the case. Land Bank’s original offer of =
P337,965 was
increased to =
P1,364,342. The agreement was approved by the Court. The amount was fully
paid in 2004.
b. 7.3437 hectares, costing =
P181,484, were placed by the Department of Agrarian Reform (DAR)
under the Compulsory Acquisition scheme. The DAR Arbitration Board (DARAB) in
Talavera, Nueva Ecija affirmed the valuation of Land Bank fixing the just compensation
to =
P186,717. The Parent Company filed a motion for reconsideration reiterating the Parent
Company’s position that the property should be valued at =
P587,496 based on the appraisal
made by an independent appraiser in 2001. The motion was denied by the DARAB. The
Parent Company has elevated the case to the Regional Trial Court. On January 4, 2007, the
RTC denied the Company’s petition for just compensation. The Company thereafter
manifested its intention to the DAR and Landbank to accept the amount of =
P186,717. The
Company is waiting for the documentary requirements from the said government agencies to
facilitate the payment.
58
- 37 c. 187.6785 hectares (mango-orchard) with costs of =
P169,200 and appraised value of
=19,355,146, whereby the Parent Company has filed a petition for total exemption. The
P
Provincial Agrarian Reform Officer has formally endorsed the Parent Company’s petition for
exemption to the Regional Office of the DAR and the latter has endorsed the same to the
DAR Head Office. Meantime, the Parent Company has offered 5.5 hectares to DAR under the
VOS scheme. On February 17, 2004, the DAR denied the Parent Company’s petition for total
exemption from CARL. Also, the DAR directed the municipal agrarian reform officer of
Cuyapo, Nueva Ecija to immediately proceed with the compulsory acquisition of the 187.6785
hectares (mango-orchard) as well as the 25.4181 hectares.
The DAR Secretary
denied the motion for reconsideration which the Company filed on June 30, 2004. The Parent
Company offered the mango orchard under the VOS scheme and tendered to the DAR and
Land Bank its formal offer in the sum of =
P299,950,000. After the DAR and Land Bank
conducted ocular inspections of the property, the Parent Company and Land Bank agreed to the
valuation of the property in the total amount of P
=85,814,316 which was confirmed by the
Parent Company’s BOD during its January 16, 2006 meeting.
In 2006, payments in cash and bonds amounting to =
P26,887,422 and =
P58,926,894,
respectively, were received by the Parent Company. The bonds were subsequently sold in
2006 for a gain of P
=954,487 as recognized in the consolidated statement of income.
26. Significant Agreements
a. LMG leases out a parcel of land in Pinamucan, Batangas to a third party for a period of
10 years renewable for two 10-year terms. Annual rental is US$260,000 plus yearly increases
computed based on the terms of the lease agreement, which is paid yearly in advance and
recorded as part of “Accounts payable and accrued expenses” account in the consolidated
balance sheets.
Upon expiration of the agreement on July 23, 2003, the lease agreement was extended until
July 22, 2004. The rental for the extended period is US$311,139, inclusive of value added tax.
The lease contract was no longer renewed in 2004.
b. LMG leases out its storage tanks to various companies for periods of six months to one year,
renewable at the option of both parties.
c. LMG has supply and purchase agreements with several suppliers for the supply of molten
sulfur.
d. CMC has a supply agreement with a foreign corporation for the supply of liquid caustic soda
and other industrial products until December 31, 2005.
e. KPC has a license agreement (Agreement) with Kemira for 10 years until November 2007, to
manufacture and sell water treatment chemicals by using product technology developed and to
be developed by Kemira. Under the Agreement, KPC will pay US$550,000 covering license
fee, basic designs, commissioning and start-up of a new aluminum sulfate plant; management
and marketing; technical support; and production know-how. The fee was later reduced to
US$400,000.
Total payments made by KPC amounting to US$300,000 or
=11,331,000 (net of taxes) were deferred. The balance of deferred license fee of
P
=2,549,475 and =
P
P5,098,950, as of December 31, 2006 and 2005 is included under the “Other
noncurrent assets” account in the consolidated balance sheets.
- 38 -
59
Amortization of deferred license fee charged to operations amounted to =
P2,549,475 in 2006,
2005 and 2004.
27. Segment Reporting
The Group’s operating businesses are organized and managed separately according to the nature of
the products and services provided, with each segment representing a strategic business unit that
offers several products and serves several markets.
The chemicals segment manufactures and supplies chemical products for water and sewage
treatment and inorganic coagulants for the paper industry. It offers products used in the food,
water, battery, detergent, and paper industries.
The leasing segment provides tank yard and office space leasing. It provides facilities for power
industry and businesses like travel agencies and communications sites.
The Group generally accounts for inter-segment sales and transfers as if the sales or transfers were
to third parties at current market prices.
Chemical
Revenue:
Revenue from external customers
Revenue from other segments
Segment results:
Income tax expense
Net income (loss) for the year
Assets
Liabilities
Segment Cash Flows:
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Other Segment Information
Acquisition (Property, plant and
equipment and other noncurrent
investments)
Depreciation and amortization
P
=421,587,058
–
2006
Tankyard
P
=43,411,596
–
(107,673,329) 41,111,196
2,037,092
762,045
(109,710,421) 40,349,151
1,008,505,618 212,175,308
536,815,122
18,017,231
(9,645,824)
(27,795,538)
14,419,100
1,479,153
57,442,880
- 39 -
Others
P
=– P
=464,998,654
14,432,151
14,432,151
98,833,530
32,271,397
(3,176,629)
(377,492)
102,010,159
32,648,889
533,796,477 1,754,477,403
147,138,045
701,970,398
23,077,090 (79,612,441)
60,884,812 144,506,277
(53,999,954) (55,921,236)
4,753,692
4,551,664
Total
70,028
939,365
(66,181,175)
177,595,551
(95,502,090)
6,302,873
62,933,909
60
Chemical
Revenue:
Segment results:
Income tax expense
Assets
Liabilities
Segment Cash Flows:
investments)
Others
Total
=
P805,611,575
–
=
P47,012,879
–
=
P– =
P852,624,454
11,558,260
11,558,260
(165,336,418)
(5,906,317)
(159,430,101)
25,693,682
1,184,941
24,508,741
(1,912,515) (141,555,251)
(790,104)
(5,511,480)
(1,122,411) (136,043,771)
949,208,627
575,458,337
441,802,526
84,460,211
508,766,056 1,899,777,209
221,042,864 880,961,412
5,945,971
(37,083,117)
(13,675,107)
45,643,526
2,141,974
(644)
1,722,592
4,511,215
(6,166,010)
53,312,089
(30,429,928)
(19,841,761)
32,310,228
61,540,953
1,417,346
3,698,000
387,932
1,425,624
34,115,506
66,664,577
Chemical
Revenue:
Results:
Income tax expense
Assets
Liabilities
Segment Cash Flows:
investments)
2005
Tankyard
=
P1,311,378,219
–
2004
Tankyard
Others
Total
=
P64,432,580
–
=
P– =
P1,375,810,799
12,991,491
12,991,491
(7,415,401) 24,271,608
11,534,902
4,002,765
(18,868,875) 20,268,843
1,097,617,052 390,153,880
536,652,688
63,585,848
245,522
17,101,729
(40,714)
15,496,953
204,808
1,604,776
506,944,821 1,994,715,753
209,996,991
810,235,527
77,266,396
(48,806,342)
(48,247,831)
30,136,793
(2,558,048)
(1,025,528)
9,157,724
(1,534,105)
(7,659,662)
60,948,106
61,495,231
5,937,739
3,353,185
387,932
1,931,784
- 40 -
116,560,913
(52,898,495)
(56,933,021)
67,273,777
66,780,200
61
28. Other Matters
a. The Parent Company is one of the defendants in a court case involving a dispute between two
stockholders. The case involves the complaint for damages in the amount of
=390.0 million based on the allegation of a certain stockholder that it suffered damages as a
P
result of the defendants’ alleged fraudulent act of representing that the shares purchased from
one of the defendants were free from all liens and encumbrances other than those stated in the
deed of sale.
On September 4, 2000, the Regional Trial Court (RTC) rendered a decision ordering the
defendants to pay the plaintiff the total amount of P
=269.1 million, which consisted of
=256.0 million for the value of lost shares minus the balance of the purchase price,
P
=12.0 million for litigation expenses, =
P
P0.1 million for exemplary damages, and =
P1.0 million for
attorney’s fees. The motions for reconsideration were filed by the defendants but were denied
by the RTC on November 14, 2000.
On March 5, 2004, there was a notice of decision from the Court of Appeals exonerating the
Parent Company on the above case.
Motions for partial reconsideration were filed by the two stockholders with the Supreme Court.
As of April 10, 2006, the motions have remained pending with the said court.
b. The Department of Labor and Employment Region IV issued a resolution denying the Group’s
motion for reconsideration of the order granting 16 farm workers wage differentials in the total
amount of P
=1.05 million.
The Parent Company elevated the case to the Court of Appeals. The court dismissed the Parent
Company’s petition. The Parent Company filed a motion for reconsideration of the court’s
order, which resolution is still pending with the said court. The motion is pending resolution
with the said court. The amount of P
=0.5 million, 50% of the total liability, was accrued in 2003
and included in the “Accounts payable and accrued expenses” account in the consolidated
balance sheets.
Management believes that the outcome of the case will not significantly affect the financial
position and results of operations of the Company.
c. The Parent Company and some subsidiaries have pending deficiency tax assessments covering
certain years. In this regard, LMG received a preliminary collection letter from the Bureau of
Internal Revenue requesting LMG to pay tax liabilities amounting to =
P38.2 million, inclusive
of surcharge and penalties. However, LMG executed a waiver of defense of prescription and
submitted a position paper on the said assessments. Management believes that the ultimate
outcome of these assessments, if any, would not materially affect the Group’s financial position
or results of operations.
d. Some subsidiaries are defendants in various court cases relating to claims for damages and
labor claims. It is the opinion of the subsidiaries’ management that settlement costs, if any,
will not materially affect the subsidiaries’ financial position and operating results.
62
- 41 e. A subsidiary filed an arbitration case with the Philippine Dispute Resolution Center, Inc.
(PDRCI), against a customer, regarding the reimbursement of fuel supplied by the subsidiary.
On March 15, 2005, judgment was rendered in favor of the subsidiary whereby the customer is
ordered to pay the sum of =
P784,868, payable in six (6) monthly installments.
f.
On September 13, 2004, the Department of Environment and Natural Resources (DENR) and
the city government of Pasig ordered the closure of LMG’s sulfuric acid plant through a Cease
and Desist Order (CDO). This was due to the alleged sulfuric acid emission which affected
several pupils in a nearby school in Barangay San Joaquin. The CDO also required LMG to
undertake remedial measures and enhance its Environmental Management Plant (EMP) for the
sulfuric acid plant to further ensure its safe operation.
On October 10, 2005, DENR/EMB and the City of Pasig issued permanent lifting of the
closure orders subject to LMG’s compliance with environmental laws and regulations.
Results of investigation, conducted by an independent party, showed that it was unlikely for
LMG to have caused the pollution incident.
g. In October 2005, CAWC announced its temporary shutdown the objective of which is to stop
the massive losses being incurred. CAWC was adversely and critically affected by the surge of
Sodium Tri-Polyphosphates (STPP) imports from various countries. Moreover, CAWC filed a
petition for Safeguard Measure with the Department of Trade and Industry (DTI). Safeguard
Measure is a remedy and safety net against the injurious effect of the surge in imports
enshrined and recognized by the Constitution.
At this time, CAWC has not yet attained normal operation. However, they continue to operate
intermittently producing small quantities of STPP for a loyal Filipino detergent producer.
Moreover, CAWC is in the midst of an on-going negotiation with a major multinational
company for a two-year supply contract for STPP. In the meantime, CAWC is still awaiting
the final decision of the DTI on their petition for the imposition of Safeguard Measure on
imported STPP from various countries.
The status of operation of CAWC has no significant impact on the consolidated financial
statements of the Group.
h. In April 2006, the agency agreement between CMC and Basic Chemical Solutions (BCS) of
Singapore, sole supplier of liquid caustic soda, expired and was not renewed. The Company
only operated from January to April 2006. However, despite the short period of operations the
Company’s sales volume in 2006 only dropped by 19.47% compared to the trading period of
2005.
In the light of the expiration of the agreement with BCS in April 2006, the objective of the
Company for 2007 is to secure an agency agreement with other chemical traders. The business
plan includes the expansion of product lines in 2007 in order to generate additional revenues
for the trading business. The Company is now negotiating with prospective suppliers for the
possible trading of Vinyl Chloride Monomer (VCM), acetic acid, linear alkyl benzene (LAB),
glycerine, and zeolite.
CMC’s status of operations has no significant impact in the Group’s consolidated financial
statements.
63
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
Chemical Industries of the Philippines, Inc.
Chemphil Building, 851 A. Arnaiz Avenue
We have audited the accompanying financial statements of Chemical Industries of the Philippines,
Inc., which comprise the parent company balance sheets as at December 31, 2006 and 2005, and the
parent company statements of income, parent company statements of changes in stockholders’ equity
and parent company 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
64
-2-
Opinion
In our opinion, the parent company financial statements present fairly, in all material respects, the
financial position of Chemical Industries of the Philippines, Inc. as of December 31, 2006 and 2005,
and its financial performance and its cash flows for the years then ended in accordance with Philippine
Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Josephine H. Estomo
Partner
CPA Certificate No. 46349
SEC Accreditation No. 0078-AR-1
Tax Identification No. 102-086-208
PTR No. 0266550, January 2, 2007, Makati City
April 4, 2007
65
PARENT COMPANY BALANCE SHEETS
December 31
2005
2006
ASSETS
Current Assets
Cash and cash equivalents (Note 4)
Receivables - net (Note 5)
Due from related parties - net (Note 13)
Other current assets (Note 6)
Total Current Assets
Noncurrent Assets
Investments (Note 7)
Property and equipment (Note 8)
At cost - net
At revalued amounts
Other noncurrent assets - net (Note 9)
Total Noncurrent Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Notes payable (Note 10)
Accounts payable and accrued expenses (Note 11)
Due to related parties (Note 13)
Current portion of long-term debt (Note 12)
Total Current Liabilities
Noncurrent Liabilities
Accrued retirement benefits payable (Note 16)
Long-term debt - net of current portion (Note 12)
Deferred credit (Note 7)
Deferred income tax liability - net (Note 17)
Total Noncurrent Liabilities
Total Liabilities
Stockholders’ Equity
Capital stock - =
P10 par value
Authorized - 19,000,000 shares
Issued - 10,296,688 shares (held by 23 holders in 2006
and 2005)
Additional paid-in capital
Net changes in fair value of available-for-sale investments
Revaluation increment in land (Note 8)
Retained earnings (deficit)
Less cost of 87 shares held in treasury
Total Stockholders’ Equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
P
=9,088,528
23,399,103
26,423,925
11,197,798
70,109,354
=115,928
P
23,448,268
2,887,985
11,273,823
37,726,004
191,877,487
178,272,777
2,027,508
252,261,547
17,520,581
463,687,123
P
=533,796,477
2,896,953
271,616,692
18,253,630
471,040,052
=508,766,056
P
P
=39,150,000
15,776,906
4,393,388
–
59,320,294
=46,550,000
P
15,033,028
23,232,843
4,800,000
89,615,871
8,414,394
–
1,478,919
77,924,438
87,817,751
147,138,045
20,785,083
21,721,236
1,478,919
87,441,755
131,426,993
221,042,864
102,966,880
102,966,880
16,621,243
12,210,000
163,077,395
91,783,784
386,659,302
870
386,658,432
P
=533,796,477
16,621,243
–
175,548,260
(7,412,321)
287,724,062
870
287,723,192
=508,766,056
P
See accompanying Notes to Parent Company Financial Statements.
66
PARENT COMPANY STATEMENTS OF INCOME
2006
REVENUE
Management fees (Note 13)
Rental - net (Note 13)
Operating costs and expenses (Note 15)
Gain on sale of property and equipment (Note 8)
Dividend income
Recovery from Petrocorp investments (Note 7)
Interest income (Note 13)
Interest expense (Notes 10, 11 and 12)
Gain on sale of marketable securities (Note 19)
Income from MERALCO refund (Note 9)
Recovery of accounts receivable previously written-off
Other income (expenses) - net
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT FROM INCOME TAX (Note 17)
Current
Deferred
NET INCOME (LOSS)
2005
P
=9,500,000
4,932,151
14,432,151
=8,600,000
P
2,958,260
11,558,260
(10,989,402)
66,142,270
25,564,762
7,996,450
2,347,355
(6,627,865)
954,487
–
–
(986,678)
84,401,379
(14,845,082)
2,012,081
3,920,000
–
227,622
(8,346,876)
–
1,095,976
2,214,926
250,578
(13,470,775)
98,833,530
(1,912,515)
965,607
(4,142,236)
(3,176,629)
P
=102,010,159
170,834
(960,938)
(790,104)
(P
=1,122,411)
67
PARENT COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Additional
Capital Stock
Impairment of available-for-sale
BALANCES AT JANUARY 1, 2005
Effect of change in income tax rates on
revaluation increment in land (Note 17)
P
=102,966,880 P
=16,621,243 (P
=17,785,496)
–
102,966,880
–
–
–
102,966,880
Transfer of portion of deferred tax liability to
revaluation increment due to effect of
change in tax rates
–
Transfer of portion of revaluation increment
in property, plant and equipment realized
through sale
–
Changes in fair values of available-for-sale
–
Total income and expense recognized in equity
–
Net income for the year
–
–
Dividends declared - P
=2.1366 per share (Note 14)
–
Paid-in
Capital
Net Changes in
Fair Value of
Revaluation
Available-forsale Increment
investments
in Land
–
16,621,243
17,785,496
Retained
Earnings
(Deficit)
P
=183,650,487 P
=11,495,586
–
(17,785,496)
Treasury
Stock
(P
=870) P
=296,947,830
–
–
183,650,487
(6,289,910)
–
–
–
(8,102,227)
–
(8,102,227)
–
(1,122,411)
(1,122,411)
–
175,548,260
(7,412,321)
–
–
6,715,081
–
–
(19,185,946)
19,185,946
–
12,210,000
12,210,000
–
12,210,000
–
–
(12,470,865)
–
(12,470,865)
–
–
19,185,946
102,010,159
121,196,105
(22,000,000)
–
–
–
–
–
P
=12,210,000
P
=163,077,395
P
=91,783,784
–
–
–
16,621,243
–
–
–
–
–
P
=102,966,880 P
=16,621,243
–
Total
–
(870) 296,947,830
–
–
–
(8,102,227)
(1,122,411)
(9,224,638)
(870) 287,723,192
–
6,715,081
–
12,210,000
18,925,081
102,010,159
120,935,240
(22,000,000)
(P
=870) P
=386,658,432
68
PARENT COMPANY STATEMENTS OF CASH FLOWS
2005
2006
CASH FLOWS FROM OPERATING ACTIVITIES
Income (Loss) before income tax
Adjustments for:
Depreciation and amortization (Note 8)
Interest expense (Notes 10, 11 and 12)
Interest income (Note 13)
Dividend income
Gain on sale of property and equipment and bonds
(Notes 8 and 19)
Operating income before working capital changes
Decrease (increase) in:
Receivables
Other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Net cash generated from (used in) operations
Interest paid
Interest received
Income taxes paid, including creditable withholding and final tax
Net cash flows from (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of property and equipment and bonds (Note 8)
Dividends received from associates
Decrease (increase) in other noncurrent assets
Additions to property and equipment (Note 8)
Additions to investments
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Availments of notes payable
Payment of:
Notes payable
Long-term debt
Dividends paid
Net cash flows used in financing activities
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4)
P
=98,833,530
(P
=1,912,
939,365
6,627,865
(2,347,355)
(25,564,762)
1,425,624
8,346,876
(227,622)
(3,920,000)
(67,096,757)
11,391,886
(2,012,081)
1,700,282
(21,945,375)
(67,407)
686,344
(2,685,505)
991,925
888,021
743,878
(19,549,445)
(12,370,689)
(41,110,808)
(5,917,875)
873,361
(1,575,925)
(47,731,247)
4,116,472
4,086,098
3,589,629
12,686,922
(10,068,481)
227,622
(1,123,471)
1,722,592
87,063,260
25,564,762
492,212
(70,028)
(425,123)
112,625,083
2,208,523
3,920,000
(1,229,376)
(387,932)
–
4,511,215
14,000,000
–
(21,400,000)
(26,521,236)
(22,000,000)
(55,921,236)
8,972,600
(87,246)
(6,078,764)
–
(6,166,010)
67,797
115,928
P
=9,088,528
48,131
=115,928
P
69
PARENT COMPANY NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Chemical Industries of the Philippines, Inc. (the Company) is incorporated in the Philippines and
is the holding company of corporations primarily engaged in the manufacture and sale of industrial
chemicals. The registered office address of the Company is Chemphil Building, 851 A. Arnaiz
Avenue, Legaspi Village, Makati City.
The Parent Company has two majority-owned domestic subsidiaries, namely, CAWC, Inc.
(CAWC) and LMG Chemicals Corp. and Subsidiaries (LMG). LMG has a wholly owned
domestic subsidiary, Chemphil Marketing Corp. (CMC) and a majority-owned domestic
subsidiary, Kemwater Phil. Corp. (KPC).
The Parent Company also owns 49% of Perfumeria Española Corp. (PEC) known in the
Philippines for the Heno de Pravia brand of personal care lines.
The accompanying parent company financial statements of the Company were authorized for issue
by the Board of Directors (BOD) on April 4, 2007.
2. Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation and Statement of Compliance
The separate financial statements were prepared under the historical cost basis, except for
available-for-sale investments which have been measured at fair value and parcels of land stated at
revalued amounts. These financial statements are presented in Philippine peso, which is the
Company’s functional and presentation currency.
The separate financial statements, which are prepared for submission to the Philippine Securities
and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR), are presented in
compliance with Philippine Financial Reporting Standards (PFRS).
The Company also prepares and issues consolidated financial statements for the same period as the
separate financial statements presented in compliance with PFRS. These may be obtained at the
registered office address of the Company.
Changes in Accounting Policies
The accounting policies adopted in 2006 are consistent with those of the previous year, except that
the Company has made changes in accounting policies resulting from adoption of the following
revised standards and Philippine Interpretation International Financial Reporting Interpretations
Committee (IFRIC) effective January 1, 2006:
•
Amendments to PAS 19, Employee Benefits, provides additional option to recognize all
actuarial gains and losses immediately outside of profit or loss (i.e., in equity). If the new
option is adopted, present actuarial gains and losses in a statement of changes in equity titled
‘Statement of Recognized Income and Expenses’. The Company chose not to apply the new
option to recognize all actuarial gains and losses immediately outside of profit or loss.
70
-2•
Amendments to PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts requires 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 hedges of forecast intragroup transactions permits the foreign currency risk
of a highly probable intragroup forecast transaction to qualify as the hedged item in a cash
flow hedge, provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and that the foreign currency
risk will affect the parent company statement of income.
Amendment for the fair value option restricts the use of the option to designate any financial
asset or any financial liability to be measured at fair value through the profit or loss.
•
Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease,
provides guidance in determining whether arrangements contain a lease to which lease
accounting must be applied. The adoption of this interpretation did not have any significant
impact on the parent company financial statements.
Adoption of the revised accounting standards and interpretation did not result to restatement of
prior year’s parent company financial statements. Additional disclosures required by the revised
standards and interpretation were included in the parent company financial statements, where
applicable.
Future Changes in Accounting Policies
The Company has not applied the following PFRS and Philippine Interpretations which are not yet
effective for the year ended December 31, 2006:
•
PFRS 7, Financial Instruments: Disclosures, and the complementary amendment to PAS 1,
Presentation of Financial Statements: Capital Disclosures (effective for annual periods
beginning on or after January 1, 2007), 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 of PAS 32, Financial
Instruments: Disclosure and Presentation. It is applicable to all entities that report under
PFRS. The amendment to PAS 1 introduces disclosures about the level of an entity’s capital
and how it manages its capital.
•
PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1,
2009), requires a management approach to reporting segment information. PFRS 8 will
replace PAS 14, Segment Reporting, and is required to be adopted only by entities whose debt
or equity instruments are publicly traded, or are in the process of filing with the SEC for
purposes of issuing any class of instruments in a public market.
71
-3•
Philippine Interpretation IFRIC 7, Applying the Restatement Approach under PAS 29,
Financial Reporting in Hyperinflationary Economies (effective for annual periods beginning
on or after March 1, 2006), provides guidance on how to apply PAS 29 when an economy first
becomes hyperinflationary, in particular the accounting for deferred tax.
•
Philippine Interpretation IFRIC 8, Scope of PFRS 2 (effective for annual periods beginning on
or after May 1, 2006), requires PFRS 2 to be applied to any arrangements where equity
instruments are issued for consideration which appears to be less than fair value.
•
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives (effective for
annual periods beginning on or after June 1, 2006), 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 (effective for
annual periods beginning on or after November 1, 2006), prohibits the reversal of impairment
losses on goodwill and available-for-sale 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
(effective for annual periods beginning on or after March 1, 2007), 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 the subsidiary’s
employees receive rights to the equity instruments of the parent.
•
Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual
periods beginning on or after January 1, 2008), covers contractual arrangements arising from
private entities providing public services.
The effects of the adoption of these standards and interpretations, if any, and the revised
disclosures will be included in the parent company financial statement when these are adopted.
Cash and Cash Equivalents
Cash consists of cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less and that are subject to an insignificant risk of changes in value.
Financial Assets and Liabilities
Financial assets are classified as either financial assets at fair value through profit or loss, loans
and receivables, held-to-maturity investments, and available-for-sale financial assets, as
appropriate. Financial liabilities on the other hand, are classified as either financial liabilities
through profit or loss or other liabilities, as appropriate. The Company determines the
classification of its financial assets and liabilities after initial recognition and, where allowed and
appropriate, re-evaluates this designation at each financial year-end.
72
-4-
Financial assets and liabilities are recognized initially at fair value. Transaction costs, if any, are
included in the initial measurement of financial assets and liabilities, except for any financial
instruments measured at fair value through profit and loss. The Company recognizes a financial
asset or liability in the parent company balance sheet when it becomes a party to the contractual
provision of the instrument.
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.
All regular way purchases and sales of financial assets are recognized on the settlement date,
(i.e. the date that the Company commits to purchase the asset). Regular way purchases or sales are
purchases or sales of financial assets that require delivery of assets within the period generally
established by regulation or convention in the marketplace.
Financial assets or financial liabilities at fair value through profit or loss
Financial assets or financial liabilities classified in this category are designated by management on
initial recognition when the following criteria are met:
• The designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets or recognizing gains or losses on them on a different
basis, or
• The assets and liabilities are part of a group of financial assets and financial liabilities,
respectively, or both financial assets and financial liabilities, which are managed and their
performance evaluated on a fair value basis, in accordance with a documented risk management
or investment strategy, or
• The financial instrument contains an embedded derivative, unless the embedded derivative
does not significantly modify the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.
Financial assets classified as held for trading are included in the category “financial assets at fair
value through profit or loss”. Financial assets are classified as held for trading if they are acquired
for the purpose of selling in the near term. Derivatives are also classified as held for trading
unless they are designated as effective hedging instruments. Gains or losses on investments held
for trading are recognized in the parent company statement of income.
The Company has not designated any financial assets or financial liabilities as financial assets or
liabilities at fair value through profit or loss.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturities are
classified as held-to-maturity 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 held-to-maturity, 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 less allowance for
73
-5-
impairment. 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.
The Company has not designated any financial assets as held-to-maturity assets.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments and
fixed maturities that are not quoted in an active market. Such assets are carried at amortized cost
using the effective interest method. Gains and losses are recognized in the parent company
statement of income when the loans and receivables are derecognized or impaired, as well as
through the amortization process.
Classified as loans and receivables are the Company’s trade receivables and due from related
parties.
Available-for-sale investments are those non-derivative financial assets that are designated as
available-for-sale or are not classified in any of the three preceding categories. After initial
recognition, available-for-sale 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 parent company statement of income.
Classified as available-for-sale financial assets are investments in noncurrent marketable equity
securities and bonds.
Other Financial Liabilities
Other financial liabilities pertain to financial liabilities that are not held for trading or not
designated as fair value through profit or loss upon the inception of the liability. These include
liabilities arising from operations (e.g., payables, accruals).
The liabilities are recognized initially at fair value and are subsequently carried at amortized cost,
taking into account the impact of applying the effective interest method of amortization (or
accretion) for any related premium, discount and any directly attributable transaction costs.
Derecognition of Financial Assets and Liabilities
Financial Assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar
financial assets) is derecognized when:
•
•
the rights to receive cash flows from the asset have expired; or
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
74
-6•
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.
Financial Liabilities
A financial liability is derecognized when the obligation under the liability is discharged,
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 parent company
Impairment of Financial Assets
The Company assesses at each balance sheet date whether or not 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 is
reduced either directly or through use of an allowance account. The amount of the loss is
recognized in the parent company 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.
75
-7-
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 parent company 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.
Available-for-Sale Investments
If an available-for-sale 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 parent company statement of income, is transferred from equity to the
parent company statement of income. Reversals in respect of equity instruments classified as
available-for-sale are not recognized in profit. Reversals of impairment losses on debt instruments
are reversed through the parent company 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
Offsetting of Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the parent
company balance sheet if, and only if, there is a currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net basis, or to realize the asset and
settle the liability simultaneously. This is not generally the case with master netting agreements,
and the related assets and liabilities are presented gross in the parent company balance sheet.
Investments in Shares of Stock
The Company’s investments in shares of stock of CAWC, a 99.67% owned subsidiary, and LMG,
a 73.93% majority-owned subsidiary, are accounted for under the cost method in the parent
company financial statements. A subsidiary is an entity which the Company holds, directly or
indirectly, more than half of the issued share capital, or controls more than half of the voting
power, or exercises control over the operation and management of the subsidiary. The Company
recognizes income from investment only to the extent that the Company receives distribution from
any accumulated profits of the subsidiary 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 investment.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization and any
impairment in value, except for land which is carried at revalued amount as determined by an
independent firm of appraisers.
76
-8The net appraisal increment from revaluation is shown as “Revaluation increment in land” account
under the Stockholders’ Equity section of the parent company balance sheet.
Revaluation is made with sufficient regularity such that the carrying amount does not differ
materially from that which would be determined using fair value at the balance sheet date. Any
resulting increase in the asset’s carrying amount as a result of the revaluation is credited directly to
“Revaluation increment in land” net of related deferred tax liability. Any resulting decrease is
directly charged against any related revaluation increment to the extent that the decrease does not
exceed the amount of the revaluation increment in respect of the same asset.
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 in which the costs are incurred. In situations where it can be clearly demonstrated that
the expenditures have resulted in an increase in the future economic benefits expected to be
obtained from the use of an item of property and equipment beyond its originally assessed
standard of performance, the expenditures are capitalized as an additional cost of property and
equipment.
Depreciation and amortization commences once the assets are put into operational use and are
computed on a straight-line basis over the estimated useful lives of the assets as follows:
Land improvements
Buildings and improvements
Standing crops
Years
5-10
25-30
10
3-5
3-5
1-3
The residual values, estimated useful lives and depreciation and amortization method are reviewed
periodically and adjusted if appropriate at each balance sheet date.
When property and equipment are sold or retired or otherwise disposed of, the cost and the related
appraisal increase, accumulated depreciation and amortization and impairment in value are
removed from the accounts, and any resulting gain or loss is recognized in the parent company
Upon the disposal of the revalued land, the related revaluation increment realized in respect of the
latest valuation will be released from the revaluation increment directly to retained earnings.
77
-9Investment Property
Investment property, which is included in Other noncurrent assets in the parent company balance
sheet, pertains to parcel of land not used in operation and is stated at cost less any impairment in
value. This is used by the owner or by the lessee under operating lease to earn rentals or for
capital appreciation on both, rather than use in the production or supply of goods or services for
administrative purposes; or sale in the ordinary course of business.
Investment properties are derecognized when either they have been disposed of or when they are
permanently withdrawn from use and no future economic benefit is expected from their disposal.
Any gains or losses on the retirement or disposal of an investment property are recognized in the
parent company statement of income in the year 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 sell.
Impairment of Non-financial Assets
The carrying values of non-financial assets are reviewed for impairment when events or changes
in circumstances indicate that the carrying values may not be recoverable. If any such indication
exists and where the carrying values exceed the estimated recoverable amounts, the assets are
written down to their recoverable amounts. An asset’s recoverable amount is the greater of net
selling price and value in use. In assessing value in use, the estimated future cash flows are
discounted to their present values using a pre-tax discount rate that reflect current market
assessments of the time value of money and the risks specific to the asset. Any impairment loss is
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
reviewed only if there has been a change in the estimates used to determine the asset’s recoverable
amount since the last impairment loss was recognized. If that is the case, the carrying amount of
the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying
amount that would have been determined, net of depreciation and amortization, had no impairment
loss been recognized for the asset in prior years. Such reversal is recognized in the parent
company statement of income.
Treasury Shares
The Company’s common shares which are reacquired (treasury shares) are deducted from equity.
No gain or loss is recognized in the parent company statement of income on the purchase, sale or
cancellation of the Company’s common shares.
Revenue
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:
a. Management fee is recognized as services are rendered.
b. Rental is recognized on a straight-line basis over the term of the lease.
c. Interest income is recognized as the interest accrues.
78
- 10 Borrowing Costs
Borrowing costs are expensed as incurred.
Retirement Benefits Cost
Retirement benefits cost is actuarially computed using the projected unit credit method. This
method reflects services rendered by employees up to the date of valuation and incorporates
assumptions concerning employees’ projected salaries. Actuarial valuations are conducted with
sufficient regularity, with option to accelerate when significant changes to underlying assumptions
occur. Retirement benefits cost includes current service cost, interest cost, expected return on any
plan assets, actuarial gains and losses, past service cost and the effect of any curtailment or
settlement. Actuarial gains and losses are recognized as income or expense when the net
cumulative unrecognized actuarial gains and losses of the defined benefit 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 defined benefit plan.
The net retirement liability recognized by the Company in respect of the defined benefit retirement
plan is the aggregate of the present value of the defined benefit obligation and actuarial gains and
losses not recognized reduced by the past service cost not yet recognized and the fair value of plan
assets out of which the obligations are to be settled directly.
The net retirement asset recognized by the Company in respect of the defined benefit retirement
plan is the lower of: (a) the present value of the defined benefit obligation at the balance sheet
date less the fair value of the plan assets, together with adjustments for unrecognized actuarial
gains or losses and past service costs that shall be recognized in later periods or (b) the total of any
cumulative unrecognized net actuarial losses and past service cost and the present value of any
economic benefits available in the form of refunds from the plan or reductions in future
contributions to the plan.
The present value of the defined benefit obligation is determined by discounting the estimated
future cash outflows using risk-free interest rates of government bonds that have terms to maturity
approximating the terms of the related retirement liability.
Operating Lease
The determination of whether the 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 on 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 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 reassessment for scenarios (a), (c), or (d) and at the date of
renewal or extension period for scenario (b).
For arrangements entered prior to January 1, 2005, the date of inception is deemed to be
January 1, 2005 in accordance with the transitional requirements of IFRIC 4.
79
- 11 -
Leases where the Company as lessor retains substantially all the risks and benefits of ownership of
the asset are classified as operating leases. Operating lease proceeds are recognized as income in
the parent company statement of income on a straight-line basis over the lease term.
Leases where the Company as lessor retains substantially all the risks and benefits of ownership of
the asset are classified as operating leases. Operating lease proceeds are recognized as income in
the parent company statement of income on a straight-line basis over the lease term.
Income Taxes
Current Tax
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantively enacted at the balance sheet
date.
Deferred Tax
Deferred 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 tax liabilities are recognized for all taxable temporary
differences. Deferred tax assets are recognized for all deductible temporary differences, unused
minimum corporate income tax (MCIT) and 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 unused MCIT and NOLCO can be utilized.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable profit will be available to allow all or
part of the deferred income tax asset to be utilized. Unrecognized deferred tax assets are
reassessed at each balance sheet date and are recognized to the extent that it has become probable
that future taxable profit will allow the deferred tax asset to be recorded.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the
year when the asset is realized or the liability is settled based on the tax rates that have been
enacted or substantively enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set
off the deferred tax assets against the deferred tax liabilities and the deferred taxes relate to the
same taxable entity and the same taxation authority.
Income tax relating to items recognized directly in equity is recognized in the stockholders’ equity
and not in the parent company statement of income.
Foreign Currency Transactions and Translations
Transactions denominated in foreign currencies are recorded in Philippine peso based on the
exchange rates prevailing at the transaction dates. Outstanding foreign currency-denominated
monetary assets and liabilities are translated to Philippine peso at exchange rates prevailing at the
balance sheet dates. Foreign exchange differentials between rate at transaction date, and rate at
settlement date or balance sheet date of foreign currency-denominated monetary assets or
liabilities are reflected in the parent company statement of income.
80
- 12 Provisions and Contingencies
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 assessment
of the time value of money and, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provision due to the passage of time is recognized as an
interest expense.
Contingent liabilities are not recognized in the parent company financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. A contingent asset is not recognized in the parent company financial statements but
disclosed when an inflow of economic benefit is probable.
Events After the Balance Sheet Date
Post year-end events up to the date of the approval of the BOD that provide additional information
about the Company’s position at balance sheet date (adjusting events) are reflected in the parent
company financial statements. Post year-end events that are not adjusting events are disclosed in
the notes to the parent company financial statements when material.
3. Significant Accounting Judgments and Estimates
The preparation of the accompanying financial statements in compliance with PFRS requires
management to make judgments, estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. The judgments, estimates and assumptions used in
the accompanying financial statements are based upon management’s evaluation of relevant facts
and circumstances that are believed to be reasonable as of the date of the financial statements.
While the Company believes that the assumptions are reasonable and appropriate, differences in
the actual experience or changes in the assumptions may materially affect the estimated amounts.
Actual results could differ from such estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is revised if the revision
affects only that period, or in the period of the revision and future periods if the revision affects
both current and future periods.
Determination of Company’s Functional Currency
The Company, based on the relevant economic substance of the underlying circumstances, has
determined its functional currency to be the Philippine peso. It is the currency of the primary
economic environment in which the Company operates.
Classification of Financial Instruments
The Company classifies a financial instrument, or its components, on initial recognition as a
financial liability, a financial asset or an equity instrument in accordance with the substance of the
contractual arrangement and the definitions of a financial liability, a financial asset or an equity
instrument. The substance of a financial instrument, rather than its legal form, governs its
classification in the parent company balance sheet.
81
- 13 The Company determines the classification at initial recognition and re-evaluates this
classification at every reporting date.
Operating Lease
The Company has entered into property leases, where it has determined that the risks and rewards
related to those properties are retained with the lessors. As such, these lease agreements are
accounted for as operating lease.
The Company’s rental income amounted to =
P4,932,151 in 2006 and =
P2,958,260 in 2005.
Estimation of Allowance for Doubtful Accounts
Allowance for doubtful accounts is provided for accounts that are specifically identified to be
doubtful as to collection. The level of allowance is evaluated by management on the basis of
factors that affect the collectibility of the accounts.
The Company’s receivables, net of allowance for doubtful accounts, amounted to =
P23,399,103 and
=23,448,268 as of December 31, 2006 and 2005, respectively. Allowance for doubtful accounts as
P
of December 31, 2006 and 2005 amounted to =
P620,823 and =
P1,390,391, respectively (see Note 5).
Valuation of Land Under Revaluation Basis
The Company’s land is carried at revalued amounts, which approximate their fair values at the
date of the revaluation, less any subsequent accumulated impairment losses. The valuations of
land are performed by professionally qualified appraisers. Revaluations are made every two to
three years to ensure that the carrying amounts do not differ materially from those which would be
determined using fair values at balance sheet date.
The revalued amount of land amounted to P
=252,261,547 and =
2006 and 2005, respectively (see Note 8).
Estimation of Useful Lives of Property, Plant and Equipment
The Company estimates the useful lives of its property and equipment based on the period over
which the assets are expected to be available for use. The Company reviews annually the
estimated useful lives of property and equipment based on factors that include asset utilization,
internal technical evaluation, technological changes, environmental and anticipated use of the
assets tempered by related industry benchmark information. It is possible that future results of
operation could be materially affected by changes in these estimates brought about by changes in
factors mentioned. A reduction in the estimated useful lives of property and equipment would
increase depreciation expense and decrease noncurrent assets.
The carrying values of the property and equipment at cost amounted to =
P2,027,508 and
=2,896,953 as of December 31, 2006 and 2005, respectively (see Note 8). Total depreciation
P
expense charged to operations amounted to =
P939,365 and =
P1,425,624 in 2006 and 2005,
respectively.
Recognition of Deferred Tax Assets
The Company reviews the carrying amounts at each balance sheet date and adjusts the balance of
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.
The Company’s deferred tax assets amounted to =
P11,226,467 and =
2006 and 2005, respectively (see Note 17).
82
- 14 Retirement Benefits
The determination of the obligation and cost of retirement benefits is dependent on the selection of
certain assumptions used by actuaries in calculating such amounts. Those assumptions are
described in Note 16 and include among others, discount rates, expected returns on plan asset and
salary increase rates. Actual results 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 retirement obligations.
The Company’s accrued retirement benefits amounted to =
P8,414,394 and =
P20,785,083 as of
December 31, 2006 and 2005, respectively. Retirement expense charged to operations amounted
to =
P564,759 in 2006 and =
P3,725,163 in 2005.
Provisions
The Company provides for present obligations (legal or constructive) where it is probable that
there will be an outflow of resources embodying economic benefits, that will be required to settle
said obligations. An estimate of the provision is based on known information at balance sheet
date, net of any estimated amount that may be reimbursed to the Company. If the effect of the
time value of money is material, provisions are discounted using a current pre-tax rate that reflects
the risks specific to the liability. The amount of provision is being re-assessed at least on an
annual basis to consider new relevant information. The Company has no provisions in 2006 and
2005.
4. Cash and Cash Equivalents
Cash on hand and in banks
Short term investments
2006
P
=588,528
8,500,000
P
=9,088,528
2005
=115,928
P
–
=115,928
P
Cash in banks earn interest at the respective bank deposit rates. Short-term investments are made
for varying periods of up to three months depending on the immediate cash requirements of the
Company, and earn interest at the respective short-term investment rates.
5. Receivables
Receivable from stockholders
Trade
Current portion of receivable from MERALCO - net
of deferred interest income (Note 9)
2006
P
=22,660,526
460,074
2005
=23,158,084
P
444,604
211,302
649,989
(Forward)
83
- 15 -
Officers and employees
Others
2006
P
=35,911
652,113
24,019,926
620,823
P
=23,399,103
2005
=186,919
P
399,063
24,838,659
1,390,391
=23,448,268
P
2006
P
=9,993,468
396,049
808,281
P
=11,197,798
2005
=9,383,150
P
467,369
1,423,304
=11,273,823
P
6. Other Current Assets
Prepaid taxes
Supplies
Deposits and others
7. Investments
Investments in subsidiaries and associates - at cost
Available-for-sale financial assets
2006
2005
P
=161,966,251
29,911,236
P
=191,877,487
=161,966,251
P
16,306,526
=178,272,777
P
Investments in subsidiaries and associates, which are all incorporated in the Philippines, consist of
investment in the following companies:
Subsidiaries and Associates
CAWC
LMG
PEC
Percentage of
Ownership
99.67
73.93
49.00
The combined financial information of its subsidiaries and associates (LMG and its subsidiaries,
CAWC and PEC) are summarized below:
Total assets
Total liabilities
Minority interest
Total stockholders’ equity
Net income (loss)
2006
P
=2,047,611,743
775,361,759
46,100,305
1,226,149,679
56,505,865
2005
=1,707,289,672
P
743,257,500
41,883,870
922,148,302
(143,490,233)
84
- 16 Available-for-Sale Investments
Available-for-sale financial assets consists of:
=108,437,500
a. Investment in All Asia Capital and Trust Corporation (All Asia) amounting to P
which was fully impaired in previous years following the latter’s recurring losses, negative
working capital and capital deficiency.
b. Investment in PetroChemicals Corporation of Asia-Pacific (Petrocorp) amounting to
=181,784,776 which was fully impaired in previous years following Petrocorp’s recurring
P
losses, substantial negative working capital and capital deficiency.
In 2006, portion of the investment in Petrocorp amounting to =
P7,996,450 was recovered by the
Company and recognized in the 2006 parent company statement of income.
c. Other investments consist of investment in golf club shares and other proprietary shares
amounting to =
P29,194,303 and bonds and other debt instruments amounting to =
P716,933 as of
December 31, 2006 (P
=16,007,716 and =
P298,810, respectively as of December 31, 2005).
The Company’s other investments are carried at fair value with net cumulative gain as of
December 31, 2006 of =
P12,210,000, net of deferred tax liability of =
P1,340,000, recognized as
a separate component of stockholders’ equity.
Deferred credit, amounting to =
P1,478,919, classified as noncurrent liability in the balance sheet,
pertains to the portion of the gain on sale of the Company’s 4.79% ownership in Kemwater
Philippines Corp. (KPC) to LMG attributable to the Company’s interest in LMG. This was
deferred and will only be realized from transactions with outside parties through sale. The portion
of the gain on sale attributable to the deemed sale to the minority in LMG amounting to =
P521,512
was recognized as a realized gain in 2003, in the year of sale.
8. Property and Equipment
2006
Machinery
Land Buildings and
And Transportation
Improvements Improvements Equipment
Equipment
Cost
Beginning balances
Additions
Reclassification
Write-offs/Disposals
Ending balances
P
=9,194,012
–
–
–
9,194,012
Office
Standing Furniture and
Crops
Fixtures
Total
P
=825,086
–
–
(825,086)
–
P
=23,129,964
–
–
(235,847)
22,894,117
P
=4,740,545 P
=8,302,018 P
=29,438,389 P
=75,630,014
–
–
70,028
70,028
–
–
–
–
(545,454) (8,302,018)
(278,837) (10,187,242)
4,195,091
–
29,229,580 65,512,800
825,083
20,920,675
9,190,647
4,740,525 8,302,016
28,754,115 72,733,061
–
3
(825,086)
–
P
=–
478,400
–
(235,844)
21,163,231
P
=1,730,886
3,261
–
–
9,193,908
P
=104
–
–
–
2
(545,451) (8,302,018)
4,195,074
–
P
=17
P
=–
457,704
939,365
–
5
(278,740) (10,187,139)
28,933,079 63,485,292
P
=296,501 P
=2,027,508
Accumulated
Depreciation
and Amortization
Beginning balances
Depreciation and
amortization
Reclassification
Ending balances
Net Book Values
85
- 17 2005
Land Buildings and Machinery and Transportation
Equipment
Equipment
Cost
Beginning balances
Additions
Reclassification
Ending balances
and Amortization
Beginning balances
Depreciation and
amortization
Reclassification
Write-offs/Disposal
Ending balances
Net Book Values
=
P825,086
–
–
–
825,086
=
P23,218,620 =
P10,982,376
–
–
–
23,563
(88,656)
(1,811,927)
23,129,964
9,194,012
Office
Standing Furniture and
Crops
Fixtures
Total
=
P10,877,521 =
P8,302,018 =
P30,147,936 =
P84,353,557
–
–
387,932
387,932
–
–
(23,563)
–
(6,136,976)
– (1,073,916) (9,111,475)
4,740,545
8,302,018 29,438,389 75,630,014
825,083
–
20,444,421
478,400
10,970,479
8,483
10,772,616
18,276
8,302,016
–
28,907,855
920,465
–
–
825,083
=3
P
(2,146)
–
20,920,675
P
=2,209,289
23,563
(1,811,878)
9,190,647
=
P3,365
–
(6,050,367)
4,740,525
=
P20
–
–
8,302,016
=
P2
(21,417)
–
(1,052,788) (8,915,033)
28,754,115 72,733,061
P
=684,274 =
P2,896,953
2006
80,222,470
1,425,624
2005
Land
At revalued amount:
Beginning balances
Additions
Disposals
Ending balances
Cost
P
=271,616,692
–
(19,355,145)
P
=252,261,547
P
=1,373,247
=271,616,692
P
–
–
=271,616,692
P
=1,542,446
P
Land is carried at revalued amounts using the fair market value as determined by an independent
firm of appraisers on October 9, 2001. The resulting increase in valuation of these assets
amounting to =
P175,548,260, net of deferred tax liability of =
P94,525,986 million is presented under
the “Revaluation increment in land” account in the stockholders’ equity section of the parent
company balance sheets. There was no change in the valuation of these assets based on the
appraisal report dated March 16, 2007.
The Company’s land located in Cuyapo, Nueva Ecija (included in “Land at revalued amounts”
account) with costs of =
P169,200 and appraised value of =
P19,355,145 is subject to the
Comprehensive Agrarian Reform Law (CARL) (see Note 20). In 2006, the Company sold this
land for =
P85,497,415 resulting to a gain of =
P66,142,270 as recognized in the parent company
statement of income. The related revaluation increment transferred to retained earnings amounted
to =
P19,185,946.
The cost of fully depreciated property and equipment which are still used in operations are as
follows:
Land improvements
Buildings and improvements
Standing crops
2006
P
=825,086
11,213,276
9,194,012
4,740,545
8,302,018
24,178,293
P
=58,453,230
2005
P825,086
=
11,093,631
9,017,554
4,740,545
8,302,018
23,106,280
=57,085,114
P
86
- 18 9. Other Noncurrent Assets
2006
Investment property - land not used in operations (Note 20)
P
=12,709,572
2,982,437
Cash in bank restricted for use in operations (Note 10)
2,205,674
Receivable from MERALCO - net of deferred interest income
157,431
Others
–
18,055,114
534,533
P
=17,520,581
2005
=12,971,384
P
3,140,115
2,171,578
445,987
59,099
18,788,163
534,533
=18,253,630
P
Investment property
Investment property-land not used in operations is carried at cost. As of December 31, 2006 and
2005, the appraised value amounted to =
P357.9 million as determined by independent appraisers on
March 16, 2007. The excess of the appraised value of the land over the carrying value is not
recognized in the parent company financial statements.
Restricted Cash
Cash in bank restricted for use in operations consists of time deposit which serves as a collateral
for a short-term loan with a local bank and garnished bank accounts related to the lawsuit filed by
one of the Company’s stockholders.
In 2005, Manila Electric Company (MERALCO), informed the Company that in reference to the
MERALCO Phase IVB of the refund approved by the Energy Regulatory Board, the Company’s
electric service was qualified for refund under Phase IVB.
Under the refund MERALCO scheme, the refund may be received through postdated checks or as
a fixed monthly credit to bills with cash option. The Company intends to recover the refund
through postdated checks to be collected over 5.25 years, starting in April 2006 up to July 2011.
The Company recognized a receivable from MERALCO amounting to P
=1,212,589 consisting of
unearned interest income of =
P116,613 and income from refund of =
P1,095,976. The receivable was
discounted using an effective interest rate of 11%. Breakdown of outstanding balances are as
follows:
Collectible within 1 year and 6 months
2006
Current Noncurrent
P
=175,412
P
=–
3,592
–
2005
Current
Noncurrent
=701,646
P
P
=350,824
70,899
10,321
Collectible within 5 year and 3 months
2006
Current Noncurrent
P
=56,934
P
=185,035
17,452
27,604
2005
Current
Noncurrent
=30,499
P
=
P129,620
11,257
24,136
The current portion of the refund receivable is included in the “Receivables” account in the parent
company balance sheets (see Note 5).
87
- 19 10. Notes Payable
Partially secured loan obtained from a local bank
with interest rate of 12.25% in 2006 and 2005.
The loan is collateralized by a chattel mortgage
over investments in shares of stock with
carrying value of =
P31,000,000 and =
P19,000,000
as of December 31, 2006 and 2005, respectively.
P4,107,851 in
2006 and =
P3,125,699 in 2005.
Unsecured loan obtained from a local
association with interest rate of 8% per annum,
payable monthly. Total interest paid amounted
to =
P351,511 and =
P295,244 in 2006 and 2005,
respectively.
Partially secured loan obtained from a local bank
with interest rate of 12% plus 3% service fee in
2006 and 2005. The loan is collateralized by a
certificate of time deposit amounting to
=1,153,566 and =
P
P1,121,901 in 2006 and 2005,
respectively. Total interest paid amounted to
=318,200 and =
P
P367,276 in 2006 and 2005,
respectively.
Unsecured loan obtained from a local bank with
interest rate equivalent to 91-day Treasury Bill
(T-Bill) rate plus 2% to be repriced monthly.
P232,258 in
2006 and =
P584,892 in 2005.
Others
2006
2005
P
=32,900,000
=32,900,000
P
3,650,000
3,650,000
2,600,000
2,700,000
–
–
P
=39,150,000
6,800,000
500,000
=46,550,000
P
Interest expense for short-term notes payable amounted to =
P5,009,820 in 2006 and =
P4,373,111
in 2005.
11. Accounts Payable and Accrued Expenses
Accrued expenses
Trade
Output taxes
Advances from tenants
Other payables
2006
P
=8,629,757
3,891,819
1,046,445
1,012,454
1,196,431
P
=15,776,906
2005
=4,709,288
P
6,084,387
1,812,091
2,427,262
=15,033,028
P
88
- 20 12. Long-term Debt
Unsecured long-term promissory note with a local
bank:
Interest rate equivalent to the prevailing lender
rate subject to monthly repricing, payable
monthly starting November 2001 until
October 2006. The Company paid
=12,800,000 and =
P
P4,250,000 of the loan
principal in 2006 and 2005, respectively.
Interest expense amounted to =
P843,307 and
=2,571,891 in 2006 and 2005, respectively.
P
P843,307
and =
P1,789,929 in 2006 and 2005,
respectively.
Unsecured long-term promissory note with CAWC
(Note 13):
Interest rate equivalent to 3.5% per annum,
payable annually until October 2008. The
principal amount is payable in lump sum on
October 2008. Interest expense amounted to
=
P104,533and =
P529,835 in 2006 and 2005,
respectively.
Less current portion of long term debt
2006
2005
P
=–
=12,800,000
P
–
–
–
P
=–
13,721,236
26,521,236
4,800,000
=21,721,236
P
Interest expense for long term debt amounted to =
P947,840 in 2006 and =
P2,319,764 in 2005.
13. Related Party Transactions
The Company has the following significant transactions with related parties:
a. Service agreements with affiliates. The service fee consists of management fee and shared
services fee. Management fee represents the related parties’ share in the general corporate
overhead incurred by the Company. The shared services fee is billed using an activity-based
costing, under which, services rendered are based on manhours spent or number of items
processed or output produced, as applicable. Management fee and shared services fee charged
to affiliates are as follows:
Management Fee:
LMG
CAWC
Vision Insurance Consultants, Inc. (VIC)
Others
2006
2005
P
=5,000,000
3,000,000
600,000
900,000
P
=9,500,000
=5,000,000
P
3,000,000
600,000
–
=8,600,000
P
(Forward)
89
- 21 -
Shared Services Fee:
LMG
CAWC
KPC
PEC
VIC
CMC
Others
2006
2005
P
=15,393,585
8,347,338
5,999,487
1,412,105
944,457
644,330
66,674
P
=32,807,976
=18,119,606
P
11,628,149
6,213,312
1,611,989
1,216,877
850,667
280,000
=39,920,600
P
b. Rental agreement with subsidiaries and affiliates for one year renewable at the option of both
parties. Total rental income from subsidiaries and affiliates are as follows:
2005
=462,302
P
373,144
262,068
181,355
291,725
1,570,594
264,871
=1,305,723
P
2006
P
=384,862
376,884
265,068
173,855
281,465
1,482,134
249,033
P
=1,233,101
CAWC
LMG
KPC
VIC
PEC
Less discount to tenant
c. Extension and availment of noninterest and interest-bearing (interest rates of 8% in 2006 and
8% to 9.75% in 2005) cash advances. Interest income earned amounted to =
P1,010,935 and
=354 in 2006 and 2005, respectively. Related interest expense amounted to =
P
P774,738 and
=724,223 in 2006 and 2005, respectively.
P
d. In October 2003, the Company entered into a loan agreement with CAWC (see Note 12).
Outstanding balances from the foregoing transactions are as follows:
Advances
Noninterest-bearing
Interest-bearing
2005
2005
2006
2006
Current:
Due from:
Petrocorp
LMG
CAWC
PEC
Total
Less allowance for
doubtful accounts
P
=–
2,389,525
2,246,082
–
4,635,607
–
P
=4,635,607
Premiums Payable
2005
2006
Due to:
KPC
LMG
VIC
CMC
CAWC
PEC
Others
P
=–
–
1,258,724
–
–
–
–
P
=1,258,724
=–
P
–
1,630,637
–
–
–
–
=1,630,637
P
=–
P
–
–
–
–
2006
Interest
2005
2006
Others
2005
2006
Total
2005
Total
=7,985,778
P
–
–
–
7,985,778
P
=8,512,639
2,389,525
23,665,402
368,998
34,936,564
=9,012,639
P
–
–
–
9,012,639
5,097,793
8,512,639
=2,887,985 P
P
=26,423,925
6,124,654
=2,887,985
P
P
=–
–
20,978,057
–
20,978,057
=–
P
–
–
–
–
P
=1,026,861
–
440,617
–
1,467,478
=1,026,861
P
–
–
–
1,026,861
P
=7,485,778
–
646
368,998
7,855,422
–
–
=– P
P
=20,978,057
–
=–
P
1,026,861
P
=440,617
1,026,861
P
=–
7,485,778
P
=369,644
Advances
Noninterest-bearing
Interest-bearing
2005
2005
2006
2006
P
=368,702
–
101,460
–
–
–
–
P
=470,162
=1,585,442
P
P
=–
1,689,169
–
121,084
–
–
1,822,846
1,228,314
–
31,909
–
–
–
=4,655,918 P
P
=1,822,846
=6,142,931
P
–
934,882
2,410,146
–
–
–
=9,487,959
P
Interest
2005
2006
Others
2006
2005
=311,530 P
P
=– P
=95,446
–
–
–
953,453
351,465
–
358,526 1,200,703
–
21,444
–
–
–
–
–
– 36,219
–
P2,487,130 P
P
=709,991 =
=131,665
=–
P
2,762,391
–
–
1,561,887
646,921
–
=4,971,199
P
2006
Total
2005
Total
=8,039,903
P
=464,148 P
4,451,560
–
3,640,056
1,711,649
3,610,849
2,181,372
2,811,645
–
678,830
–
–
36,219
P23,232,843
P
=4,393,388 =
90
- 22 -
e. Compensation of key management personnel consists of short-term employee benefits and
termination benefits amounting to =
P4,346,027 and =
P1,014,659, respectively, in 2006 and
=8,559,461 and =
P
P551,600, respectively, in 2005.
14. Stockholders’ Equity
On October 14, 2006, the Company declared cash dividends in the sum of =
P22 million as of
October 13, 2006. Total outstanding shares as of the declaration date was 10,296,601 shares
excluding treasury shares of 87, resulting to dividends of =
P2.1366 per share which was directly
charged to unappropriated retained earnings.
15. Operating Costs and Expenses
Salaries and other compensation
Outside services
Other employee benefits
Provision for doubtful accounts
Taxes and licenses
Depreciation and amortization (Note 8)
Retirement benefits cost (Note 16)
Travel
Insurance
Others
Share of subsidiaries and related parties in cost of
common services (Note 13)
2006
P
=19,355,080
7,374,427
4,907,385
3,286,727
2,243,072
1,457,349
1,357,281
939,365
564,759
205,815
185,325
1,920,793
43,797,378
2005
=26,872,950
P
8,217,647
6,457,723
2,183,339
–
1,253,943
1,421,186
1,425,624
3,725,163
249,073
338,611
2,620,423
54,765,682
(32,807,976)
P
=10,989,402
(39,920,600)
=14,845,082
P
16. Retirement Benefits Cost
The Company has a funded, non-contributory defined benefit retirement plan covering
substantially all permanent employees, which requires contributions to be made to a separately
administered fund.
The following tables summarize the components of retirement benefits cost recognized in the
parent company statements of income and the funding status and amounts recognized in the parent
company balance sheets.
91
- 23 Net retirement benefits cost recognized in the parent company statements of income are as
follows:
Interest cost
Net actuarial (gain) loss
Retirement benefits cost for the year
Actuarial return (loss) on plan assets
2006
P
=996,909
4,587,401
(1,387,545)
(3,632,006)
564,759
(P
=2,298,626)
2005
=1,160,487
P
4,004,934
(1,472,134)
31,876
3,725,163
=560,712
P
Accrued retirement benefits payable recognized in the parent company balance sheets are as
follows:
Present value of the obligation
Unrecognized net actuarial loss
2006
P
=22,496,777
8,334,917
14,161,860
(5,747,466)
P
=8,414,394
2005
=38,539,874
P
13,875,449
24,664,425
(3,879,342)
=20,785,083
P
Changes in the present value of the defined benefit obligation are as follows:
Interest cost
Benefits paid
Actuarial gain on obligation
2006
P
=38,539,874
996,909
4,587,401
(16,177,355)
(5,450,052)
P
=22,496,777
2005
=33,374,453
P
1,160,487
4,004,934
–
–
=38,539,874
P
2006
P
=13,875,449
1,387,545
12,935,449
(16,177,355)
(3,686,171)
P
=8,334,917
2005
=12,267,781
P
1,472,134
135,534
–
–
=13,875,449
P
Changes in the fair value of the plan assets are as follows:
Actual contributions
Benefits paid
Actuarial loss on plan assets
The major categories of plan assets of the Company as a percentage of the fair value of the plan
assets as of December 31, 2006 are as follows:
Investment in government securities
Investment in stocks
Other investments
Other assets
58%
12%
25%
5%
92
- 24 The overall expected return on the plan assets is determined based on the market prices prevailing
on the date applicable to the period over which the obligation is to be settled.
The principal assumptions used in determining retirement benefits costs for the Company’s plan
are as follows as of January 1 of each year:
Number of employees
Discount rate per annum
Expected annual rate of return on plan assets
Future annual increase in salary
2005
70
12%
12%
6%
2006
51
12%
12%
6%
As of December 31, 2006, the following are the assumptions: discount rate of 8%, expected annual
rate of return on plan assets of 10% and future annual increase in salary of 6%.
Amount for the current and previous annual period of the present value of the defined benefit
obligation, fair value of plan assets, deficit in the plan and any experience adjustments are as
follows:
Defined benefit obligations
Unfunded retirement obligation
Experience adjustment on plan liabilities
Experience adjustment on plan assets
2006
P
=22,496,777
8,334,917
14,161,860
3,728,932
(3,524,076)
2005
=38,539,874
P
13,875,449
24,664,425
–
–
The Company expects to contribute P
=2,933,603 to the retirement fund in 2007.
17. Income Taxes
a. The components of the Company’s provision for income tax-current are as follows:
MCIT
Capital gains tax
Final tax on interest income
2006
P
=208,350
510,000
247,257
P
=965,607
2005
=125,380
P
–
45,454
=170,834
P
b. The components of the Company’s net deferred tax liability included in the parent company
balance sheets are as follows:
Deferred tax assets on:
Allowance for doubtful accounts
Unamortized past service cost contributions
NOLCO
2006
2005
P
=3,383,798
3,475,564
2,945,038
894,414
P
=2,817,351
266,548
3,775,406
–
(Forward)
93
- 25 -
Provision for probable losses
Accrued other expenses
MCIT
Interest from MERALCO refund
Deferred tax liability on:
Revaluation increment in land
Net changes in fair values of available-for-sale
investments
2006
P
=184,112
123,131
208,350
12,060
11,226,467
2005
P
=184,112
–
–
40,814
7,084,231
(87,810,905)
(94,525,986)
(1,340,000)
(89,150,905)
(P
=77,924,438)
–
(94,525,986)
(P
=87,441,755)
Management believes that it is not probable that any actual income tax liability will arise from
revaluation of land since it is unlikely that the revalued property will be sold, exclusive of the
business, in the foreseeable future.
c. The reconciliation of the income taxes computed at the statutory income tax rate to the benefit
from income tax shown in the parent company statements of income follows:
Provision for (benefit from) income tax computed at
statutory income tax rate
Adjustments for:
Gain on sale of capital assets
Nontaxable dividend income
Application of previously unrecognized
deferred tax asset
Gain on sale of tax-exempt bonds
Interest income subjected to final tax
Unallowable interest expense
Deferred tax assets not recognized
Benefit from income tax
2006
2005
P
=34,591,735
(P
=621,568)
(22,602,635)
(8,947,667)
–
(1,274,747)
(3,499,373)
(2,798,758)
(334,071)
(185,443)
181,734
417,849
–
(P
=3,176,629)
(3,249,418)
–
–
(28,408)
28,560
(972,063)
5,327,540
(P
=790,104)
d. As of December 31, 2006, the Company’s NOLCO and MCIT that are available for deduction
from future taxable income and regular corporate income tax, respectively, are as follows:
NOLCO
Year Incurred
2003
2004
2005
2006
NOLCO
incurred
=
P6,399,086
2,977,847
4,865,105
2,555,468
P
=16,797,506
Expiry Date
2006
2007
2008
2009
Balance as of
Expired/ December 31,
Applied
2006
=
P6,399,086
=
P–
–
2,977,847
–
4,865,105
–
2,555,468
=6,399,086 =
P
P10,398,420
Tax Effect
=
P–
1,042,246
1,702,787
894,414
=
P3,639,447
94
- 26 MCIT
Year Incurred
2003
2004
2005
2006
MCIT
incurred
=
P144,181
17,593
125,380
208,350
=495,504
P
Expiry date
2006
2007
2008
2009
Expired
=
P144,181
–
–
–
=
P144,181
Balance as of
December 31,
2006
=
P–
17,593
125,380
208,350
=
P351,323
e. The deductible temporary difference, MCIT and NOLCO for which no deferred income tax
assets were recognized are as follows:
NOLCO
MCIT
Accrued retirement
2006
P
=7,842,952
142,973
–
2005
=14,242,038
P
287,154
9,998,210
The deferred tax assets on these deductible temporary difference, NOLCO and MCIT were not
recognized because management believes that the Company may not have sufficient taxable
profits available to allow all or part of these deferred tax assets to be utilized in the near future.
f.
On May 24, 2005, the new Expanded-Value Added Tax (E-VAT) law was signed as Republic
Act (RA) No. 9337 or the E-VAT Act of 2005. The E-VAT law took effect on November 1,
2005 following the approval on October 19, 2005 of Revenue Regulations (RR) 16-2005
which provides for the implementation of the rules and regulations of the new E-VAT law.
Among the relevant provisions of the new E-VAT law are:
i.
change in corporate income tax rate from 32% to 35% for the next three years effective on
November 1, 2005, and 30% starting on January 1, 2009 and thereafter;
ii. a 70% cap on the input VAT that can be claimed against output VAT;
iii. the amount of interest paid or incurred within taxable year on indebtedness in connection
with the taxpayer’s profession, trade or business shall be allowed as a deduction from
gross income, provided that, the taxpayer’s otherwise allowable deduction for interest
expense shall be reduced by 42% of the interest income subject to final tax, provided that,
effective January 1, 2009, the rate shall be 33%; and
iv. increase in the VAT rate imposed on goods and services from 10% to 12% effective
January 1, 2006 provided that the VAT collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds 2.8% or the Philippine national government
deficit as a percentage of GDP of the previous year exceeds 1.5%.
On January 31, 2006, the Philippine President, upon recommendation of the Secretary of
Finance, approved the 2% increase in VAT rate effective on February 1, 2006.
95
- 27 On November 21, 2006, the President signed into law RA No. 9361 which amends
Section 110 (B) of the Tax Code. This law, which became effective on December 13,
2006, provides that if
the input tax, inclusive of the input tax carried over from the previous quarter exceeds the
output tax, the excess input tax shall be carried over to the succeeding quarter or quarters.
The Department of Finance, through the BIR, issued Revenue Regulations No. 2-2007 to
implement the provisions of the said law. Based on the regulation, the amendment shall
apply to the quarterly VAT returns to be filed after the effectivity of RA No. 9361 except
VAT returns covering taxable quarters ending earlier than December 2006.
18. Financial Risk Management Objectives and Policies
The Company’s financial instruments comprise of cash and cash equivalents, receivable from
MERALCO, available-for-sale investments, notes payable and long-term debt. The main purpose
of these financial instruments is finance the Company’s operations. The Company has various
other financial assets and liabilities, such as trade receivables and trade payables and due to/from
related parties, which arise directly from its operations.
It is, and has been throughout the year under review, the Company’s policy that no trading in
financial instruments shall be undertaken.
The main risks arising from the Company’s financial instruments are cash flow interest rate risk,
credit risk and liquidity risk. The BOD reviews and approves policies for managing each of these
risks and they are summarized below.
Cash Flow Interest Rate Risk
The Company’s exposure to the risk for changes in market interest rates relates primarily to the
Company’s long-term debt obligations and due to/from related parties with a floating interest rate.
The Company also avails of bank loans with fixed interest rates in order to manage its interest
cost.
Credit Risk
Credit risks are minimized and monitored by limiting the Company’s associations to business
parties with high creditworthiness. Receivables are monitored on an ongoing basis through the
Company’s management reporting procedures. The Company does not have any significant
exposure to any individual customer or counterparty. With respect to credit risk arising from cash
and cash equivalents, receivables and available-for-sale investments the Company’s exposure to
credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying
amount of these instruments. The Company deals only with financial institutions duly evaluated
and approved by the BOD.
Since the Company trades only with recognized third parties, there is no requirement for collateral.
Liquidity Risk
The Company’s objective is to maintain a balance between continuity of funding and flexibility
through the use of bank loans and advances from related parties. Further, the Company maintains
open credit lines with local banks in order to renew and revolve maturing short-term loans.
96
- 28 -
19. Financial Instruments
Set out below is a comparison by category of carrying amounts and fair values of all of the
Company’s financial instruments.
Carrying Amount
2005
2006
Financial assets:
Cash and cash equivalents
Trade receivables
Financial liabilities:
Trade payables
Notes payable
Long-term debt
Fair Value
2005
2006
=
P115,928 P
=
P115,928
P
=9,088,528
=9,088,528
444,604
444,604
460,074
460,074
29,911,236 16,306,526 29,911,236 16,306,526
1,095,976
1,095,976
519,083
519,083
2,887,985 26,423,925
2,887,985
26,423,925
P20,851,019 P
P20,851,019
P
=66,402,846 =
=66,402,846 =
6,084,387
6,084,387
3,891,819
3,891,819
39,150,000 46,550,000 39,150,000 46,550,000
– 26,521,236
– 26,521,236
4,393,388 23,232,843
4,393,388 23,232,843
P102,388,466 P
P102,388,466
P
=47,435,207 =
=47,435,207 =
The carrying amounts of cash and cash equivalents, trade receivables and payables, receivable
from MERALCO, due to/from related parties, notes payable and long-term debt approximate their
fair values either because of their short-term nature or the interest rates that they carry which
approximate the interest rates for comparable instruments in the market.
Market values, based on quoted prices, have been used to determine the fair value of available-forsale investments.
20. Comprehensive Agrarian Reform Law
The CARL (Executive Order No. 229 and Republic Act No. 6657) provides, among others, the
redistribution of all private and agricultural lands regardless of tenurial arrangements and
commodity produced, subject to certain terms and conditions.
The Company owns several parcels of land with a total land area of 220.4403 hectares located in
Cuyapo, Nueva Ecija that are subjected to CARL as follows:
a. 25.4181 hectares, costing =
P628,154, under the Voluntary Offer to Sell (VOS) scheme. The
Company filed a just compensation case against Land Bank of the Philippines (Land Bank)
before the Regional Trial Court of Guimba. The Company has accepted Land Bank’s offer to
amicably settle the case. Land Bank’s original offer of =
P337,965 was increased to
=1,364,342. The agreement was approved by the Court. The amount was fully paid in 2004.
P
b. 7.3437 hectares, costing =
P181,484, were placed by the Department of Agrarian Reform
(DAR) under the Compulsory Acquisition scheme. The DAR Arbitration Board (DARAB) in
Talavera, Nueva Ecija affirmed the valuation of Land Bank fixing the just compensation to
=186,717. The Company filed a motion for reconsideration reiterating the Company’s
P
position that the property
should be valued at =
P587,496 based on the appraisal made by an independent appraiser in
2001.
97
- 29 The motion was denied by the DARAB. The Company has elevated the case to the Regional
Trial Court (RTC). On January 4, 2007, the RTC denied the Company’s petition for just
compensation.
The Company thereafter manifested its intention to the DAR and Landbank to accept the
amount of =
P186,717. The Company is waiting for the documentary requirements from the
said government agencies to facilitate the payment.
c. 187.6785 hectares (mango-orchard) with costs of =
P169,200 and appraised value of
=19,355,146, whereby the Company has filed a petition for total exemption. The Provincial
P
Agrarian Reform Officer has formally endorsed the Company’s petition for exemption to the
Regional Office of the DAR and the latter has endorsed the same to the DAR Head Office.
Meantime, the Company has offered 5.5 hectares to DAR under the VOS scheme. On
February 17, 2004, the DAR denied the Company’s petition for total exemption from CARL.
Also, the DAR directed the municipal agrarian reform officer of Cuyapo, Nueva Ecija to
immediately proceed with the compulsory acquisition of the 187.6785 hectares (mangoorchard) as well as the 25.4181 hectares. The DAR secretary denied the motion for
reconsideration which the Company filed on June 30, 2004. The Company offered the
mango orchard under the VOS scheme and tendered to the DAR and Land Bank its formal
offer in the sum of =
P299,950,000. After the DAR and Land Bank conducted ocular
inspections of the property, the Company and Land Bank agreed to the valuation of the
property in the total amount of =
P85,814,316 which was confirmed by the Company’s BOD
during its January 16, 2006 meeting.
In 2006, payments in cash and bonds amounting to =
P26,887,422 and =
P58,926,894,
respectively, were received by the Company. The bonds were subsequently sold in 2006 for
a gain of
=
P954,487 as recognized in the parent company statements of income.
21. Pending Litigations and Assessments
a. The Company is one of the defendants in a court case involving a dispute between two
stockholders. The case involves the complaint for damages in the amount of P
=390.0 million
based on the allegation of a certain stockholder that it suffered damages as a result of the
defendants’ alleged fraudulent act of representing that the shares purchased from one of the
defendants were free from all liens and encumbrances other than those stated in the deed of
sale.
On September 4, 2000, the RTC rendered a decision ordering the defendants to pay the
plaintiff the total amount of =
P269.1 million, which consisted of =
P256.0 million for the value of
lost shares minus the balance of the purchase price, P
=12.0 million for litigation expenses,
=0.1 million for exemplary damages, and =
P
P1.0 million for attorney’s fees. The motions for
reconsideration were filed by the defendants but were denied by the RTC on November 14,
2000.
On March 5, 2004, there was a notice of decision from the Court of Appeals exonerating the
Company on the above case.
Motions for partial reconsideration were filed by the two stockholders with the Supreme
Court. As of April 10, 2006, the motions have remained pending with the said court.
98
- 30 -
b. The Department of Labor and Employment Region IV issued a resolution denying the
Company’s motion for reconsideration of the order granting 16 farm workers wage
differentials in the total amount of =
P1.05 million.
The Company elevated the case to the Court of Appeals. The court dismissed the Company’s
petition. The Company filed a motion for the reconsideration of the Court’s order, which
resolution is still pending with the said court. The amount of P
=0.5 million, which represents
50% of the total liability, had been accrued in 2003 and included in the “Accounts payable and
accrued expenses” account in the parent company balance sheets.
Management believes that the outcome of the case will not significantly affect the financial
position and results of operations of the Company.
c. The Company has pending deficiency tax assessments covering certain years. Management
believes that the ultimate outcome of these assessments, if any, would not materially affect the
Company's
financial
position
or
results
of
operations.
99
Board of Directors
Jesus N. Alcordo
Antonio M. Garcia
Ramon M. Garcia
Jose Ma. L. Ordoveza
Chairman of the Board
Jaime Y.
Gonzales
Augusto P. Nilo
Ana Maria G.
Ordoveza
President &
Chief Executive Officer
Executive Officers
Antonio M. Garcia
-
Chairman of the Board
Ana Maria G. Ordoveza
-
President & Chief Executive Officer
Jaime Y. Gonzales
- Treasurer & Chief Financial Officer
Luis A. Vera Cruz
-
Corporate Secretary
Salvador L. Pena
-
Asst. Corporate Secretary
100
CIP Management
Support Services Group
(As of December 31, 2006)
Jaime Y. Gonzales
Treasurer & Chief Financial Officer
Corporate Affairs, Marketing Research
& Information Services
Elenita A. Calar, Vice-President
Financial Services
Maureen T. Cabanban, Vice-President
Leah N. Alfaro, Manager, Disbursement Services
Eden S. Aguirre, Manager, Integrated Disbursement
Credit & Collection Services
Integrated Procurement Services
Isidora A. Lee, Vice-President
Benedicto M. Hernandez, Sr. Manager, Import/Export
Management Control & Information System Services
Ma. Teresa E. Manaog, Manager
Legal and Risk Management Services
Reynaldo C. Rafael, Assistant Vice-President
Erwin A. Temprosa, Manager
Group Personnel Policy and Administrative
Services/Industrial Relations and Employee
Development (GPPAS/IRED)
Hilda M. Del Rosario, Senior Vice-President
Pearl T. Laurea, Assistant Vice-President, IRED Pasig
Station
Fe O. Ureta, Manager
Controllership and Internal Audit Services
Donald M. Sanchez, Senior Manager /Group Controller
Antonio A. Martin, Manager
Company Controller – LMG Chemicals Corp.,
Kemwater Phil. Corp.
Medical & Community Services Department
Luz D. Pagkalinawan, Consultant
Noel C. Espinosa, Senior Manager, Company Physician
101
Corporate Directory
HEAD OFFICE
Chemphil Building, 851 Antonio S. Arnaiz Avenue
Telephone Nos. 818-8711 to 28
Fax No. 817-4803
MAILING ADDRESS
P.O. Box 1489
Makati Central Post Office
WEBSITE
www.chemphil.com.ph
Email ADDRESS
chemphilgroup@chemphil.com.ph
Mktg&InfoServices@chemphil.com.ph
EXTERNAL AUDITOR
Sycip, Gorres, Velayo & Co.
SGV Building, 6760 Ayala Avenue
Makati City
EXTERNAL LEGAL COUNSELS
Angara, Abello, Concepcion, Regala & Cruz
5th Floor, ACCRA Building
122 Gamboa Street, Legaspi Village, Makati City
Benitez, Parlade, Africa, Herrera, Parlade and Panga Law Offices
Ground Floor, Pacific Bank Building
6776 Ayala Avenue, Makati City
BANK
Metropolitan Bank & Trust Company
102

2007 Business Outlook - Chemical Industries of the Philippines

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