Document 6525091

COVER SHEET
5
1
0
4
8
S.E.C. Registration Number
F
I
L
I
N
V
E
S
T
C
O
R
P
O
R
A
T
I
D
O
E
V
E
L
O
P
M
E
N
T
A
N
I
L
N
(Company’s Full Name)
1
7
3
P
.
S
A
N
J
U
A
G
O
N
,
M
E
Z
M
E
T
S
T
R
O
.
M
A
(Business Address; No. Street City / Town / Province)
1
c/o Atty. Abner C. Gener, Jr.
7270431 / 7256328
Contact Person
Company Telephone Number
2
3
Month
1
1
Day
7
-
A
1
FORM TYPE
Month
Fiscal Year
Day
Annual Meeting
Secondary License Type; If Applicable
C
F
D
Dept. Requiring this Doc.
Total No. of Stockholders
Amended Articles Number / Section
Domestic
Foreign
--------------------------------------------------------------------------------------------------------------------To be accomplished by SEC Personnel concerned
File Number
LCU
Document I.D.
Cashier
STAMPS
SECURITIES AND EXCHANGE COMMISSION
1
SEC FORM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17
OF THE SECURITIES REGULATION CODE AND SECTION 141
OF CORPORATION CODE OF THE PHILIPPINES
1.
For the calendar year ended December 31, 2005
2.
Commission identification Number 51048.
4.
Exact name of registrant as specified in its charter: FILINVEST DEVELOPMENT CORPORATION
5.
Philippines
Province, Country or other jurisdiction of Code
3. BIR Tax Identification No. 042-000-053-167.
6.
8.
(SEC Use Only)
Industry Classification Code:
7.
173 P. Gomez St., San Juan, Metro Manila
Address of principal office
9.
Not applicable
Former name, former address, and former fiscal year, if
changed since last report
10.
Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA
Number of Shares of Common Stock
Outstanding and Amount of Debt Outstanding
Title of Each Class
727-04-31 to 39
Registrant’s telephone number, including area code
Common stock, =P=1.00 par value
Preferred stock, =P=1.00 par value
11.
12.
5,933,904,119 shares
P11,563M long-term debt
Are any or all of these securities listed in the Philippines Stock Exchange?
Yes [ X ]
No [
]
Check whether the issuer:
(a) Has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17 thereunder or Section 11 of the RSA
and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding
12 months (or for such shorter period that the registrant was required to file such reports) :
Yes [ X ]
No [ ]
(b) Has been subject to such filing requirements for the past 90 days.
Yes [
13.
]
No [ X ]
Aggregate market value of the voting stock held by non-affiliates as of December 31, 2005.
P 2,075 million
2
TABLE OF CONTENTS
PART I - BUSINESS AND GENERAL INFORMATION
Item 1
Item 2
Item 3
Item 4
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Page No.
4
20
21
23
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5
Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6
Item 7
Item 8
Management's Discussion and Analysis or Plan of Operations
Financial Statements
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
24
25
30
30
PART III – CONTROL AND COMPENSATION INFORMATION
Item 9
Item 10
Item 11
Item 12
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
31
32
33
34
PART IV - COMPLIANCE WITH LEADING PRACTICES ON CORPORATE
GOVERNANCE
PART V - EXHIBITS AND SCHEDULES
35
Item 14
35
35
a. Exhibits
b. Reports on SEC Form 17-C (Current Report)
SIGNATURES
3
PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Business
Filinvest Development Corporation (“FDC” or the “Company”) is the listed holding company of the Filinvest Group of Companies.
Although incorporated only on April 27, 1973, FDC traces its roots to the consumer finance and banking business established in the early
years by the Group’s patriarch, Andrew L. Gotianun, Sr.. Driven by its key management objectives of consistent profitability, strong
balance sheet, and absolute credit worthiness, FDC has since established a well-known reputation for quality and reliability as it evolved
into one of the country’s major business groups.
For the past three (3) years, FDC’s revenues were generated from its leasing, investing and managing activities and from the following
major subsidiaries engaged in three (3) main business activities, namely:
a.Residential property development
Filinvest Land, Inc; incorporated on November 14, 1989 as Citation Homes, Inc. and later changed its name and started
operations in August 1993 when FDC spun off its real estate business.
b.
Commercial property development
Filinvest Alabang, Inc; incorporated on August 25, 1993
Festival Supermall, Inc; incorporated on March 21, 1997
Cyberzone Properties, Inc; incorporated on January 14, 2000
Filinvest Asia Corporation; incorporated on January 22, 1997
c.
Banking and financial services
East West Banking Corporation; incorporated on March 22, 1994
With over 30 years of experience in an industry that is highly sensitive to the financial crises, market downturns, and political upheaval,
the Filinvest Group has emerged as one of the few survivors in the country.
FDC and its subsidiaries have carefully built and nurtured a distinguished performance record in the real estate development, which was
recognized by international bankers, funds managers, other global institutional investors, and the international financial community. In the
2005 Euromoney Real Estate Awards, Filinvest received the Award for Investment Management in the Philippines. This was the result of a
survey designed by the London-based international finance magazine to provide a qualitative and quantitative review of the best services
in real estate.
There are no material reclassifications, mergers, consolidations or purchases or sales of significant amount of assets (not ordinary) by the
Company and/or its significant subsidiaries during the past three (3) years.
There is also no bankruptcy, receivership or similar proceedings filed by the Company and/or any of its significant subsidiaries during the
past three (3) years.
4
Organization Structure
The chart below sets out the current structure of FDC and its subsidiaries and affiliates.
FDC
Property
Development
Banking & Financial
Service
• Filinvest Land, Inc.
• Filinvest Alabang,
Inc.
• Filinvest Supermall,
Inc.
• Filinvest Asia Corp.
• Cyberzone
Properties, Inc.
• EastWest Banking
Corp.
• Filinvest (Cayman
Islands) Ltd.
• FDC Capital
(Cayman Islands)
Ltd.
• FLI Capital (Cayman
Islands) Ltd.
Others
• FSM Cinema, Inc.
• Northgate
Convergence Corp.
• H.B. Fuller (Phil.),
Corp.
Business Strategies
Focus on core property business
FDC’s overall strategy remains focused and anchored on the strength and expansion of its core property business, which has developed a
strong brand name recall and association with quality that spans across all sectors of the property industry: from low and medium-cost
residential to high-end commercial property development, to mixed-use, self-contained communities, industrial and technological parks
and leisure property developments.
In 1994, FDC made a strategic decision to diversify its business risks into non-property related business, which capitalizes on FDC’s
strengths, and complements its property development activities by incorporating East West Banking Corporation (EWBC). This decision
initiated the re-entry into the banking industry, an area where the Filinvest Group had management expertise in the 70s to 80s.
For the year 2005, the non-property business contributed 25% to FDC’s consolidated net revenues. The contribution is expected to
continuously grow significantly over time.
Strong recurring income base
FDC, through its commercial property subsidiaries has been building up its recurring income base, through its investment in Festival
Supermall, the 200,000 sq.m. premier regional shopping center located in south of Metro Manila, and South Station Mall, a low-income
retail shopping center located inside the terminal area within Filinvest Corporate City (FCC). The development of mixed-use retail
complex such as, the Westgate in FCC, the I.T. buildings in Northgate Cyberzone, various commercial lots in FCC and commercial units
in PBCom Tower in Makati City are all set to contribute significantly to its recurring income base.
The Group has over 50,000 square meters of PEZA accredited I.T. zone prime office space in Makati City and Alabang, Muntinlupa City
principally aimed at the growing call center and back-office market. Through Cyberzone Properties, Inc. and Filinvest Asia Corp., the
5
Company has taken advantage of the business process outsourcing (BPO) boom and now supplies over 7,000 call center seats. As of
December 31, 2005 its properties registered close to 100% occupancy.
To take advantage of the pressing demand for I.T. offices, CPI started constructing Plaz@ A, a 6-storey building with a leasable area of
11,000 sq.m. in the fourth quarter of 2005 and is scheduled to be completed in June 2006. The plans for the next building Plaza D, have
already been finalized with the construction activity started in February 2006.
The group registered a 14% compounded growth rate in its rental revenue base from P342 million in 2000 to P1,029 million in 2005. Mall
and rental revenue grew by 19%, from P864 million in 2004 to P1,029 million in 2005.
Disciplined approach to investment, divestment, and risk-taking
In recent years and under challenging economic conditions, Filinvest Group follows a strict discipline in identifying prospective projects
by measuring profitability, cashflow and performance potential against risks and defined standards. It has reviewed periodically its
investment portfolio in order to determine divestment of those businesses that fail to meet these standards. The same system is also
helpful in determining the preferred capital structure for its undertakings, i.e., whether or not to take a dominant equity position or to go on
a joint venture in order to spread out the investment risk even further.
Recently, FAI and CPI entered into an investment agreement with Africa Israel International Properties (2002) Ltd., as a major investor in
Northgate Cyberzone. The Israel-based firm agreed to subscribe up to 40% of CPI’s outstanding capital stocks. One of the largest
companies in Israel, it has investments in residential real estate, shopping malls, energy, fashion, telecommunications and media, and
infrastructure. Its shares are traded in Tel Aviv Stock Exchange.
In 2004, FDC sold its investment in Hocheng Philippines as part of its divestment process.
Controlled growth
It has always been the Group’s philosophy to implement a controlled and conservative growth strategy. As a resulting policy, only
properties and projects with ready and sustainable market and can support the Company’s desired returns are developed. During slow
growth cycles, this strategy is further calibrated by adjusting project initiation and investment criteria upwards, to make them more
stringent and reflective of the anticipated sales slowdown, and to conserve the company’s liquid resources and investment capacity.
Proper timing of project offerings and investments is considered critical to fully exploit the opportunities in the market. Controlled growth
is a tested way of ensuring that the Group’s ability to take advantage is maximized.
Efficient debt management
FDC has made a serious effort to manage their liabilities. The Group avails of medium to long-term project financing facilities in order to
better match the nature of revenues and cash generation with debt repayment. In 2005, FDC took advantage of the liquidity and low
interest rate to improve the maturities and financing cost of its existing debts. The group obtained a total of P4.4 billion loans which will
create a saving of over P100 million a year in interest charges. Its maturities schedule improved from 2.3 to 4 years.
Moreover, foreign currency liabilities have been reduced significantly. As a result, the Group effectively redeemed US$ 150 Million and
US$ 100 Million convertible bonds obligations in November 2001 and February 2002. The remaining foreign currency obligation as of
December 31, 2005 was $18.8 million, which is fully hedged.
Landbank
The Group maintains a landbank of approximately 2,262.47 hectares, including 346.93 hectares contributed by joint venture partners,
mostly for its residential housing and subdivision lot development. This landbank grew slowly and cautiously in the past. The Group has
not acquired any significant properties since the onset of the Asian recession in 1997.
Decisions when acquiring land investment property are selectively made after a thorough scan of areas with market and population
growth. Further studies are comprehensive analyses of national and regional development thrusts, communication and transportation
infrastructure growth, employment growth, technical viability of project development, and competitive trends.
6
Despite the eight-year halt in the purchase of land for development, augmented by prospective joint ventures, the existing inventory is
anticipated to sufficiently support the Group’s projected residential and other property developments and serve as a valuable resource pool
for the next few years.
Professional management
To keep the company dynamic and competitive, its management and strategic directions are determined and implemented with a purely
rational and systematic approach. It is also the stated policy of the Group that the company is run professionally in order that it will
survive its founders.
Business Development 2005
Business development for 2005 in property development focused still on maximizing returns on its existing landbank and buildings by
improving sales turnover of inventory and building space occupancy.
The Company’s strategy utilized intensive product development with the goal of creating attractive product packages to meet market
demands and to tap niche markets. Likewise, it concentrated on building up its marketing forces and brokers network to reach a wide
market area and all types of buyers.
FLI strengthened its position in all market segments by introducing a broader range of products in various locations. Special focus was
made on geographical expansion outside of Metro Manila, like projects in Bulacan, Cebu, Davao, and Zamboanga, to tap the housing
market nationwide. Also township developments such as Timberland Heights in San Mateo Rizal, Ciudad de Calamba in Laguna, and
Filinvest East County in the eastern part of Rizal, were introduced to make its presence felt in Greater Metro Manila and adjoining
provinces. These townships are designed to be complete communities with all the amenities including provisions for schools, hospitals,
and commercial areas. To tap niche market of retirees and high-end residential markets, FLI introduced leisure and farm communities with
the developments like Nusa Dua, Laeuna de Taal, and Timberland Sports and Nature Club. A new product was also developed, called
Asenso Village, an affordable and fully functional business park community designed to support the growth of micro, small, and medium
enterprises (MSME’s). The MSME business parks will each feature innovative housing units that incorporate living quarters and a
production area. FLI will provide support to the aspiring entrepreneurs in the form of trainings, business development, promotion and
marketing, apart from enjoying tax incentives from the government.
FDC underwent final planning activities in 2005 in preparation for the launching in 2006 of its newest leisure development, the Seascape
Resort Town. The expansive 12-hectare seaside property located in Mactan, Cebu, is a master-planned resort community that offers
private lots, casitas, villas, condominium units and a Beach Club. The world-class resort is geared towards the booming tourists trade and
is intended to fill the shortage in prime tourists destination in Cebu.
Development of Filinvest Corporate City moved at a steady pace in 2005 with Filinvest Alabang, Inc. welcoming new locators and
constructing its condominium projects. Three fully taken up buildings, West Parc Alder, 2301 Civic Place and Vivant Flats are scheduled
for turnover in 2006. Four new condominiums are currently being offered in the market. With Festival SuperMall, Westgate Center and
South Station, FAI has successfully tapped into three distinct market segments and will add another 15,000 sq.m. in 2006 with the
upcoming construction of phase two of South Station.
On the banking sector, EWB focused on consumer financing through aggressive marketing of consumer products across geographical
areas, better service through strong information technology system, and product innovation. Growth in consumer loans mainly sourced
from auto loans, credit cards and salary loans was made possible through establishment of various Car Suite Loan Centers in key points of
Metro Manila and in the provinces, coupled with a strong goodwill from the car dealers. At the same time it offered second-hand car
financing to create larger group of clients. Investments in new application software, network and data servers, and data processing backup
and disaster recovery centers supported the needs of clients for efficient, fast and innovative banking services. Newest product innovations
are, The Bizcheque , The Payroll Assist, The Check Prepare, The Electronic Payroll Exchange System (EPES), have been made available
to its growing number of clients. Also, four (4) new Personal Banking Centers (PBCs) were opened in 2005.
Revenue Mix
Historically, the Group’s property-related operations accounted for the largest portion of FDC’s consolidated revenues. For the year 2005,
the Company’s consolidated net revenues amounted to P3.8 billion with revenue contribution from the following:
7
•
•
•
Residential Property Development
Financial and Banking Services
Commercial Property Development
50%
20%
30%
Development and construction costs spent by the Company’s property development subsidiaries namely, FLI, FAI, and CPI, for the last
three years and their percentages to total revenues of the real estate operations are as follows
YEAR
AMOUNTS (in millions)
% to NET REVENUE
2005
2004
2003
1,314
1,333
1,574
25
30
41
Real Estate Development
Filinvest Land, Inc. (FLI)
Filinvest Land, Inc. (FLI) posted a 10% growth in net income. Total consolidated assets stood at P28 billion while stockholders’ equity hit
P18 billion.
Sales reservations grew 10% in 2005 to P3.3 billion from P3.0 billion in 2004 due to continued strong performance of the affordable and
middle-income sectors.
The company’s sales growth is attributed to strong OFW demand, affordable financing, and strong government support. The new
Expanded Value Added Tax (EVAT) law has been favorable to FLI since it exempts sales of house and lot packages priced up to P2.5
million, and lot only packages up to P1.5 million, from EVAT. The company benefited substantially from OFW income with about 39%
of total buyers belonging to this sector.
FLI strengthened its position in low and middle-income markets by introducing a broader range of products in various locations. These
accounted for 79% of total sales in 2005. Special focus was also made on geographical expansion outside Metro Manila to tap the housing
market nationwide. FLI currently has several ongoing projects all over the Philippines:
Project Name
Socialized
Belvedere Townhomes
Belleview Meadows
Belmont Hills
Melody Plains
Sunny Brooke
Bahay Pangarap
Country Meadows
San Pedro Homesite
Southern Heights
Blue Isle
Affordable
Melody Heights
Springfield View
Woodville
Location
Area (in Ha)
Tanza, Cavite
Tanza, Cavite
Gen. Trias, Cavite
San Jose del Monte, Bulacan
Gen. Trias, Cavite
Dasmariñas, Cavite
Gen. Trias, Cavite
San Pedro, Laguna
San Pedro, Laguna
Sto. Tomas, Batangas
52.83
6.08
10.76
22.52
42.25
16.52
7.85
19.90
22.18
47.15
San Jose del Monte, Bulacan
Tanza, Cavite
Gen. Trias, Cavite
9.51
20.83
12.24
8
Westwood Place
Crystal Aire
Brookeside Lane
Fairway View
Oakridge
Raintree
Windward Hills
Meritville
Blue Grass
Alta Vida
Medallion
Vista Hills
Punta Altezza
The Woodlands
Parkspring
Castlespring Heights
Citation Homes
Primrose
Villa Montserrat
Summerfield
Middle-Income
Banyan Ridge
Montebello
Southpeak
The Manors @ SOPK
Auburn Place
Classic Estates
Village Square
Mountain View
Serra Monte Villas
Serra Monte Mansions
Spring Country
Spring Heights
Irvine Place
The Tropics
Northview
Mission Hills – Sta. Catalina
Mission Hills – Sta. Cecilia
Mission Hills – Sta. Clara
Highlands Pointe
Villas at Higlands Pointe
Manor Ridge @ Highlands Pointe
High-End
Brentville Int’l
Prominence
Tanza, Cavite
Gen. Trias, Cavite
Gen. Trias, Cavite
Dasmariñas, Cavite
Dasmariñas, Cavite
Dasmariñas, Cavite
Dasmariñas, Cavite
Las Piñas
Sto. Tomas, Batangas
Brgy. San Roque, Bulacan
Brgy. Ibayo Marilao, Bulacan
Brgy. Punta, Calamba, Laguna
Brgy. Punta, Calamba, Laguna
Angono, Rizal
San Pedro, Laguna
Caloocan City
Novaliches
Antipolo City
Taytay, Rizal
San Pedro, Laguna
17.44
14.10
18.60
26.50
3.30
3.40
24.00
2.40
4.25
13.40
3.70
5.15
9.65
7.60
14.86
5.90
18.30
9.49
7.66
1.85
San Mateo, Rizal
Brgy. Punta, Calamba, Laguna
San Pedro, Laguna
San Pedro, Laguna
Las Piñas
Parañaque
San Pedro, Laguna
Quezon City
Batasan Hills, Quezon City
Cainta, Rizal
Bagong Silangan, Quezon City
Bagong Silangan, Quezon City
Cainta, Rizal
Cainta, Rizal
Quezon City
Antipolo City
Antipolo City
Antipolo City
Taytay, Rizal
Taytay, Rizal
Taytay, Rizal
6.30
10.29
35.31
1.93
1.96
7.32
1.90
17.86
10.51
8.90
24.58
9.00
3.60
2.80
39.60
18.53
7.60
1.34
43.38
3.12
4.39
Mamplasan, Biñan, Laguna
Mamplasan, Biñan, Laguna
228.78
87.23
9
The Village Front
Cambridge Place
Mission Hills – Sta. Barbara
Mission Hills- Sta. Monica
Regional
Orange Grove
Fuente de Villa Abrille
Corona del Mar
Aldea del Sol
Mactan Tropics
Farm Estate
Mandala Farm Estate
Nusa Dua
Forest Farms
Leisure
Laeuna de Taal
Timb. Sports & Nature Club
Industrial Estate
Filinvest Technology Park
Mamplasan, Biñan, Laguna
Quezon City
Antipolo City
Antipolo City
42.75
0.33
20.13
16.83
Matina Pangi, Davao City
Tulip Drive,Matina, Davao City
Pooc, Talisay, Cebu City
Bankal, Lapu-Lapu, Cebu City
Basak, Lapu-Lapu, Cebu City
32.00
10.60
36.00
8.30
5.30
San Mateo, Rizal
Tanza, Cavite
Angono, Rizal
39.50
20.80
31.00
Talisay, Batangas
San Mateo, Rizal
10.80
8.20
Brgy. Punta, Calamba, Laguna
52.00
Regional sales improved substantially in Cebu as a result of the opening of a new project, Aldea del Sol, as well as new phases in Corona
del Mar, a residential resort community in Talisay, Cebu. For 2006, FLI is planning to open Mactan Tropics, a residential community
located near the Mactan Export Processing Zone.
Following the success of Orange Grove and Fuente de Villa Abrille in Davao, FLI launched another quality subdivision called Villa
Mercedita in Dumoy, Davao City. With the first phase already sold out, Villa Mercedita II is scheduled for launching in 2006.
Filinvest continued to make its presence felt in the northern, southern, as well as eastern sections of Greater Metro Manila through its
extensive township developments. These townships are designed to become complete communities with all the amenities including
provision for schools, hospitals and commercial areas. The three ongoing townships are Timberland Heights, Ciudad de Calamba and
Filinvest East County.
The 677-hectare Timberland Heights in San Mateo, Rizal is a mountain resort township just 15 minutes away from Quezon City. The first
project launched within the township was Mandala Residential Farm Estate, which offers hobby farmers generous lot cuts and Asianinspired homes that complement the mountain lifestyle. Two phases have already been opened in response to the strong market demand.
Banyan Ridge was developed for those who prefer smaller lot sizes for purely residential use.
Situated at the highest point of Timberland Heights is Timberland Sports and Nature Club, designed to be a world-class family country
club in a mountain resort setting. It will offer 12,000 sqm of indoor sports, recreational and social facilities on an eight-hectare elevated
and rolling terrain. The clubhouse is now under construction with expected completion in the third quarter of 2007.
In addition to its traditional products, FLI is tapping niche markets by expanding its reach in leisure and farm communities. The company
perceives that these components are necessary to reach other housing sectors such as retirees, as well as the high-end residential markets.
New developments continue to enhance Nusa Dua, the first residential farm estate in Tanza, Cavite. Two phases have been sold out and a
third phase has been opened to meet the demand.
Laeuna de Taal is FLI’s first leisure community launched in 2004. Located in Talisay, Batangas, it is a 60-hectare lakeside residential
resort that offers scenic residential lots, casitas, a Lake Club, and a wide range of facilities for outdoor recreation. FLI continued to sell
open lots in the Orilla and Bahia residential enclaves in 2005. The first stage of land development, along with the main entrance gate and
guardhouse of Bahia were completed in 2005. Land development of both enclaves will continue throughout 2006. The next phase of
development is the launching and groundbreaking of the Lake Club scheduled in 2006.
10
FLI launched a new product called Asenso Village, an affordable and fully functional business park community specifically geared
towards cottage industries. Featuring innovative housing units that incorporate living quarters and a production area, Asenso Village is
designed to support the growth of micro, small, and medium enterprises (MSMEs). Aside from enjoying tax incentives, entrepreneurs in
Asenso Villages will receive support from FLI in the form of training, business development, promotion, and marketing. FLI has
identified nine sites around the country for these MSME business parks. Scheduled for launching this year are Asenso Villages in Tanza,
Cavite; Calamba, Laguna; and San Rafael, Bulacan.
Future property development is supported by FLI’s extensive land bank of around 2,150.78 hectares. The current land bank is sufficient to
support the company’s projected development activities for the coming years.
FILINVEST ALABANG, INC.
Filinvest Alabang, Inc. (FAI) posted a net income of P107.3 million in 2005. The company’s consolidated assets stood at P33.9 billion
with year-end debt of P3.4 billion. A total of 61% of its gross revenues was derived from leasing operations of its lots, mall and office
buildings
Office Sector
Northgate Cyberzone
Cyberzone Properties, Inc. (CPI) is the Philippine Economic Zone Administration (PEZA) accredited facilities provider, which pioneered
“built-to-suit” (BTS) offices in Northgate Cyberzone. It delivered both the Convergys building and HSBC building in 2005 ahead of
schedule. Aside from these, two other operational I.T. buildings in the Plaz@ block are fully taken up by locator companies.
To address the pressing demand for I.T. offices, CPI started constructing Plaz@ A, a 6-storey building with a leasable area of 11,000
sq.m. in the fourth quarter of 2005 and is scheduled for completion in June 2006. Plaz@ A has been fully taken up by two major call
center players even prior to completion. CPI broke ground in February 2006 on Plaz@ D, a mirror image of Plaz@ A, and by the second
quarter of 2006, a third building will commence construction. Both building will be available for turnover before the end of 2006. The
completion of these three buildings will increase CPI’s leasing portfolio from 40,000 sqm to 71,000 sqm.
A significant development is the entry of Africa Israel International Properties (2002) Ltd. as a major investor in the Northgate Cyberzone.
Under the investment agreement signed with CPI and FAI, the Israel-based firm agreed to subscribe up to 40% of CPI’s outstanding
capital stock. One of the largest companies in Israel, it has investments in residential real estate, shopping malls, energy, fashion,
telecommunications and media, and infrastructure. Its shares are traded in the Tel Aviv Stock Exchange.
Civic Prime
FAI has also achieved remarkable success with its two Small Office-Home Office (SOHO) projects. 2301 Civic Place, which is right
beside Asian Hospital, is scheduled for turnover by the second quarter of 2006. Even during the construction period, unit owners of 2301
Civic Place already received inquiries from people interested to lease their units upon completion.
On the heels of the sold-out 2301 Civic Place, the second SOHO project called Civic Prime was launched in May 2005. Located across
Festival Supermall, near South Station, the 10-storey 11,220 sqm (GFA) Civic Prime is substantially sold out and will start construction in
the second quarter of 2006.
Retail Sector
Festival Supermall
Festival Supermall reaffirmed its position as the premier regional shopping center of South Metro Manila. It welcomed 84 new stores in
2005 to add to its increasing roster of over 600 tenants. Redevelopment of various areas in the mall continued in 2005 to further maximize
its leasing potential and to enhance its tenant mix. The Water Garden redevelopment into a “Green and Grills” is underway. Greens and
Grills will house al fresco dining for the late office crowd amidst garden center tenants and underneath the canopy of age old acacia trees.
11
Westgate Center
A 9.5-hectare master-planned retail development that features high-end dining, wellness, and lifestyle stores, is 80% leased out. The
establishments that opened in 2005 were Wine Depot, UCC Coffee, Zong Restaurant, Belo Medical Center, Gymboree, Med Express, Cest
Si Bon French Restaurant and Westgate Alabang Home Depot. Forthcoming additions in 2006 includes row of Japanese, Indian, and
Seafood Restaurants, among others, to further enhance its roster of fine dining establishments.
South Station
South Station’s Green Building, which opened to public in March 2005, now caters to more than half a million commuters who traverse
the area daily. This year, FAI will start construction of phase 2 of South Station retail which will add a total leasable area of almost 5,000
sq.m and more 500 bargain center spaces. The project is envisioned to make South Station the regional bargain and transport center of the
South.
F@st Bytes
To serve the 2/7 needs of the growing ranks of call center personnel, the Convergence Block will house F@st Bytes. This 4,000 sq.m. ,
24-hour dining and retail hub opens in June 2006.
Filinvest Corporate City
The entry of three big box retail locators further strengthened the city’s reputation as the shopping mecca of the South. The South
Supermarket opened its doors in November 2005. Located along Filinvest Avenue, near Westgate Center, this 8,441 sq.m. complex houses
a major supermarket complemented by dining establishments, and convenience drug and bookstores. The Alabang Home Depot with
Wilcon Builders Depot, together both offer more than 25,351 sq.m. of construction supplies that will service the home improvement and
construction needs of the growing residential region in the south of Greater Metro Manila.
Residential Sector
FAI has found a niche in residential developments with projects that cater to different market segments.
Palms Pointe
Palms Pointe is now a bona fide residential community with land development utilities, and amenities already in place. Located right
across The Palms Country Club, it consists of 148 prime lots within a gated enclave. More than fifty lots have been turned over to the
buyers and several houses are now under construction. The first batch of residents is expected to move in by the second quarter of 2006.
La Vie Flats
The three-tower condominium community called “The Flats” caters to the upper middle-income market. Its first offering, the 17-storey
Vivant Flats, was fully taken up in 2005. Construction is now in the finishing stages and the units will be ready for turnover by mid-2006.
Following the success of Vivant Flats, La Vie Flats, the second tower, is scheduled to ground break in June 2006. La Vie will further add
to the amenities of The Flats complex with its gym and children study hall and play room. It houses its own function room.
West Parc
For the middle income segment, West Parc offers accessibility and a convenient lifestyle across Westgate and near the Alabang-Zapote
Road. The 15-storey Alder Building is nearing completion and is scheduled for turnover by second half of 2006. Birch Building quickly
followed suit and is now under construction and expected to be completed by 2008. The third tower, Cedar Building, was launched in the
first quarter of 2006 to meet the continued demand for this product line.
Studio One
Scheduled for soft launching in the first quarter of 2006 is Studio One, a 12-storey condominium with compact 13 sq.m. residential units
set to rise within the Northgate Cyberzone. Located in same neighborhood as the outsourcing firms like HSBC, APAC and Convergys, it
12
walking distance for call center personnel who can save both commute time and cost, and have a much safer residential destination during
the wee hours of the morning.
Pioneer Pointe
FAI is the project manager of Pioneer Pointe, a 28-storey mid-income condominium along Pioneer Street in Mandaluyong City.
Construction is in full swing with structural topping off expected in October 2006 and turnover by December 2007.
Leisure Sector
The Palms Country Club
The Palms Country Club continued to be patronized by its members in 2005. It presently has over 1,400 members and continues to offer
membership shares. Share value is now at P785,000 per share, up by 57% from its initial price of P500,000 per share.
The club hosted numerous weddings and other social and corporate functions, establishing its position as a preferred venue for big events
in the area. The Palms Club lifestyle is seasoned by the successful events organized for its members such as the Summer Camp for kids
and the New Year’s Eve party.
FILINVEST ASIA CORPORATION
Filinvest Asia Corporation (FAC) is a partnership between the Company and Reco Herrera Ltd., an investment vehicle of the Government
of Singapore Investment Corporation Real Estate Ltd. It owns 35,000 square meters of leasable office space in the 52-storey PBCom
Tower, a joint venture with the Philippine Bank of Communications. Strategically located at the corner of Ayala Avenue and Herrera
Street in Makati City, PBCom Tower is an information technology zone approved by the Philippine Economic Zone Authority (PEZA).
In 2005, FAC posted a net income of P36 million. The company achieved 100% occupancy for its total space owned in PBCom Tower.
Major tenants are business process outsource companies such as HSBC Electronic Data Processing (Philippines), Inc., Crescent Services
(Philippines) PTE Ltd., Daksh eServices, and other multinationals including American Express, Sony Life and New York Life.
SEASCAPES RESORT TOWN
Scheduled for launching in 2006 is Seascapes Resort Town, FDC’s newest leisure development located in Mactan, Cebu. Final planning
activities were undertaken in 2005 in preparation for its 2006 launch.
Covering an expansive 12-hectare seaside property, Seascapes Resort Town is a master-planned resort community that offers private lots,
casitas, villas, condominium units and a Beach Club. The site is just fifteen minutes away from the Mactan International Airport and thirty
minutes away from Cebu City.
Planned by international leading resort architects in the world, Seascapes will fill-up the shortage in prime tourist destination in Cebu. It
will not only afford its clients a world-class resort lifestyle vacation but would also allow them to become investors in a booming tourist
trade.
EAST WEST BANKING CORPORATION
East West Bank (EWB) capped a successful year of focusing more on consumer financing by posting a net income after taxes of P202
million in 2005, for a 459% increase over the P44 million earned the previous year.
The bank’s total resources amounted to P24.83 billion at the end of 2005, marking a P2.2 billion or 10% increase from the previous year.
The expansion in resources was mainly due to increases in loan receivables which grew by P1.1 billion and investments in government
securities which expanded by P1.0 billion. This was driven by a higher-than-industry growth in deposit liabilities of 16.2% or P2.8 billion.
Deposit liabilities at the end of the year is at P21.2 billion.
13
Aggressive marketing of consumer products
The year 2005 saw the continuance of the bank’s strategy of shifting its loan concentration from corporate to the consumer market.
Marketing strategies for auto financing, mortgage loans, salary loans and credit cards were enhanced as customer databases of business
partners were tapped and cross-selling to existing customers was aggressively pursued.
Consumer loans grew by 28% or P1.5 billion during the year.
Wider reach
EWB opened four new Personal Banking Centers (PBCs) in 2005. The bank’s branch network stood at 70 as of end-December. These four
PBCs are located in Muntinlupa (Alabang-Zapote Road), Isabela, Cotobato, and Tacloban.
These new PBCs, together with the increased productivity of the bank’s existing branches, boosted the bank’s deposit growth in 2005 to a
level that exceeded industry performance.
Continuous Product Innovation
The ability to innovate and adapt the bank’s products to its customers’ changing financial needs and level of technological sophistication
has enabled the bank to grow at a faster rate than the commercial banking industry.
The EWB Corporate Suite, a group of automated solutions for corporate clients, was significantly enhanced in 2005 with the addition of
process simplification features and improved interface with existing automated systems.
Plans for 2006
The shift in the bank’s lending strategy from corporate to consumer will continue in 2006 as PBCs are transformed into major customer
loan channels and products are fine-tuned to customer needs.
The bank’s technological advantage will also be capitalized to reach more customers through the effective mining of available customer
databases.
Core systems and support systems will be continuously enhanced to support the bank’s drive towards being one of the more customercentric, efficient and profitable institutions in the country.
Competition
Real Estate Development
Real estate development, ownership, and management is very competitive. The extent and composition of the competition varies
by geographic region and price segment. The Group believes that FLI is strongly positioned in the affordable-income to middleincome residential subdivision market and in the farm estates. Success in these markets depends on acquiring well-located land at
attractive prices and financing packages often in anticipation of the direction of urban growth. Effective competition depends on a
trained and motivated sales force and delivering quality design and construction at competitive prices. FLI’s name and reputation in
the Philippine property market contributes to its competitive edge over the other market players.
FLI directly competes with other major real estate companies positioned either as a full range developer or with subsidiary
companies focused on a specific market segment and geographic coverage. Its direct competitors include the M.B. Villar Group of
Companies (Camella for socialized to affordable projects and Crown Asia and Brittany for its middle to high-end projects);
Extraordinary Corporation for low-cost housing projects; Moldex Realty, particularly in the affordable to middle-income category;
and Ayala Land and Sta. Lucia Realty Corporation in terms of premium subdivisions. On the farm estate projects, other developers
14
Landco Pacific, Laguna Property Holdings, Inc., Antipolo Properties and Rumali Land Corp. while on the industrial estates, Carmelray
Industrial Parl, First Philippine Holding Corp., are the other developers in the areas of Laguna and Batangas provinces. Due to the
financial crisis that hit the region in recent years, real estate companies now give emphasis to capacity to pay and cash flow
considerations. Property firms currently offer longer downpayment periods, as well as a choice of amortization schedules with graduated
interest rates.
Commercial Property Development
The strong property market in the mid-1990s spurred the launch of at least four major business districts in Metro Manila such as FAI’s
Filinvest Corporate City in Alabang, Rockwell in Makati City, Global City in Fort Bonifacio, and Megaworld’s Eastwood in Quezon City.
Commercial lot sales have virtually ceased since then, forcing developers to rely on existing rental revenues to support regular operations.
The existence of large land inventories suggests a long-term buyers’ market that could place a firm cap on price and rental appreciation.
However, FCC enjoys a distinct market niche and is the top choice for those who decide to locate in the South. Makati, Ortigas and Fort
Bonifacio compete for the same market while FCC has limited competition. Its only competitor is the Madrigal Business Park of Ayala
Land which is only 25 hectares and zoned primarily for office development and was sold out even prior to FCC’s launch. Currently, office
spaces in FCC already enjoy a premium over those located in Madrigal.
Festival Supermall’s major competitors include SM South Mall of SM Prime Holdings, Alabang Town Center, and Metropolis, all located
in the south.
Northgate Cyberzone and Filinvest Asia Corp.’s competition include Megaworld’s Eastwood in Quezon City and Fort Bonifacio’s esquare, Pbcom Tower and RCBC Plaza in Makati City.
Banking and Financial Services
The commercial banking industry is dominated by a few large universal banks, which account for almost half of the industry’s total
resources. Most of these banks were results of mergers and acquisitions-strategy that was undertaken to enable them to compete head-on
in a globalized banking environment. Banks saw the need to beef up resources in the face of stiffer competition, especially with the entry
of foreign banks.
The establishment of a wide network and national presence also became imperative, primarily to meet the transactional requirements of
corporations and businesses and to provide wider source of cheap funds. Some of the bigger banks even went beyond local presence and
established branches and representative offices outside the country.
The sheer size of these banks, both in terms of resources and network, has allowed them to capture a substantial share of both lending and
fund generation businesses. As a result, these same banks posted the highest earnings among other players in the industry.
For smaller and medium-sized banks, a consistent strategy employed was to niche for a particular market where their core competencies
would enable them to provide competitive advantage against the bigger banks.
As expected, the entry of 10 new foreign banks further heightened competition among commercial banks. While the foreign banks
initially focused on fund generation and trade-related services, eyeing the top corporate and multinational clients as primary target market,
local banks particularly the bigger ones, began shifting their market focus to the middle market clientele and started fully tapping areas
outside Metro Manila as a means to expand market reach.
Patents, Trademarks, Copyrights
The Group does not hold any operations, which are dependent or expected to depend on patents, trademarks, copyrights, franchises,
concessions and royalty agreements.
Government and Environmental Regulation
15
The real estate business in the Philippines is subject to significant Government regulations, which cover, among other things, land and title
acquisition, development planning and design, construction and mortgage financing, and refinancing. There are no significant costs and
effects of compliance with environmental laws.
After a project plan is prepared, the Group applies for a development permit with the local government. If the land is initially designated
as agricultural land, FLI applies to the Department of Agrarian Reform ("DAR") for a Certificate of Conversion or Exemption, as may be
proper, in order to develop the same for residential purposes.
Once a development permit is obtained, the Group applies for a license to sell the individual lots from the Housing and Land Use
Regulatory Board (HLURB). The Group may also need approval from the Lands Management Bureau (for industrial used lands) or the
Land Registration Authority (for residential used lands) for the relevant subdivision plan.
Project developers are required to submit as part of each application for a development permit an environmental impact statement prepared
by a qualified consultant. Development permits are granted only when the Department of Environment and Natural Resources (DENR)
issues to the developer, a Certificate of Non Coverage for the proposed development plans. Where a property or a project has been
determined to be "environmentally critical" the developer is required to obtain an Environmental Compliance Certificate (ECC). As a
requirement for the issuance of ECC, an Environment Geological and Geohazard Assessment Report shall be submitted.
Subsidiaries engaged in financial services are subject to the rules and regulations as provided for by the BSP and SEC.
Major Risk Factors
Real Estate Development
Property values in the Philippines are affected by the general supply and demand of real estate, the rate of economic and political
developments in the Philippines. A substantial portion of the Group’s earnings depends on continued strength in the Philippine property
market.
In the event new supply exceeds demand as a result of economic uncertainty or slower growth, political instability, increased interest rate,
which reduce the ability of the Group’s customers to finance real estate purchases or otherwise, the financial condition and results of
operations of the Group could be affected.
The profitability of property development activities depends, in part, on the cost of constructing the housing units, and infrastructure
improvements included in the developments. The Group has sought to reduce such costs through standardized housing and infrastructure
design and economies of scale realized through volume purchases and large developments. Inflation in construction costs or the cost of
materials would reduce gross profit margins.
To improve its sales generation, the Group introduced different financing schemes that will help prospective buyers of real estate. The
Group also expanded its sales distribution channels, local and international, and improved manpower efficiency to quickly respond to
business development and marketing needs of the Group and its customers.
Banking and Financial Services
As part of the risk identification, monitoring and control process, the Bank defined the various financial risks it encounters in the course of
doing the business. The bank endeavors to make the lists comprehensive and strives to update subject lists as much as possible. The bank
recognizes the following risks:
Risks – on the Bank’s perspective, is the occurrence of an event, either expected or unanticipated, that may have an adverse impact on the
Bank’s operational and/or financial performance leading to a possible loss in the Bank’s capital or earnings.
Risk Management – is a continuous process of identifying, analyzing, measuring, controlling, communicating and evaluating risks. It is a
bank-wide endeavor where all the units of the Bank are expected to share in the responsibility.
Types of Risks:
• Quantifiable Risks – subject to numerical measurement; managed and controlled by general and specific limits.
• Non-Quantifiable Risks – not subject to specific measurement; still significant and not managed in isolation.
Quantifiable Risks
16
Market Risk or Price Risk refers to risk to earnings and capital arising from adverse changes in the prices or market value of the Bank’s
overall trading and investment portfolios (both on or off-balance sheet) as marked conditions changes.
•
•
•
•
Foreign Exchange Risk – arising from adverse changes in foreign exchange rates
Interest Rate Risk – arising from adverse changes in interest rates
Equity Risk – arising from adverse movements in the price of corporate holdings/shares/stocks
Commodity Risks – arising from adverse changes in the price of physical commodities
Interest rate risk pertains to the risk of losses in the bank’s portfolio in interest bearing instruments such as GS, corporate bonds and notes,
due to adverse changes in interest rates. As such, the bank not only considers the impact of changes in interest rates in its short term
earnings but more importantly on its networth or economic value to mitigate the effects on the bank’s overall liquidity, capital adequacy
and stability.
Market Risk Management Measures is generally and consequently measured and then controlled by a system of limits. RMG defines and
presents for approval to the Risk Committee and Board, the various risks management measures to be used in quantifying market and
interest rate risks. Once approved the following risk measures is used.
Sensitivity Measures
Marked to market is simply the difference in value between a portfolio measured at a present market rate and the value of that same
portfolio after a shift in the said market rate.
Accrual for accrual portfolios, sensitivity is calculated as the change in the accrual based cost to close of the current position for a
specified unit change in the interest rate of the currency the accrual portfolio is denominated. This method starts with interest gap
schedules for each currency based on asset and liability re-pricing.
Value at Risk (VAR) is a tool for measuring the potential loss from an unlikely adverse event in a normal market environment. It is a
measure of a likely earning volatility for marked to market portfolios. It is defined as a statistical estimate of the maximum possible loss
on a given position during a time horizon within a given confidence level.
Market Risk Measurement
All risk-taking activities are subject to limits, which are sponsored by the Business Units Head, recommended by the Risk Management
Committee and approved by the Board of Directors. The following tools are used to effectively manage market risk.
•
•
•
•
•
•
Month to Month Mark to Market - Profit and loss for risk taking activities
VAR Limit (value at risk) - Management tolerance for Potential Loss
Stop Loss Limit - Management tolerance for mark to market loss in a given period
Loss Alert - Early Warning for potentially large losses
Nominal Position limit - Management approved total position
Stress Test - Impact of Extreme Market Movement on Bank Earnings
The success of the risk limit system is contingent on a key operational control.
Credit Risk refers to the risk to earnings or capital arising from an obligor/s, customer/s or counterparty/ies failure to perform and/or to
meet the terms of any contract with the Bank, subjecting the Bank to a financial loss. Credit Risk may last for the entire tenor and set at
the full amount of a transaction and in some cases may exceed the original principal exposures.
•
•
•
•
•
•
•
•
Underwriting Risk – default on loans and overdrafts
Contingent Lending Risk – default on letters of credit and guarantees
Counter-party Risk – arising from failure of a counter-party to fulfill all his obligations to the Bank
Counter-party pre-settlement Risk – counter-party default before contract value date
Counter-party settlement Risk – counter-party default on contract value date
Issuer Risk – issuer of securities bought by the bank will renege on their contractual obligation to honor the security on
maturity
Custody Risk – the appointed custodian of the Bank will fail in its duty to safe-keep the Bank’s securities
Country Risk – inflow and outflow control will be imposed by a country’s government.
17
Credit Risk cover mostly loan portfolio analysis, where the Bank shall employ risk management techniques to quantify and qualify cynical
versus specific risk for a given portfolio under potentially adverse economic conditions. It is expected that in these periods of stress, the
Bank’s loan portfolio will suffer, but the degree of credit quality erosion will depend primarily on the Bank’s own risk culture, lending
policies and controls.
The Bank can reduce credit risks by diversifying its loan portfolio across various sectors and borrowers. This is the underlying principle of
portfolio diversification against loan concentration. In general, the Bank is convinced that excessive concentration of lending in a single
business sector (e.g. real estate development) or geographic area plays a significant role in weakening asset quality. Good diversification
across economic sectors and geographic areas enables the Bank to ride through business cycles without causing undue harm to asset
quality. It likewise allows the Bank to manage risks associated with Bank’s largest exposures.
The Credit Risk Management department was formalized within the institution through the Credit Policy Manual. The same documents
are disseminated throughout the Bank in order that all the Bank’s personnel are knowledgeable of the credit risk methodology of the
institution. Other principles to be followed are that:
a.
b.
c.
Credit approval bodies are formalized within the institution. Credit approval bodies and the risk management organization
of the Bank is independent of the trading unit.
Credit authority and consequently, approval authorities of these approving bodies are well defined.
Senior Management is actively involved in the credit process and the credit analysis and approval function tends to be
centralized – versus the decentralized structure of the marketing and client-relationship process.
The Chief Risk Officer (CRO) manages and oversees the day-to-day activities of the RMG, the IAD and the RCD. The CRO likewise
evaluates all risk policy proposals and reports to be presented to the RMAC. The CRO, through the RMG, shall also coordinate with the
RTUs and the RCCUs of the Bank as regards the submission of requisite reports on their risk compliance and control activities.
Liquidity Risks refers to risks earnings or capital arising from the Bank’s inability to meet in a timely manner its financial commitments
when they fall due without incurring unacceptable losses. This is the ability of the bank to fund increases in assets and meet obligations in
all currencies as they fall due. A strong liquidity management system is characterized by a good management information system,
effective analysis of net funding requirements under alternative scenarios, diversification of funding sources and contingency planning.
•
•
Funding Liquidity Risk – arising from a bank’s inability to meet obligations when they fall due.
Trading Liquidity Risk - arising from a bank’s inability to unwind its position to meet funding needs.
Liquidity management starts with the formulation and dissemination of a clear liquidity strategy that maps out the general approach that
the bank will have to liquefy various quantitative and qualitative targets. The Board of Directors has the responsibility for approving
liquidity strategy. Day to day implementation and monitoring of this strategy is left to the ALCO, which formulates the strategy and have
this reviewed by Risk Management Committee for approval.
Non-Quantifiable Risks
Operational Risk refers to risk earnings and capital arising from weaknesses in organizational structure poor oversight function of the
board of directors and senior management, weak internal control system, inadequate internal and external audit coverage and deficient
management info system.
•
•
•
•
Processing Risk – inherent in the execution and settlement of transaction
Accounting Risk – associated with lapses in reporting and audit
Documentation Risk – arising from documentary evidence being incomplete, incorrect and unenforceable.
System Risk – arising from the failure in capacity and security of bank system.
Legal Risk refers to risks to earnings or capital as a result of unenforceable contracts from legal non-conformity, lawsuit or adverse legal
judgment.
•
•
Legal Non-conformity Risk – arising from Bank’s products, services or processes being found to be incompatible with the
letter of law.
Customer Lawsuit Risk – arising from legal cases filed against the Bank for its failure to disclose all relevant information
(including risk involved) or breach of contract.
18
•
Law Amendment Risk – arising from amendments to the law rendering current products or services inapplicable or less
profitable.
Compliance/Regulatory risk refers to risks arising from violations or nonconformity to laws, rules and regulations, prescribed practices or
ethical standards.
•
•
•
Regulatory Non-conformity Risk – arising from Bank’s products, services or processes being found to be incompatible
with regulators’ rules and regulations.
Regulatory Sanctions – arising from current violations of rules and regulations will mean penalties and future difficulty in
securing licenses and approvals.
Changes in Rules and Regulations – arising from changes in rules and regulations rendering current products and services
inapplicable or less profitable.
Reputational Risk refers to the risk to earnings or capital arising from failure to perform responsibilities expected from a bank resulting to
loss of reputation or erosion of public trust inherent in its banking charter.
•
•
•
Suitability Risk – refers to risk arising from marketing of bank’s financial instruments to unqualified clients.
Disclosure Risk – refers to risk occurring from failure to disclose and ascertain that client comprehends all inherent risk
arising from proposed transactions.
Valuation Risk – refers to risk arising from inaccurate market valuation of financial instruments held on a regular basis.
Personnel Risk refers to risk arising from the possibility that employees or management will fail to perform their duties expected of them
as bank employees.
•
•
Lack of Fit Risk – refers to risk that the appointed personnel do not have the requisite skill or attitude to perform the
assigned task.
Integrity – refers to risk that the assigned personnel do not posses the moral qualification for the job assigned.
Systemic Risk refers to the risk arising from global, regional or industry wide turbulence or crisis.
Strategic Risk refers to the risk to earnings and capital arising from adverse decisions or improper implementation of subject decisions.
Risk Functional Organization
The Bank’s implementation of the risk management process involves a top-down approach that starts with the Board of Directors. The
Bank’s Directors, through the Board-level Risk Management and Audit Committee (RMAC), is actively involved in planning, approving,
reviewing, and assessing all risks involved within the Bank
The RMAC’s functions are supported by the Executive Committee (EXCOM), which provides essential inputs and advice, particularly on
credit and investment policy matters. In this regard, the Loan and Investments Committee (LoanCom), one of the Bank’s management
working committees provides the necessary assistance to the EXCOM.
When it comes to treasury-related risks, the RMAC also gets policy inputs and advice from the Asset-Liability Management Committee
(ALCO), another management working committee within the Bank. The Operations Committee (OPCOM) likewise provides policy inputs
and advice to the RMAC concerning operating risks. All these policy inputs and advice are channeled through the Risk Management
Group (RMG) which directly reports to the RMAC.
Two departments also reporting directly to the RMAC are the Internal Audit Division (IAD) and the Regulatory and Compliance
Department (RCD). IAD is tasked with monitoring the Bank’s internal management control processes and providing an independent
assessment of the Bank’s systems to ensure that integrity is maintained. The RCD, for its part, is tasked with monitoring and assessing the
compliance with the Bank’s various units with banking rules and regulations. It is also tasked with the proper dissemination of these rules
and regulations within the Bank.
19
Employees
As of December 31, 2005, the Group had a total workforce of 1,629 persons consisting of 74 senior executive officers, 1,504 full-time
staff (555 in administrative, 309 in clerical, 428 in operation and 212 in technical), and 51 other employees (8 in administrative, 35 in
clerical, 5 in operation and 3 in technical) hired for diverse projects on temporary basis. The Group does not anticipate substantial
increase in the number of its employees within the next twelve (12) months although it is expected that the number of workforce will
increase as a result of the planned additional branches of EWB in 2006. None of the employees are unionized.
The Group has no Collective Bargaining Agreement (CBA) with any of its employees.
Item 2. Properties
Properties and Equipment
The Company owns a parcel of land located in San Juan, Metro Manila with an area of 3,246 square meters, which is being used as the
head office of FDC and FLI. The Company through Filinvest Asia Corporations also owns 50% of the office space in PBCom Tower
located along Ayala Avenue, Makati City which office spaces are being leased out to several tenants
FLI is renting spaces for its sales offices in Quezon City, Cavite, Muntinlupa City, Cebu and Davao City. The term of the leases is for one
year, and thereafter, the term of the lease shall be on a month to month basis, or upon the option of both parties, a new contract is drawn.
Total rental payments in 2005 amounted to P22.9 million.
The Bank also leases several premises occupied by its head office and branches with annual escalation of 5% to 10% and for periods
ranging from 5 to 15 years, renewable upon mutual agreement of both parties. Total rentals charged to operations amounted to P110
million in 2005.
The Company does not intend to acquire properties for the next 12 months except as needed in the ordinary course of business.
Landbank
It is an integral part of the Group’s strategy to maintain an extensive landbank at all times. The Group currently maintains a landbank,
which it believes, could sustain at least five to ten years of development and sales. The Group’s landbank consists of vacant or
undeveloped land primarily in the Calabarzon and regional urban areas.
As of December 31, 2005, the Group’s landbank consisted of approximately 2,262.47 hectares. The following table shows as at
December 31, 2005 the Group’s landbank and land held under joint ventures in which the Group participates:
Landbank as of December 31, 2005
Location
MetroManila..….............
Bulacan.......…..............
Rizal.............................
Batangas.....…..............
Cavite..........…..............
Laguna.........….............
Cebu...........…..............
General Santos…..........
Davao
Ormoc
Negros Occidental….…..
Group Owned
Joint Venture
( in hectares)
45.31
249.01
631.85
161.23
394.12
313.88
15.37
53.55
0.14
0.05
51.04
49.58
0.63
60.02
69.59
29.50
5.27
97.77
34.57
20
Total.................….........
1,915.54
346.93
Potential land acquisitions and participation in joint venture projects are evaluated against a number of criteria, including the attractiveness
of the acquisition price relative to the market, the suitability or the technical feasibility of the planned development. The Company
identifies land acquisitions and joint venture opportunities through active search and referrals. Under the joint venture agreements, the
joint venture partner contributes the land and the Group undertakes the development and marketing of the products. The joint venture
partner is allocated either the developed lots or the proceeds from the sales of the units based on pre-agreed distribution ratio.
In addition to the above listed landbank, the Group also owns part, either direct ownership or joint ownership with the Government
through the Public Estates Authority, of the 244 hectare Filinvest Corporate City (FCC) in Alabang, Muntinlupa City. Certain parcels of
land owned by the Group with an aggregate area of 35.88 ha. were mortgaged with financial institutions as security for the Group’s longterm debt.
At present the Group believes that the landbank it maintains could sustain at least five to ten years of development and sales, thus, it
has, as a rule, no intention of acquiring substantial rawlands in the next two years, unless an extremely attractive offer is received.
Item 3. Legal Proceedings
The Group is subject to lawsuits and legal actions in the ordinary course of its real estate development and other allied activities.
However, the Group does not believe that any such lawsuits or legal actions will have a significant impact on the financial position or
result of operations of the Group. Following are the cases involving certain properties of the Group that impact on its financial position
more than its other properties, but which the Group believes will be eventually resolved in favor of the member concerned:
1.
Abdul Backy, et al. vs. Filinvest Land, Inc. et al.
This is an action for the declaration of nullity of deeds of conditional and absolute sales of certain real properties located in Tambler,
General Santos City executed between the Company’s subsidiary, Filinvest Land, Inc. (“FLI”) and the plaintiffs' patriarch, Hadji
Gulam Ngilay. The Regional Trial Court (RTC) of Las Piñas City (Br. 253) decided the case in favor of FLI. The decision is on
appeal with the Court of Appeals.
2.
Meritville Alliance vs. FLI
On March 27, 1996 certain alleged flood-affected homeowners of Meritville, a subdivision developed by FLI in a topographically
depressed area of Las Piñas City, filed a complaint with the Housing and Land Use Regulatory Board (HLURB) against FLI to
require elevation of the portions of the subdivision (with an aggregate area of approximately 0.6 hectares) frequently visited by
flooding on which 77 housing units have been constructed. FLI has assailed with the Supreme Court the decision of the Court of
Appeals affirming the decisions of the Office of the President and the Board of Commissioners of the HLURB adverse to FLI.
3.
Republic of the Philippines vs. Rolando Pascual, et al.
The National Government through the Office of the Solicitor General filed suit against Rolando Pascual, Rogelio Pascual and FLI for
cancellation of title and reversion in favor of the Government of properties subject of a joint venture agreement between the said
individuals and FLI. The Government claims that the subject properties covering about 73.33 hectares are not alienable and
disposable being part of the forest lands. The case is now pending with the RTC of General Santos City (Br. 36).
4.
Adia vs. FLI
Various CLOA holders based in Brgy. Hugo Perez, Trece Martirez City filed a complaint with the RTC of Trece Martirez against
FLI for recovery of possession with damages, claiming that in 1995 they surrendered possession of their lands to FLI so that the
same can be developed pursuant to a joint venture arrangement allegedly entered into with FLI. They now seek to recover
possession of said lands pending the development thereof by FLI. The RTC rendered a decision ordering FLI to vacate the subject
property. FLI filed a motion for reconsideration which is now pending with RTC.
5.
Alberto D. Hilapo et al. vs. Republic of the Philippines, et al. (Civil Case No. 99-0075, RTC-Muntinlupa, Br. 256); Alberto D.
Hilapo, et al. vs. Hon. Alberto L. Lerma, et al. (CA G.R. SP No. 77969, Court of Appeals); Alberto D. Hilapo, et al. vs. Republic of
the Philippines, et al. (G.R. No. 161639, Supreme Court)
21
Plaintiffs in Civil Case No. 99-075 claim to be the owners of the 244-hectare parcel of land known as the Alabang Stock Farm which
is the subject of a joint venture between the Government and the Company. Civil Case No. 99-0075 is a civil action seeking
principally the annulment of Transfer Certificate of Title No. 185552 issued in the name of the Republic of the Philippines which
covers the entire Alabang Stock Farm area subject of the corresponding Joint Venture Agreement, as well as the transfer certificates
of title derived therefrom, including titles to portions of the Alabang Stock Farm in the name of the Company’s subsidiary and
assignee of its interest under the joint venture, Filinvest Alabang, Inc. (“FAI”). The RTC of Muntinlupa City dismissed the case per
in its Resolution dated December 19, 2002 and Order dated April 21, 2003. The plaintiffs filed a petition for certiorari (CA G.R. SP
No. 77969) with the Court of Appeals seeking the reversal of the aforesaid dismissal. In a Decision dated October 10, 2003, the
Court of Appeals dismissed the petition. In a Resolution promulgated on January 8, 2004, the Court of Appeals (Seventeenth
Division) denied petitioners’ motion for the reconsideration of the aforesaid Decision. The said petitioners have assailed before the
Supreme Court the decision and resolution of the Court of Appeals.
6.
Alberto D. Hilapo, et al. vs. Hon. Alberto L. Lerma, et al. (CA G.R. SP No. 61888, Court of Appeals)
This is a special action for certiorari instituted by the plaintiffs in Civil Case No. 99-0075 (see above) seeking the nullification of the
Orders of the Regional Trial Court of Muntinlupa City (Br. 256) dated May 5, 2000 and September 4, 2000 which directed the lifting
of the notice of lis pendens that said plaintiffs caused to be annotated on the titles of the Government and of FAI over various
portions of the Alabang Stock Farm. The case is pending with the Court of Appeals.
7.
Heirs of Rufino Hilapo and Gregoria Arevalo vs. Republic of the Philippines, et al. (Civil Case No. 99-320, RTC-Muntinlupa, Br.
256)
As in Civil Case No. 99-075 (see above), the plaintiffs in this case claim to be the owners of the 244-hectare parcel of land known as
the Alabang Stock Farm which is the subject of a joint venture between the Government and the Company. It seeks principally the
annulment of Transfer Certificate of Title No. 185552 issued in the name of the Republic of the Philippines which covers the entire
Alabang Stock Farm area subject of the corresponding Joint Venture Agreement, as well as the transfer certificates of title derived
therefrom, including titles to portions of the Alabang Stock Farm in the name of FAI. The plaintiffs herein likewise seek the
reconveyance of the Alabang Stock Farm in their favor. By Resolution dated December 19, 2002, the RTC of Muntinlupa City
required the plaintiffs to pay the docket fees corresponding to the value of the property subject of this case. To date, the plaintiffs
have not done so. The case is still pending with the RTC of Muntinlupa City.
8.
Luciano Paz vs. The Republic of the Philippines (Civil Case No. 00-059, RTC-Muntinlupa City); Luciano Paz vs. Hon. N.C. Perello,
et al. (CA G.R. SP No. 66677, Court of Appeals); Luciano Paz vs. Republic of the Philippines, et al. (G.R. No. 157367, Supreme
Court)
In a petition instituted with the RTC of Muntinlupa City (Civil Case No. 00-059) petitioner sought the cancellation of the title of the
Government over the Alabang Stock Farm, and titles derived therefrom, including those in the name of FAI. The RTC of
Muntinlupa City dismissed the case on June 4, 2001. The petitioner then instituted a special civil action for certiorari (CA G.R. SP
No. 66677) with the Court of Appeals seeking the nullification of the dismissal of Civil Case No. 00-059. On August 1, 2002, the
Court of Appeals promulgated a Decision denying due course and dismissing the petition in CA G.R. SP No. 66677. In April 2003,
the petitioner filed a petition for review on certiorari (G.R. No. 157367) with the Supreme Court seeking the reversal of the
dismissal of CA G.R. SP No. 66677 and Civil Case No. 00-059. The case is still pending with the Supreme Court.
9.
Luciano Paz vs. Hon. N.C. Perello, et al. (CA G.R. SP No. 87864, Court of Appeals)
This is a special civil action for certiorari instituted by Luciano Paz, the plaintiff in Civil Case No. 00-059 (see above) seeking the
nullification of the Order of the RTC of Muntinlupa City (Br. 276) ordering the cancellation of the notice of lis pendens which
petitioner Paz caused to be annotated on some of the titles covering the Alabang Stock Farm. By Resolution dated January 4, 2005,
the Court of Appeals dismissed the petition in this case. The Court of Appeals ordered entry of judgment in a Resolution dated April
25, 2005.
10. Commissioner of Internal Revenue vs. FDC and FAI (CTA Case No. 6128, Court of Tax Appeals); Commissioner of Internal
Revenue vs. FDC and FAI (CA-G.R. SP No. 74510, Court of Appeals); Commissioner of Internal Revenue vs. FDC and FAI (G.R.
No. 167689, Supreme Court)
On January 26, 2005, the Court of Appeals rendered its Decision in CA-G.R. SP No. 74510 denying due course to the Commissioner
of Internal Revenue’s Petition for Review and dismissing the same. Previously on September 10, 2002, the Court of Tax Appeals
(CTA) rendered its Decision in CTA Case No. 6128, which found the Petition for Review of the Company and FAI in said case
22
partly meritorious and cancelled and set aside the following assessments against the Company and FAI: (1) Assessment Notice No.
SP-INC-96-00018-2000, imposing deficiency income tax on the Company for taxable year 1996, in the amount of P150,074,006.27;
(2) Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000, imposing deficiency documentary stamp tax on
the Company for taxable years 1996 and 1997, in the amounts of P10,425,487.06 and P5,796,699.40, respectively; and (3)
Assessment Notice No. SP-INC-97-00027-2000 imposing deficiency income tax on FAI for taxable year 1997, in the amount of
P1,477,494,638.23, but sustained Assessment Notice No. SP-INC-97-00019-2000, which imposed a deficiency income tax on the
Company for taxable year 1997, and ordered the Company to pay the amount of P5,691,972.03, the alleged interest income on the
advances extended by the Company to its subsidiaries/affiliates, plus 20% deficiency interest computed from February 16, 2000 until
full payment thereof. The Commissioner filed the Petition in CA-G.R. SP No. 74510 in the Court of Appeals on January 13, 2003 by
way of appeal from the aforementioned Decision rendered by the CTA on September 10, 2002 in CTA Case No. 6128, insofar as the
assessments against the Company and FAI which were cancelled by the CTA are concerned. On February 17, 2005, the
Commissioner filed a Motion for Reconsideration of the January 26, 2005 Decision which the Court of Appeals denied on March 31,
2005.
The Company is not aware of any other information as to any other legal proceedings known to be contemplated by government
authorities or any other entity.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of the calendar year covered by this report.
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Cash Dividend
None declared in 2005 and 2004. The payment of cash dividends in the future will depend upon the company’s earnings, cash flow,
financial condition, capital investment requirements and other factors (including certain restrictions on dividends imposed by the terms of
loan agreements). Pursuant to the loan agreements entered into by the company and certain financial institutions, the Company needs the
lenders’ prior consent in cases of cash dividend declaration.
Market Information
STOCK PRICES
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Period End
1.78
1.36
1.14
1.24
1.36
1.14
1.08
1.18
1.50
1.16
1.12
1.20
1.00
1.02
0.98
1.02
1.00
1.00
0.98
0.95
1.00
1.00
0.98
1.02
As of April 27, 2006 the closing price of FDC share was at P3.30.
23
The number of shareholders of record as of December 31, 2005 was 5,620 and as of April 26, 2005 was 5,586. Common shares issued
and outstanding as of December 31, 2005 were 5,933,904,119.
Top 20 Stockholders
As of December 31, 2005
Shareholders
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
ALG Holdings Corp.
Trust for Michael Gotianun
Jonathan T. Gotianun
Lourdes Josephine G. Yap
PCD Nominee Corp. (Non-Filipino)
PCD Nominee Corp. (Filipino)
FDC Equities Investment Ltd.
Michael Gotianun
Ricardo Alonzo
First Metro Investment Corporation
East-West Banking Corp. FAO Trust Acct. No. 135
Hongkong Bank OBO Manila A/C 118976/150
Abacus Capital & Investment Corp.
Andrew Gotianun, Sr &/or Mercedes T. Gotianun
East-West Banking Corp. FAO Trust Acct. No. 132
Josephine G. Yap
Hongkong Bank OBO Manila A/C 118976/150
Efren C. Gutierrez
Hongkong Bank OBO Manila A/C 118976/150
Enrique Cheng
Total
Class of
Securities
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
No. of Shares held
4,201,927,831
415,337,720
339,291,901
329,919,980
190,972,134
150,974,324
79,733,354
37,218,799
23,214,024
21,120,500
19,750,000
10,119,500
7,700,000
7,575,000
6,942,900
6,292,900
5,764,100
5,401,388
4,128,515
3,300,000
% to
Total
70.52%
6.97%
5.69%
5.54%
3.21%
2.53%
1.34%
0.62%
0.39%
0.35%
0.33%
0.17%
0.13%
0.13%
0.12%
0.11%
0.10%
0.09%
0.07%
0.06%
5,866,684,871
98.46%
Recent Sale of Unregistered Securities
There are no securities sold by the Company in the past three (3) years, which were not registered under the Code.
Item 6. Management’s Discussion and Analysis or Plan of Operations
Results of Operations
• 2005
Real estate operations posted 6% growth in net revenue, to P3.8 billion from P3.6 billion in 2004. Mall and rental revenues increased by
19% or P165 million with the increased occupancy in Festival Supermall, FAI lots, Westgate, South Central and Cyberzone. The Group
welcomed new tenants such as Wilcon Builder’s Depot and Alabang Home Depot in Filinvest Corporate City; 84 new stores were added
in Festival Supermall; and, Westgate’s newest establishments are Belo Medical Center, Gymboree, Zong Restaurant, UCC Coffee, Wine
Depot, Med Express, Cest Si Bon French Restaurant, and Westgate Alabang Home Depo. FLI expanded its sales by 7% with mostly
coming from the middle-income sector, beefed up by a strong OFW demand. This was offset by the decline in sale of lots and residential
condomimium units of FAI, which decreased by 57% and 42%, respectively. It was however partially eased with the improvement in sale
of commercial condominium units, which increased by 1281%. Coupled with the lower sale of club shares, which went down by 42%, and
higher deferred gross profit due to more sales booked under installment method, total gross profit declined by 17%. Other income rose to
24
P1.4 billion, up by 31% from P1.1 billion in 2005, mainly sourced from interest in installment contracts receivable, investment in bonds,
and gain from the exchange of land.
Real estate operating expenses grew by 19% mainly as a result of higher fuel costs which increased tripping and transportation expenses;
higher travel expenses because of more regional projects; fees incurred for the increase in capitalization of FLI; incidental expenses for
various loan availments, and higher marketing expenses, and taxes and licenses.
Banking operations net revenue escalated by 65%, to P1.2 billion from P760 million in 2004. With the bank’s focus on consumer
financing, interest income grew by 72% mainly supplied by auto loans, credit card, salary loans, and investments, which increased loans
receivables by 11%. With the bank’s aggressive deposit campaigns and introduction of new products, volume of deposits grew by 15%,
which brought costs of financial services to P1.2 billion or a 28% increase from P922 million in 2004. Operating expenses was at P1
billion, a 19% increase over last year’s with the new personal banking centers and advertising costs for the new products and product
lines. The bank capped a successful year with a net income of P117 million, an increase of 139% from P84 million earned the previous
year.
As a result, the Group’s EBITDA rose by 14%, to P2.6 billion. Depreciation and amortization increased by 31% due to decomponetization
of Festival Supermall and CPI buildings, changing its useful life from 50 to 20 years, as required by the new reporting standards. Interest
expenses declined by 42% with the group taking advantage of the low interest rates while obtaining new loans of P4.4 billion, a move
which improved the company’s maturity schedule from 2.3 to 4 years and savings of over P100 million a year in terms of interest costs.
This year’s consolidated net income registered a 65% growth, to P878 million from P533 million the previous year.
Cash and cash equivalents stood at P3.6 billion, an increase of 9% over last year, brought about by cash proceeds from loan availments.
Long-term debt was at P11 billion, up by 21%. On December 12, 2005, the parent company FDC purchased the bonds issued by FLI on
February 7, 2002 amounting to P1.2 billion to Reco Grandhomes Pte. Ltd., a Singaporean company. Prior to the purchase and amendment
of the subscription agreement on December 14, 2005, the maturity date of the bond is February 7, 2007 with interest rate at 10% payable
semi-annually and the bonds, unless previously redeemed or converted and cancelled, can be redeemed at an amount such that the
annualized internal rate of return in the bonds is equivalent to 19% per annum. The new agreement between FLI and the parent company
set the maturity of the bonds on December 14, 2010 with interest rate of 12.2% payable quarterly and redemption price equivalent to the
face value of the bonds.
The group’s receivables rose by 51% primarily due to higher installment receivables of FLI. Moreover, this year recorded higher
receivables from financial institutions as a result of more affordable financing packages offered by banks to customers. Subdivision Lots,
Condominiums, and Residential Lots for Sale increased to P7.7 billion from last year’s P7 billion mainly as a result of land and housing
developments for Brentville, Mandala Farm Estate, Aldea del Sol, Fuente de Villa Abrille and other new projects set up during the year.
Other Assets were higher by 33% with the increase in prepayments, additional costs of computer systems, and deferred charges incurred in
connection with newly-availed long-term debts.
Accounts payable and accrued expenses increase of 10% was due to temporary advances and payments outstanding as of year-end.
Unrealized gross profit on Installment Contracts Receivable, Sale of Condominium units and Club shares increased by 56% with higher
sales booked by FLI during the year. Estimated liability for land and property development was up by 151% with the provisions for new
and on-going projects such as Samanea, Timberland Heights, Forest Farm, the new regional projects, Villa Montserrat, and Palms Pointe.
With the growth in net income, Retained Earnings stood at P12 billion, at 7% growth over last year.
Performance Indicators
As of December 31, 2005
Earning per share (basic)
Net Income
As of December 31, 2004
P 0.147
/share
P 0.090
/share
8.13
times
11.39
Times
Weighted average number of outstanding
common shares
Price Earnings Ratio
Closing Price
25
Earnings per share
Return on Gross Revenue
Net Income
17%
11%
0.30
0.26
Total Revenue
Debt to equity ratio (gross)
Notes Payable & Long-term Debt
Total Stockholders' Equity
EBITDA to Total Interest Paid
EBITDA
6.917
times
3.514
times
Total Interest Payment
The profitability of the Company is reflected in the earnings per share, which improved from P0.090 a share in 2004 to P0.147 a share in
2005 due to a positive 65% growth in terms of consolidated income for the year 2005. The price earnings ratio decreased due to the
higher earnings per share partially mitigated by the improvement in end of the period’s closing price (market price per share as of 2005 is
P1.2 and P1.02 as of 2004) for the year 2004 compared to 2003.
Return on gross revenue increased due to improved income generated both by the real estate operations and financial and banking
services.
Total debt to equity ratio increased from 0.26:1 to 0.30:1 due to availment of new loans however at much lower interest rates and stretched
maturity periods.
Other Notes to Financial Statements
There are no known trends, events or uncertainties that have had or that are reasonably expected to have favorable or unfavorable impact
on net sales or revenues or income from continuing operations of the Company.
The operating activities of the Company are carried uniformly over the calendar year. There are no significant elements of income or loss
that did not arise from the Company’s continuing operations.
There are no seasonal aspects that had a material effect on the Company’s financial conditions or results of operations.
There are no known events that will trigger the settlement of a direct or contingent financial obligation that is material to the Company.
There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the
Company with unconsolidated entities or other persons created during the reporting period.
• 2004
FLI booked total sales of P2.236 billion which is 52% higher than the 2003 sales. On the other hand FAI’s net earnings after tax
amounted to P231.9 million, a 162% growth over the past year. The Company, for the year 2004, posted a positive growth of about 223%
in terms of consolidated net income. Net income for the year amounted to P541.3 million or an increase of P373.8 million from P167.5
million last years as a result of the factors mentioned below.
On the real estate operations, for the year 2004, the Company’s consolidated sale of lots, condominium and residential units and club
shares increased by 44% from P2.022 billion in 2003 to P2.911 billion. The commercial property and condominium developer, FAI
posted a 72% increase in the sale of its commercial lots and condominium projects compared to last year while the residential property
developer, FLI posted a 52% increase in the sale of its residential units. During 2004, FAI sold more commercial lots and started booking
the sales of lots from its premiere project, the Palms Pointe, a residential development across The Palms Country Club. FLI on the other
hand, reported higher sales from the middle-income and affordable projects. However, because of fewer club shares sold in 2004 as FAI
is nearing completion of the sale of total authorized shares to be sold, sale of club shares decreased from P197.4 million in 2003 to P102.7
million. Realized (deferred) gross profit from prior years’ real estate sales increased from (P56.7 million) to P46.2 million. The increase is
26
due to the partial recognition of profit from previous years’ sales of condominium projects, installment sales and discounting of
receivables.
The financial and banking services recorded a positive growth in revenues as interest income increased by 14% from P984.3 million to
P1.118 billion coming mostly from additional loans granted. Receivable from customers increased from P8.249 billion as of end 2003 to
P9.109 billion as of end 2004. Also, the other income of financial and banking services increased by 19% due to higher service charges
fees, commissions and other income earned during the year 2004. Thus, net revenues of the financial and banking services increased by
13% to P759.6 million for the year ended December 31, 2004.
The Group generated consolidated net revenues of P4.339 billion during the year, 13% higher than the P3.831 billion net revenues
generated last year.
The increase in the operating expenses of the financial and banking services from P805.4 million to P1.025 billion for 2004 is due mainly
to additional expenses incurred by the new ten (10) personalized banking centers opened during the year 2004, additional manpower,
amortization and depreciation of fixed assets and deferred charges on the acquisition of new equipment and software and additional
provision for probable losses booked in 2004.
Because of the huge provision for income tax in 2003 resulting from the utilization of a substantial portion of FDC’s NOLCO, provision
for income tax decreased by 22% from P627.6 million in 2003 to P489.8 million in 2004..
Receivables increased by 17% from P3.756 billion in 2003 to P4.408 billion as of December 31, 2004 due to higher sales booked by the
commercial lots, condominium and residential units.
Receivable from customers increased from P8.249 billion as of December 31, 2003 to P9.109 billion as of December 31, 2004 because of
additional loans granted by the bank resulting from the aggressive campaign for its loan programs catering mostly to the consumer/retail
market. During the year 2004, the bank added ten (10) new personalized banking centers, which also contributed to its loans and deposit
generation.
Investments increased by P2.474 billion from P4.080 billion in 2003 due to additional acquisitions made during the year 2004 of trading
and investment securities by the financing and banking services unit.
Property and equipment increased by P4.969 billion or 25% mainly because of higher revaluation of land of a subsidiary booked during
the year. This also explains the increase in revaluation increment in land account under stockholders’ equity from P8.223 billion in 2003
to P11.188 billion in 2004.
Deferred tax assets decreased by 14% due to the adjustment on this account corresponding to the net loss carry over utilized and/or written
off by the Group during the current year.
Other assets decreased by 20% from P2.029 billion in 2003 to P1.614 million as of December 31, 2004 due to amortization of deferrals
and prepayments during the year and reduction in advances to contractors/suppliers, creditable withholding tax and other assets.
Deposit liabilities increased by 27% from P13.697 billion in 2003 to P17.410 as of December 31, 2004 because of the aggressive
marketing, intensified promotional activities, launching of new and attractive products and additional branches opened by EWBC.
Income tax payable represents the current provision for income tax net of the application of creditable withholding tax of a subsidiary.
The increase in deferred tax liabilities of P1.908 billion represents mainly the deferred tax on the additional revaluation increment in land
booked in 2004 as earlier mentioned.
Bonds payable decreased by 9% due to the payment of US$2.15 million guaranteed convertible bonds that matured last February 28,
2004.
Unrealized gross profit on installment contracts receivable, sales of condominium units and club shares decreased by 19% because of the
realization of gross profit pertaining to receivables discounted during the year.
The decrease in estimated liability for land and property development of P129.4 in 2004 represents land development and construction
costs spent during the year.
27
As of December 31, 2004 the total consolidated assets stood at P76.878 billion while stockholders’ equity amounted to P29.404 billion.
The consolidated bonds payable and long-term debt amounted to P9.535 billion as of December 31, 2004. The debt to equity ratio was
0.32:1.00 as of December 31, 2004.
The Company has no material commitments for capital expenditures, except for the ongoing project developments of its real estate
subsidiaries and the initial expenses necessary for the new branches of its bank subsidiary which expenses can be adequately covered by
the subsidiaries’ operating cashflow. Aside from significant peso fluctuations and hike in interest rates, there are no events or uncertainties
that are reasonably expected to have a material impact on the Company’s short term or long-term liquidity or on the Company’s revenues
from continuing operations.
• 2003
2003 was a better year than the previous year for the Group as far as the results of operations is concerned. The Group generated
consolidated net revenues of P3.831 billion in 2003, a 19% increase over the P3.219 billion net revenues generated in 2002. Income
before income tax amounted to P1.054 billion in 2003 or a 169% increase while the net income amounted to P167.5 million or an increase
of 222% over the P52.0 million of last year as a result of the factors mentioned below.
The 2003 real estate operations yield better results than the last year. The Company’s consolidated sale of lots, condominium and
residential units and club shares for 2003 increased by P21.9 million from P2.0 billion in 2002 to P2.022 billion in 2003 because of higher
sales booked by its commercial property and condominium developer, FAI. FAI’s sales amounted to P354.9 million in 2003, 288% higher
than last year. Cost of sales of lots, condominium and residential units and club shares decreased from P928.7 million in 2002 to P750.9
million inspite of the increase in sales since a larger percentage of sales where contributed by FAI commercial lots with higher profit
margin. The gross profit margin on FLI sales improved during the year which also contributed to the lower cost. However, realized gross
profit from prior years real estate sales decreased from P142.5 million in 2002 to (P56.7) million in 2003. The decrease is a result of a big
amount of profit realized in 2002 from the sales of club shares since the club was completed in 2002 and income from club shares are
accounted for under the percentage of completion method.
Rentals and other income increased by 39% from P1.394 billion to P1.944 billion. Such increase is attributed to higher rentals generated
from Festival Mall, PBCom Tower, I.T. Buildings, Westgate Center and certain lots in FCC. Interest income also increased by 95% from
P155.6 million to P304.1 million because of higher interests earned from trade receivables and temporary placements.
The financial and banking services likewise posted positive growth in revenues. Net revenues from this segment amounted to
P673.1million or a 10% increase from 2002. Interest income increased by 15% from P858.1 million to P984.3 million because of
additional loans granted during the year (Receivables from customers increased from P7.396 billion as of end 2002 to P8.249 billion as of
end 2003). Interests realized from various trade transactions (investment) contributed also to the increase. Other income likewise increased
by 26% from P378.0 million to P475.8 million because of higher income generated from trading transactions and foreign exchange profits
and other service fees earned during the year. But the costs and expenses of the financial and banking services also increased from P624.4
billion to P787.0 million this year due mainly to interest expense on a larger deposit base including FCDU (deposit liabilities increased
from P10.784 billion as of December 31, 2002 to P13.697 billion as of 2003).
Operating expenses of the real estate operations decreased by 6% as a result of several cost cutting measures being adopted by the
management while those of the financial and banking services increased from P701.5 million to P805.4 million because of the overhead of
additional branches established during the year (seven (7) Personalized Banking Centers) and amortization of fixed assets and deferred
charges due to the acquisition of new equipment and softwares.
Provision for income tax in 2003 amounted to P627.6 million (P103.8 million in 2002) increased because of the adjustment made on
deferred income tax related to the utilization of a substantial portion of the Company’s NOLCO.
The Company’s cash and cash equivalents increased from P2.122 billion as of December 31, 2002 to P3.244 billion as of 2003 mainly
because of the increase in deposits made with Bangko Sentral ng Pilipinas and other banks by the subsidiary bank and cash remaining
from discounting of receivables.
Receivable from customers consisting substantially of loans and discounts increased by P853.1 million from P7.396 billion as of
December 31, 2002 to P8.249 billion as of end 2003 because of additional loans granted by the bank resulting from the aggressive
campaign for its loan programs catering mostly to the consumer/retail market. During the current period, the bank added seven (7) new
branches which also contributed to its loans and deposit generation.
28
Subdivision Lots, Condominium and Residential Units for Sale account balance increased from P8.208 billion as of December 31, 2002
to P9.045 billion. The increase represents land acquisition and development costs of new projects like Nusa Dua and Village Front and
the condominium projects in FCC.
Investments increased from P3.580 billion to P4.080 billion as of December 31, 2003 primarily because of additional trading and
investments securities maintained at EWBC’s inventory at end of the year.
Land and Land Development also increased by P527.3 million to P16.906 billion because of additional development and capitalized
borrowing costs incurred on FLI’s various land and FAI’s FCC project.
Property and Equipment account decreased by P66.7 million due to depreciation provision and disposals of certain equipment, net of
some acquisitions during the year.
As previously mentioned, there was an adjustment made on deferred income tax related to the utilization of substantial portion of the
Company’s NOLCO. Such adjustment caused the decrease in the balance of Deferred income tax account from P1.652 billion to P1.073
billion.
The decrease of other assets from P1.495 billion as of December 31, 2002 to P1.010 billion as of December 31, 2003 was caused by the
reduction of EWBC ROPOA and deferred charges.
Deposit liabilities increased by P 2.913 billion because of the aggressive marketing, intensified promotional activities and additional
branches opened by EWBC.
Accounts payable and accrued expenses decreased by P1.279 billion due to settlement of certain accounts payable and other liabilities and
the application of some accounts receivable during the year
Long-term debt was higher as of December 31, 2003 at P8.337 billion compared to 2002’s P8.093 billion because of additional loans
obtained to partially finance the Group’s development activites.
Unrealized gross profit on installment contracts receivable, sales of condominium units and club shares increased by 95% from P52.6
million in 2002 to P102.4 million in 2003 due to the sales booked by the commercial and condominium sector which are accounted for
under the percentage of completion method.
As of December 31, 2003, the total consolidated assets stood at P66.183 billion while stockholders’ equity amounted to P30.041 billion.
The consolidated debt to equity ratio was 0.32:1.00 as of December 31, 2003.
The Company has no material commitments for capital expenditures, except for the ongoing project developments of its real estate
subsidiaries. Aside from significant peso fluctuations and hike in interest rates, there are no events or uncertainties that are reasonably
expected to have a material impact on the Company’s short term or long-term liquidity or on the Company’s revenues from continuing
operations. On the FLI’s P2.0 billion LTCP maturing in 2004, FLI is considering as one of its options refinancing it through the issuance
of new LTCP.
INFORMATION ON INDEPENDENT ACCOUNTANT
Audit and Audit-Related Fees
The aggregate fees billed to the Group for professional services rendered by the external auditor for the examination of the annual
financial statements amounted to P3.320 in 2005 and P3.115M in 2004, net of VAT . There are no other assurance and related services by
the external auditor that are reasonably related to the performance of the audit or review of the Group’s financial statements.
Tax Fees
The Group has not engaged the services of the external auditor for tax accounting, compliance, advice, planning and any other form of tax
services.
All Other Fees
29
There are no other fees billed in each of the last two (2) years for products and services provided by the external auditor, other than the
services reported under items mentioned above.
The Audit Committee based on the recommendation by the Internal Audit and management, evaluates the need for such professional
services and approves the engagement and the fees to be paid for the services.
Item 7. Financial Statements
The consolidated financial statements and schedules listed in the accompanying Index to Financial Statements and Supplementary
Schedules (page 39) are filed as part of this Form 17-A1.
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
There have been no changes during the two most recent fiscal years or any subsequent interim period in independent accountant who was
previously engaged as principal accountant to audit the Company’s financial statements.
There have been no disagreements with the Company’s independent accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9. Directors and Executive Officers of the Registrant
The following are the Directors and Executive Officers of FDC:
Andrew L. Gotianun Sr.
Chairman Emeritus and
Director
Mr. Gotianun, 78, Filipino, is the founder of the Filinvest group of companies and is
presently serving in various capacities in different companies of the group. He is also the
Chairman of Filinvest Alabang, Inc. and East West Banking Corporation. He has been a
director of the Company for more than five years. He was also the President of the Insular
Bank of Asia and America from 1982 to 1985.
Jonathan T. Gotianun
Chairman
Mr. Gotianun, 52, Filipino, is also the President of Davao Sugar Central Co., Inc., Filinvest
Farms Corporation and Cotabato Sugar Central Co., Inc., and Vice-Chairman of East West
Banking Corporation. He served as director and Senior Vice-President of Family Bank
and Trust Co. until 1984. He has been a director of the Company for more than five years.
He obtained a Master’s degree in Business Administration from Northwestern University.
Lourdes Josephine G. Yap
President and Director
Mrs. Yap, 51, Filipino, is also the Executive Vice-President of Filinvest Alabang, Inc. and
President of The Palms Country Club, Inc. She received her Master’s degree in Business
Administration from the University of Chicago. She has been the President of the
Company since the year 2000.
Mercedes T. Gotianun
Director
Ms. Gotianun, 77, Filipino, was involved in the operations of Family Bank and Trust Co.
since its founding in 1970 and was President and Chief Executive Officer of the said bank
from 1978 to 1984. She obtained her undergraduate degree from the University of the
Philippines. She is also the Chairman and Chief Executive Officer of Filinvest Land, Inc.
and a director of Filinvest Alabang, Inc. She has been the director of the Company for
more than five years.
Andrew T. Gotianun Jr.
Director
Mr. Gotianun, 54, Filipino, served as Director of Family Bank and Trust Co. from 1980 to
1984. He has been in the realty business for more than 16 years. He is also the ViceChairman and Executive Vice-President of Filinvest Land, Inc. He has been a director of
30
the Company for more than five years.
Alfredo V. Asuncion
Independent Director
Mr. Asuncion, 78, Filipino, is an independent director of the Company. He is a civil
engineer by profession. He is also a director and president of Pagsanjan Aggregates
Corporation.
Lamberto U. Ocampo
Independent Director
Mr. Ocampo, 81, Filipino, is also an independent director of the Company. He is a civil
engineer by profession. He served as director of DCCD Engineering Corporation from
1957 to 2001, Chairman of the Board of DCCD from 1993 to 1995, and President from
1970 to 1992.
Michael Edward T.
Gotianun
Vice President
Mr. Gotianun, 49, Filipino, is also a director and Vice President of Filinvest Alabang, Inc.
and Festival Supermall, Inc.
Nelson M. Bona
Treasurer
Mr. Bona, Filipino, was formerly an Executive Vice-President of East West Banking
Corporation and Managing Director of Millenia Broadband Communications, Inc. and
Filinvest Capital, Inc.
Abner C. Gener, Jr.
Corporate Secretary
Mr. Gener, 35, Filipino, joined the Company in September 2000. He is also the Assistant
Corporate Secretary of Filinvest Land, Inc. and the Corporate Secretary of Filinvest
Alabang, Inc., Festival Supermall, Inc. and The Palms Country Club, Inc.
Mr. Andrew L. Gotianun, Sr. is married to Mrs. Mercedes T. Gotianun and together are the parents of Mr. Andrew T. Gotianun, Jr., Mrs.
Lourdes Josephine Gotianun-Yap and Mr. Jonathan T. Gotianun.
The Directors of the Company are elected at the annual stockholders' meeting to hold office until the next succeeding annual meeting and
until their respective successors have been appointed or elected and qualified.
Officers are appointed or elected annually by the Board of Directors at its first meeting following the annual stockholders' meeting, each to
hold office until the corresponding meeting of the Board of Directors in the next year or until their successors shall have been elected or
appointed and shall have qualified.
The Company is not aware of any legal proceedings involving its directors or executive officers that materially affect their ability or
integrity to act as such directors or officers.
The Company is likewise not aware of any of the following events having occurred during the past five years up to the date of this annual
report: (a) any bankruptcy petition filed by or against any business in which any of the directors or officers was a general partner or
officer either at the time of the bankruptcy or within two years prior to that time; (b) any conviction by final judgment in a criminal
proceeding, domestic or foreign, or any criminal proceeding, domestic or foreign, pending against any of the directors, or officers; (c) any
order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign,
permanently or temporarily enjoining, barring, suspending or otherwise limiting the involvement of any of the directors or officers in any
type of business, securities, commodities or banking activities, and (d) any finding by a domestic or foreign court of competent jurisdiction
(in a civil action), the Securities and Exchange Commission or comparable foreign body, or a domestic or foreign exchange or electronic
marketplace or self regulatory organization that any of the directors or officers has violated a securities or commodities law, and the
judgment has not been reversed, suspended or vacated, within the past five years.
There is no person, not being an executive officer of the Company, who is expected to make a significant contribution to the business.
The Company, however, occasionally engages the regular services of consultants.
There were no transactions during the last two years or any proposed transactions, to which the Company was or is to be a party, in which
any director or officer, any nominee for election as a director, any security holder
or any member of the immediate family of any of
the persons mentioned in the foregoing had or is to have a direct or indirect material interest.
No minority shareholder exercised the right to nominate an independent director to the Company in accordance with SRC Rules and
Regulations.
31
Item 10. Executive Compensation
Information as to the aggregate compensation paid or accrued during the last two fiscal years and to be paid in the ensuing fiscal year to
the Company’s Executive Officer and other officers as follows:
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Name and Principal Position
Jonathan T. Gotianun
Chairman
Lourdes Josephine Gotianun-Yap
Director and President
Andrew L. Gotianun, Sr.
Director
Mercedes T. Gotianun
Director
Andrew T. Gotianun, Jr.
Director
Alfredo V. Asuncion
Independent Director
Lamberto U. Ocampo
Independent Directore
All officers and directors as a group unnamed
Year
Salary
Bonus
Other Annual
Compensation
2006-Estimated
2005
18.9M
18.9M
3.1M
3.1M
-
21.8M
21.8 M
2004
24.9M
3.6M
-
28.5 M
TOTAL
Except for per diem of P5,000 being paid to independent directors for every meeting attended, there are no other arrangements to which
directors are compensated, for any services provided as director, including any amounts payable for committee participation or special
assignments in 2005 and ensuing year.
There is no employment contract between the Company and the above named executive officers.
There are no outstanding warrants or options held by the Company’s CEO, the above named executive officers, and all officers and
directors as a group.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(1) Security Ownership of Certain Record and Beneficial Owners
As of December 31, 2005, the Company knows no one who beneficially owns in excess of 10% of its common stock except as set forth in
the table below.
32
Title of
class
Common
Common
Common
Common
Name, address of record owner and
relationship with issuer
ALG Holdings Corp.1
173 P. Gomez St., San Juan,
Manila
Majority owner of issuer
Trust for Michael Gotianun
173 P. Gomez St., San Juan,
Manila
Jonathan T. Gotianun
173 P. Gomez St., San Juan,
Manila
Chairman of the Board of issuer
Lourdes Josephine G. Yap
173 P. Gomez St., San Juan,
Manila
President of issuer
Name of beneficial owner and
relationship with record owner
Citizenship
No. of shares
held
% of
Class
Same
Filipino
4,201,927,831
70.52%
415,337,720
6.97%
Metro
Metro
Michael Gotianun
Beneficiary of the Trust
Same
Filipino
339,291,901
5.69%
Same
Filipino
339,291,901
5.69%
Metro
Metro
Total number of shares of all record and beneficial owners as a group is 5,295,849,353 shares, or 88.87%.
(2) Security Ownership of Management
_
Class
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Name of Beneficial Owner
Trust for Michael Gotianun
Andrew L. Gotianun, Sr.
Mercedes T. Gotianun
Efren C. Gutierrez
Andrew T. Gotianun, Jr.
Lourdes Josephine G. Yap
Jonathan T. Gotianun
Andrew L. Gotianun, Sr. and/or Mercedes T.
Gotianun
Michael T. Gotianun
Joseph M. Yap and/or Josephine G. Yap
Amount and Nature of
Beneficial Ownership
415,337,720 (R)
1,458 (B)
3,078,554 (B)
5,401,388 (R
1,554 (B)
339,291,901 (B)
339,291,901 (B)
7,575,000 (B)
Citizenship
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
% of Class
6.97%
Negligible
Negligible
Negligible
Negligible
5.69%
5.69%
Negligible
Filipino
Filipino
Negligible
Negligible
37,218,799 (B)
200,000 (B)
Total ownership of all directors and officers as a group is 1,147,398,275 shares or 18.35%.
Interests of the above directors/executive officers in the Company’s common shares are direct.
3) Voting, Trust Holders of 5% or more
There are no persons holding 5% or more of a class of shares under any voting trust or similar agreement
(4) Changes in Control
The Company is not aware of any agreement, which may result in a change in control of the registrant.
1
Josephine G. Yap, Jonathan T. Gotianun, Trust for Michael Gotianun and FDC Equities Investments, Ltd. are the major stockholders of ALG Holdings
Corporation. Mr. Andrew L. Gotianun, Sr. is typically given the authority to vote all the shares of ALG Holdings Corporation in any meeting of the
stockholders of FDC.
33
Item 12. Certain Relationships and Related Transactions
The Company and its subsidiaries in their normal course of business, have certain related party transactions with affiliates principally
consisting of advances and intercompany charges.
The Company retains the law firms of Sycip Salazar Hernandez & Gatmaitan, Estelito P. Mendoza, and Roco Kapunan Migallos Perez &
Luna and is paying them legal fees that the Corporation believes to be reasonable for the services rendered.
There is no other transaction during the last two years, or proposed transactions, to which the Company was or is to be a party, in which
any director or executive officer, any nominee for election as a director, any security holder or any member of the immediate family of any
of the foregoing persons, had or is to have a direct or indirect material interest.
PART lV COMPLIANCE WITH LEADING PRACTICES ON CORPORATE GOVERNANCE
By way of evaluation of the level of compliance by the management and Board of the Company with its Manual on Corporate
Governance, the Compliance Officer is made to report at the meetings of the Board what the pertinent requirements on corporate
governance are at the time and the Board determines how best to comply with such requirements.
Part of the measures being adopted by the Company in order to comply with the leading practices on corporate governance is the
participation and attendance by members of top level management and the Board at seminars on corporate governance initiated by
accredited institutions. The Company welcomes proposals, whether sourced internally or from institutions and entities such as the SEC to
improve corporate governance.
There are no known material deviations from the Company’s Manual on Corporate Governance.
PART V EXHIBITS AND SCHEDULES
Item 14. Exhibits and Reports on SEC Form 17-C
(a) Exhibits - see accompanying Index to Exhibits
The following exhibit is filed as a separate section of this report:
The other exhibits, as indicated in the Index to Exhibits are either not applicable to the Company or require no answer.
(b) Reports on SEC Form 17-C
Reports on SEC Form 17-C were filed during the last-six month period covered by this report and are listed below:
Date Filed
June 10, 2005
June 10, 2005
June 21, 2005
Report Type
Disclosure
Press Release
Disclosure
June 21, 2005
Disclosure
October 12, 2005
Disclosure
November 25,
2005
Disclosure
December 9, 2005
Disclosure
Particulars
Result of stockholders’ meeting of the Company
On the 223% income growth of the Company for 2004
Confirmation of authority of the Company to enter into an omnibus financing
agreement with the International Finance Corporation and FLI covering FLI’s P2.25billion loan from the said financial institution
Execution of an Omnibus Financing Agreement among FLI, the International Finance
Corporation and the Company covering FLI’s P2.25-billion loan from the said
financial institution
Authority of the Company to enter into an omnibus agreement with certain domestic
financial institutions governing the terms of the P1.05-billion worth of fixed rate notes
to be issued by the Company in favor of said institutions
Execution of an Omnibus Loan and Security Agreement between the Company and
Insular Life Assurance Co. Ltd. and ING Bank N.V. covering the terms of the
Company’s P540-million loan with the said institutions
Authority of the Company to sign a commitment letter addressed to Sunlife of Canada
34
December 12, 2005
December 12, 2005
December 12, 2005
December 12, 2005
January 12, 2006
January 12, 2006
January 26, 2006
February 20, 2006
March 9, 2006
(Phils.), Inc. governing the terms of the Company’s P390-million loan from the said
financial institution
Disclosure
Authority of the Company to enter into a Bond Sale and Purchase Agreement
covering the P1.2-billion Convertible Bonds issued by FLI
Press Release Announcement of the purchase by the Company of the P1.2-billion Convertible Bonds
issued by FLI
Disclosure
Signing of the Bond Sale and Purchase Agreement
Disclosure
Confirmation of authority of the Company to sign a commitment letter addressed to
Sunlife of Canada (Phils.), Inc. governing the terms of the Company’s loan from the
said financial institution, originally from P390 million to P400 million
Disclosure
Confirmation of authority of the Company to sign a commitment letter addressed to
Sunlife of Canada (Phils.), Inc. governing the terms of the Company’s additional
P400-million loan from the said financial institution
Disclosure
Authority of the Company to execute an agreement with FLI to amend certain terms
of the P1.2-billion Convertible Bonds issued by FLI and purchased by the Company
Disclosure
Execution of an Amendment Agreement between the Company and FLI covering the
amendments to the terms and conditions of the P1.2-billion Convertible Bonds issued
by FLI
Explanation On the excusable oversight of the Company to timely file its SEC Form 23-B covering
the disposition of about 300 million FLI shares in December 2005
Reconsideration On the penalty imposed by the Securities and Exchange Commission for the belated
filing by the Company of SEC Form 23-B
35
FILINVEST DEVELOPMENT CORPORATION
CONSOLIDATED
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
FORM 17-A, Item 7
Consolidated Financial Statements
Statement of Management’s Responsibility for Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Income and Retained Earnings for the years ended
December 31, 2005 and 2004
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004
Notes to Consolidated Financial Statements
Supplementary Schedules
MARKETABLE SECURITIES - (CURRENT MARKETABLE SECURITIES AND
OTHER SHORT-TERM CASH INVESTMENTS)
NA
AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES,
RELATED PARTIES AND PRINCIPAL STOCKHOLDERS (OTHER THAN
AFFILIATES)
NA
NON-CURRENT MARKETABLE EQUITY SECURITIES, OTHER
LONG-TERM INVESTMENTS, AND OTHER INVESTMENTS
NA
D.
INDEBTEDNESS TO UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES
NA
E.
PROPERTY, PLANT AND EQUIPMENT
NA
F.
ACCUMULATED DEPRECIATION
NA
G.
INTANGIBLE ASSETS / OTHER ASSETS
NA
H.
LONG-TERM DEBT
I.
INDEBTEDNESS TO AFFILIATES AND RELATED PARTIES (LONG-TERM
LOANS FROM RELATED COMPANIES)
NA
J.
GUARANTEES OF SECURITIES OF OTHER ISSUERS
NA
K.
CAPITAL STOCK
A.
B.
C.
*
*
* These schedules which are required by Part IV of SRC Rule 12 are contained in the Company’s Audited Consolidated
Financial Statements or the Notes to Consolidated Financial Statements.
37
INDEX TO EXHIBITS
Form 17- A
No.
*
A
Page
No.
*
(3)
Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession
(5)
Instrument Defining the Rights of Security Holders, Including Indentures
*
(8)
Voting Trust Agreement
*
(9)
Material Contracts
*
(10)
Annual Report to Security Holders, Form 17-Q or Quarterly Report to Security
Holders
*
(13)
Letter re Change in Certifying Accountant
*
(16)
Report Furnished to Security Holders
*
(18)
Subsidiaries of the Registrant
A
(19)
Published Report Regarding Matters Submitted to Vote of Security Holders
*
(20)
Consent of Experts and Independent Counsel
*
(21)
Power of Attorney
*
(29)
Additional Exhibits
*
These exhibits are either not applicable to the Company or require no answer.
This schedule is contained on Note 1 of the Company’s 2005 audited Consolidated Financial Statements
38
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-F
Report of Independent Auditors
On Supplementary Schedules
The Stockholders and the Board of Directors
Filinvest Development Corporation
173 P. Gomez Street
San Juan, Metro Manila
We have audited in accordance with auditing standards generally accepted in the Philippines, the
consolidated financial statements of Filinvest Development Corporation and Subsidiaries (the Group)
as of and for the year ended December 31, 2005 included in this Form 17-A and have issued our report
thereon dated April 26, 2006. Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the Index to Consolidated
Financial Statements and Supplementary Schedules are the responsibility of the Group’s management
and presented for purposes of complying with the Securities Regulation Code Rule 68 and are not part
of the basic consolidated financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements and, in our opinion,
fairly state in all material respect the financial data required to be set therein in relation to the basic
consolidated financial statements taken as a whole.
SYCIP GORRES VELAYO & CO.
Ramon D. Dizon
Partner
CPA Certificate No. 46047
SEC Accreditation No. 0077-A
Tax Identification No. 102-085-577
PTR No. 4180833, January 2, 2006, Makati City
April 26, 2006
SGV & Co is a member practice of Ernst & Young Global
*SGVMC107838*
COVER SHEET
A S 0 9 3 - 0 0 6 5 1 8
SEC Registration Number
F I L I N V E S T
A N D
D E V E L O P M E N T
C O R P O R A T I O N
S U B S I D I A R I E S
(Company’s Full Name)
1 7 3
P .
G o m e z
t r o
M a n i l a
S t r e e t ,
S a n
J u a n ,
M e
(Business Address: No. Street City/Town/Province)
Mr. Nelson M. Bona
727-0431
(Contact Person)
(Company Telephone Number)
1 2
3 1
Month
Day
A A F S
Month
(Form Type)
(Fiscal Year)
Day
(Annual Meeting)
(Secondary License Type, If Applicable)
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
Foreign
To be accomplished by SEC Personnel concerned
File Number
LCU
Document ID
Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
*SGVMC107838*
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-F
Report of Independent Auditors
The Stockholders and the Board of Directors
Filinvest Development Corporation
173 P. Gomez Street
San Juan, Metro Manila
We have audited the accompanying consolidated balance sheets of Filinvest Development
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Philippines.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Filinvest Development Corporation and Subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the Philippines.
SYCIP GORRES VELAYO & CO.
Ramon D. Dizon
Partner
CPA Certificate No. 46047
SEC Accreditation No. 0077-A
Tax Identification No. 102-085-577
PTR No. 4180833, January 2, 2006, Makati City
April 26, 2006
SGV & Co is a member practice of Ernst & Young Global
*SGVMC107838*
FILINVEST DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands of Pesos)
December 31
2004
(As restated)
2005
ASSETS
Cash and cash equivalents (Notes 5 and 31)
Loans and receivables - net
Real estate operations (Notes 6, 20 and 31)
Financial and banking services (Notes 7 and 31)
Receivable from customers - net
Real estate operations (Note 6)
Financial and banking services (Note 7)
Subdivision lots, condominiums and residential
units for sale (Notes 3 and 8)
Financial assets at fair value through
profit and loss (Notes 3, 9 and 31)
Available-for-sale financial assets (Notes 3, 9 and 31)
Held-to-maturity financial assets (Notes 3, 9 and 31)
Investments at cost - net (Notes 3 and 9)
Land and land development (Notes 3, 10 and 11)
Investment property (Notes 3 and 12)
Property and equipment - net (Notes 3 and 13)
Deferred income tax assets (Note 29)
Noncurrent assets held for sale
Other assets - net (Notes 3 and 14)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposit liabilities (Notes 15 and 31)
Accounts payable and accrued expenses (Notes 3, 16, 20 and 31)
Income tax payable (Note 29)
Deferred income tax liabilities (Note 29)
Long-term debt (Notes 17 and 31)
Bonds payable (Notes 18 and 31)
Unrealized gross profit on installment contracts receivable, sale
of condominium units and club shares
Estimated liability for land and property development
P
=4,828,788
=3,314,702
P
6,640,979
10,066,065
–
–
–
–
4,407,505
9,109,426
7,704,657
6,992,894
2,493,017
2,183,650
2,601,874
–
18,242,261
22,233,954
1,036,731
779,029
150,000
4,153,961
P
=83,114,966
–
–
–
6,553,877
17,257,988
21,756,980
1,258,484
488,508
–
4,041,221
=75,181,585
P
P
=19,995,911
5,393,860
275
5,947,400
11,562,549
–
=17,409,720
P
4,918,329
215
5,536,868
8,306,953
1,228,170
326,100
1,237,819
44,463,914
209,592
493,436
38,103,283
(Forward)
*SGVMC107838*
-2December 31
2004
(As restated)
2005
Stockholders’ Equity
Equity attributable to equity holders of the parent
Capital stock (Note 19)
Additional paid-in capital
Revaluation increment in land (Note 3)
Revaluation reserve on available-for-sale
financial assets (Note3)
Net unrealized loss on decline in value of noncurrent
marketable equity securities (Note 3)
Retained earnings (Note 3)
Treasury stock (Note 25)
Total
Minority interest
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
P
=5,958,124
2,099,874
8,396,411
=5,958,124
P
2,099,874
8,246,432
235,004
–
–
11,922,489
(24,220)
28,587,682
10,063,370
38,651,052
P
=83,114,966
(34,103)
11,156,633
(24,220)
27,402,740
9,675,562
37,078,302
=75,181,585
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC107838*
FILINVEST DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands of Pesos, Except Earnings Per Share Figures)
Years Ended December 31
2004
2005 (As restated)
REVENUES
Real Estate Operations
Sale of lots, condominium and residential units and club shares
Costs of sale of lots, condominium and residential
units and club shares
Gross profit
Mall and rental revenues
Realized (deferred) gross profit
Other income (Note 23)
Financial and Banking Services
Interest income (Note 7)
Costs of financial and banking services (Note 22)
Other income (Note 23)
NET REVENUES
General and Administrative Expenses (Note 21)
Real estate operations
Financial and banking services
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 29)
Current
Deferred
NET INCOME
Attributable to:
Equity holders of the parent company
Minority interest
Earnings Per Share (Note 25)
P
=2,851,051
=2,910,466
P
(1,318,366)
1,532,685
1,029,424
(177,772)
1,422,616
3,806,953
(1,329,253)
1,581,213
864,233
46,148
1,088,035
3,579,629
1,917,231
(1,177,018)
509,786
1,249,999
5,056,952
1,117,639
(922,140)
564,145
759,644
4,339,273
2,097,804
1,204,488
3,302,292
1,754,660
2,028,208
1,043,515
3,071,723
1,267,550
79,614
408,795
488,409
100,687
391,143
491,830
P
=1,266,251
=775,720
P
P
=878,443
387,808
P
=1,266,251
=533,361
P
242,359
=775,720
P
P
=0.147
=0.090
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC107838*
FILINVEST DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in Thousands of Pesos)
Capital Stock
Additional
Paid-in
Capital
Equity Attributable to Equity Holders of the Parent
Net Unrealized
Revaluation
Loss on Decline
Reserve on in Market Value
Revaluation
Availableof Noncurrent
Increment
for-Sale
Marketable
Retained
in Land Financial Assets Equity Securities
Earnings
Treasury
Stock
Total
Minority
Interest
Total
For the Year Ended December 31, 2005
Balances as of December 31, 2004,
as previously reported
Cumulative effect of changes in accounting
policies (Note 3)
Balances as of December 31, 2004,
as restated
Cumulative effect of change in accounting
for investments (Note 3)
Balances as of January 1, 2005
Changes in fair value of available-for-sale
investments recognized directly in
equity (Note 3)
Net income for the year
Total income and expense for the year
Effect of change in tax rate
Balances as of December 31, 2005
=5,958,124
P
=2,099,874
P
=11,188,323
P
=–
P
(P
=34,103)
=11,179,244
P
(P
=24,220)
=30,367,242
P
=10,055,830
P
=40,423,072
P
–
–
(2,941,891)
–
–
(22,611)
–
(2,964,502)
(380,268)
(3,344,770)
5,958,124
2,099,874
8,246,432
–
(34,103)
11,156,633
(24,220)
9,675,562
37,078,302
5,958,124
2,099,874
–
8,246,432
269,270
269,270
34,103
–
(112,587)
11,044,046
–
(24,220)
190,786
27,593,526
–
9,675,562
190,786
37,269,088
(34,266)
–
(34,266)
–
P
= 235,004
–
–
–
–
P
=–
–
878,443
878,443
P
= 2,099,874
–
–
–
149,979
P
= 8,396,411
–
–
–
–
(P
= 24,220)
(34,266)
878,443
844,177
149,979
P
= 28,587,682
–
387,808
387,808
–
P
= 10,063,370
(34,266)
1,266,251
1,231,985
149,979
P
= 38,651,052
P
= 5,958,124
P
= 11,922,489
27,402,740
For the Year Ended December 31, 2004
Balances as of December 31, 2003,
as previously reported
Cumulative effect of changes in accounting
policies (Note 3)
Balances as of December 31, 2003,
as restated
Net income for the year, as previously
reported
Cumulative effect of changes in accounting
policies (Note 3)
As restated
Balances as of December 31, 2004
=5,958,124
P
=2,099,874
P
=11,188,323
P
=–
P
(P
=34,103)
=10,637,996
P
(P
=24,220)
=29,825,994
P
=9,806,995
P
=39,632,989
P
–
–
(2,941,891)
–
–
(14,724)
–
(2,956,615)
(373,792)
(3,330,407)
5,958,124
2,099,874
8,246,432
–
(34,103)
10,623,272
(24,220)
26,869,379
9,433,203
36,302,582
–
–
–
–
–
541,248
–
541,248
248,835
790,083
–
–
=5,958,124
P
–
–
=2,099,874
P
–
–
=8,246,432
P
–
–
=–
P
–
–
(P
=34,103)
(7,887)
533,361
=11,156,633
P
–
–
(P
=24,220)
(7,887)
533,361
=27,402,740
P
(6,476)
242,359
=9,675,562
P
(14,363)
775,720
=37,078,302
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC107838*
FILINVEST DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands of Pesos)
Years Ended December 31
2004
2005 (As restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest expense (Notes 21 and 22)
Depreciation and amortization (Note 21)
Provision for probable losses
Interest income (Notes 7 and 23)
Operating income before changes in operating assets and liabilities
Increase in:
Loans and receivables
Receivable from customers
Subdivision lots, condominium and residential units for sale
Increase (decrease) in:
Deposit liabilities
Accounts payable and accrued expenses
Unrealized gross profit on installment contracts receivable,
sales of condominium units and club shares
Net cash generated from operations
Income taxes paid
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received
Decrease (increase) in:
Land and land development
Financial assets at fair value through profit and loss
Available-for-sale financial assets
Held-to-maturity financial assets
Investments at cost
Other assets
Net acquisitions of investment property and property and equipment
Net cash used in investing activities
(Forward)
P
=1,754,660
=1,267,550
P
1,552,064
464,473
103,411
(2,301,847)
1,572,761
1,567,409
364,009
107,006
(1,323,117)
1,982,857
(1,292,299)
–
(711,763)
–
(126,811)
(192,231)
1,409,174
1,219,914
2,699,730
128,080
116,508
2,314,295
(79,554)
2,234,741
(49,161)
4,442,464
(100,869)
4,341,595
404,033
282,640
(984,273)
(2,493,017)
4,376,747
(2,601,874)
–
(354,956)
(719,694)
(2,373,034)
(578,401)
–
–
–
(2,473,614)
303,426
(758,946)
(3,224,895)
*SGVMC107838*
-2Years Ended December 31
2004
2005 (As restated)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of):
Long-term debt
Bonds payable
Interest paid
Net cash provided by (used in) financing activities
P
=3,634,423
(1,228,170)
(753,874)
1,652,379
(P
=34,765)
(119,133)
(892,475)
(1,046,373)
NET INCREASE IN CASH AND CASH EQUIVALENTS
1,514,086
70,327
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
3,314,702
3,244,375
P
=4,828,788
=3,314,702
P
CASH AND CASH EQUIVALENTS AT END
OF YEAR
See accompanying Notes to Consolidated Financial Statements.
*SGVMC107838*
FILINVEST DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Filinvest Development Corporation (the Parent Company) and Subsidiaries (collectively referred
to as the Filinvest Group or the Group) is engaged in real estate operations as a developer of
residential subdivisions and mixed-use urban projects including condominiums and commercial
buildings, industrial and farm estates. The Filinvest Group is also involved in mall operations and
banking and financial services. The Parent Company’s registered office address is 173 P. Gomez
Street, San Juan, Metro Manila.
The accompanying consolidated financial statements were approved and authorized for issue by
the Board of Directors (BOD) on April 26, 2006.
2. Summary of Significant Accounting Policies
Basis of Financial Statement Preparation
The accompanying consolidated financial statements are presented in compliance with accounting
principles generally accepted in the Philippines (Philippine GAAP) as set forth in Philippine
Financial Reporting Standards (PFRS). These are the Group’s first consolidated financial
statements prepared in compliance with PFRS.
The Group prepared consolidated financial statements until December 31, 2004 in accordance
with Statements of Financial Accounting Standards/International Accounting Standards.
The Group applied PFRS 1, First-time Adoption of Philippine Financial Reporting Standards, in
preparing the consolidated financial statements, with January 1, 2004 as the date of transition.
The Group applied the accounting policies set forth below to all the years presented, except those
relating to financial instruments. An explanation of how the transition to PFRS has affected the
reported financial position, financial performance and cash flows of the Group is provided in
Note 3.
The accompanying consolidated financial statements are prepared under the historical cost
convention as modified by the fair value measurement of financial assets at fair value through
profit and loss (FVPL), AFS financial assets and certain derivative financial instruments.
The consolidated accounts of East West Banking Corporation (EWBC) reflect the accounts
maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The
financial statements individually prepared for these units are combined after eliminating inter-unit
accounts. For financial reporting purposes, FCDU accounts and foreign currency denominated
accounts in RBU are translated into their equivalents in Philippine pesos based on the Philippine
Dealing System weighted average rate (PDSWAR) prevailing at the end of the year (for assets
and liabilities) and at the average PDSWAR for the year (for income and expenses).
*SGVMC107838*
-2The preparation of the consolidated financial statements in compliance with PFRS requires the
use of certain critical accounting estimates. It also requires management to exercise its judgment
in the process of applying the Group’s accounting policies. The areas involving a high degree of
judgment or complexity or areas where assumptions and estimates are significant to the financial
statements are disclosed in Note 4.
The functional currency of the Group is the Philippine Peso.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Parent Company and
its controlled subsidiaries. The financial statements of the subsidiaries are prepared for the same
reporting year as the Parent Company.
Subsidiaries are consolidated when control is transferred to the Group and cease to be
consolidated when control is transferred out of the Group. Control is presumed to exist when the
Group owns more than 50% of the voting power of an enterprise. The consolidated financial
statements are prepared using uniform accounting policies for like transactions and other events in
similar circumstances. All significant intercompany balances and transactions, intercompany
profits and unrealized gains and losses have been eliminated in the consolidation.
The consolidated financial statements include the accounts of Filinvest Development Corporation
and the following controlled subsidiaries:
FDC Capital (Cayman Islands) Ltd. (FDCCCIL)
Filinvest (Cayman Islands) Ltd. (FCIL)
Filinvest Alabang, Inc. (FAI)
Festival Supermall, Inc.
FSM Cinemas, Inc.
Cyberzone Properties, Inc. (CPI)
Northgate Convergence Corporation (NCC)
Proplus, Inc.
EWBC
Filinvest Asia Corporation (FAC)
Filinvest Land, Inc. (FLI)
FLI Capital (Cayman Islands) Ltd. (FLICL)
Property Maximizer Professional Corp.
Homepro Realty Marketing Corporation
Property Specialist Resources, Inc.
Percentage of Ownership
2004
2005
100
100
100
100
90*
89*
100
100
60
60
100
100
100
100
100
100
60
60
60
60
57**
53**
100
100
100
100
100
100
100
100
* includes 20% share of FLI in FAI
** includes 10% share of FAI in FLI
*SGVMC107838*
-3Minority interests include their proportion of the fair values of identifiable assets and liabilities
recognized upon acquisition of a subsidiary.
The losses applicable to the minority in a consolidated subsidiary may exceed the minority
interest in the equity of the subsidiary. The excess, and any further losses applicable to the
minority, 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’s share of losses
previously absorbed by the majority has been recovered.
Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents include cash and other cash items,
amounts due from BSP and other banks and interbank loans receivable, securities purchased
under resale agreement and other short-term and highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three months or less from dates
of acquisition and that are subject to an insignificant risk of change.
Financial Assets and Liabilities
Effective January 1, 2005 financial assets and financial liabilities are recognized initially at fair
value. Transaction costs are included in the initial measurement of all financial assets and
liabilities, except for financial instruments which are measured at fair value through profit and
loss.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity net of any
related income tax benefits. Financial instruments are offset when there is a legally enforceable
right to offset and intention to settle either on a net basis or to realize the asset and settle the
liability simultaneously.
Financial assets and financial liabilities are classified into the following categories: financial asset
or financial liability at fair value through profit and loss (FVPL), loans and receivables, held-tomaturity (HTM) financial assets, available-for-sale (AFS) financial assets and other financial
liabilities. When financial assets are recognized initially, they are measured at fair value, plus, in
the case of investments not at fair value through profit or loss, directly attributable transaction
costs. The Group determines the classification at initial recognition and re-evaluates this
recognition at every reporting date.
a. Financial Assets at FVPL
A financial asset or financial liability is classified in this category if acquired principally for
the purpose of selling or repurchasing in the near term or upon initial recognition, it is
designated by management at fair value through profit or loss. Derivatives are also
categorized as held at fair value through profit or loss, except those derivatives designated and
considered as effective hedging instruments. Assets or liabilities classified under this
category are carried at fair value in the balance sheet. Changes in the fair value of such assets
and liabilities are accounted for in earnings.
*SGVMC107838*
-4The Group follows the trade date accounting where assets to be received and liabilities to be
paid are recognized on the trade date and the derecognition of assets that are sold and the
recognition of a receivable from the buyer are recognized on the trade date. Realized and
unrealized gains and losses on these instruments are recognized under the trading gain
account in the consolidated statements of income and expenses. Interest earned on debt
instruments classified as financial resources at FVPL is reported as interest income.
b. AFS Financial Assets
AFS financial assets are non-derivatives that are either designated in this category or not
classified in any of the other categories. AFS financial assets are carried at fair value in the
consolidated balance sheet. Changes in the fair value of such assets are accounted for in
equity.
The fair value of financial assets 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.
Financial assets that may not be quoted in an active market are classified as AFS financial
assets when purchased and held indefinitely, but which the Group anticipates to sell in
response to liquidity requirements or in anticipation of changes in interest rates or other
factors. AFS also include all other financial resources that are not classified as financial
assets at FVPL, HTM financial assets or loans and receivables.
c. Loans and Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. They arise when the Group provides money, goods or
services directly to a debtor with no intention of trading the receivables. Loans and
receivables are carried at cost or amortized cost in the balance sheet. Amortization is
determined using the effective interest rate method. Loans and receivables comprise the
following:
Mortgage, Notes and Installment Contracts Receivable
Mortgage, notes and installment contracts receivable are carried at original contract price net
of deferred interest income and any allowance for probable losses.
Sales Contracts Receivables
This account pertains to receivables from the sale of investment properties on installment
basis. These receivables are initially recognized at the original contract price discounted at the
prevailing market rate. Any discount or premium as of initial recognition is amortized using
the effective interest rate method. The carrying values of these receivables are adjusted for
discount or premium amortization, collections and allowance for probable losses, if any.
*SGVMC107838*
-5Loans and Discounts
Loans are carried at amortized cost using the effective interest method and allowance for
probable losses.
Other Receivables
Other receivables are recognized and carried at original invoice amount less an allowance for
any uncollectible amounts.
d. Held-to-Maturity Financial Assets
HTM financial assets are non-derivative financial assets with fixed or determinable payments
and fixed maturities wherein the Group has the positive intention and ability to hold to
maturity. Held-to-maturity financial assets are carried at cost or amortized cost in the
consolidated balance sheet. Amortization is determined by using the effective interest rate
method.
e. Derivative Financial Instruments
EWBC is a counterparty to forward exchange contracts. These contracts, if any, are entered
into as a service to customers and as a means of reducing and managing foreign exchange as
well as for trading purposes. Amounts contracted, if any, are recorded as contingent accounts
which are not included in the consolidated balance sheets. Such derivative financial
instruments, if any, are stated at fair value through profit and loss.
The fair value of forward exchange contracts is calculated by reference to current forward
exchange rates for contracts with similar maturity profiles. The resulting profit or loss, if any,
is included in the consolidated statements of income.
Any embedded derivatives that are bifurcated from host financial and non-financial contracts
are accounted for at FVPL.
f.
Interest-bearing Financial Liabilities
All loans and borrowings are initially recognized at the fair value of the consideration
received less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at
amortized cost using the effective interest method. Amortized cost is calculated by taking
into account any related issue costs, discount or premium.
Gains and losses are recognized in net profit or loss when the liabilities are derecognized as
well as through the amortization process.
*SGVMC107838*
-6Prior to January 1, 2005, the Group classified its financial assets into trading account securities
(TAS), available-for-sale securities (ASS), investments in bonds and other debt instruments
(IBODI), receivable from customers and other investments.
a. TAS
TAS consist of government and private debt and equity securities that are purchased and held
principally with the intention of selling them in the near term. These securities are carried at
their market values; realized and unrealized gains and losses on these instruments are credited
to or charged to operations. Interest earned on debt instruments is reported as interest income.
b. ASS
Securities are classified as ASS when purchased and held indefinitely, that is, neither held to
maturity nor for trading purposes, where the Group anticipates to sell in response to liquidity
requirements or in anticipation of changes in interest rates or other factors.
ASS are carried at their fair market values; unrealized gains and losses are excluded from
income and reported as a separate component of capital funds. Realized gains and losses are
credited to or charged to operations.
c. IBODI
These are government and private debt securities over which the Group has the positive intent
and ability to hold to maturity. These securities are carried at amortized cost. Realized gains
and losses are included in the consolidated statements of income. An allowance for probable
losses, if any, is established by a charge to income to reflect other-than-temporary impairment
in value.
d. Receivable from customers
Receivable from customers are stated at the outstanding principal balance, reduced by
unearned discounts and allowance for probable losses.
Unearned discount of the Group is recognized as income over the life of the loans using
effective interest method. Interest income on nondiscounted loans is accrued as earned, except
in the case of nonaccruing loans as required by existing Bangko Sentral ng Pilipinas (BSP)
regulations.
Loans of the Group are classified as nonaccruing in accordance with BSP regulations, or
when, in the opinion of management, collection of interest or principal is doubtful. Interest
income on nonaccruing loans is recognized only to the extent of cash collections received.
Loans are not reclassified as accruing until interest and principal payments are brought
current or the loans are restructured in accordance with existing BSP regulations, and future
payments appear assured.
*SGVMC107838*
-7The allowance for probable losses of the Group represents management’s estimate of
probable losses inherent in the portfolio, after consideration of prevailing and anticipated
economic conditions, prior loss experience, estimated recoverable values based on fair market
values of underlying collaterals, prospects of support from guarantors, subsequent collections,
and evaluations made by BSP. The BSP observes certain criteria and guidelines based largely
on the classification of loans in establishing specific loan loss reserves.
e. Other investments
Other investments represent equity securities on entities over which the Group has no
significant influence. These are carried at cost less allowance for decline in value, if any. The
allowance for probable decline in value is set up by a charge to income.
Interest in Joint Venture
FAC, a joint venture (JV) of the Parent Company and Reco Grand Homes of Singapore, and
FAI’s interest in FCC are accounted for by the proportionate consolidation of the assets,
liabilities, income and expenses on a line-by-line basis. Sales of real estate by the joint venture, is
accounted for using the full accrual method.
A joint venture is a contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control. The Group recognizes its interest in the joint venture using
proportionate consolidation. The Group combines its share of each of the assets, liabilities,
income and expenses of the joint venture with the similar items, line by line, in its consolidated
financial statements. The financial statements of the joint venture are prepared for the same
reporting year as the Group, using consistent accounting policies. Adjustments are made to bring
into line any dissimilar accounting policies that may exist.
When the Group contributes or sells assets to the joint venture, any portion of gain or loss from
the transaction is recognized based on the substance of the transaction. When the Group
purchases assets from the joint venture, the Group does not recognize its share of the profits of the
joint venture from the transaction until it resells the assets to an independent party. The joint
venture is proportionately consolidated until the date on which the Group ceases to have joint
control over the joint venture.
Subdivision Lots, Condominiums and Residential Units for Sale
Subdivision lots, condominiums and residential units for sale are carried at the lower of cost and
NRV. The cost of subdivision lots, condominiums and residential units for sale includes the costs
incurred for development and improvement of the properties, including capitalized borrowing
cost. NRV represents current selling price less cost to complete the development and estimated
marketing and selling expenses.
Land and Land Development
Land and land development consists of properties for future development and are carried at the
lower of cost and NRV. The cost of land and land development includes those costs incurred for
development and improvement of properties, including capitalized borrowing costs. NRV
represents current selling price less the estimated expenses.
*SGVMC107838*
-8Investment Property
Investment property is held to earn rentals 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 consists of land, building improvements and other investments. Land and
other investments are carried at cost. Building improvements are carried at cost less accumulated
depreciation and amortization and any impairment in value.
Building improvements are depreciated on a straight-line basis over the estimated useful life of
the investment property of 20 years.
Investment property is derecognized when either they have been disposed of or when the
investment property is permanently withdrawn from use and no future benefit is expected of its
disposal. Any gains or losses on the retirement or disposal of an investment property are
recognized in the consolidated statements of income in the year of retirement or disposal.
Transfers are made to investment property when, there is a change in use, evidenced by ending of
owner-occupation, commencement of an operating lease to another party or ending of
construction or development. Transfers are made from investment property when, and only when,
there is a change in use, evidenced by commencement of owner-occupation or commencement of
development with a view to sale. Transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and they
do not change the cost of that property for measurement or disclosure purposes.
Property and Equipment
Except for land, which is carried at cost, property and equipment is stated at cost less accumulated
depreciation and amortization and any accumulated impairment in value.
The initial cost of property and equipment comprises its purchase price 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.
When items of property and equipment are sold or retired, the cost and accumulated depreciation
and amortization and any impairment in value are eliminated from the accounts and any gain or
loss resulting from the disposal is included in the consolidated statements of income.
*SGVMC107838*
-9Borrowing costs, which include interest regarded as interest cost adjustments during the period
necessary to prepare the property for its intended use, are capitalized under commercial mall.
Depreciation and amortization are calculated on a straight-line basis over the estimated useful life
of the assets as follows:
Commercial mall
Building and improvements
Machinery and equipment
Furniture, fixtures and office equipment
Transportation equipment
Communication equipment
50 years
20-50 years
5 years
3-5 years
5 years
5 years
Leasehold improvements are amortized over the term of the lease or their estimated useful lives
(3 to 15 years), whichever is shorter.
The useful life and depreciation and amortization method are reviewed periodically to ensure that
the period and method of depreciation and amortization are consistent with the expected pattern
of economic benefits from items of property and equipment.
The separate recognition of significant components of property and equipment depends on
whether these components serve the same purpose as the related items of property and equipment.
If the corresponding components do not serve the same purpose, they must be recognized
separately. If the component parts serve the same purpose, the need to recognize them separately
depends on whether they have the same structure and the same normal useful life as the other
component parts of the asset. If the structure and normal useful life are different, the component
parts must be recognized individually insofar as they comply with the definition of the assets.
Accordingly, the cost of acquisition must be allocated to the individual components over their
respective useful lives. The depreciation of the component parts must be recognized for each
component part separately. The subsequent expenses for the exchange or replacement of such
assets must be recognized as acquisition costs for a separate asset and depreciated over their
useful life.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset is included in the statements of income in the year the asset is derecognized.
*SGVMC107838*
- 10 Impairment of Financial Assets
The Group assesses at each balance sheet date whether a financial asset or group of financial
assets is impaired.
Assets Carried at Amortized Cost
If there is objective evidence that an impairment loss on loans and receivables carried at
amortized cost has been incurred, the amount of the loss is measured as the difference between
the asset’s carrying amount and the present value of estimated future cash flows (excluding future
credit losses that have not been incurred) discounted at the financial asset’s original effective
interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount
of the asset shall be reduced either directly or through 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.
AFS Financial Assets
If an AFS financial 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 consolidated statements of income, is transferred from stockholders’
equity to the consolidated statements of income. Reversals in respect of equity instruments
classified as AFS financial assets are not recognized in the consolidated statements of income.
Reversals of impairment losses on debt instruments are reversed through consolidated statements
of income, if the increase in fair value of the instrument can be objectively related to an event
occurring after the impairment loss was recognized in the consolidated statement of income.
*SGVMC107838*
- 11 Derecognition of Financial Assets and Liabilities
A financial asset (or, where applicable a part of a financial asset or part of a group of similar
financial assets) is derecognized where:
·
the rights to receive cash flows from the asset have expired;
·
the 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.
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange
or modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in profit or loss.
Impairment of Non-financial Assets
The carrying values of assets (e.g., investment property, property and equipment and other nonfinancial assets) are reviewed for impairment when events or changes in circumstances indicate
the carrying values may not be recoverable. If any such indication exists and where the carrying
values exceed the estimated recoverable amounts, the assets or cash-generating units are written
down to their recoverable amounts. The recoverable amount of the asset 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 value using a pre-tax discount rate that reflects current market
assessment of the time value of money and the risks specific to the asset. For an asset that does
not generate largely independent cash inflows, the recoverable amount is determined for the cashgenerating unit to which the asset belongs. Impairment losses are recognized in the consolidated
statements of income.
*SGVMC107838*
- 12 Borrowing Costs
Borrowing costs are generally expensed as incurred. Interest and other financing costs incurred
during the construction period on borrowings used to finance property development are
capitalized as part of development costs (included under “Subdivision lots, condominiums and
residential units for sale” and “Land and development” accounts in the consolidated balance
sheets). Capitalization of borrowing costs commences when the activities to prepare the asset are
in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing
costs ceases when substantially all the activities necessary to prepare the asset for its intended sale
are complete. If the carrying amount of the asset exceeds its recoverable amount, an impairment
loss is recorded.
Treasury Shares
Own equity instruments which are reacquired are deducted from equity. No gain or loss is
recognized in profit or loss in the purchase, sale, issue or cancellation of the Parent Company’s
own equity instruments.
Revenue and Cost Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Group and the revenue can be reliably measured. The following specific recognition criteria must
also be met before revenue is recognized:
a. Real Estate Operations
Real Estate Sales
Income from sales of subdivision lots and housing units in substantially completed projects
where collectibility of sales price is reasonably assured is accounted for using the full accrual
method while income from sales of projects where collectibility of sales price is not
reasonably assured is recognized using the installment method. Realized income on
installment sales is computed based on collections multiplied by the gross profit rates of
individual sales contract.
Income from sales of condominium units are accounted for under the percentage-ofcompletion method where FAI has material obligations to complete the development of the
condominium project. Under this method, gross profit is recognized as the related obligation
is fulfilled.
Cost of subdivision lots and housing units and condominium units sold before completion of
the contemplated development is determined based on actual development costs and project
estimates of building contractors and the Group’s technical staff. The estimated future
expenditures for the development of the sold condominium units are shown under “Estimated
liability for land and property development” account in the consolidated balance sheets.
Actual expenditures are charged to this account as incurred.
*SGVMC107838*
- 13 Sales contracts
Income from sales contracts where collectibility of sales price is reasonably assured is
accounted for using the full accrual method, while income from sales of assets where
collectibility of sales price is not reasonably assured is recognized using the installment
method. Realized income on installment sales is computed based on collections multiplied by
the gross profit rates of individual sales contracts.
Sale of Club Shares
Sales of club shares are recognized when the risks and rewards of ownership of the shares
have passed to the buyer and the amount of revenue can be measured reliably.
Management Income
Management fees and other related fees from administration, property management and others
are recognized when earned.
Rent Income
Rent income from investment properties is recognized in the statements of income either on a
straight-line basis over the lease term, or based on a certain percentage of the gross revenue of
tenants, pursuant to the terms of the lease contracts.
b. Financial and Banking Services
Interest Income
Interest on loans and receivables is recognized based on accrual accounting using the
effective interest method. In 2004 and prior years, interest income on nonperforming loans
was recognized only to the extent of actual cash collections. Beginning 2005, interest income
on impaired loans is recognized through accretion based on the rate used to discount future
cash flows to their net present value.
Interest on interest-bearing placements and securities are recognized as the interest accrues,
taking into account the effective yield on such assets.
Unearned discount is recognized as income over the terms of the loans and receivables using
the effective interest method and shown as deduction from loans and receivables.
Loan Fees and Service Charges
Loan commitment fees are recognized as earned over the terms of the credit lines granted to
each borrower. Loan syndication fees are recognized upon completion of all syndication
activities and where EWBC does not have further obligations to perform under the
syndication agreement.
Service charges and penalties are recognized only upon collection or accrued where there is a
reasonable degree of certainty as to their collectibility.
Dividend Income
Dividend income is recognized when the Group’s right to receive payment is established.
*SGVMC107838*
- 14 Goodwill
Goodwill represents the excess of EWBC’s interest in the fair value of identifiable net assets of a
subsidiary or an associate at the dates of acquisition.
Goodwill is subject to annual impairment tests whereby goodwill is allocated to EWBC’s
reporting units and impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value. It is stated at cost less accumulated amortization and any impairment in
value. In accordance with PFRS 3, Business Combinations, goodwill will no longer be amortized.
Noncurrent Assets Held for Sale
Noncurrent assets held for sale includes investment in EW Savings Bank, Incorporated (EWSBI),
a sole subsidiary of EWBC. On March 31, 2000, EWBC decided to shorten the term of EWSBI
and eventually end its corporate life effective on the same date.
As required by PAS 27, Consolidated and Separate Financial Statements, investment in EWSBI
is carried at its acquisition cost.
Retirement Costs
Retirement costs on the Group’s defined benefit retirement plan are actuarially computed using
the projected unit credit valuation 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 costs include current
service cost, interest cost, expected return on any plan assets, actuarial gains and losses and the
effect of any curtailment or settlement.
The past service cost is recognized as an expense on a straight-line basis over the average period
until the benefits become vested. If the benefits are already vested immediately following the
introduction of, or changes to, a pension plan, past service cost is recognized immediately.
The liability recognized in the balance sheets in respect of the defined benefit retirement plans is
the present value of the defined benefit obligation at the balance sheet date less the fair value of
the plan assets, if any. The defined benefit obligation is calculated annually by independent
actuaries using the projected unit credit method. The present value of the defined benefit
obligation is determined by discounting the estimated future cash outflows using risk-free interest
rates that have terms to maturity approximating the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial
assumptions are immediately charged or credited to the consolidated statements of income.
Operating Leases
Operating lease payments are recognized as an income or expense in the consolidated statements
of income on a straight-line basis over the lease term.
*SGVMC107838*
- 15 Offsetting
Financial assets and financial liabilities are only offset and the net amount reported in the
consolidated balance sheets when there is a legally enforceable right to offset the recognized
amounts and the Group intends to either settle on a net basis, or to realize the resource and at the
liability simultaneously.
Income Taxes
Current Tax
Current income tax assets and liabilities for the current and prior periods are measured at the
amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively enacted at the
consolidated balance sheet dates.
Deferred Tax
Deferred income tax is provided using the balance sheet liability method on all temporary
differences at the balance sheet date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred
income tax assets are recognized for all deductible temporary differences, carryforward benefit of
the excess of minimum corporate income tax (MCIT) over regular corporate income tax and
unused 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 carryforward of MCIT
and unused NOLCO can be utilized.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred income
tax assets are reassessed at each balance sheet date and are recognized to the extent that is has
become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply
to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws)
that have been enacted or substantively enacted at the balance sheet dates.
Income tax relating to items recognized directly in equity is recognized in equity and not in the
consolidated statements of income.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists to offset current income tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same taxation authority.
Earnings Per Share
Basic earnings per share amounts are calculated by dividing net profit for the year attributable to
ordinary equity holders of the Group by the weighted average number of ordinary shares
outstanding during the year.
*SGVMC107838*
- 16 Foreign Currency Transactions and Translations
The functional and presentation currency of the Group is the Philippine Peso. Transactions
denominated in foreign currencies are recorded in Philippine Peso based on the exchange rates
prevailing at the transaction dates. Foreign currency-denominated monetary assets and liabilities
are translated to Philippine Peso at exchange rates prevailing at the balance sheet date. Foreign
exchange differentials between rate at transaction date and rate at settlement date or balance sheet
date of foreign currency-denominated monetary assets or liabilities are credited to or charged
against current operations.
Fiduciary Activities
Assets and income arising thereon together with related undertakings to return such assets to
customers are excluded from these consolidated financial statements where EWBC acts in a
fiduciary capacity such as nominee, trustee or agent.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market assessment
of the time value of money and, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provision due to the passage of time is recognized as
interest expense.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. They are
disclosed in the consolidated financial statements unless the possibility of an outflow of resources
embodying economic benefits is remote. Contingent assets are not recognized in the consolidated
financial statements but are disclosed in the consolidated financial statements when an inflow of
economic benefits is probable.
Subsequent Events
Post year-end events that provide additional information about the Group’s position at the balance
sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end
events that are not adjusting events are disclosed when material in the notes to the consolidated
financial statements.
3. Explanation of Transition to PFRS
The transition to PFRS resulted in certain changes to the Group’s previous accounting policies
referred to in the following tables and explanations as “previous GAAP.” The comparative
figures for the 2004 consolidated financial statements were restated to reflect the changes in
policies except those relating to financial instruments. The Group availed of the exemption under
PFRS 1 and as allowed by the Securities and Exchange Commission (SEC) to apply Philippine
Accounting
*SGVMC107838*
- 17 Standards (PAS) 32, Financial Instruments: Disclosure and Presentation and PAS 39, Financial
Instruments: Recognition and Measurement, the standards on financial instruments, from
January 1, 2005. The cumulative effect of adopting PAS 39 was charged to January 1, 2005
retained earnings.
An explanation of the effects of the transition to PFRS is set forth in the following tables and
notes.
Reconciliation of Equity (In Thousands of Pesos)
Notes
ASSETS
Cash and cash equivalents
Receivables – net
Receivable from customers - net
Subdivision lots, condominiums
and residential units for sale
Investments at cost - net
Land and land development
Investment property - net
Property and equipment - net
Deferred income tax assets
Other assets
TOTAL ASSETS
At January 1, 2004
(date of transition)
Effect of
Previous
transition
GAAP
to PFRS
=3,244,375
P
3,755,723
8,249,129
e
c/e
e
a/e
b/e
a/d/e/f
9,044,753
4,080,263
15,318,617
–
24,747,572
560,901
3,063,379
=72,064,712
P
LIABILITIES AND STOCKHOLDERS’
EQUITY
Liabilities
Deposit liabilities
=13,697,038
P
Accounts payable and accrued expenses
b
5,984,628
Income tax payable
156
Deferred income tax liabilities - net
b/e
5,167,501
Notes payable
4,741
Long-term debt
8,336,977
Bonds payable
1,347,303
Unrealized gross profit on installment
contract receivable, sales of condominium
units and club shares
258,753
Estimated liability for land and property
development
622,878
35,419,975
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY
Equity attributable to equity holders of
the parent
Capital stock
5,958,124
Additional paid-in capital
2,099,874
Revaluation increment in land
e
8,222,501
Net unrealized loss on decline in
value of noncurrent marketable
equity securities
(66,722)
Retained earnings
b/c/d/e/f
10,637,996
Treasury shares
(24,220)
Total
26,827,553
Minority interest
9,817,184
TOTAL STOCKHOLDERS’
36,644,737
EQUITY
TOTAL LIABILITIES AND
P72,064,712
=
STOCKHOLDERS’EQUITY
=–
P
–
–
PFRS
At December 31, 2004
(end of last period presented under
previous GAAP)
Effect of
Previous
transition
GAAP
to PFRS
PFRS
=3,244,375
P
3,755,723
8,249,129
=3,314,702
P
4,407,505
9,109,426
(2,244,090)
–
(226,293)
21,764,993
(23,466,279)
4,534
(674,838)
(P
=4,841,973)
6,800,663
4,080,263
15,092,324
21,764,993
1,281,293
565,435
2,388,541
=67,222,739
P
9,236,984
6,553,877
17,484,281
–
24,747,572
504,217
4,712,213
=80,070,777
P
(2,244,090)
–
(226,293)
21,756,980
(23,489,088)
(15,709)
(670,992)
(P
=4,889,192)
6,992,894
6,553,877
17,257,988
21,756,980
1,258,484
488,508
4,041,221
=75,181,585
P
=–
P
30,214
–
(1,541,780)
–
–
–
=13,697,038
P
6,014,842
156
3,625,721
4,741
8,336,977
1,347,303
=17,409,720
P
4,902,729
215
7,096,890
–
8,306,953
1,228,170
=–
P
15,600
–
(1,560,022)
–
–
–
=17,409,720
P
4,918,329
215
5,536,868
–
8,306,953
1,228,170
258,753
209,592
–
(1,511,566)
622,878
33,908,409
493,436
39,647,705
–
(1,544,422)
493,436
38,103,283
–
–
(2,941,891)
5,958,124
2,099,874
5,280,610
5,958,124
2,099,874
11,188,323
–
–
(2,941,891)
5,958,124
2,099,874
8,246,432
–
(14,724)
–
(2,956,615)
(373,792)
(66,722)
10,623,272
(24,220)
23,870,938
9,443,392
(34,103)
11,179,244
(24,220)
30,367,242
10,055,830
–
(22,611)
–
(2,964,502)
(380,268)
(34,103)
11,156,633
(24,220)
27,402,740
9,675,562
(3,330,407)
33,314,330
40,423,072
(3,344,770)
37,078,302
(P
=4,841,973)
=67,222,739
P
=80,070,777
P
(P
=4,889,192)
=75,181,585
P
–
=–
P
–
–
=3,314,702
P
4,407,505
9,109,426
–
209,592
*SGVMC107838*
- 18 a. Property and Equipment
Under PFRS, property and equipment may include various equipment acquired by EWBC
through dacion or foreclosure previously classified as real and other properties owned or
acquired (ROPOA). Such assets, being acquired through a nonmonetary exchange, should be
recorded at their fair market values as of initial recognition, including any costs directly
attributable to their acquisition. Any difference between the fair market value of the
equipment and the carrying value of the related loan is recorded as part of current operations.
Subsequently, this equipment may be accounted for under the cost model or the revaluation
model. Under the cost model (which EWBC has adopted as prescribed by the BSP), the
equipment are carried at depreciated cost less any impairment loss.
The adoption of PFRS resulted in the reclassification of ROPOA to investment property
amounting to P
=0.5 million as of December 31, 2004.
b. Employee Benefits
Under previous GAAP, pension benefits were actuarially determined using the entry age
normal method and past service cost and experience adjustments, amortized over the expected
average remaining working lives of the covered employees. Under PFRS, pension benefits
are determined using the projected unit credit method. Actuarial gains and losses that exceed
a 10% “corridor” are amortized over the expected average remaining working life of
participating employees and vested past service cost, recognized immediately.
The Group has chosen not to recognize using the “corridor approach” the cumulative actuarial
gains or losses that resulted from the measurement of such schemes in accordance with
PAS 19, Employee Benefits, at the date of transition. Instead, the Group has elected to
recognize all cumulative actuarial gains and losses at the date of transition to PFRS.
The adoption of this standard resulted in (a) decrease in retained earnings and deferred
income tax liability by P
=15.2 million, net of share of the minority interest amounting to
=5.4 million, and P
P
=5.1 million, respectively, and increase in pension liability and deferred
income tax assets by P
=30.2 million and P
=4.5 million, respectively, as of January 1, 2004 and
(b) decrease in retirement expense and pension liability by P
=14.6 million, decrease in deferred
tax assets by P
=1.3 million and increase in deferred income tax liability and provision for
income tax-deferred by P
=3.4 million and P
=4.7 million as of December 31, 2004.
c. Capitalized Foreign Exchange Losses
PAS 21, Effects of Changes in Foreign Exchange Rates, does not allow capitalization of
foreign exchange differentials. Thus, effective January 1, 2004, accumulated capitalized
foreign exchange losses included under the “Land and land development” account were
adjusted retroactively to retained earnings.
The adoption of this standard decreased retained earnings, minority interest and land and land
development by P
=23.6 million, P
=20.9 million and P
=44.5 million as of January 1, 2004. The
Group has stopped capitalization of foreign exchange losses starting 2004.
*SGVMC107838*
- 19 d. Impairment of Assets
The Group adopted PAS 36, Impairment of Assets , which requires an annual impairment test
to be conducted on intangible assets with indefinite useful lives such as goodwill. The
adoption of this standard resulted in EWBC’s recognition of impairment loss on goodwill
amounting to P3.1 million, net of share of the minority amounting to P2.0 million, for the year
ended December 31, 2004.
e. Investment Property
Under PFRS, property and equipment held to earn rentals or for capital appreciation or both,
should be treated as investment property. A company has an option to choose either the fair
value model or cost model in accounting for investment property. Fair value model requires
an investment property to be measured at fair value with fair value changes recognized
directly in the statement of income. Cost model requires that an investment property should
be measured at depreciated cost less any accumulated impairment losses.
The Group has land and buildings and building improvements, which are held to earn rentals.
Accordingly, land and buildings and building improvements should be treated as investment
property using the cost model accounting. The adoption of PFRS resulted in recognition of
investment property amounting to P
=21.8 billion, decrease in property and equipment, land and
land development, ROPOA, subdivision lots by P
=23.5 billion, P
=226.3 million, P
=669.7 million
and P
=2.2 billion, respectively (b) decrease in retained earnings by P
=24.1 million, net of share
of the minority interest amounting to P
=16.0 million (c) decrease in revaluation increment in
land by P
=2.9 billion, net of share of the minority interest amounting to P
=4.0 million and
(d) decrease in deferred income tax liability by P
=20.5 million as of January 1, 2004.
f. Amortization of Goodwill
EWBC adopted PFRS 3 Business Combination. Under this standard, intangible assets with
indefinite useful lives such as goodwill are no longer amortized, as there is no limit to the
number of years over which the asset is expected to generate cash flows . However, goodwill
is required to be reviewed for impairment on an annual basis.
The adoption of these standards resulted in reversal of amortization of goodwill amounting to
P10.3 million, net of share of the minority amounting to P6.8 million, for the year ended
December 31, 2004.
*SGVMC107838*
- 20 The PFRS transition adjustments discussed in the preceding notes increased (decreased)
retained earnings as follows:
Notes
Amortization of goodwill
Investment property
Capitalized foreign exchange losses
Employee benefits
Impairment of assets
Property and equipment
f
e
c
b
d
a
December 31,
January 1,
2004
2004
(In Thousands)
=10,274
P
=–
P
2,444
24,074
(23,580)
(23,580)
(8,525)
(15,218)
–
(3,082)
(142)
–
(P
=22,611)
(P
=14,724)
Reconciliation of Consolidated Net Income for 2004 (In Thousands)
Notes
Net revenues
General and administrative expenses
Real estate operations
Financial and banking services
Income before income tax
Provision for income tax
Income before net earnings
applicable to minority interest
Net earnings applicable to
minority interest
Net income
b
a/b/d/e/f
b/e
a/b/d/e/f
Previous GAAP
=4,339,273
P
(2,034,441)
(983,516)
1,321,316
(531,233)
Effect of
transition
to PFRS
=–
P
PFRS
=4,339,273
P
6,233
(59,999)
(53,766)
39,403
(2,028,208)
(1,043,515)
1,267,550
(491,830)
790,083
(14,363)
775,720
(248,835)
P541,248
=
6,476
(P
=7,887)
(242,359)
P533,361
=
Effect on Cash Flows Statement for 2004
There are no material differences between the cash flows statement prepared under PFRS and
cash flows statement presented under previous GAAP.
PFRS Impact on Financial Instruments
As discussed above, the cumulative adjustments required for the differences between the previous
GAAP and PAS 32 and 39 are determined and recognized directly against the January 1, 2005
retained earnings and revaluation reserve. Under previous GAAP, investments held for trading
and not for trading are measured at the lower of aggregate cost or market. Under PFRS, financial
assets at FVPL and AFS financial assets are carried at fair value and HTM financial assets and
loans and receivables are carried at amortized cost using the effective interest method.
The measurement of AFS financial assets at fair value resulted in increase in AFS financial assets
and revaluation reserve and decrease in retained earnings by P
=156.7 million, P
=269.3 million and
=112.6 million, respectively, as of January 1, 2005 and decrease in AFS financial assets and
P
revaluation reserve on AFS financial assets by P
=34.3 million as of December 31, 2005.
The adoption of PFRS resulted also in a recognition of HTM financial assets and financial assets
at FVPL amounting to P
=4.3 billion and P
=2.6 billion as of December 31, 2005.
*SGVMC107838*
- 21 Other Adopted PFRS
The Group has also adopted the following other PFRS, which did not materially affect the
Group’s financial position and results of operation. The comparative presentation and disclosures
have been amended as required by these standards. The adoption of these standards has no effect
on equity at January 1 and December 31, 2004.
·
PAS 1, Presentation of Financial Statements, provides a framework within which an entity
assesses how to present fairly the effects of transactions and other events; provides the base
criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income
from operating activities and extraordinary items as separate line items in the statement of
income; and specifies the disclosures about key sources of estimation, uncertainty and
judgments management has made in the process of applying the entity’s accounting policies.
·
PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the
concept of fundamental errors and the allowed alternative to retrospective application of
voluntary changes in accounting policies and retrospective restatement to correct prior period
errors. It defines material omissions or misstatements, and describes how to apply the
concept of materiality when applying accounting policies and correcting errors.
·
PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the
accounting for dividends declared after the balance sheet date.
·
PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on the
recognition and measurement of items of property, plant and equipment. It also provides that
each part of an item of property, plant and equipment with a cost that is significant in relation
to the total cost of the item shall be depreciated separately.
·
PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and
buildings and prohibits expensing of initial direct costs in the financial statements of the
lessors.
·
PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of
the standard, the definitions and disclosures for related parties. It also requires disclosure of
the compensation of key management personnel by benefit type.
·
PAS 32, Financial Instruments: Disclosure and Presentation, resulted in a more
comprehensive disclosures about a company’s financial instruments, whether recognized or
unrecognized in the financial statements. New disclosure requirements include terms and
conditions of financial instruments used by a company, types of risks associated with both
recognized and unrecognized financial instruments (market risk, price risk, credit risk,
liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized
financial assets and financial liabilities, and a company’s financial risk management policies
and objectives. The standard also requires financial instruments to be classified as liabilities
or equity in accordance with its substance and not its legal form.
*SGVMC107838*
- 22 Standards not yet Effective
The Group did not early adopt the following standards and amendments that have been approved
but are not yet effective:
·
Amendments to PAS 19, Employee Benefits: Actuarial Gains and Losses, Group Plans and
Disclosures. The revised disclosures from the amendments will be included in the Group’s
consolidated financial statements when the amendments are adopted in 2006.
·
PFRS 7, Financial Instruments - Disclosures. The revised disclosures on financial
instruments provided by this standard will be included in the Group’s consolidated financial
statements when the standard is adopted in 2007.
4. Significant Accounting Judgments and Estimates
The preparation of the consolidated financial statements in accordance with Philippine GAAP
requires the Group to make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses and disclosure of contingent assets and contingent liabilities.
Future events may occur which will cause the assumptions used in arriving at the estimates to
change. The effects of any change in estimates are reflected in the consolidated financial
statements as they become reasonably determinable.
Estimates and judgments are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under the
circumstances.
The following are the critical judgments and key assumptions that management has made, apart
from those involving estimations, which have the most significant effect on the amounts
recognized in the consolidated financial statements:
Real Estate Revenue Recognition
Selecting an appropriate revenue recognition method for a real estate sale transaction requires
certain judgments based on, among others:
a. Buyers commitment on sales which may be ascertained through the significance of the buyers
initial downpayment; and
b. Stage of completion of the project
Operating Lease Commitments - The Group as Lessor
The Group has entered into various property leases on its investment properties portfolio. The
Group has determined that it retains all significant risks and rewards of ownership on these
properties which are leased out on operating leases.
*SGVMC107838*
- 23 Distinction Between Investment Properties and Owner-occupied Properties
The Group determines whether a property qualifies as investment property. In making its
judgment, the Group considers whether the property generates cash flows largely independent of
the other assets held by an entity. Owner-occupied properties generate cash flows that are
attributable not only to property but also to the other assets used in the production or supply
process.
When properties comprise a portion that is held to earn rentals or for capital appreciation and
another portion is held for use in the production or supply of goods or services or for
administrative purpose, and these portions cannot be sold separately, the property is accounted for
as investment property only if an insignificant portion is held for use in the production or supply
of goods or services or for administrative purposes. Judgment is applied in determining whether
ancillary services are so significant that a property does not qualify as investment property. The
Group considers each property separately in making its judgment.
Investment property amounted to P
=22.2 billion and P
=21.8 billion as of December 31, 2005 and
2004, respectively. Property and equipment amounted to P
=1.0 billion and P
=1.3 billion as of
December 31, 2005 and 2004, respectively.
Management’s Use of Estimates
The key assumptions concerning the future and other key sources of estimation uncertainty at the
balance sheet date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below:
Financial Assets and Liabilities
Philippine GAAP requires certain financial assets and liabilities to be carried at fair value, which
requires use of extensive accounting estimates and judgments. While significant components of
fair value measurement were determined using verifiable objective evidence (i.e. foreign
exchange rates, interest rate and volatility rates), the amount of changes in fair value would differ
due to usage of different valuation methodology. Any changes in fair value of these financial
assets and liabilities would affect directly the statements of income and changes in equity.
Estimating Liability for Land and Property Development
Obligations to complete development of real estate project are recognized in the consolidated
balance sheets and are based on cost estimates made by the Group’s technical staff. These
estimated costs are reviewed at least annually and are updated if expectations differ from previous
estimates. Changes are mainly due to adjustments in development plan, materials and labor
prices. Estimated liability for land and property development amounted to P
=1.2 billion and P
=0.5
billion as of December 31, 2005 and 2004, respectively.
Impairment Losses of Loans and Receivables
The Group reviews its loan and receivable portfolios to assess impairment at least on a quarterly
basis. In determining whether an impairment loss should be recorded in the statements of income,
the Group makes judgments as to whether there is any observable data indicating that there is a
measurable decrease in the estimated future cash flows from a portfolio of loans and receivables
*SGVMC107838*
- 24 before the decrease can be identified with an individual loan or receivable in that portfolio. This
evidence may include observable data indicating that there has been an adverse change in the
payment status of borrowers in a group, or national or local economic conditions that correlate
with defaults on assets in the Group.
As of December 31, 2005, the loans and receivables amounted to P
=16.7 billion.
Fair Value of Financial Instruments
The fair values of financial instruments that are not quoted in active markets are determined by
using valuation techniques. Where valuation techniques (for example, models) are used to
determine fair values, they are validated and periodically reviewed by qualified personnel
independent of the area that created them. All models are certified before they are used, and
models are calibrated to ensure that outputs reflect actual data and comparative market prices. To
the extent practical, models use only observable data, however areas such as credit risk (both own
and counterparty), volatilities and correlations require management to make estimates. Changes
in assumptions about these factors could affect reported fair value of financial instruments.
Impairment of AFS Financial Assets
The Group determines that AFS financial assets are impaired when there has been a significant or
prolonged decline in the fair value below its cost. This determination of what is significant or
prolonged requires judgment. In making this judgment, the Group evaluates among other factors,
the normal volatility in share price. In addition, impairment may be appropriate when there is
evidence of deterioration in the financial health of the investee, industry and sector performance,
changes in technology, and operational and financing cash flows.
HTM Financial Assets
The Group follows the guidance of PAS 39 on classifying non-derivative financial assets with
fixed or determinable payments and fixed maturity as HTM financial assets. This classification
requires significant judgment. In making this judgment, the Group evaluates its intention and
ability to hold such investments to maturity. If the Group fails to keep these investments to
maturity other than in certain specific circumstances, for example, selling an insignificant amount
close to maturity, it will be required to reclassify the entire portfolio to AFS financial assets. The
financial assets would therefore be measured at fair value and not at amortized cost.
As of December 31, 2005, the HTM financial assets of the Group amounted to P
=2.6 billion.
Estimated Allowance for Doubtful Accounts
The Group maintains allowances for doubtful accounts at a level considered adequate to provide
for potential uncollectible receivables. The level of this allowance is evaluated by management
on the basis of factors that affect the collectibility of the accounts. These factors include, but are
not limited to, the length of the Group’s relationship with the customers, the customers, the
customers’ payment behavior and known market factors.
Provision for doubtful accounts amounted to P
=20.6 million and P
=12.0 million in 2005 and 2004,
respectively. Receivables, net allowance for doubtful accounts amounted to P
=16.7 billion and
=13.5 billion as of December 31, 2005 and 2004, respectively.
P
*SGVMC107838*
- 25 Estimating Useful Lives of Investment Property and Property and Equipment
The Group estimates the useful lives of its investment property and property and equipment based
on the period over which these assets are expected to be available for use. The estimated useful
lives of investment properties and property and equipment are reviewed at least annually and are
updated if expectations differ from previous estimates due to physical wear and tear and technical
or commercial obsolescence on the use of these assets. It is possible that future results of
operations could be materially affected by changes in estimates brought about by changes in
factors mentioned above.
Investment property amounted to P
=22.2 billion and P
=21.8 billion as of December 31, 2005 and
2004, respectively. Property and equipment amounted to P
=1.0 billion and P
=1.3 billion as of
December 31, 2005 and 2004, respectively.
Estimating Pension Obligation and Other Retirement Benefits
The determination of the Group’s obligation and cost for pension and other retirement benefits is
dependent on selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in Note 24 and include among others, discount rates, expected
returns on plan assets and rates of salary increase. While the Group believes that the assumptions
are reasonable and appropriate, significant differences in actual experience or significant changes
in assumptions materially affect retirement obligations.
Pension liability included under the “Accounts payable and accrued expenses” account amounted
to P
=115.1 million and P
=106.0 million as of December 31, 2005 and 2004, respectively.
Contingencies
The Group is currently involved in various legal proceedings. The estimate of the probable costs
for the resolution of these claims has been developed in consultation with outside counsel
handling the defense in these matters and based upon analysis of potential results. The Group
currently does not believe these proceedings will have material effect on the Group’s financial
position. It is possible, however, that future results of operations could be materially affected by
changes in the estimates or in the effectiveness of the strategies relating to these proceedings (see
Note 27).
Non-financial Asset Impairment
The Group assesses impairment on assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The factors that the Group considers
important which could trigger an impairment review include the following:
·
·
·
Significant underperformance relative to expected historical or projected future operating
results;
Significant changes in the manner of use of the acquired assets or the strategy for overall
business; and
Significant negative industry or economic trends.
*SGVMC107838*
- 26 -
5. Cash and Cash Equivalents
This account consists of:
2005
2004
(In Thousands)
P
=3,307,860
=1,766,213
P
1,520,928
1,548,489
P
=4,828,788
=3,314,702
P
Cash on hand and in other banks
Due from BSP
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 the respective short-term investment rates.
6. Loans and Receivables and Receivable from Customers - Real Estate Operations
Loans and receivables (December 31, 2005 balances) and receivables from customers
(December 31, 2004 balances) from real estate operations consist of:
Contract receivables - net of deferred
interest income of =
P162,179 in 2005
and P
=114,577 in 2004
Advances to joint venture partners
Advances to contractors, officers
and employees
Due from related parties (Note 20)
Receivables from tenants
Receivables from sale of condominium
units and club shares
Accrued interests
Others - net of allowance for doubtful
accounts of =
P0.2 million in 2005
2004
Due After
One Year
Total
=933,250
P
547,482
=1,417,655
P
–
=2,350,905
P
547,482
349,224
239,098
247,256
91,491
229,945
224,002
309
–
–
91,800
229,945
224,002
–
–
139,063
47,780
158,623
292,383
–
–
158,623
292,383
3,351
P
=2,954,711
415,050
P
=6,640,979
512,365
=2,989,541
P
–
=1,417,964
P
512,365
=4,407,505
P
Due Within
One Year
2005
Due After
One Year
P
=1,607,087
648,744
P
=2,857,131
90,546
P
=4,464,218
739,290
345,541
239,098
247,256
3,683
–
–
139,063
47,780
411,699
P
=3,686,268
Due Within
One Year
Total
(Amounts in Thousands)
FLI entered into various purchase agreements with financial institutions whereby the Company
sold its installment contracts receivables as of December 31, 2005 and 2004 with provision that
the Company should buy back these receivables in case these become overdue for two to three
consecutive months or when the contract to sell has been cancelled.
FLI retains the sold receivables in the “contract receivables” account and records the proceeds
from these sales as “other payables” included under “accounts payable and accrued expenses”
account (see Note 16) amounting to P
=0.98 billion and P
=1.17 billion as of December 31, 2005 and
2004, respectively.
*SGVMC107838*
- 27 The proceeds from the sale were used to fund various businesses and projects. For the installment
contracts receivable sold to Home Development Mutual Fund (HDMF) and local banks, FLI
continues to collect in behalf of and remit to the purchasers, on a monthly basis, the aggregate
maturing principal amortization plus interest agreed-upon by both parties.
FLI has a mortgage insurance contract with Home Guaranty Corporation (HGC), a government
insurance company, for a retail guarantee line amounting to P
=2.0 billion over a period of 20 years
starting October 1, 1988 and renewable annually. In 2003 and 2002, additional retail guarantee
lines amounting to P
=3.0 billion were secured by the Company with a coverage period of one year
and renewable annually. Under the terms of the line, HGC guarantees the repayment of the loans
granted by FLI to buyers of subdivision lots and housing units, including interest specified
thereon. In case of default by the buyers, HGC shall pay the insured loan to FLI with a 10-year
interest-bearing bond.
Contracts receivables amounting to P
=1.72 billion were insured under this guarantee line as of
December 31, 2004. There are no installment contracts receivables insured under this guarantee
line in 2005. The insured balance as of December 31, 2005 and 2004 includes installment
contracts receivables sold amounting to P
=1.63
7. Loans and Receivables and Receivable from Customers - Financial and Banking Services
Loans and receivables (December 31, 2005 balances) and receivables from customers
(December 31, 2004 balances) from financial and banking services consist of:
Loans and discounts (Note 6)
Unearned discounts
Customers’ liabilities under acceptances
and trust receipts
Bills purchased
Unquoted debt securities
Allowance for probable losses
2004
2005
(In Thousands)
=8,839,011
P
P
=10,304,117
(236,215)
(544,313)
8,602,796
9,759,804
585,516
144,297
203,959
10,693,576
(627,511)
P
=10,066,065
797,320
177,316
–
9,577,432
(468,006)
=9,109,426
P
Credit card receivables, included in loans and discounts, amounted to P
=298.86 million and
=94.73 million as of December 31, 2005 and 2004, respectively.
P
*SGVMC107838*
- 28 The following shows the information relating to loans by collateral (amounts in thousands):
2005
Amount
Secured:
Hold-out on deposit
Real estate
Chattel
Securities
Quedans
Others
Unsecured
P
=2,986,067
1,447,141
1,353,438
585,105
80,000
1,499,507
7,951,258
3,286,631
P
=11,237,889
2004
Amount
%
26.57
12.88
12.04
5.21
0.71
13.34
70.75
29.25
100.00
=2,259,372
P
1,488,663
996,024
947,357
80,000
320,039
6,091,455
3,722,192
=9,813,647
P
%
23.02
15.17
10.15
9.65
0.82
3.26
62.07
37.93
100.00
Information on the concentration of credit as to industry follows (amounts in thousands):
2005
Amount
Transport, storage and
communications
Manufacturing
Wholesale and retail trade
Financial intermediaries
Real estate, renting and business
services
Agriculture, fisheries and forestry
Others
2004
Amount
%
%
P
=3,345,927
2,620,006
1,617,149
1,260,405
29.77
23.31
14.39
11.22
=303,368
P
1,893,267
1,584,609
2,662,945
3.09
19.29
16.15
27.14
774,657
286,446
1,333,299
P
=11,237,889
6.89
2.55
11.87
100.00
1,569,162
328,075
1,472,221
=9,813,647
P
15.99
3.34
15.00
100.00
The BSP considers that loan concentration exists when total loan exposure to a particular industry
or economic sector exceeds 30% of total loan portfolio. As of December 31, 2005 and 2004,
EWBC does not have credit concentration in any particular industry.
BSP Circular No. 351 allows banks to exclude from nonperforming receivables classified as
“Loss” in the latest examination of the BSP which are fully covered by allowance for probable
losses, provided that interest on said receivables shall not be accrued and that such receivables
shall be deducted from the total receivable portfolio for purposes of computing non-performing
loans. As of December 31, 2005 and 2004, nonperforming loans (NPLs) of EWBC not fully
covered by allowance for probable losses are as follows:
Total NPLs
Less NPLs fully covered by allowance for
probable losses
2004
2005
(In Thousands)
=1,073,111
P
P
=1,270,186
164,518
P
=1,105,668
265,741
=807,370
P
*SGVMC107838*
- 29 As of December 31, 2005 and 2004, secured and unsecured NPLs of EWBC are as follows:
Secured
Unsecured
2004
2005
(In Thousands)
=609,260
P
P
=848,075
463,851
422,111
=1,073,111
P
P
=1,270,186
8. Subdivision Lots, Condominiums and Residential Units for Sale
This account consists of:
Subdivision and residential units
Office condominiums (Note 11)
2004
(As restated)
2005
(In Thousands)
=6,647,762
P
P
=7,080,183
345,132
624,474
=6,992,894
P
P
=7,704,657
9. Investments and Debt and Equity Securities Classified as Financial Assets
This account consists of:
2004
(As restated)
2005
(In Thousands)
Financial assets at FVPL - net of unrealized gains
of P
=32.70 million:
Government bonds
Private bonds and commercial papers
Equities
AFS financial assets:
AFS financial assets
Investment in club shares
Investment in club projects
P
=1,423,697
1,069,118
202
2,493,017
=–
P
–
–
–
1,139,859
794,932
248,859
2,183,650
–
–
–
–
(Forward)
*SGVMC107838*
- 30 2004
(As restated)
2005
(In Thousands)
HTM financial assets, with an aggregate market
value of P
=4.49 billion:
BSP Treasury bills
Government bonds
Private bonds and commercial papers
Treasury notes
Other investments:
Shares of stock of other companies - net of
allowance for impairment loss of P
=7.61 million
Trading and investment securities - net of allowance
for probable losses of P
=100.55 million
Investments in club shares
Noncurrent marketable equity securities - net
of unrealized decline in value of P
=34.1 million
P
=2,256,427
228,565
55,781
61,101
2,601,874
=–
P
–
–
–
–
553,061
–
–
5,347,641
536,834
–
–
P
=7,278,541
116,341
6,553,877
=6,553,877
P
The aggregate market value of trading and investment securities (consisting of BSP treasury bills,
private commercial papers, debt securities fixed rate treasury notes and others) amounted to
=4.9 billion as of December 31, 2004.
P
Retained earnings are further restricted for the payment of dividends to the extent of the cost of
common shares held in treasury amounting to P
=24.22 million.
On various dates in 2004, the Parent Company sold approximately 2% equity in FLI and realized
a loss amounting to P
=88.0 million. In 2005, the Parent Company exchanged approximately 3%
equity in FLI for the purchase of the investment in bonds of FLI and realized a gain amounting to
=116.2 million. The loss on sale in 2004 and gain on disposal of investment in 2005 of FLI
P
shares are included in “Other Income” account under real estate revenue section in the
consolidated statements of income.
10. Land and Land Development
This account consists of:
Land
FCC Project (Note 11)
2004
(As restated)
2005
(In Thousands)
=11,000,218
P
P
=12,049,925
6,257,770
6,192,336
=17,257,988
P
P
=18,242,261
*SGVMC107838*
- 31 Capitalized interest regarded as borrowing costs arising from loans obtained to finance the Parent
Company’s and subsidiaries’ (FAI and FLI) on-going projects that are capitalized as part of “Land
and Land Development” account in the consolidated balance sheets amounted to P
=0.4 billion in
2005 and 2004.
As of December 31, 2005 and 2004, certain parcels of land with carrying value of P
=4.6 billion
and P
=4.0 billion, respectively, secure the same loans payable of the Parent Company and FAI
(Note 17).
11. Interest and Agreements in Joint Ventures
On June 14, 1995, FLI and Parent Company (collectively referred to as “Filinvest”) entered into a
Memorandum of Agreement (the MOA) with the Philippine Bank of Communications (PBCom)
for the construction of the PBCom Office Condominium (the Project) on parcels of land (the
Property) located at Ayala Avenue, Makati City. On January 30, 1996, Filinvest and PBCom
entered into a First Supplemental Agreement covering the MOA.
Pursuant to the MOA and the First Supplemental Agreement, PBCom shall provide the Property
while Filinvest shall contribute technical expertise and cash equivalent to the fair market value of
the Property for the construction of the Project. For purposes of the Project, the fair market
value of PBCom’s Property was fixed at P
=900 million. In consideration for PBCom’s Property
and for Filinvest’s equal financial contribution, the parties agreed to divide equally the ownership
of the Project upon completion thereof. To maintain this 50%-50% sharing basis, all interest
earnings on Filinvest’s cash contribution as well as project cost overruns shall likewise be shared
equally by both parties.
On September 11, 1996, Filinvest and a third party entered into a Memorandum of Understanding
to form a joint venture corporation that shall hold and manage the 50% ownership interest of
Filinvest under the MOA and in the Project, with the third party acquiring 40% and Filinvest
acquiring 60% of the joint venture corporation’s issued capital. FLI waived and relinquished all
of its rights and interests in and obligations with respect to the Project and the MOA in favor of
the Parent Company.
On November 15, 1996, Parent Company and a wholly-owned subsidiary of the third party
executed a Shareholders’ Agreement (the SA) whereby the parties agreed to form a joint venture
corporation to be named Filinvest Asia Corporation (FAC) which shall hold and manage the 50%
ownership interest of FDC under the MOA and in the Project under the terms and conditions of
the MOA and the SA.
On April 1, 2001, the construction of the Project was completed. FAC and PBCom have agreed
on the assignment of PBCom Office Condominium units based on their respective contributions.
These condominium units are intended for sale. However, in view of the market conditions,
certain condominium units are currently being leased for 3 to 8 years. Accordingly, the related
costs of these leased units are presented as “Investment property” in the consolidated balance
sheets and depreciated over its estimated useful life of 50 years.
*SGVMC107838*
- 32 FAC’s 50% share of the assets, liabilities, revenue and expenses of the joint venture, which are
proportionately consolidated into the Group financial statements ended December 31, 2005 and
2004 are as follows:
2005
(In Thousands)
Assets
Cash
Receivables - net
Other current assets
Investment properties
Furniture and fixtures
Liabilities
Accounts payable and accrued expenses
Due to related parties
Deposits from tenants
Net Income
Cash flows arising from:
Operating activities
Investing activities
Financing activities
2004
P
=841
15,924
4
2,045,129
79
P
=2,061,977
P2,719
=
25,550
577
2,044,680
79
=2,073,605
P
P
=11,399
1,466
200
P
=13,065
P
=5
=26,950
P
2,154
175
=29,279
P
=7
P
(P
=1,591)
(449)
162
(P
=1,878)
(P
=903)
(84)
(120)
(P
=1,107)
FCC
On April 14, 1993, the Public Estates Authority (PEA) under the Office of the President of the
Republic of the Philippines (as “Owner”) by virtue of Memorandum Order No. 371, entered into a
Joint Venture Agreement (JVA) with the Parent Company (as “Developer”) for the development
of a 244-hectare property known as the FCC, formerly Alabang Stock Farm, located in Alabang,
Muntinlupa City into a modern, mixed-use urban center. In September 1993, the Parent Company
assigned to FAI all of its rights and interests relative to the JVA.
FAI undertakes the horizontal development and subdivision of the FCC in accordance with the
Master Development Plan, and the subsequent sale, lease and disposition of individual sites and
lots within the property.
The JVA provides for the contribution by the Philippine Government of the property to the Joint
Venture through PEA. As its contribution to the joint venture, FAI undertakes to develop, at its
own cost, the property in accordance with the Master Development Plan and provide all
administrative, marketing, collection and cash management services for the joint venture. In
addition, FAI shall pay the Philippine Government P
=200 million to be used for the relocation of
existing government structures and facilities in the property and shall relocate at its own expense
all existing squatters and residents of the property. It shall also deliver 2,000 additional housing
units at no additional cost to the Philippine Government.
*SGVMC107838*
- 33 Exercising its option provided in the JVA, the Philippine Government further required FAI to
construct and deliver up to a maximum of 19,000 socialized housing units on land to be provided
exclusively by FAI, in exchange for a proportionate percentage of the Philippine Government’s
ownership interest in the joint venture.
In consideration of the respective contributions and undertakings of the parties under the JVA,
FAI and the Philippine Government as represented by PEA are entitled to a share in all revenue to
be derived from the joint venture project at a ratio of 74:26.
12. Investment Property
The composition of and movements in this account follow:
Land
Cost
At January 1
Additions
Disposals/reclassifications
At December 31
Accumulated Depreciation and Amortization
At January 1
Depreciation and amortization (Note 21)
Disposals/reclassifications
At December 31
Accumulated Impairment Loss
Provision for probable impairment loss
Disposals/reclassifications
At December 31
Net Book Value
Total
=15,494,465
P
109,592
–
15,604,057
=6,946,232
P
670,383
(11,801)
7,604,814
P
=22,440,697
779,975
(11,801)
23,208,871
–
–
–
–
683,717
288,328
(1,182)
970,863
683,717
288,328
(1,182)
970,863
–
–
–
=15,604,057
P
4,739
(685)
4,054
=6,629,897
P
4,739
(685)
4,054
P
=22,233,954
Land
Cost
At January 1
Additions
Disposals/reclassifications
At December 31
Accumulated Depreciation and Amortization
At January 1
Depreciation and amortization (Note 21)
At December 31
Net Book Value
2005
Buildings and
Improvements
(In Thousands)
2004
Buildings and
Improvements
(In Thousands)
Total
=15,270,770
P
223,695
–
15,494,465
=7,024,981
P
328,760
(407,509)
6,946,232
=22,295,751
P
552,455
(407,509)
22,440,697
–
–
–
=15,494,465
P
530,758
152,959
683,717
=6,262,515
P
530,758
152,959
683,717
=21,756,980
P
*SGVMC107838*
- 34 The Group’s investment properties includes land and buildings utilized in mall operations,
investment in condominium units for sale, buildings and building improvements, land
improvements acquired in settlement of loans and receivables [previously classified as real and
other properties owned or acquired (ROPOA)] and other properties held for long-term rental
yields and for capital appreciation.
As of December 31, 2005 and 2004, total accumulated borrowing costs consisting of interest and
net foreign exchange losses regarded as interest cost adjustments, capitalized as part of
commercial mall project cost amounted to P
=885.5 million and P
=913.7 million, respectively.
The aggregate fair value of the Group’s investment properties amounted to P
=33.8 billion as of
December 31, 2005.
The fair value of the investment properties have been determined on the basis of recent sales of
similar properties in the same areas as the investment properties and taking into account the
economic conditions prevailing at the time the valuations were made.
Rental income from investment properties amounted to P
=917.3 million in 2005 and P
=781.5
million in 2004. Direct operating expenses arising from investment properties amounted to
=171.9 million in 2005 and P
P
=144.1 million in 2004.
13. Property and Equipment
The rollforward analysis of this account follows:
Land
and
Buildings
Cost
At January 1
Additions
Disposals/adjustments
At December 31
Accumulated Depreciation
and Amortization
At January 1
Depreciation and
amortization (Note 21)
Disposals/adjustments
At December 31
Net Book Value
=1,030,275
P
21,326
(193,534)
858,067
Machinery
and Transportation
Equipment
Equipment
2005
Furniture
and Communication
Leasehold
Fixtures
Equipment Improvements
(In Thousands)
=262,618
P
9,000
(13)
271,605
=55,454
P
3,075
(2,647)
55,882
=488,318
P
68,074
(12,610)
543,782
=6,167
P
127
–
6,294
=265,689
P
17,525
(9,307)
273,907
105,271
183,689
50,952
366,173
6,039
139,401
40,567
–
145,838
=712,229
P
28,157
(13)
211,833
=59,772
P
1,968
(2,647)
50,273
=5,609
P
72,571
(9,159)
429,585
=114,197
P
88
–
6,127
=167
P
32,794
(4,510)
167,685
=106,222
P
Construction
in
Progress
P1,488
=
37,047
–
38,535
Total
P
= 2,110,009
156,174
(218,111)
2,048,072
–
–
–
–
=38,535
P
851,525
176,145
(16,329)
1,011,341
P
= 1,036,731
*SGVMC107838*
- 35 -
Land
and
Buildings
Cost
At January 1
Additions
Disposals/adjustments
At December 31
Accumulated Depreciation
and Amortization
At January 1
Depreciation and
amortization (Note 21)
Disposals/adjustments
At December 31
Net Book Value
=1,023,706
P
13,144
(6,575)
1,030,275
67,139
44,707
(6,575)
105,271
=925,004
P
Machinery
and Transportation
Equipment
Equipment
2004
Furniture
and Communication
Leasehold
Fixtures
Equipment Improvements
(In Thousands)
Construction
in
Progress
=242,269
P
20,391
(42)
262,618
=55,235
P
5,619
(5,400)
55,454
=400,672
P
88,667
(1,021)
488,318
=2,613
P
3,554
–
6,167
=223,021
P
42,668
–
265,689
=1,319
P
169
–
1,488
146,882
52,031
287,946
2,562
110,982
–
36,879
(72)
183,689
=78,929
P
3,818
(4,897)
50,952
=4,502
P
84,162
(5,935)
366,173
=122,145
P
3,477
–
6,039
=128
P
28,419
–
–
–
=1,488
P
139,401
=126,288
P
Total
=1,948,835
P
174,212
(13,038)
2,110,009
667,542
201,462
(17,479)
851,525
=1,258,484
P
14. Other Assets
This account consists of:
Goodwill
ROPOA
Others
Less allowance for probable losses
2004
(As restated)
2005
(In Thousands)
=160,396
P
P
=155,212
670,565
–
3,289,061
3,998,749
4,120,022
4,153,961
78,801
–
=4,041,221
P
P
=4,153,961
15. Deposit Liabilities
Of the total deposit liabilities of EWBC as of December 31, 2005 and 2004, about 54.70% and
50.07%, respectively, are subject to periodic interest repricing. The remaining deposit liabilities
earn annual fixed interest rates ranging from 1% to 8.5% and from 1% to 9.0% as of
December 31, 2005 and 2004, respectively.
Under existing BSP regulations, non-FCDU deposit liabilities are subject to liquidity reserve
equivalent to 11% and 8% as of December 31, 2005 and 2004, respectively, and statutory reserve
of 10% and 9% as of December 31, 2005 and 2004, respectively. As of December 31, 2005 and
2004, EWBC is in compliance with such regulation.
*SGVMC107838*
- 36 Available reserves of EWBC as of December 31, 2005 and 2004 follow:
2004
2005
(In Thousands)
=639,814
P
P
=596,978
1,440,383
1,296,070
–
2,078,526
1,093,186
–
=3,173,383
P
P
=3,971,574
Cash and other cash items
Due from BSP
HTM financial assets
IBODI
The following table presents the breakdown of deposit liabilities by contractual settlement dates
as of December 31, 2005 and 2004:
Demand
Savings
Time
Due Within
One Year
2005
Due Beyond
One Year
P
=1,998,790
5,556,954
2,835,867
P
=10,391,611
P
=–
–
9,604,300
P
=9,604,300
Due Within
One Year
Total
(In Thousands)
=1,892,006
P
P
=1,998,790
5,138,365
5,556,954
2,883,249
12,440,167
=9,913,620
P
P
=19,995,911
2004
(As restated)
Due Beyond
One Year
Total
=–
P
–
7,496,100
=7,496,100
P
=1,892,006
P
5,138,365
10,379,349
=17,409,720
P
16. Accounts Payable and Accrued Expenses
The details of accounts payable and accrued expenses are as follows:
Accounts payable
Advances from customers
Due to related
parties (Note 20)
Accrued interest
Bills payable and demand
drafts
Domestic bills purchased
Installment contracts
payable
Sundry and other credits
Other payables(Note 4)
Due Within
One Year
2005
Due After
One Year
P
= 1,129,230
1,067,415
P
=–
–
372,346
366,426
–
–
372,346
366,426
123,876
109,521
26,307
–
–
47,860
–
1,029,132
P
= 4,224,253
–
1,121,747
P
=1,169,607
Due Within
One Year
Total
(In Thousands)
=576,329
P
P
=1,129,230
715,504
1,067,415
2004 (As restated)
Due After
One Year
Total
=–
P
–
=576,329
P
715,504
764,258
255,624
–
–
764,258
255,624
123,876
109,521
74,167
783,955
140,962
–
–
–
–
783,955
140,962
–
–
2,150,879
P
=5,393,860
13,982
1,167,216
=4,417,830
P
–
500,499
=500,499
P
13,982
1,667,715
=4,918,329
P
Installment contracts payable represent the balance of the purchase price of a parcel of land
acquired from Fort Bonifacio Development Corporation in 1997, which is subject to an interest
rate of 10% per annum and payable in 35 equal quarterly installments from January 7, 1999 to
October 7, 2007.
*SGVMC107838*
- 37 -
17. Long-term Debt
Long-term debt consists of the following respective borrowings of the Group and their contractual
settlement dates:
2005
(In Thousands)
2004
Parent Company Loans
Loan:
Loans from various financial institutions.
P
=1,050,000
=–
P
–
1,000,000
Interest equivalent to 3.75% spread over the
91-day Treasury Bill benchmark rate with
quarterly repricing, payable quarterly in arrears.
The principal amount is payable in 12 variable
quarterly installments commencing in
September 2007.
950,000
958,333
Interest equivalent to 3.25% spread over the
91-day Treasury Bill benchmark rate or 1.25
above the 90-day PHIBOR payable quarterly in
arrears. The principal amount is payable in 16
variable quarterly installments commencing in
September 2003.
848,000
888,000
Interest equivalent to 1% spread over the
benchmark yield on five (5)-year treasury
securities, payable semi-annually in arrears.
540,000
–
Interest rate per annum equivalent to the rate of
1.25% over benchmark yield on 5-year treasury
securities as displayed on MART1, payable
quarterly in arrears.
400,000
–
Corporate notes:
Loan obtained from a financial institution with
interest rate of 15.43%. The loan is payable in
lump sum on January 1, 2012 and collateralized
by a parcel of land owned by a subsidiary with
appraised value of P
=2.3 billion in 2004. The
loan was paid in full.
Term loans:
(Forward)
*SGVMC107838*
- 38 -
2005
(In Thousands)
Notes under credit facility granted by Home
Development Mutual Fund (HDMF) subject to
interest rates ranging from 11.26% to 13.24% in
2005 and 12.01% to 13.24% in 2004 or 91-day
Treasury Bills plus 5%, payable quarterly in
arrears, with maturities until June 2008.
2004
P
=256,384
=184,793
P
30,000
40,000
Secured - interest rate of 12% to 13% per annum
in 2005 and 2004. The loan is collateralized by
a real estate mortgage on parcel of land owned
by a subsidiary with appraised value of
=317.1 million and P
P
=284.0 million in 2005 and
2004, respectively.
150,000
150,000
Secured - with various interest rates ranging
from 11.25% to 11.65% per annum in 2005 and
from 9.05% to 11.95% per annum in 2004. This
loan is secured by a Notice of Assignment and
Third Party Memorandum of Charge covering
US$2.2 million deposit in 2004. The loan was
paid in full in May 2005.
–
112,200
3,000
4,227,384
3,000
3,336,326
Interest equivalent to 6% spread over the
91-day Treasury Bill rate with quarterly
repricing, payable quarterly in arrears. The
principal amount is payable in 12 installments
starting May 2005 with quarterly amortizations
of P
=3.3 million. The loan is collateralized by a
real estate mortgage on condominium units
owned by a subsidiary with market value of
=90.8 million and P
P
=80.0 million in 2005 and
2004, respectively.
Short-term loans from local banks:
Unsecured loan with interest rates ranging from
6.17% to 8.38% in 2005 and from 7.80% to
8.50% in 2004.
Total Parent Company loans
(Forward)
*SGVMC107838*
- 39 2005
(In Thousands)
2004
Subsidiaries’ Loans
FAI
Syndicated and long-term loans with fixed
interest rate or based on the variable average
rate over a 91-day Treasury Bill benchmark
plus a spread of 2-3.5%. The loans are payable
in equal quarterly installments, the earliest
started in 2002.
P
=1,962,598
=1,454,268
P
997,567
591,359
–
2,960,165
175,000
2,220,627
2,750,000
2,750,000
1,625,000
4,375,000
7,335,165
P
=11,562,549
–
2,750,000
4,970,627
=8,306,953
P
Long-term dollar loan with interest equivalent
to 3.25% over the LIBOR and payable semiannually in arrears. This loan is payable in 15
equal semi-annual installments starting in
September 2004.
Short-term loans from financial institutions.
FLI
Corporate notes granted by various financial
institutions. Interest rate ranging from 10% to
11% in 2005 and from 10% to 12% in 2004 or
equivalent to the 91-day Treasury Bill
benchmark rate plus 3.5% margin.
Term and developmental loans granted by
various financial institutions and local banks.
Interest rate is a mix of fixed and floating rates
Total Subsidiaries’ loans
Total
The details of foregoing loans of the Parent Company follow:
Corporate Notes
On October 19, 2005, the Parent Company obtained from various financial institutions a loan
facility at an aggregate principal amount of P
=1.1 billion with an interest equivalent to the 5-year
Treasury securities benchmark rate plus spread of 0.75% to 1%. The loan was used to pay the
Parent Company’s loan obtained from a financial institution amounting to P
=1.0 billion. The loan
is collateralized by a parcel of land owned by a subsidiary with appraised value of P
=1.8 billion.
*SGVMC107838*
- 40 The maturity dates of the corporate notes follow:
Maturity Date
October 19, 2008
October 19, 2009
October 19, 2010
Maturing Principal
=75,000
P
125,000
850,000
=1,050,000
P
The annual maturities of the above term loans of the Parent Company are as follows
(in thousands):
Year
2006
2007
2008
2009
Thereafter
Amount
=294,820
P
463,384
604,180
525,000
2,340,000
=4,227,384
P
FAI
Syndicated long-term and US dollar loans of FAI
The repayment schedule of the syndicated and long-term dollar loan as of December 31, 2005 is
as follows:
Year
2006
2007
2008
2009
2010
2011
Syndicated and
Long-term Loans
=286,431
P
415,432
468,431
444,549
241,147
106,608
=1,962,598
P
Long-term
Dollar Loans
=142,142
P
171,085
171,085
171,085
171,085
171,085
=997,567
P
Total
=428,573
P
586,517
639,516
615,634
412,232
277,693
=2,960,165
P
The syndicated and long-term loans substantially obtained by the FAI in 2001 were used to
finance the FAI’s project in Northgate Cyberzone Information Technology Park, other projects
and for its working capital requirements.
US$22 million loan agreement with International Finance Corporation (IFC)
In July 2001, FAI entered into a US$22 million loan agreement with IFC. In October 2001, FAI
received US$16 million proceeds representing a portion of the original loan availment. The loan
is payable in fifteen (15) equal semi-annual installments starting on September 15, 2004 and will
mature on September 15, 2011. The interest on the loan is based on LIBOR plus a 3.25% spread
and shall be paid semi-annually in arrears. FAI has duly executed a guarantee agreement in favor
of the lender for the performance of all the obligations under the terms and conditions set forth in
the loan agreement.
*SGVMC107838*
- 41 The exchange rates used to translate the dollar-denominated loan to Philippine peso were P
=53.09
and P
=56.34 per US$1.00 at December 31, 2005 and 2004, respectively. Foreign currency
exchange gain (loss) included in the consolidated statements of income amounted to P
=11.3 million
and P
=7.4 million in 2005 and 2004, respectively.
The loans are secured by mortgage on certain parcels of land of FAI with aggregate carrying
values of P
=1.5 billion as of December 31, 2005 and 2004 (see Note 10). Of the said amount,
=705.3 million and P
P
=658.2 million pertain to the carrying values of the parcels of land mortgaged
to IFC, as of December 31, 2005 and 2004, respectively.
FLI
Corporate Notes
On November 16, 2004, FLI obtained from various financial institutions a loan facility at an
aggregate principal amount of P
=2.75 billion. The loan was used by FLI to refinance its
=2.0 billion long-term commercial papers which matured in November 2004, and to partly finance
P
its permanent working capital requirements. The maturity dates of the corporate notes follow:
Due date:
November 2007
November 2008
November 2009
Maturing Principal
(In Thousands)
=412,500
P
687,500
1,650,000
=2,750,000
P
Term Loans
This account consists of:
a. Term loan from a financial institution. On June 17, 2005, FLI entered into a Local Currency
Loan Agreement with a financial institution whereby FLI was granted a credit line facility
amounting to P
=2.50 billion. In October 2005, FLI availed P
=1.13 billion. The loan is payable
in 10 semi-annual installments commencing in December 2008 until 2013 with a fixed
interest rate of 11.94%. Maturity of the loan is in 2013. This loan is guaranteed by the
Parent Company.
*SGVMC107838*
- 42 b. Developmental loans from local banks. This includes secured loans obtained from local
banks. As of December 31, 2005, the details are as follows (in thousands):
Secured loan obtained on July 22, 2005 with interest rate
equivalent to the prevailing Home Plus Loan rate of the bank for
one year plus 1% subject to annual repricing thereafter. The
loan is collaterized by a real estate mortgage on a P
=500 million
parcel of land owned by FLI.
Secured loan obtained on June 7, 2005 with interest rate
equivalent to 3% spread over the three month Treasury Bills
benchmark rate. The principal amount is payable in 12 equal
quarterly installments commencing on September 7, 2007. The
loan is collaterized by a real estate mortgage on a P
=400 million
parcel of land owned by FLI.
=300,000
P
200,000
=500,000
P
The loan agreements covering the loans, corporate notes, convertible bonds, long-term promissory
note and notes payable provide for restrictions and requirements with respect to, among others,
declaration or making payment of all dividends; making distribution on its share capital; purchase,
redemption or acquisition of any share of stock; incurrence or assumption of indebtedness; sale or
transfer and disposal of all or a substantial part of its capital assets; restrictions on use of funds;
availments of additional loans; maintaining certain financial ratios; and entering into any
partnership, merger, consolidation or reorganization.
The related borrowing costs arising from the foregoing borrowings capitalized as part of land and
land development amounted to P
=154.1 million and P
=160.8 million in 2005 and 2004, respectively.
18 Bonds Payable
On February 7, 2002, FLI issued P
=1.2 billion convertible bonds to Reco, due on February 7, 2007.
The bonds are convertible into FLI’s shares of stock at the option of the holders, at any time
during the conversion period, at an amount equivalent to the historical weighted average market
price of the shares plus 10% thereon, but shall not in any event be less than P
=1.70 per share nor
more than P
=1.87 per share, subject to adjustments under certain events. All or some of the bonds
are likewise redeemable by FLI at any time during the conversion period. Unless previously
redeemed, converted or cancelled, FLI will redeem all of the outstanding bonds on the maturity
date at an amount such that the annualized internal rate of return in the bonds is equivalent to 19%
per annum. Interest on the bonds is payable semi-annually in arrears commencing on August 7,
2002 at the rate of 10% per annum until the bonds mature on February 7, 2007. Proceeds from
the issuance of the convertible bonds were used for the complete redemption of SUPeR Bonds
issued in February 2000.
*SGVMC107838*
- 43 On December 12, 2005, the Parent Company purchased the bonds issued by FLI on
February 7, 2002 amounting to P
=1.2 billion from Reco. Effective December 14, 2005, the Parent
Company and FLI amended the Bond Subscription Agreement and set the maturity of the bonds
on December 14, 2010 with interest rate of 12.2%, payable quarterly, and with redemption
amount equivalent to the face value of the bonds.
19. Capital Stock
The details of capital stock as of December 31, 2005 and 2004 are as follows (in thousands):
Capital stock - P
=1 par value
Preferred - cumulative
Authorized - 2,000,000,000 shares
Common
Authorized - 8,000,000,000 shares
Issued - 5,958,124,000 shares
=5,958,124
P
The preferred stock shall be issued subject to the following conditions, rights, preferences,
qualifications and limitations:
a. The holder thereof shall be entitled to dividends at the rate to be determined by the BOD prior
to issuance of the preferred stock. The dividends are payable out of the surplus profits of the
Parent Company so long as such preferred stock is outstanding.
b. Dividends on preferred stock shall be payable on the last business day of each calendar period
as shall be determined by the BOD prior to the issuance of such preferred stock. Preferred
stock shall not be entitled to participate in any such dividends paid to the holders of common
stock. Accumulation of dividends shall not bear interest.
c. In the event of voluntary or involuntary liquidation, dissolution, receivership, bankruptcy or
winding up of the affairs of the Parent Company, except in the case of a merger or
consolidation, the holders of the preferred stock shall be entitled to be paid in full at par, or
ratably, in Philippine currency, insofar as the assets of the Parent Company will permit, for
each share of preferred stock held, together with the accumulated and unpaid dividends
thereon, up to date of distribution, before any distribution is made to holders of common
stock. After the holders of the preferred stock shall have received their share in distribution,
the remaining assets of the Parent Company shall be appropriated to the holders of common
stock.
*SGVMC107838*
- 44 d. Beginning on the fourth year up to the day before the end of the fifth year from the date of
issuance of the preferred stock, the Parent Company, at any one time or from time to time at
the option of the BOD, may redeem in whole or in part the preferred stock at the time
outstanding, upon notice duly given as hereinafter provided, by paying thereof in cash the
amount equal to the par value of the shares to be so redeemed, plus such premium, if any,
(expressed in percentages of the par value) as shall be fixed by the BOD prior to the issuance
of such preferred stock, provided that any and all preferred stock remaining unredeemed and
outstanding shall be redeemed by the Parent Company not later than the last business day of
the fifth year from the date of issuance of the preferred stock, by paying therefore in cash the
amount equal to the par value of the shares to be redeemed.
e. The holders of the preferred stock shall not be entitled to any voting rights or privileges
except in those cases expressly provided by law.
f.
The preferred stock shall not be convertible into any other shares or securities of the Parent
Company.
20. Related Party Transaction
Significant transactions with related parties are as follows:
a. The Parent Company conducted a review of its financial transactions particularly the
borrowings made and the corresponding costs. Included in the review was the manner by
which the Parent Company has acted as a conduit for FAI for the purpose of the latter
securing loans.
Considering that while the Parent Company is the borrower of record, FAI is the real
borrower and beneficiary of the loans. Management has adopted the position that, among
others, the borrowing costs charged by the lenders should actually be charged to FAI by way
of reimbursement to properly reflect the transaction between the two parties.
b. The Parent Company has management agreements with two related parties engaged in sugar
central operations. The management agreements provide for tax, legal, fund management and
other finance related services, purchasing and other corporate services that the Parent
Company will render in connection with finance and administrative functions. In 2005 and
2004, management fee is 14% and 12%, respectively, of the related parties’ gross sales.
Management fee included in consolidated statements of income amounted to P
=270.6 million
and P
=242.7 million in 2005 and 2004, respectively.
c. Transactions with Reco consist mainly of interest bearing cash advances to fund the PBCom
project. As of December 31, 2005 and 2004, the Parent Company owed Reco amounting to
=33.8 million and P
P
=89.8 million, respectively.
*SGVMC107838*
- 45 d. FAI has outstanding long-term loan of P
=25 million from GCK Realty Corporation, a related
party. The loan, which bears interest at 10% per annum and payable quarterly in full on or
before September 5, 2005, is included in the “Syndicated and long-term loans” under the
“Long-term Debt” account (see Note 17). The loan was paid in full on June 6, 2005.
e. EWBC has loan transactions with investees and with certain directors, officers, stockholders
and related interests (DOSRI). Existing banking regulations limit the amount of individual
loans to DOSRI, 70% of which must be secured, to the total of their respective deposits and
book value of their respective investments in the Bank. In the aggregate, loans to DOSRI
generally should not exceed the respective total capital funds or 15% of total loan portfolio,
whichever is lower, of respective companies.
BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.
The following table shows information relating to the loans, other credit accommodations and
guarantees classified as DOSRI accounts under regulations existing prior to the foregoing
circular and new DOSRI loans, other credit accommodations granted under the foregoing
circular as of December 31, 2005 and 2004:
Total outstanding DOSRI accounts
Percent of DOSRI accounts granted
under regulations existing prior to
BSP Circular No. 423
Percent of DOSRI accounts granted under
BSP Circular No. 423
Percent of DOSRI accounts to total loans
2005
P
=1,967,291
2004
=1,983,359
P
14.81%
16.80%
14.81%
14.81%
16.80%
16.80%
The following table shows information relating to the loans, other credit accommodations and
guarantees, as well as availments of previously approved loans and committed credit lines not
considered DOSRI accounts prior to the issuance of said circular but are allowed a transition
period of two years from the effectivity of said circular or until said loan, other credit
accommodations and guarantees become past due, or are extended, renewed or restructured,
whichever comes later as of December 31, 2005 and 2004:
Total outstanding non-DOSRI accounts prior to
BSP Circular No. 423
Percent of unsecured non-DOSRI accounts prior to
BSP Circular No. 423 to total loans
Percent of past due non-DOSRI accounts prior to
BSP Circular No. 423 to total loans
Percent of nonaccruing non-DOSRI accounts prior
to BSP Circular No. 423 to total loans
2005
2004
P
=11,315,080
=9,819,046
P
31.42%
31.54%
7.34%
8.05%
9.56%
9.09%
*SGVMC107838*
- 46 f.
The compensation of key management personnel consists of short-term employee salaries and
benefits amounting to P
=21.8 million and P
=21.4 million as of December 31, 2005 and 2004,
respectively.
There are no agreements between the Group and any of its key management personnel
providing for benefits upon termination of employment, except for such benefits to which
they may be entitled under the Group’s retirement plan.
g. Other transactions with related parties include interest-bearing cash advances and various
charges to and from affiliates for administrative and other expenses.
The amounts and the balances arising from the foregoing significant related party transactions are
as follows:
2005
(In Thousands)
Due from related parties (Note 6):
ALG Holdings Corporation
The Palms Country Club
Pro-Excel Property Managers, Inc.
Others
Due to related parties (Note 16):
Pacific Sugar Holdings Corp.
Reco
FCC Foundation, Inc.
Others
2004
P
=181,364
43,063
10,470
4,201
P
=239,098
=–
P
47,805
7,580
174,560
=229,945
P
P
=290,682
33,812
31,324
16,528
P
=372,346
=625,548
P
89,812
33,381
15,517
=764,258
P
21. General and Administrative Expenses
This account consists of:
2004
2005 (As restated)
(In Thousands)
Real estate operations
Interest expense
General and administrative:
Depreciation and amortization (Notes 12 and 13)
Salaries and wages and employee benefits
Taxes and licenses
Repairs and maintenance
Outside services
(Forward)
P
=375,047
=645,269
P
348,526
259,787
136,265
110,984
76,624
227,245
277,539
9,205
81,697
94,536
*SGVMC107838*
- 47 -
Travel and transportation
Rent
Entertainment, amusement and recreation
Bank charges
Provision for doubtful accounts
Retirement costs (Note 24)
Provision for decline in value of investment
Provision for impairment loss
Foreign exchange loss
Others
Marketing expenses
Financial and banking services
General and administrative:
Salaries, wages and employee benefits
Outside services
Depreciation and amortization (Notes 12 and 13)
Rent (Note 26)
Entertainment, amusement and recreation
Travel and transportation
Retirement costs (Note 24)
Others
Provision for probable losses
2004
2005 (As restated)
(In Thousands)
=46,689
P
P
=58,507
77,549
48,868
41,900
41,439
18,644
36,819
11,996
20,575
16,528
18,537
–
16,645
31,873
–
31,228
–
146,973
187,535
1,758,871
1,736,158
269,337
361,646
2,028,208
2,097,804
338,689
126,648
115,947
109,770
27,907
37,865
3,366
340,885
1,101,077
103,411
1,204,488
P
=3,302,292
299,025
113,540
127,176
95,005
60,541
34,001
4,489
202,732
936,509
107,006
1,043,515
=3,071,723
P
Revenue Regulations No. 10-2002 defines expenses to be classified as EAR expenses and sets a
limit for the amount that is deductible for tax purposes. EAR expenses are limited to 0.5% of net
sales for sellers of goods or properties or 1% of net revenue for sellers of services. For sellers of
both goods or properties and services, an appropriate formula is used in determining the ceiling of
such expenses.
*SGVMC107838*
- 48 -
22. Cost of Financial and Banking Services
This account consists of:
2004
2005
(In Thousands)
Interest and other borrowings:
Deposit liabilities
Other borrowings
P
=1,150,884
26,134
P
=1,177,018
=847,860
P
74,280
=922,140
P
23. Other Income
Other income from real estate consists of:
Interest income
Service income
Foreign currency exchange gains (losses) - net
Others
2004
2005
(In Thousands)
=205,478
P
P
=384,616
271,524
299,123
86,415
(29,349)
524,618
768,226
=1,088,035
P
P
=1,422,616
Other income (losses) from financial and banking services consist of:
Service charges, fees and commissions
Foreign exchange profits and trading gains
Foreign currency exchange losses - net
Others
2004
2005
(In Thousands)
=127,529
P
P
=194,375
66,289
210,462
(5,177)
(3,548)
375,504
108,497
=564,145
P
P
=509,786
24. Retirement Plan
EWBC has a funded noncontributory defined benefit retirement plan covering substantially all its
officers and regular employees. Under the plan, all covered officers and employees are entitled to
cash benefits after satisfying certain age and service requirements. The latest actuarial valuation
study of the plan was made on March 28, 2006.
*SGVMC107838*
- 49 Real Estate Operations has an unfunded and noncontributory defined benefit pension plan
covering all full-time regular employees. The plan provides for lump-sum benefits equivalent to
100% of the employee’s salary for every year of creditable service. The normal retirement age is
60 years old, however, an employee who attains the age of 55 with 15 years of service and opts
for an early retirement is entitled to benefits ranging from 70% to 90% of the normal retirement
pay depending on the age upon retirement. Unrealized past service costs are amortized over the
expected average future service years of plan members estimated to be 20 years.
The following tables summarize the components of net pension expense recognized in the
consolidated statements of income and the funded status and amounts recognized in the
consolidated balance sheets for the existing pension plan.
Net pension expense included in the consolidated statements of income are as follows:
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial loss
Total pension expense
2004
(As restated)
2005
(In Thousands)
=11,438
P
P
=10,761
12,446
14,516
(2,867)
(3,357)
–
(17)
=21,017
P
P
=21,903
The amounts recognized in the consolidated balance sheets for the pension plan are as follows:
Benefit obligation
Plan assets
Unrecognized net actuarial loss
Net liability
2004
(As restated)
2005
(In Thousands)
=105,968
P
P
=115,134
(31,975)
(35,332)
73,993
79,802
7,292
7,275
=81,285
P
P
=87,077
Changes in the present value of the defined benefit obligation are as follows:
At January 1
Current service cost
Interest cost
Benefits paid
Actuarial gain on obligation
At December 31
2004
2005
(In Thousands)
=104,300
P
P
=105,968
11,438
10,761
12,446
14,516
(16,198)
(16,111)
(6,018)
–
=105,968
P
P
=115,134
*SGVMC107838*
- 50 Changes in the fair value of plan assets are as follows:
At January 1
Expected return on plan assets
Contribution
Benefits paid
Actuarial loss on plan assets
At December 31
2004
2005
(In Thousands)
=27,306
P
P
=31,975
2,867
3,357
12,315
–
(11,347)
–
834
–
=31,975
P
P
=35,332
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date, applicable to the period over which the obligation is to be settled.
The principal assumptions used in determining pension benefits are as follows:
Discount rates
Salary increase rates
Expected rate of return on plan assets
2005
12.0-14.5%
6.0-8.0%
10.5%
2004
11.0-14.5%
6.0-8.0%
10.5%
25. Earnings Per Share (EPS)
The following reflects the income and share data used in the basic earnings per share
computations:
a. Net income
b. Weighted average number of outstanding
common shares
c. EPS - Basic (a/b)
2004
2005 (As restated)
(In Thousands, Except
Per Share Figures)
=533,361
P
P
=878,443
5,955,725
P
=0.147
5,955,725
=0.090
P
Treasury shares are deducted from the total outstanding shares in computing the weighted average
number of outstanding common shares.
*SGVMC107838*
- 51 -
26. Lease Commitments
The Group, as a lessor, has future minimum rental receivables under operating leases as of
December 31, 2005 as follows (in thousands):
Within one year
After one year but not more than five years
More than five years
P438,815
=
1,573,657
1,848,786
=3,861,258
P
The Group, as a lessee, has future minimum rental payables under operating leases as of
December 31, 2005 as follows (in thousands):
Within one year
After one year but not more than five years
More than five years
=126,214
P
380,919
244,184
=751,317
P
27. Contingencies
The Group is involved in various legal actions, claims and contingencies incident to the ordinary
course of the business. Management believes that any amount the Group may have to pay in
connection with any of these matters would not have a material adverse effect on the consolidated
financial position or operating results.
There are pending tax assessments and pre-assessments on the Group by the Bureau of Internal
Revenue relating to prior tax periods, a substantial portion of which pertains to issues affecting
the banking industry. The Group’s management, through their tax counsels, is contesting these
assessments and pre-assessments on the ground that factual situations were not considered and
which, if considered, would not give rise to material tax deficiencies.
28. Project Investments
FAI entered into Project Investment Agreements (PIAs) with various investors to undertake the
development of “Vivant Flats”, “Pioneer Pointe” and “2301 Civic Place” (the Projects) on FAI’s
lots (except for Pioneer Pointe where FAI acts only as project manager). Under the agreements,
the investors (co-owners and co-developers of the projects) committed to invest in the Projects by
contributing a proportionate share in the total project cost through capital contributions.
Simultaneous with the signing of the PIAs, each investor opened a trust account to be maintained
in the investor’s name. EWBC acts as the trustee and will receive, hold, manage and disburse the
fund in trust for the investor and in a manner set forth in the PIAs and Trust Agreements. The
trustee will also hold in trust for the investor, the latter’s undivided pro-rata interest and title to
the related project until the same is transferred to the name of the investor or his assignee.
*SGVMC107838*
- 52 FAI, as owner of the lots, grants in favor of the investors an option to purchase the said lots
subject to the terms and conditions as specified in the PIAs.
FAI acts as the manager of the Projects. In consideration of the services to be rendered, FAI will
receive a management fee computed at certain percentages of the total project cost. Actual
construction has started in 2004. Total costs incurred by FAI on the projects as of
December 31, 2005 and 2004 amounted to P
=586.3 million and P
=328.0 million, respectively, which
were included in “Property and Equipment” account in the consolidated balance sheets.
29. Income Taxes
The components of the Group’s deferred income tax are as follows:
2004
2005
(As restated)
(In Thousands)
Deferred income tax assets on:
NOLCO
Provisions and accruals
MCIT
Changes in amortization of discount
Unrealized foreign currency exchange losses
Others
Deferred income tax liabilities on:
Revaluation increment in land
Capitalized borrowing costs
Gain on asset foreclosuresand dacion
Unrealized foreign currency exchange gains
Future taxable rent income
Others
P
=258,973
376,433
74,259
45,663
–
23,701
P
=779,029
=256,175
P
199,779
12,006
–
12,917
7,631
=488,508
P
P
=4,040,761
1,815,549
43,494
14,932
7,351
25,313
5,947,400
P
=5,168,371
=3,684,629
P
1,512,608
20,152
–
6,721
312,758
5,536,868
=5,048,360
P
The Group did not recognize tax benefits on the following temporary differences since
management believes that the benefit will not be realized through income tax deductions in the
near future.
NOLCO
MCIT
Allowance for impairment loss
Unrealized foreign currency exchange loss
Provisions and accruals
2004
2005
(In Thousands)
=785,891
P
P
=607,190
18,721
34,791
74,834
21,740
217,563
16,740
–
162
=1,097,009
P
P
=680,623
*SGVMC107838*
- 53 Details of the Group’s NOLCO and MCIT are as follows (in thousands):
Year Incurred
2005
2004
2003
NOLCO
P401,683
=
528,207
417,223
=1,347,113
P
MCIT
=69,281
P
30,433
9,336
=109,050
P
Expiry Date
December 31, 2008
December 31, 2007
December 31, 2006
The reconciliation of the provision for income tax computed at the statutory tax rate to the actual
provision for income tax follows:
Income tax at statutory rate
Adjustments for:
Effect of change in tax rate
Interest income subjected to final tax
Nondeductible interest expense
Tax-free realized gross profit on
BOI-registered property
Tax-exempt interest income and trading gain
Unrecognized deferred tax assets
Gain on sale of investment in shares of stocks - net
Tax-free realized gross profit on sold
socialized housing units
Nondeductible financing loss
Realized gross profits on sales of club shares
Nondeductible EAR
Expired MCIT
Realized gross profit on transfer of land
Rent income covered by PEZA
Dividend income
Capital gains tax
Others
2004
2005 (As restated)
(In Thousands)
=405,616
P
P
=570,265
153,957
(90,405)
68,992
–
(62,143)
19,819
(66,367)
(58,894)
(53,404)
(28,724)
(41,780)
(73,385)
146,449
(27,468)
(16,907)
(9,062)
(6,828)
4,176
3,861
(1,772)
(1,041)
(588)
425
20,725
P
=488,409
(19,281)
–
(10,951)
4,379
93,205
(2,990)
(608)
(6,235)
581
66,622
=491,830
P
*SGVMC107838*
- 54 RA No. 9337
RA No. 9337 was enacted into law amending various provisions in the existing 1997 National
Internal Revenue Code. On October 18, 2005, the Supreme Court has rendered its final decision
declaring the validity of the RA No. 9337. Among the reforms introduced by RA No. 9337,
which became effective on November 1, 2005, are as follows:
·
·
·
·
·
·
Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Increase in value added tax (VAT) rate from 10% to 12% effective February 1, 2006 as
authorized by the Philippine President pursuant to the recommendation of the Secretary of
Finance;
Decrease in gross receipt tax (GRT) rate from 7% to 5%;
Revision of invoicing and reporting requirements for VAT;
Expansion of scope of transactions subject to VAT; and
Provision on thresholds and limitations on VAT credits that can be claimed.
Under Philippine tax laws, EWBC is subject to percentage and other taxes as well as income
taxes, principally consisting of GRT and documentary stamp taxes.
Effective in May 2004, RA No. 9294 restores the tax exemption of FCDUs and offshore banking
units (OBUs). Under such law, the income derived by the FCDU from foreign currency
transactions with nonresidents, OBUs, local commercial banks including branches of foreign
banks is tax-exempt while interest income on foreign currency loans from residents other than
OBUs or other depository banks under the expanded system is subject to 10% gross income tax.
30. Segment Information
Operating segments are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. Generally, financial information is required to
be reported on the basis that is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
The Group derives its revenues from the following reportable segments:
Real Estate
This involves acquisition of land, planning and development of large-scale fully integrated
residential and commercial communities; development and sale of residential and commercial lots
and the development and leasing of retail and office space and land in these communities;
construction and sale of residential, housing and condominiums and office buildings;
development of farm estates, industrial and business parks; operation of cinema and mall; and
property management.
*SGVMC107838*
- 55 Banking and Financial Services
This involves commercial banking operations, including savings and time deposits in pesos and
foreign currencies; commercial mortgage and agribusiness loans; payment services, fund
transfers, international trade settlements and remittances from overseas workers; trust and
investment services including portfolio management, unit funds, trust administration and estate
planning; and safety deposit facilities.
Financial information on the operations of these business segments are summarized as follows
(amounts in thousands):
Revenues
Net income
Segment assets
Less deferred tax asset
Net segment assets
Segment liabilities
Less:
Income tax payable
Deferred tax liabilities
Net segment liabilities
Cash flows arising from:
Operating activities
Investing activities
Financing activities
Real Estate Operations
2004
2005 (As restated)
=3,746,001
P
P
=4,153,697
1,524,081
1,150,748
92,697,713 103,640,369
–
–
92,697,713 103,640,369
33,727,243
41,196,802
Banking and
Financial Services
2004
(As restated)
2005
=887,084
P
P
=1,418,224
(84,347)
201,715
22,587,447
24,371,171
488,508
779,029
22,098,939
23,592,142
19,795,922
21,439,250
275
5,947,400
35,249,127
215
5,536,868
28,190,160
–
–
21,439,250
–
–
19,795,922
757,248
(2,993,205)
(891,027)
1,413,230
815,249
(1,674,848)
317,514
(3,052,940)
(660,079)
2,992,627
(3,052,940)
(107,067)
Eliminating
Revenues
Net income
Segment assets
Less deferred tax asset
Net segment assets
Segment liabilities
Less:
Income tax payable
Deferred tax liabilities
Net segment liabilities
Cash flows arising from:
Operating activities
Investing activities
Financing activities
Combined
2005
P
=5,571,921
1,352,463
117,068,884
779,029
116,289,855
62,636,052
2004
(As restated)
=4,633,085
P
1,439,734
126,227,816
488,508
125,739,308
53,523,165
275
5,947,400
56,688,377
215
5,536,868
47,986,082
1,074,762
(6,046,145)
(1,551,106)
4,405,857
(2,237,691)
(1,781,915)
Consolidated
2005
(P
=514,969)
(474,020)
(33,953,918)
–
(33,953,918)
(18,172,138)
2004
(As restated)
(P
=293,812)
(906,373)
(51,046,231)
–
(51,046,231)
(15,419,882)
2005
P
=5,056,952
878,443
83,114,966
779,029
82,335,937
44,463,914
2004
(As restated)
=4,339,273
P
533,361
75,181,585
488,508
74,693,077
38,103,283
–
–
(18,172,138)
–
–
(15,419,882)
275
5,947,400
38,516,239
215
5,536,868
32,566,200
1,159,979
2,446,354
3,203,485
(64,262)
(1,060,447)
735,542
2,234,741
(3,599,791)
1,652,379
4,341,595
(3,298,138)
(1,046,373)
*SGVMC107838*
- 56 -
31. Financial Assets and Liabilities
The following table sets forth the carrying values of financial assets and liabilities recognized as
of December 31, 2005. There are no material unrecognized financial assets and liabilities as of
December 31, 2005.
Fair Value
Carrying Value
(In Thousands)
Financial Assets
Cash and cash equivalents
Loans and receivables
Real estate operations
Financial and banking services
Financial assets at FVPL
AFS financial assets
HTM financial assets
Total financial assets
Financial Liabilities
Deposit liabilities
Accounts payable and accrued expenses
Long-term debt
Total financial liabilities
=4,828,788
P
=4,828,788
P
6,640,979
10,066,065
2,493,017
1,948,646
2,601,874
=28,579,369
P
6,640,979
10,066,065
2,493,017
2,183,650
2,601,874
=28,814,373
P
=19,995,911
P
5,393,860
11,562,549
=36,952,320
P
=19,995,911
P
5,393,860
11,562,549
=36,952,320
P
The methods and assumptions used by the Group in estimating the fair value of the financial
instruments are:
·
Cash and other cash equivalents: The carrying amounts approximate fair values considering
that these accounts consist mostly of overnight deposits and floating rate placements.
·
Loans and receivables: Fair values of loans and receivables are estimated using the discounted
cash flow methodology, using EWBC’s current incremental lending rates for similar types of
loans and receivables.
·
Due from related parties: The carrying amounts approximate fair values.
·
Debt securities: Fair values are generally based upon quoted market prices. If the market
prices are not readily available, fair values are estimated using either values obtained from
independent parties offering pricing services or adjusted quoted market prices of comparable
investments or using the discounted cash flow methodology.
·
Equity securities: Fair values are based on quoted prices published in markets. Unquoted
equity securities are allowed to be carried at cost less impairment loss, if any.
·
Liabilities: Fair values are estimated using the discounted cash flow methodology using the
Group’s current incremental borrowing rates for similar borrowings with maturities consistent
with those remaining for the liability being valued.
*SGVMC107838*
- 57 -
32. Financial Risk Management Objectives and Policies
The Group’s principal financial instruments comprise of cash and short-term deposits and bank
loans. The main purpose of these financial instruments is to raise finance for the Group’s
operations. The Group has various other financial instruments such as available-for-sale financial
assets which arise directly from the Group’s operations.
The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk,
credit risk and foreign currency risk. The Group also monitors the market price risk arising from
all financial instruments. The board reviews and agrees policies for managing each of these risks.
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’s interest rate
exposure management policy centers on reducing the Group’s overall interest expense and
exposure to changes in interest rates. The Group’s policy is to manage its interest cost using a
mix of fixed and floating interest-rate debts. The Group regularly monitors available loans in the
market which is of cheaper interest rate and substitutes high-rate debts of the Group. The Group’s
long-term debt with floating interest rate usually mature after 3-5 years from the date of
availment, while fixed term-loans mature after 5-7 years.
The Group follows a prudent policy in managing its assets and liabilities so as to ensure that
exposures to fluctuations in interest rates are kept within acceptable limits.
As a substantial proportion of EWBC’s total loan portfolio is for a term of one year or less, and
the majority of the balance of its medium-term portfolio is on a floating-rate basis. As of
December 31, 2005, 50% of EWBC’s total loan portfolio comprised of floating rate loans which
are repriced periodically by reference to the transfer pool rate which reflects the bank’s internal
cost of funds. As a result of these factors, EWBC’s exposure to interest rate fluctuations, and
other market risks, is significantly reduced. EWBC, in keeping with banking industry practice,
aims to achieve stability and lengthen the term structure of its deposit base, while providing
adequate liquidity to cover transactional banking requirements of customers. No interest is paid
on demand accounts, which as of December 31, 2005 accounted for 9.5% of total deposits, except
for a demand account product which pays a rate of interest equal to that payable on regular
savings accounts of EWBC. Rates on savings accounts and time deposit accounts, which
constituted 26% and 62%, respectively, of total deposits as of December 31, 2005 are set by
different criteria. Savings account rates are set by reference to prevailing market rates, while rates
on time deposits and special savings accounts are usually priced by reference to rates applicable
to prevailing rates on Philippine Treasury Bills and other money market instruments or, in the
case of foreign currency deposits, SIBOR and other benchmark dollar deposit rates in the Asian
and international money markets with similar maturities.
*SGVMC107838*
- 58 The method by which EWBC measures the sensitivity of its assets and liabilities to interest rate
fluctuations is by way of repricing gap. This analysis provides EWBC with a measure of the
impact of changes in interest rates on the accrual portfolio i.e. the risk exposure of future
accounting income. The repricing gap is calculated by distributing the statement of condition into
tenor buckets according to the time remaining to maturity or next repricing date and then
obtaining the difference between the total of the repricing (interest sensitive) assets and repricing
(interest sensitive) liabilities.
Liquidity Risk
The Group’s objective is to maintain a balance between continuity of funding and flexibility
through the use of bank loans. The Group’s policy is to manage its cash flow by continuously
monitoring the cash flows for interest payment and bank and notes principal payment.
As part of its liquidity risk management, the Group regularly evaluates its projected and actual
cash flows. It also continuously assesses conditions in the financial markets for opportunities to
pursue fund raising activities, in case any requirements arise. Fund raising activities may include
bank loans and capital market issues. Accordingly, its loan maturity profile is regularly reviewed
to ensure availability of funding through an adequate amount of credit facilities with financial
institutions.
Overall, the Group’s funding arrangements are designed to keep an appropriate balance between
equity and debt, to give financing flexibility while continuously enhancing the Group’s
businesses.
Credit Risk
The investment of the Group’s cash resources is managed so as to minimize risk while seeking to
enhance yield. The Group’s holding of cash and marketable securities expose the Group to credit
risk of the counterparty if the counterparty is unwilling or unable to fulfill its obligations, and the
Group consequently suffers financial loss.
It is the Group’s policy that buyers who wish to avail the in-house financing scheme are subject to
credit verification procedures. Receivable balances are being monitored on a regular basis and
subjected to appropriate actions to manage credit risk.
On credit risk arising from the other financial assets of the Group, which comprise cash and cash
equivalents and available-for-sale financial assets, the Group’s exposure arises from default of the
counterparty, with a maximum exposure equal to the carrying amount of these instruments.
EWBC manages credit risk by setting limits for individual borrowers, and groups of borrowers
and industry segments. EWBC also monitors credit exposures, and continually assesses the
creditworthiness of its borrowers. In addition, EWBC obtains security where appropriate, enters
into master netting agreements and collateral arrangements with counterparties, and limits the
duration of exposures.
*SGVMC107838*
- 59 In compliance with BSP requirements, EWBC has revised in April 2005 its internal credit risk
rating system for the purpose of measuring credit risk for every exposure in a consistent manner
as accurately as possible and use the risk information for business and financial decision making.
The system covers companies with asset size of above P
=15.0 million with audited financial
statements by SEC accredited auditors starting reporting year 2005. EWBC adopted the Bankers’
Association of the Philippines model which has been approved by the BSP as a minimum
standard for an internal risk rating system under BSP Circular 439. The system has 2 components
namely a) Borrower Risk Rating System which provides an assessment of credit risk without
considering the security arrangements and b) Facility Risk Rating which is an account rating
taking into account the collateral and other credit risk mitigants. The rating scale consists of 10
grades, 6 of which fall under unclassified accounts and 4 classified according to regulatory
provisioning guidelines).
For details of the composition of the loans and receivable portfolio refer to Note 7 to the
consolidated financial statements.
Concentrations arise when a number of counterparties are engaged in similar business activities,
or activities in the same geographic region, or have similar economic features that would cause
their ability to meet contractual obligations to be similarly affected by changes in economic,
political or other conditions. Concentrations indicate the relative sensitivity of EWBC’s
performance to developments affecting a particular industry.
The distribution of assets, liabilities, and off-balance sheet items by industry sector of EWBC as
of December 31, 2005 follows:
Industry Sector:
Trading and manufacturing
Banks and financial institutions
Construction and real estate
Consumers
Other
Liabilities
Assets
(In Thousands)
=4,418,717
P
=110,507
P
2,430,630
18,073
2,496,418
26,827
3,162,276
20,982,360
1,469,082
61,782
=13,977,123
P
=21,199,549
P
Foreign Currency Risk
Financial assets and financing facilities extended to the Group were mainly denominated in
Philippine Peso. As such, the Group’s foreign currency risk is minimal.
In translating the foreign currency-denominated monetary assets and liabilities into peso amounts,
the exchange rates used were P
=53.09 to US$1.00 and P
=56.341 to US$1.00, the Philippine peso-US
dollar exchange rates as at December 31, 2005 and 2004, respectively.
*SGVMC107838*
- 60 Foreign currency liabilities generally consist of foreign currency deposits in EWBC’s FCDU
account made in the Philippines or which are generated from remittances to the Philippines by
Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the
benefit of a third party, foreign currency deposit accounts with EWBC and foreign currency
denominated borrowings appearing in the regular books of EWBC.
Foreign currency deposits are generally used to fund EWBC’s foreign currency denominated loan
and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign
currency assets with the foreign currency liabilities held through FCDUs. In addition, the BSP
requires a 30% liquidity reserve on all foreign currency liabilities held through FCDUs.
EWBC’s policy is to maintain foreign currency exposure within acceptable limits and within
existing regulatory guidelines. EWBC believes that its profile of foreign currency exposure on its
resources and liabilities is within limits for financial institutions engaged in the type of businesses
in which EWBC is engaged.
The table summarizes EWBC’s exposure to foreign exchange risk as of December 31, 2005.
Included in the table are EWBC’s assets and liabilities at carrying amounts, categorized by
currency.
Assets
Cash and other cash items
Due from BSP
Due from other banks
Interbank loans receivable
Financial assets at FVPL
AFS financial assets
HTM financial assets
Loans and receivables
Other assets
Liabilities
Deposit liabilities
Bills and acceptances payable
Cashier’s checks and demand draft payable
Accrued taxes, interest and other expenses
Other liabilities
Net exposure
USD
Php and
Others
(In Thousands)
Total
=–
P
1,520,928
596,135
1,300,000
1,423,697
439,679
325,561
430,690
91,158
=6,127,848
P
=596,978
P
–
177,623
–
1,069,320
239,460
2,201,275
12,951,681
417,034
=17,653,371
P
=596,978
P
1,520,928
773,758
1,300,000
2,493,017
679,139
2,526,836
13,382,371
508,192
=23,781,219
P
=3,085,317
P
26,531
116,148
9,733
28,907
=3,266,636
P
=18,114,230
P
97,345
–
131,807
143,052
=18,486,434
P
=21,199,547
P
123,876
116,148
141,540
171,959
=21,753,070
P
=2,861,212
P
(P
=833,063)
=2,028,149
P
*SGVMC107838*
- 61 Market Risk
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may
result from changes in the price of a financial instrument. The value of a financial instrument
may change as a result of changes in interest rates, foreign currency exchanges rates, commodity
prices, equity prices and other market changes. EWBC’s market risk originates from its holdings
in its foreign exchange instruments, debt securities, equities and derivatives.
The Risk Management Department of EWBC is responsible for the identification, measurement,
management and control of market risk under the supervision of the Risk Management Committee
of the BOD. Market risk management is implemented under a Value-at-Risk (VaR)-based Risk
Management framework using risk measurement and control tools for standalone and portfolio
risks per currency, security dealer and the trading book.
33. Registrations with the Philippine Economic Zone Authority (PEZA)
On May 29, 2000, FAI was registered with PEZA pursuant to the provisions of Republic Act
(R.A.) No. 7916 as an Ecozone Developer/Operator to establish, develop, construct, administer
and operate a special ECOZONE to be known as the Northgate Cyber Zone - Special Economic
Zone at the FCC.
On June 6, 2000, CPI was registered with the PEZA pursuant to the provisions of R.A. No. 7916
as an Ecozone Facilities Enterprise.
On June 29, 2000, NCC was registered with the PEZA as an Ecozone Utilities Enterprise pursuant
to the provisions of R.A. No. 7916, particularly to provide bandwidth, communication lines,
internet facilities and related support services to locators at the Northgate Cyber Zone - Special
Economic Zone in FCC.
On February 13, 2002, FLI was registered with PEZA pursuant to the provisions of R.A. No. 7916
as the Ecozone Developer/Operator to lease, sell, assign, mortgage, transfer or otherwise
encumber the area designated as an Ecozone to be known as Filinvest Technology Park Calamba.
As registered enterprises, these subsidiaries are entitled to certain tax benefits and nontax
incentives such as VAT zero-rating with their local suppliers and exemption from national and
local taxes and in lieu thereof, a special five percent (5%) income tax rate based on gross income.
34. Registration with the Board of Investments (BOI)
FLI is registered with the BOI as a New Operator of a Service City on a non-pioneer status under
the Omnibus Investments Code of 1987 (Executive Order No. 226). As a registered enterprise,
FLI is entitled to certain tax and nontax incentives, subject to certain conditions.
*SGVMC107838*
- 62 -
35. Subsequent Events
On February 7, 2006, FAI, CPI and a new investor, Africa Israel, signed an investment agreement
which details the terms and conditions of Africa Israel’s investment in CPI. The new investor
agreed to subscribe to 465 million shares of CPI’s capital stock for a forty (40%) ownership over
a period of twenty four (24) months. FAI shall subscribe to additional 550 million shares through
the conversion of its advances to CPI, which shall result in 60% ownership of CPI, subject to SEC
approval. This will result in the increase of CPI’s authorized capital to P
=16 billion divided by
2 billion shares, with a par value of P
=1.00.
The proceeds of the investment shall be used to finance the construction of additional buildings at
the Northgate Cyberzone and to fund other working capital requirements of CPI.
On April 13, 2005, the BOD approved the increase in capital stock of the Parent Company to
=16 billion divided into 16 million shares with a par value of P
P
=1.00 and the declaration of 25%
stock dividends. This was approved by the SEC on January 31, 2006.
*SGVMC107838*