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SM INVESTMENTS CORPORATION (A corporation duly organized and existing under Philippine laws)
P10,000,000,000
5.2958% p.a. Series E Bonds due 2021 5.6125% p.a.Series F Bonds due 2024
Offer Price of 100% of Face Value
SM Investments Corporation (the ―Issuer‖ or ―SMIC‖ or the ―Company‖) is offering Fixed Rate Bonds (the ―Bonds‖) in the aggregate principal amount of P10,000,000,000.00 comprised of 7-year or Series E Bonds and 10-year or Series F Bonds due on 2021 and 2024 respectively, with an Over-subscription Option of up to P5,000,000,000.00 (the ―Offer‖). Assuming the Over-subscription Option is fully exercised, up to P15,000,000,000.00 in aggregate principal amount of the Bonds will be issued by the Company pursuant to the Offer on 19 May 2014 (the ―Issue Date‖). The Series E Bonds shall have a term of seven (7) years from the Issue Date, with a fixed interest rate equivalent to 5.2958% p.a. The Series F Bonds shall have a term of ten (10) years from the Issue Date, with a fixed interest rate equivalent to 5.6125% p.a. Interest on the Series E Bonds and the Series F Bonds shall be payable semi-annually in
arrears starting on November 19 and May 19 of each year for each Interest Payment Date at which the Series E Bonds and the Series F Bonds are outstanding, or the subsequent Business Day without adjustment if such Interest Payment Date is not a Business Day. The Maturity Dates of the Series E Bonds and the Series F Bonds shall be on 19 May 2021 and 19 May 2024, respectively, which will also be the last Interest Payment Dates for each respective series of the Bonds.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE SECURITIES AND EXCHANGE COMMISSION.
Issue Manager and Sole Bookrunner
Joint Lead Underwriters
Participating Underwriters
Land Bank of the Philippines United Coconut Planters Bank
Prospectus dated 25 April 2014
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The Bonds will be repaid at 100% of Face Value on the respective Maturity Dates of the Series E and Series F Bonds, unless
otherwise redeemed or purchased prior to the relevant Maturity Date, or as otherwise set out in ―Description of the Bonds – Redemption and Purchase‖ and ―Description of the Bonds – Payment in the Event of Default‖ sections on pages 56 and 61, respectively, of this Prospectus. The Bonds have been rated PRS Aaa by Philippine Rating Services Corporation (―PhilRatings‖). A rating of PRS Aaa is assigned to long-term debt securities with the smallest degree of investment risk. The Issuer‘s repayment capacity is extremely strong. A rating of PRS Aaa is the highest credit rating on PhilRatings‗ long-term credit rating scale. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organization. The Bonds shall be offered to the public at Face Value through the Underwriters named herein with the Philippine Depository & Trust Corp. (―PDTC‖) as the Registrar of the Bonds. It is intended that upon issuance, the Bonds shall be issued in scripless form, with PDTC maintaining the scripless Register of Bondholders, and, as soon as reasonably practicable, listed in the Philippine Dealing & Exchange Corp. (―PDEx‖). The Bonds shall be issued in denominations of P20,000.00 each, as a minimum, and in multiples of P10,000.00 thereafter, and traded in denominations of P10,000.00 in the secondary market. SMIC expects to raise gross proceeds amounting to at least P10,000,000,000.00, up to a maximum of P15,000,000,000.00 assuming full exercise of the Over-subscription Option. Without such Over-subscription Option being exercised, the net proceeds are estimated to be at least P9,918.36 million after deducting fees, commissions and expenses relating to the issuance of the Bonds. Assuming the Over-subscription Option is fully exercised, total net proceeds of the Offer is expected to amount to approximately P14,883.36 million. Proceeds of the Offer shall be used to finance various project expansions of the Issuer and refinance existing indebtedness (see ―Use of Proceeds‖). The Joint Lead Underwriters shall receive a fee of 0.20% on the total face value of the Bonds issued. The fee is inclusive of the fees to be ceded to Participating Underwriters. Upon issuance, the Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligations of SMIC and shall at all times rank pari passu and rateably without any preference or priority amongst themselves and at least pari passu with all other present and future unsubordinated and unsecured obligations of SMIC, other than obligations preferred by law. The Bonds shall effectively be subordinated in right of payment to all of SMIC‘s secured debts, if any, to the extent of the value of the assets securing such debt and all of its debt that is evidenced by a public instrument under Article 2244(14) of the Civil Code of the Philippines. On 18 February 2014, SMIC filed a Registration Statement with the Philippine Securities and Exchange Commission (―SEC‖), in connection with the offer and sale to the public of debt securities with an aggregate principal amount of up to P15,000,000,000 constituting the Offer (inclusive of the Over-subscription Option). The SEC is expected to issue an order rendering the Registration Statement effective, and a corresponding permit to offer securities for sale covering the Offer. The Company is allowed under Philippine laws to declare dividends, subject to certain requirements. The Company‘s Board of Directors is authorized to declare dividends only from its unrestricted retained earnings, except with respect to P108.1 billion, representing accumulated equity in net earnings of subsidiaries. Dividends may be payable in cash, shares or property, or a combination of the three, as the Board of Directors shall determine. The declaration of stock dividends is subject to the approval of shareholders holding at least two-thirds of the Company‘s outstanding capital stock. The Company‘s Board of Directors may not declare dividends which will impair its capital.
SMIC confirms that this Prospectus contains all material information relating to the Company, its affiliates and the Bonds which are in the context of the issue and offering of the Bonds (including all material information required by the applicable laws of the Republic of the Philippines). There are no other facts the omission of which would make any statement in this Prospectus misleading in any material respect. SMIC confirms that it has made all reasonable inquiries in respect of the information, data and analysis provided to it by its advisors and consultants or which is otherwise publicly available for inclusion into this Prospectus. SMIC, however, has not independently verified any such publicly available information, data or analysis. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. An investment in the Bonds described in this Prospectus involves a certain degree of risk. A prospective purchaser of the Bonds should carefully consider several risk factors inherent to the Company (detailed in ―Risk Factors‖ on pages 22 to 44 of this Prospectus), in addition to the other information contained in this Prospectus, in deciding whether to invest in the Bonds.
This Prospectus contains certain ―forward-looking statements‖. These forward-looking statements can generally be identified by use of statements that include words or phrases such as SMIC or its management ―believes‖, ―expects‖,
"anticipaiesi "intends'i "plansi "projects'i Yoresees", and other words or phrases of similar import. Similarjy,statemenLs that describe SIYIC5 objectives, plans. and goals are also forward-lookinq statements. All for\,\lard-bokingstatemenls are subject to certain risks and uncertainties that aould cause actual results to differ materially from thosecontemplated by the relevani folward,looking statements. Nothing in this proEpectus is or shoutd be retied upon as apromise or representation as to the future. The forward-looking statements included herein are made only as ofthe dateol this Pro6peclus, and S[4IC undertakes no obligation to update such forward-tooking statements pubticty to reflectsubsequent events or circumstances,
Neither the delivery of thls Prospectus nor any sale made pursuant to the Offer sha . under any circum$ance, creareany implication that the infomation contained or rcferred to in $is prospectus is accurate as of any time subsequent tothe date hereol The ljnderwriters do not make any representation or warranly, express or impljed, as to the accuGcy orcompleteness ofthe information contained in thls Prospectus,
The contents ol thls Prospectus are not to be considered as definitive legal, business or tax advice. Each prospectjvepurchaser of the Bonds receiving a copy of this Prospectls acknowledges that he has not relied on the UnderwriteE inhis investigation oflhe accuhcy ofsuch information or in his investment decision, prospective purchaseE should consulttheir own counsel/ accountanLs or other advisors as to legalr tax, business, financialand related aspects ofthe purchaseol the Bonds, among othels, Investing in the Bonds involves certain sks, For a discussion of certain factors to beconsidered in respect ofan investment in the 8onds, see the section entitled,'Risk Factors,,,
No dealer, salesman or other person has been authoriz€d by 5t4IC and the ljndeMriters to give any infomation or tomak€ any representation concerning the Bonds other than as contalned herein and, il given or made, any such otherinformatlon or representation should not be relied upon as having been authorlzed by SI4IC orthe UndeM ters,
SI4IC is organized under the laws of the Philippines. Its principal office address is at the 10s floot One E-Com Center,Harbor D ve, I\4all of Asia Complex, CBP-IA/ %say City 1300, philippines, wtth tetephone number +632 8S7 0100 andlax number +632 857 0132,
ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL INFORMATIONCONTAINED HEREIN ARE TRUE AND CURRENT.
SM Investments CorporationByi
H^RL#kPresldy Chief Executive Officer
suBscRIBED AND swoRN to before me this APR 2 5 W MAKATI9[rI, umuntexhibit ing to me his Phil ippine Passport No. EB4 05556I issued on11/ 12 / 11 at Manila
Doc. No. 4\,
i',,3iil:.#senes of 2Tff-
t/11
CIIESTERU/SORITEoSNorarylPubtic
Uniil3l Decdber2014Rol lNo.41934
PTR No. 4236044; 0l/09/14; Makati ciryrBP LRN 07903; 0l/08/09i Alb6r
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TABLE OF CONTENTS
DEFINITIONS ..................................................................................................................................... 1
SUMMARY ........................................................................................................................................... 9
SUMMARY FINANCIAL INFORMATION ......................................................................................... 16
SUMMARY OF THE OFFERING ....................................................................................................... 19
RISK FACTORS ................................................................................................................................. 22
USE OF PROCEEDS ......................................................................................................................... 45
DETERMINATION OF THE OFFER PRICE ..................................................................................... 48
PLAN OF DISTRIBUTION ................................................................................................................ 49
DESCRIPTION OF THE BONDS ..................................................................................................... 53
INTERESTS OF NAMED EXPERTS ................................................................................................. 69
CAPITALIZATION AND INDEBTEDNESS ....................................................................................... 70
DESCRIPTION OF THE ISSUER AND THE GROUP ..................................................................... 71
RECENT DEVELOPMENTS AND PROSPECTS ............................................................................. 133
MANAGEMENT‘S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ............................................................................................................................ 135
DESCRIPTION OF PROPERTIES .................................................................................................. 153
BOARD OF DIRECTORS AND MANAGEMENT OF THE ISSUER ........................................... 158
MARKET PRICE OF AND DIVIDENDS ON THE ISSUER‘S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................................................................................ 166
DESCRIPTION OF DEBT ............................................................................................................... 172
TAXATION ....................................................................................................................................... 173
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DEFINITIONS In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set out below.
Aggregate Consolidated
Indebtedness
the total of bank loans, current and noncurrent portions of long-term
debt, net of pledged time deposits
Alpha Star Alpha Star Holdings Limited
Anchor Tenant the primary tenants in any given Mall
Articles of Incorporation the Articles of Incorporation of SMIC as amended to date
BDO or Bank BDO Unibank, Inc.
BDO Capital BDO Capital & Investment Corporation, an investment house and a wholly-owned subsidiary of BDO
BIR the Bureau of Internal Revenue of the Philippines
Board or Board of Directors the Board of Directors of SMIC
Bondholder a person or entity whose name appears, at any time, as a holder of the
Bonds in the Register of Bondholders
Bonds refers collectively to the Series E and Series F Bonds in the aggregate principal amount of P10,000,000,000, and an Over-subscription Option of
up to P5,000,000,000, to be issued by SMIC and which will mature on
19 May 2021 and 19 May 2024, respectively
BSP Bangko Sentral ng Pilipinas, the Philippine Central Bank
Business Day means a day, other than Saturday, Sunday and public holidays, on which
facilities of the Philippine banking system are open and available for clearing and banks are generally open for the transaction of business in the
cities of Pasay and Makati
By-laws the By-laws of SMIC as amended to date
China Bank China Banking Corporation
CDHI Costa del Hamilo, Inc.
Company, Issuer or SMIC SM Investments Corporation
Debt-equity ratio the ratio of Aggregate Consolidated Indebtedness or total stockholders‘ equity (excluding non-controlling interest) compared to the sum of such
Aggregate Consolidated Indebtedness and total stockholders‘ equity (excluding non-controlling interest)
Directors the directors of SMIC
DOSRI Directors, officers, stockholders and related interests
EPCIB Equitable PCI Bank, Inc.
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Financial Statements SMIC‘s audited consolidated financial statements and related notes as at
31 December 2011, 2012 and 2013, and for each of the three years in the period ended 31 December 2011, 2012 and 2013.
GFA gross floor area
Government the Government of the Philippines
Grand China Grand China International Limited
Gross profit margin sales minus cost of sales
Group SMIC, its subsidiaries and associated companies
GSIS Government Service Insurance System
Hedging Transactions ―Hedging Transactions‖ means any transaction pursuant to which:
(i) a bank deposit held in a currency other than Pesos; or (ii) securities or
instruments denominated in a currency other than Pesos issued or guaranteed by (a) the Republic of the Philippines (or any agency,
instrumentality, ministry, department or other authority thereof) or (b)
entities which are rated at least ‗A‘ (long-term) by Standard & Poor‘s Ratings Services (or any successor) or ‗A2‘ (long-term foreign currency
senior unsecured debt rating) by Moody‘s Investors Service Inc. (or any successor), relating to, or acquired with, the proceeds of non-Peso
denominated indebtedness for borrowed monies, that is pledged for the purposes of raising an equivalent amount of Peso denominated
indebtedness for borrowed monies, such transaction being for the sole
purpose of limiting the currency exchange risk of such non-Peso denominated indebtedness for borrowed monies in the ordinary course of
business
HPI Highlands Prime, Inc.
Home World Home World Shopping Corporation
Issue Manager and Sole
Bookrunner
BDO Capital & Investment Corporation
Joint Lead Underwriters BDO Capital, BPI Capital Corporation, China Bank and First Metro
Investment Corporation pursuant to the Underwriting Agreement
Kultura Kultura Stores, Inc.
Major Consignors Hardware Workshop, Home World, Baby Company, Signature Lines,
Supplies Station, Toy World, Watsons, Sports Central and Kultura
Majority Bond Holders Representing not less than 51% of the outstanding Bonds
Makro Prime Metro Estate, Inc.
Malls SM City North EDSA, SM Mall of Asia, SM Megamall, SM Aura Premier, SM City
Southmall, SM City BF Paranaque, SM City Fairview, SM City San Lazaro, SM City
Marikina, SM City Manila, SM City Sta. Mesa, SM City Bicutan, SM City Sucat, SM Center Valenzuela, SM City Novaliches, SM Center Muntinlupa, SM Center
Las Pinas, SM Center Pasig, SM City Cebu, SM City Dasmarinas, SM Lanang
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Premier, SM City Clark, SM City Pampanga, SM City Davao, SM City General
Santos, SM City Bacoor, SM City Baguio, SM City Iloilo, SM City Consolacion, SM City Tarlac, SM City Taytay, SM City Marilao, SM City Masinag, SM City Cagayan
de Oro, SM City Sta. Rosa, SM City Batangas, SM City Lucena, SM City Lipa, SM
City Naga, SM City Bacolod, SM City Calamba, SM City Rosales, SM City Baliwag, SM City Rosario, SM City San Pablo, SM Center Molino, SM City
Olongapo, SM City San Fernando (see ―Description of the Issuer and the Group — Malls and Real Estate — SM Prime Holdings, Inc. —Malls‖)
Management Companies companies that manage and operate the Malls, including the provision
of manpower, maintenance and engineering, security and promotional activities; and are controlled, directly or indirectly, by the Sy Family
Master Certificate of
Indebtedness
the certificate to be issued by the Issuer to the Trustee evidencing and
covering such amount corresponding to the Bonds
Material Subsidiary SM Prime Holdings, Inc., SM Retail Inc., SM Mart, Inc., Supervalue Inc.
and Super Shopping Market, Inc. and shall include BDO Unibank, Inc. (prior to it becoming a Subsidiary and thereafter shall be tested as a
Material Subsidiary pursuant to this Condition), and any Subsidiary of
the Issuer:
(a) whose gross revenues or (in the case of a Subsidiary which itself
has subsidiaries) consolidated gross revenues, as shown by its latest audited income statement are at least 10% of the consolidated gross
revenues as shown by the latest published audited consolidated
income statement of the Issuer and its Subsidiaries; or
(b) whose net income or (in the case of a Subsidiary which itself has
subsidiaries) consolidated net income before taxation and extraordinary items, as shown by its latest audited income statement
is at least 15% of the consolidated net income before taxation and extraordinary items, as shown by the latest published audited
consolidated income statement of the Issuer and its Subsidiaries; or
(c) whose gross assets or (in the case of a Subsidiary which itself has subsidiaries) gross consolidated assets, as shown by its latest audited
balance sheet are at least 10% of the amount which equals the amount included in the consolidated gross assets of the Issuer and its
Subsidiaries as shown by the latest published audited consolidated
balance sheet of the Issuer and its Subsidiaries;
provided that, in relation to paragraphs (a), (b) or (c) above:
(i) in the case of a corporation or other business entity becoming a Subsidiary after the end of the financial period to which the
latest consolidated audited accounts of the Issuer relate, the
reference to the then latest consolidated audited accounts of the Issuer for the purposes of the calculation above shall, until
consolidated audited accounts of the Issuer for the financial period in which the relevant corporation or other business entity
becomes a Subsidiary are published, be deemed to be a reference to the then latest consolidated audited accounts of the Issuer
adjusted to consolidate the latest audited accounts (consolidated
in the case of a Subsidiary which itself has Subsidiaries) of such Subsidiary in such accounts;
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(ii) if at any relevant time in relation to the Issuer or any
Subsidiary which itself has Subsidiaries no consolidated accounts are prepared and audited, revenues, net income or gross assets
of the Issuer and/or any such Subsidiary shall be determined on
the basis of pro forma consolidated accounts prepared for this purpose by the Issuer and reviewed by the auditors for the
purposes of preparing a certificate thereon to the Trustee;
(iii) if at any relevant time in relation to any Subsidiary, no
accounts are audited, its revenues, net income or gross assets (consolidated, if appropriate) shall be determined on the basis of
pro forma accounts (consolidated, if appropriate) of the relevant
Subsidiary prepared for this purpose by the Issuer and reviewed by the auditors for the purposes of preparing a certificate thereon
to the Trustee; and
(iv) if the accounts of any Subsidiary (not being a Subsidiary
referred to in proviso (i) above) are not consolidated with those of
the Issuer, then the determination of whether or not such Subsidiary is a Material Subsidiary shall be based on a pro forma
consolidation of its accounts (consolidated, if appropriate) with the consolidated accounts (determined on the basis of the
foregoing) of the Issuer; or
(d) to which is transferred the whole or substantially the whole of the
assets of a Subsidiary which immediately prior to such transfer was a
Material Subsidiary, provided that the Material Subsidiary which so transfers its assets shall forthwith upon such transfer cease to be a
Material Subsidiary and the Subsidiary to which the assets are so transferred shall cease to become a Material Subsidiary as at the date
on which the first published audited accounts (consolidated, if
appropriate) of the Issuer prepared as of a date later than such transfer are issued unless such Subsidiary would continue to be a
Material Subsidiary on the basis of such accounts by virtue of the provisions of (a), (b) or (c) above.
Metro Manila the metropolitan area comprising the cities of Caloocan, Las Piñas,
Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Navotas, Parañaque, Pasay, Pasig, Quezon, San Juan, Taguig and Valenzuela and
the municipality of Pateros, which together comprise the ―National Capital Region‖ and are commonly referred to as ―Metropolitan Manila‖
MR Motion for Reconsideration
MRDC Multi-Realty Development Corporation
NCCTs Non-Cooperative Countries and Territories
Offer the offer of the Bonds to the public by the Issuer under the terms and
conditions as herein contained
Offer Period the period commencing within two Business Days from the date of the issuance of the SEC Permit to Sell Securities, during which the Bonds shall
be offered to the public
PAS Philippine Accounting Standards
5
Paying Agent Philippine Depository & Trust Corp., the party which shall receive the funds
from the Issuer for payment of principal, interest and other amounts due on the Bonds and remit the same to the Bondholders based on the records
shown in the Register of Bondholders
Payment Date each of the dates when payment of principal, interest and other amounts due on the Bonds are due and payable to the Bondholders; provided that,
in the event any Payment Date falls on a day that is not a Business Day, the Payment Date shall be automatically extended without adjustment to
interest accrued to the immediately succeeding Business Day
PDEx Philippine Dealing & Exchange Corporation
PDIC The Philippine Deposit Insurance Corporation
PDTC the Philippine Depository & Trust Corporation, the central depository and
clearing agency of the Philippines which provides the infrastructure for handling the lodgment of the scripless Bonds and the electronic book-entry
transfers of the lodged Bonds in accordance with the PDTC Rules, and its
successor-in-interest
PDTC Rules the SEC-approved rules of the PDTC, including the PDTC Operating
Procedures and PDTC Operating Manual, as may be amended,
supplemented, or modified from time to time
Person any individual, firm, corporation, partnership, association, joint venture,
tribunal, limited liability company, trust, government or political subdivision or agency or instrumentality thereof, or any other entity or organization
Pesos or P the lawful currency of the Philippines
PFRS Philippine Financial Reporting Standards which includes statements
named PFRS and PAS issued by the Financial Reporting Standards Council and Philippine Interpretations from International Financial Reporting
Interpretations Committee (IFRIC)
Philippines the Republic of the Philippines
PSE The Philippine Stock Exchange, Inc.
Public Debt means any present or future indebtedness in the form of, or represented
by bonds, notes, debentures, loan stock or other securities that are at the time, or are of the type customarily quoted, listed or ordinarily dealt in on
any stock exchange, over the counter or other securities market
R.A. No. 8799 Republic Act No. 8799, The Securities Regulation Code of the Philippines
Register of Bondholders the electronic record of the issuances, sales and transfers of the Bonds to
be maintained by the Registrar pursuant to and under the terms of the Registry and Paying Agency Agreement
Registrar the Philippine Depository & Trust Corporation, being the registrar
appointed by the Issuer to maintain the Register of Bondholders pursuant to the Registry and Paying Agency Agreement
Reorganization The reorganization of certain companies and assets of the SM Group as
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discussed in the section ―Recent Developments and Prospects‖ on page
133 of this Prospectus
Retail Affiliates retail companies, directly or indirectly, related to SMIC and/or the Sy Family, via ownership and/or control, including Watsons, Toy World,
Home World, Ace Hardware Phils., Inc., Surplus Marketing Corp., Star Appliance Center, Inc., Nursery Care Corporation, Supplies Station,
Sports Central and Kultura, among others
Retail Subsidiaries the Group‘s retail and merchandising business, including SM Department Stores, SM Supermarkets, SM Hypermarkets, SaveMore and Waltermart
Supermarket
ROA return on assets which measures the ratio of net income attributable to equity holders of the parent to average total assets
ROE return on equity which measures the ratio of net income attributable to equity holders of the parent to average total equity (excluding
non-controlling interest)
ROPA holdings in real and other properties acquired
Sanford Sanford Marketing Corporation (formerly Sanford Investments Corp.)
SEC the Securities and Exchange Commission of the Philippines
SEC Permit the Permit to Sell Securities issued by the SEC in connection with the Offer
Singapore Stock Exchange or SGX-ST
Singapore Exchange Securities Trading Limited
Shares common shares of the Issuer, which have a par value of =P10 per share
SM China Companies SM Shopping Center (Chengdu) Co. Ltd., Xiamen SM City Co. Ltd. and Xiamen SM Mall Management Co. Ltd. (together, ―SM Xiamen‖) and
SM International Square Jinjiang City Fujian (―SM Jinjiang‖) and
SM Shopping Center (Suzhou) Co. Ltd. (―SM Suzhou‖)
SM Department Stores the retail department stores operated by the Group under the ―SM‖ name
which presently include SM Quiapo, SM Makati, SM Cubao, SM Harrison,
SM North EDSA, SM Sta. Mesa, SM Megamall, SM Cebu, SM Southmall, SM Bacoor, SM Fairview, SM Mandurriao, SM Manila, SM Pampanga, SM
Davao, SM Cagayan de Oro, SM Bicutan, SM Lucena, SM Baguio, SM Marilao, SM Dasmariñas, SM Batangas, SM Delgado, SM San Lazaro, SM
Sucat, SM Sta. Rosa, SM Clark, SM Mall of Asia, SM Lipa, SM Bacolod, SM
Taytay, SM Marikina, SM Baliwag, SM Naga, SM Rosales, SM Rosario, SM Tarlac, SM San Pablo, SM Calamba, SM Novaliches, SM Masinag and SM
Olongapo, SM Consolacion, SM Lanang, SM General Santos City, SM San Fernando, SM Aura, SM BF Paranaque
SM Mart SM Mart, Inc., a 65.0% owned subsidiary through SM Retail
SMDC SM Development Corporation
SM Hotels SM Hotels and Conventions Corp. (formerly SM Hotels and Entertainment Corp.)
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SM Land SM Land, Inc. (formerly Shoemart, Inc.) which was merged with SM
Prime in October 2013
SM Malls in China SM Xiamen and Xiamen/Lifestyle Center, SM City Jinjiang, SM City Chengdu, SM City Suzhou, and SM City Chongqing
SM Network suppliers, tenants and other merchants that do business with entities affiliated with SMIC
SM Prime SM Prime Holdings, Inc.
SM Retail SM Retail, Inc. and its subsidiaries SM Department Stores, Supervalue,
Inc., Sanford Marketing Corporation, Super Shopping Market, Inc. and Waltermart Supermarket, Inc.
SME small and medium enterprise
Sports Central Sports Central (Manila), Inc.
SSMI Super Shopping Market, Inc.
SSS Social Security System, the Philippines‘ state pension fund for retired
private sector employees
Store Consignors suppliers who are allocated portions of the selling areas within the
relevant departments of SM Department Stores within which to sell their
merchandise. See ―Description of the Issuer and the Group — Retail and Merchandising — SM Department Stores‖
Subsidiary at any particular time, any company or other business entity which is then
directly or indirectly controlled, or more than 50%, of whose issued equity share capital (or equivalent) is then beneficially owned, by the Issuer
and/or one or more of its Subsidiaries. For a company to be ―controlled‖ by another means that the other (whether directly or indirectly and whether
by the ownership of share capital, the possession of voting power, contract or otherwise) has the power to appoint and/or remove all or the majority of
the members of the board of directors or other governing body of that
company or otherwise controls or has a power to control the affairs and policies of that company and control shall be construed accordingly.
Supplies Station Supplies Station, Inc.
SVI Supervalue, Inc.
Sy Family Mr. Henry Sy, Sr., his wife, Mrs. Felicidad T. Sy, and their children Teresita
T. Sy, Elizabeth T. Sy, Henry T. Sy, Jr., Hans T. Sy, Herbert T. Sy and Harley
T. Sy
Tax Code the amended Philippine National Internal Revenue Code of 1997 and its
implementing rules and regulations
Total Assets consolidated total assets of the Issuer and its subsidiaries
Total Liabilities the aggregate of consolidated total current and consolidated total noncurrent liabilities of the Issuer as derived from the balance sheet of the
relevant Accounts, excluding (i) any Peso denominated indebtedness for
8
borrowed monies entered into with respect to any Hedging Transaction
and (ii) non-controlling interests
Total Equity the total consolidated equity of the Issuer as derived from the balance sheet of the relevant Accounts
Toy World International Toy World, Inc.
Trustee Philippine National Bank Trust Banking Group, the entity appointed by the Issuer which shall act as the legal title holder of the Bonds and shall
monitor compliance and observance of all covenants of and performance by the Issuer of its obligations under the Bonds and enforce all possible
remedies pursuant to such mandate
Underwriters the entities appointed as the Underwriters for the Bonds pursuant to the Underwriting Agreement
Watsons Watsons Personal Care Stores (Philippines), Inc.
Waltermart Waltermart Supermarket, Inc.
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SUMMARY
The summary below is only intended to provide a limited overview of information described in more detail elsewhere in this Prospectus. As it is a summary, it does not contain all of the information that may be important to investors and terms defined elsewhere in this Prospectus shall have the same meanings when used in this summary. Prospective investors should therefore read this Prospectus in its entirety.
The Issuer and the Group Overview
The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The
Issuer was incorporated in the Philippines on 15 January 1960. On 03 June 2009, the SEC approved the amendment of SMIC‘s Articles of Incorporation for the extension of the Company‘s corporate life for another
50 years from 15 January 2010. Its registered office is at the 10th Floor, One E-Com Center, Harbor Drive,
Mall of Asia Complex, CBP-1A, Pasay City, Metro Manila, Philippines. Through its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses located in the Philippines.
The Group‘s business activities and interests are divided into three principal business segments:
Retail merchandising through its department stores, supermarkets, SaveMore, hypermarkets and
Waltermart (SM Retail);
Property group composed of the following:
- Shopping mall developments, where it is the leading shopping mall operator in the
Philippines (SM Prime);
- Real estate development and tourism (SM Prime and its subsidiaries SMDC, CDHI and HPI);
- Hotels and conventions (SM Hotels); and
Financial services, through its associate banks that have universal banking licenses in the
Philippines (BDO and China Bank).
As of the date of this Prospectus, the Issuer had four principal consolidated subsidiaries namely SM Prime,
SM Retail, SVI and SSMI and two principal equity-accounted associates, namely BDO and China Bank, each
of whose shares are listed on the PSE, except for SM Retail, SVI and SSMI, in which the Issuer had effective interests of 51.6%, 100.0%, 100.0%, 100.0%, 46.7%, and 20.0%, respectively.
For the years ended 31 December 2011, 2012 and 2013, the Issuer‘s audited consolidated revenues were
P199,915.6 million, P223,877.3 million and P253,292.8 million respectively, and its audited consolidated net
income attributable to equity holders of the parent were P21,224.6 million, P24,674.4 million and P27,445.7 million, respectively.
As at 31 December 2011, 2012 and 2013, the Issuer‘s audited consolidated total assets were
P449,062.1 million, P561,804.0 million and P632,994.2 million respectively, and its audited total equity was P222,286.9 million, P261,645.0 million and P300,240.8 million respectively.
The principal source of consolidated revenue of the Issuer is from sales of merchandise, primarily from Retail Subsidiaries, which contributed P148,182.1 million, P158,888.4 million and P180,873.0 million
respectively, or 74.1%, 71.0% and 71.4% respectively, of its consolidated revenues for the years ended
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31 December 2011, 2012 and 2013. Property contributed P42,553.0 million, P53,112.7 million and
P55,691.9 million or 21.3%, 23.7% and 22.0% respectively, of the Issuer‘s consolidated revenues for the years ended 31 December 2011, 2012 and 2013. The Shopping Malls, Real Estate Group and Retail
Subsidiaries contributed P14,611.3 million, P16,180.0 million and P15,626.9 million respectively, of the Issuer‘s consolidated net income attributable to equity holders of the parent for the years ended
31 December 2011, 2012 and 2013.
History
Mr. Henry Sy, Sr., the founder of the Group, embarked upon his retailing career immediately after the
Second World War when, in 1945, he established a small shoe store in Carriedo, Metro Manila. Having opened six shoe stores, Mr. Sy diversified the business into clothing and soft goods. In 1958, the first Shoe
Mart store opened in Rizal Avenue, Metro Manila and, following the incorporation of Shoemart in March
1960, additional stores opened in Makati Commercial Center in 1962, in Cebu in 1965 and in Cubao in 1967. Four department stores were opened during the 1970s and, with the intention that one-stop shopping
convenience be provided to customers, the new stores featured fast food centers and entertainment areas.
Shoemart operated six SM Department Stores until November 2001, when five stores were transferred to
SM Mart. As at December 31, 2013, SM Mart is a 65.0% owned subsidiary through SM Retail, with the remaining 35.0% held by the Sy Family. Pursuant to a restructuring of the Issuer‘s department store
business in 2002, SM Mart took over most of Shoemart‘s functions in managing its department store business, such as merchandising, marketing, advertising and certain other services for the SM Department
Stores as well as for its Retail Affiliates. The Group acquired its supermarket and hypermarket operations in June 2006. Shoemart was renamed SM Land, Inc. As at December 31, 2013, the Issuer, through SM Retail,
operates 48 SM Department Stores, 39 SM Supermarkets, 93 SaveMore stores, 39 SM Hypermarkets and 22
Waltermart supermarkets.
Capitalizing upon the success of the SM Department Stores and as an extension of the concept of one-stop shopping, the first shopping mall, SM City — North EDSA, commenced operations in Quezon City in 1985.
By January 1994, four shopping malls had been opened, including SM Megamall, the largest shopping mall
in the Philippines. SM Prime was incorporated in 1994 for the primary purpose of acquiring from other members of the Group, as well as companies affiliated to the Sy Family, the shopping malls and land
intended for the development of shopping malls and, henceforth, to be the Group vehicle for commercial center operations. SM Prime undertook its initial public offering on the PSE in July 1994, raising
approximately P6.0 billion. SM Prime currently owns and operates, with the assistance of certain
Management Companies, 48 shopping malls in the Philippines. In November 2007, SM Prime approved the acquisition from the Sy Family of three malls in the southern and western parts of China, namely Xiamen,
Jinjiang and Chengdu and completed the acquisition in May 2008. SM Suzhou and SM Chongqing in China opened in September 2011 and December 2012 respectively. SM Prime intends to open SM Zibo in 2014
and SM Tianjin in 2015.
The Issuer‘s expansion into real estate development commenced in October 1974 with the incorporation of
MRDC. MRDC was formed to develop high-rise condominiums and townhouse units in the prime district of Makati.
In November 1976, Mr. Henry Sy, Sr. acquired Acme Savings Bank, which was renamed Banco de Oro
Savings and Mortgage Bank in August 1977 and then as Banco de Oro Commercial Bank in December 1994.
The Bank initially provided services predominantly to suppliers of Shoemart, but has subsequently developed into a full-service commercial bank. In August 1996, the Bank was renamed Banco de Oro
Universal Bank when the BSP granted approval for the Bank to operate as an expanded commercial bank. Banco De Oro undertook its initial public offering and was listed on the PSE in May 2002, raising P2.1 billion.
In May 2007, the Bank merged with EPCIB and was subsequently renamed Banco De Oro Unibank, Inc. on 6 February 2008. On 04 November 2011, the Bank was renamed to BDO Unibank, Inc. as part of the
11
company‘s branding initiatives.
In 1986, the Group obtained majority ownership of SM Fund, Inc., a closed-end investment company listed
on the PSE. In May 1996, the SEC approved a change of name of the company to SM Development Corporation and a change of its purpose to property holding and development. The Group has also
diversified into tourism and entertainment with plans for the development of mixed-use complexes in Cebu,
Tagaytay, Batangas, Baguio and Metro Manila, which include hotels, convention centers, shopping malls and leisure and entertainment facilities. On 1 August 2007, the Issuer approved to rationalize Shoemart as
the holding entity for the various property projects of the Group. On 8 October 2007, the Issuer and Shoemart entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965 common shares
in SMDC in exchange for 372,212 common shares in Shoemart based on an independent valuation of the respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC approved the
valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212 shares.
On 2 April 2008, SM Hotels was incorporated to further focus on and develop the Group‘s hotel business,
and rationalize the Group‘s hotel and convention assets under one entity. On 29 March 2010, the SEC approved the change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and
Conventions Corp.
On 31 May 2013 the Group embarked on a highly transformational transaction to consolidate all of its real
estate interests under SM Prime in line with the Group‘s vision to create a leading integrated real estate company in Asia, increase synergies and organizational efficiencies among the Group‘s various real estate
business units and further enhance the value of the SM Group‘s real estate businesses. As of the date of this Prospectus, the Group has successfully completed the reorganization resulting to SM Prime becoming one
of the largest real estate companies in South East Asia with total assets of P335,583.7 million as of
December 31, 2013 and an aggregate land bank of more than 914 hectares (see ―Recent Developments and Prospects‖ on page 133).
SMIC was listed on the PSE on 22 March 2005, and as at 25 April 2014, had a market capitalization of
P587,251 million, based on a price of P734.50 per common share on such date.
Strategy
The Issuer‘s strategy is focused on growing its commercial center, retail, property and financial services
businesses, and maintaining or attaining market leadership in each of their respective sectors. The Issuer
will continue to target the mass market in the Philippines by offering essential goods and services such as food, clothing, housing and financial services.
The Issuer is responsible for setting Group policy and strategy. The Issuer establishes the financial and
operating policies for the Group and supervises and monitors the performance of its subsidiaries and associates.
Key elements of the Issuer‘s strategy are to:
maintain its leading market share in the shopping mall sector by continuing to expand the Group‘s
mall and retail activities into major centers of population in Metro Manila and particularly in the provinces where there are opportunities for growth, and capture strategic opportunities overseas
particularly China;
continue to capture a significant share of retail spending in the Philippines, including what it
believes is a significant share of approximately US$21.4 billion for 2012 (based on BSP data) in
remittances from overseas Filipino workers by ensuring that the Issuer provides the most attractive retail and leisure facilities to Philippine mass market consumers;
12
continue to grow its financial services businesses, including through acquisitions by BDO, and
develop further synergies between financial services and its shopping malls and the Retail Subsidiaries by encouraging its suppliers and retail customers to take advantage of and utilize the
financial services offered by BDO and China Bank;
diversify and expand the businesses of the Group (including through acquisition) by developing
opportunities in the property development, tourism and leisure sectors, where it believes there are
significant opportunities for growth as the Philippines becomes a more attractive tourist destination, by leveraging the Group‘s significant and strategically located land bank;
integrate all land banking functions into a centralized department while retaining the highly
successful culture that allowed the Group to reach its strong current land bank position, and
continue acquiring land bank that is suitable for mid-to-large scale mixed-use master planned projects in fast growing areas of the Philippines;
supervise a range of related businesses and investments, providing support, expertise and funding
to its developing businesses and encouraging further growth in its more established businesses;
and
promote the independence of its various businesses in terms of executing set strategies and
encouraging financial independence in terms of external funding.
Strengths
The Issuer believes that the key strengths of the Group are as follows:
a well-established platform providing quality services from retail to real estate development to
financial services to cater for the domestic consumption growth in the Philippines;
its 56 years of retail experience, which has created significant goodwill among its customers and
suppliers, a well-known brand and image and a reputation for providing value for customers;
its leading market share positions in providing one-stop experience through shopping malls,
department stores and supermarkets and the largest bank in the Philippines in terms of assets;
fast growing residential development expertise that is sitting at the sweet spot of the local real
estate markets, well-supported by SM-branded shopping malls nearby;
prudent financial management and a strong balance sheet with stable recurring cash flows through
focusing on diverse businesses which are relatively less cyclical;
its experienced management team, which has consistently focused on related businesses that
promote synergies; and
its overall corporate reputation in the Philippines and abroad, which has brought the Group
numerous awards for corporate excellence, corporate governance and financial management.
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Risks of Investing Before making an investment decision, investors should carefully consider the risks associated with an investment in the Bonds. These risks include:
Risks Relating to the Company
The Issuer is primarily a holding company and payments under the Bonds are structurally
subordinated to all liabilities of the Issuer‘s subsidiaries and associates
Any restriction or prohibition on the Issuer‘s subsidiaries‘ and associates‘ ability to distribute
dividends would have a negative effect on its financial condition and results of operations
The Issuer is controlled by the Sy Family, whose interests may not be the same as those of other
shareholders
The Issuer‘s businesses have significant levels of related party transactions and are interdependent,
and any material adverse change in one member of the Group could adversely affect the results of operations of other members of the Group, including SMIC
The Issuer depends on members of the Sy Family as regards the management of its business
The Issuer has conducted and may continue to conduct acquisitions, the impact of which could be
less favorable for its activities and results than anticipated, or which could affect its financial
situation
Infringement of the SM intellectual property rights would have a material adverse effect on the
Group‘s business
The Group‘s debt leverage will be increased following the issue of the Bonds
Risks Relating to the Group’s Real Estate and Property Businesses
The Philippine property market is cyclical and can be affected by domestic and global economic
conditions
SM Prime may face challenges of title to land
SM Prime will continue to compete with other mall operators and commercial and residential
developers
SM Prime is exposed to risks associated with the operation of its malls and commercial businesses
SM Prime faces numerous risks including reputational risk and operational risks relating to its
residential and commercial businesses
Property development in the Philippines is capital intensive, and the necessary funding may not
be available
Malls and other commercial properties owned by SM Prime may be subject to an increase in
operating and other expenses
14
SM Prime faces risks relating to the management of its land bank
SM Prime operates in a highly regulated environment and it is affected by the development and
application of regulations in the Philippines
SM Prime may suffer material losses in excess of insurance proceeds
The Group faces property development risk
Risks Relating to the Retail Operations
The success of the Retail Subsidiaries and Retail Affiliates will be dependent in part on the Issuer‘s
continued ability to satisfy consumer preferences and spending trends in the markets in which the
Retail Subsidiaries operate
The Retail Subsidiaries depend on their ability to retain existing suppliers and secure new suppliers
Non-renewal of leases or substantial increases in rent for the Issuer‘s retail stores may have a
material adverse effect on the Issuer
The future growth of the Retail Subsidiaries will be largely driven by the effectiveness and success
of their expansion strategy
The Retail Subsidiaries and Retail Affiliates may be subject to increasing competitive pressures
There can be no assurance that the Retail Subsidiaries are fully insured against unexpected losses
The Retail Subsidiaries‘ business activities are subject to seasonality and timing
The supermarket and hypermarket industry is highly competitive and characterized by narrow
profit margins
As a result of selling food products, the Group faces the risk of exposure to product liability claims
and adverse publicity
Risks Relating to the Banks
The Philippine banking industry is highly competitive and increasing competition may result in
declining margins in the banks‘ principal businesses
Philippine banks are generally exposed to higher credit risks and greater market volatility than
banks in more developed countries
Philippine banks‘ ability to assess, monitor and manage risks inherent in its business differs from
the standards of its counterparts in more developed countries
Philippine banks face regulatory pressure to comply with new capital standards
15
Risks Relating to the Philippines
Substantially all of the Group‘s operations and assets are based in the Philippines; a slowdown in
economic growth in the Philippines could materially adversely affect its businesses
Any political instability in the future may have a negative effect on the Group‘s financial results
SM Group‘s businesses may be disrupted by terrorist acts, crime, natural disasters and outbreaks of infectious diseases or fears of such occurrences in Metro Manila or other parts of the Philippines
Volatility in the value of the Peso against the U.S. dollar and other currencies could adversely affect
the Group‘s businesses
Corporate governance and disclosure standards in the Philippines may differ from those in more
developed countries
Risks Relating to the Bonds
The priority of debt evidenced by a public instrument
An active trading market for the Bonds may not develop
The Issuer may be unable to redeem the Bonds
Please refer to the section entitled ―Risk Factors‖ on page 22 of this Prospectus which, while not intended to be an exhaustive enumeration of all risks, must be considered in connection with a purchase of the Bonds.
16
SUMMARY FINANCIAL INFORMATION
The following tables set forth the summary consolidated financials of the Issuer as at and for the periods
indicated. The selected financial information presented below as at 31 December 2011, 2012 and 2013
and for each of the three years in the periods ended 31 December 2011, 2012 and 2013 has been derived
from the Issuer‘s consolidated financial statements. The information set out below should be read in
conjunction with, and is qualified in its entirety by reference to, the relevant consolidated financial
statements of the Issuer, including the notes thereto, included elsewhere in this Prospectus.
Consolidated Balance Sheets
As at 31 December
(in P thousands) 2011 2012 2013
ASSETS
Current Assets
Cash and cash equivalents 56,050,322 60,714,720 50,209,657
Time deposits and short-term investments 879,410 29,090,335 28,912,650
Investments held for trading and sale 1,939,709 2,854,541 1,118,980
Receivables 11,764,852 16,365,552 26,637,734
Merchandise inventories – at cost 13,436,456 13,402,762 13,232,308
Other current assets 17,189,740 23,458,208 42,827,624
Total Current Assets 101,260,489 145,886,118 162,938,953
Noncurrent Assets
Available-for-sale investments 12,453,181 16,912,646 16,499,092
Investments in shares of stock of associates and joint ventures
88,417,849 128,453,744 138,994,366
Time deposits 37,416,562 29,432,850 27,080,950
Property and equipment 15,092,354 17,186,517 18,323,380
Investment properties 131,275,911 149,970,690 192,609,189
Land and development 23,012,453 30,197,862 25,666,930
Intangibles 15,354,200 15,354,200 20,255,055
Deferred tax assets – net 694,644 642,105 2,172,799
Other non-current assets 24,084,415 27,767,236 28,453,455
Total Noncurrent Assets 347,801,569 415,917,850 470,055,216
Total Assets 449,062,058 561,803,968 632,994,169
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As at 31 December
(in P thousands) 2011 2012 2013
LIABILITIES AND EQUITY
Current Liabilities
Bank loans 25,747,920 31,793,975 27,588,259
Accounts payable and other current liabilities 44,749,807 57,865,876 68,088,327
Income tax payable 1,331,046 1,474,045 1,612,784
Current portion of long-term debt 7,920,961 13,859,558 34,566,619
Dividends payable 25,696 97,282 210,189
Total Current Liabilities 79,775,430 105,090,736 132,066,178
Noncurrent Liabilities
Long-term debt – net of current portion 128,464,019 174,532,871 175,589,418
Derivative liabilities 237,980 244,330 159,974
Deferred tax liabilities – net 4,507,979 4,542,918 6,970,527
Tenants‘ deposits and others 13,789,789 15,748,135 17,967,224
Total Noncurrent Liabilities 146,999,767 195,068,254 200,687,143
Total Liabilities 226,775,197 300,158,990 332,753,321
Equity Attributable to Owners of the Parent
Capital stock 6,121,640 6,229,746 7,962,723
Additional paid-in capital 35,536,615 42,858,920 57,799,360
Equity adjustments from common control transactions
(2,332,796) (2,332,796) (2,584,210)
Cost of Parent common shares held by subsidiaries (263,195) (125,906) (25,386)
Cumulative translation adjustment of a subsidiary 428,058 266,915 1,233,177
Remeasurement loss on defined benefit asset obligation
- - (195,074)
Net unrealized gain on available-for-sale
investments 7,008,067 11,718,559 7,338,500
Retained earnings:
Appropriated 5,000,000 35,000,000 27,000,000
Unappropriated 106,167,942 94,458,694 120,904,727
Total Equity Attributable to Owners of the Parent
157,666,331 188,074,132 219,433,817
Non-controlling Interests 64,620,530 73,570,846 80,807,031
Total Equity 222,286,861 261,644,978 300,240,848
Total Liabilities and Equity 449,062,058 561,803,968 632,994,169
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Consolidated Statements of Income For the years ended 31 December
(in P thousands) 2011 2012 2013
Revenue
Sales:
Merchandise 148,182,071 158,888,415 180,873,042
Real estate 17,215,075 22,499,679 21,242,138
Rent 20,832,729 24,695,579 27,929,390
Equity in net earnings of associates and joint ventures 6,415,424 9,042,034 13,602,269
Cinema ticket sales, amusement and others 4,138,053 4,824,228 4,945,795
Management and service fees 880,679 1,112,302 1,437,561
Gain on sale of available-for-sale investments & fair value changes on investments held for trading – net
44,368 2,055 141,163
Dividend income 368,919 628,385 883,494
Others 1,838,330 2,184,597 2,237,952
199,915,648 223,877,274 253,292,804
Costs and Expenses
Cost of sales:
Merchandise 112,192,756 117,896,688 138,720,368
Real estate 10,289,007 14,124,779 12,243,534
Selling, general and administrative expenses 40,412,750 44,978,822 51,043,797
162,894,513 177,000,289 202,007,699
Other Income (Charges)
Interest expense (8,836,013) (10,811,736) (10,943,401)
Interest income 4,274,640 4,416,746 3,709,484
Gain on disposal of investments and properties - net 2,623,864 1,301,888 546,552
Gain (loss) on fair value changes on derivatives – net 366,154 (1,403,411) (997,576)
Foreign exchange gain – net 242,862 565,132 59,411
(1,328,493) (5,931,381) (7,625,530)
Income Before Income Tax 35,692,642 40,945,604 43,659,575
Provision for (benefit from) income tax
Current 5,534,187 6,453,836 7,367,602
Deferred (39,369) 91,250 (1,947,105)
5,494,818 6,545,086 5,420,497
Net Income 30,197,824 34,400,518 38,239,078
Attributable to:
Owners of the Parent 21,224,592 24,674,381 27,445,682
Non-controlling interests 8,973,232 9,726,137 10,793,396
30,197,824 34,400,518 38,239,078
Earnings Per Common Share
Basic P27.57 P31.76 P34.85
Dilutive P27.55 P31.76 P34.85
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SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus.
Issuer SM Investments Corporation
Issue / Issue Size Fixed rate Bonds in the aggregate principal amount of
P10,000,000,000 to be registered with the SEC
Oversubscription Option In the event of oversubscription, the Issue Manager and Joint
Lead Underwriters, in consultation with the Issuer, reserve the
right to increase the aggregate Issue Size by up to P5,000,000,000
Manner of Offer Public offering
Use of Proceeds The net proceeds of the Issue shall be used primarily to
refinance certain existing debt obligations and finance expansion projects (see ―Use of Proceeds‖)
Issue Price or Offer Price 100% of the face value of the Bonds
Form and Denomination of the Bonds
The Bonds shall be issued in scripless form in minimum denominations of P20,000.00 each, and in multiples of
P10,000.00 thereafter, and traded in denominations of P10,000.00 in the secondary market
Offer Period The offer of the Bonds shall commence at 9:00 am on 30 April
2014 and end at 12:00 pm on 12 May 2014
Issue Date 19 May 2014
Maturity Date Series E : Seven (7) years from Issue Date;
Series F : Ten (10) years from Issue Date
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Interest Rate Series E : 5.2958% per annum
Series F : 5.6125% per annum
Interest Computation &
Payment
Interest on the Bonds shall be calculated on a 30/360 day count
basis commencing on 19 May 2014. Interest on the Series E and Series F Bonds shall be paid semi-annually in arrears on
November 19 and May 19 of each year.
Optional Redemption
Prior to final redemption, the Issuer shall have a one-time option, but shall not be obligated, to redeem in whole, and not a part
only, each outstanding series of the Bonds on the tenth (10th) Interest Payment Date of the Series E Bonds and on the
fourteenth (14th) Interest Payment Date of the Series F Bonds, respectively (each, an ―Optional Redemption Date‖).
The Issuer shall give not less than thirty (30) nor more than (60)
calendar days‘ prior written notice of its intention to redeem the Bonds, which notice shall be irrevocable and binding upon the
Issuer to effect such early redemption of the Bonds at the Interest Payment Date stated in such notice.
The amount payable to the Bondholders in respect of such
redemption shall be calculated based on the principal amount of the Bonds being redeemed, as the sum of (i) one hundred two
per cent (102%) of the principal amount; and (ii) accrued interest on the Bonds on the Optional Redemption Date.
Final Redemption The Bonds shall be redeemed at 100% of face value on their respective Maturity Dates.
Trustee Philippine National Bank Trust Banking Group
Registrar & Paying Agent Philippine Depository & Trust Corp.
Taxation Bond Interest
Interest income derived by Philippine citizens or resident foreign individuals from the Bonds is subject to income tax, which is
withheld at source, at the rate of 20%. Interest on the Bonds
received by non-resident foreign individuals engaged in trade or business in the Philippines is subject to a 20% final withholding
tax while that received by non-resident foreign individuals not engaged in trade or business is subject to a 25% final
withholding tax. Interest income received by domestic
corporations and resident foreign corporations is taxed at the rate of 20%. Interest income received by non-resident foreign
21
corporations is subject to a 30% final withholding tax. The tax
withheld constitutes a final settlement of Philippine income tax liability with respect to such interest.
Bondholders who are exempt from or are not subject to final withholding tax on interest income or are covered by a lower
final withholding tax rate by virtue of a tax treaty may claim such
exemption or lower rate, as the case may be, by submitting the necessary documents as required by the Bureau of Internal
Revenue and the Issuer.
Listing The Bonds are intended to be listed in the Philippine Dealing &
Exchange Corporation
22
RISK FACTORS
Investment in the Bonds involves a number of risks. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. There may be a big difference between the buying price and the selling price of these securities. An investor deals in a range of investments, each of which may carry a different level of risk. Prior to making any investment decision, prospective investors should carefully consider all of the information in this Prospectus, including the risks and uncertainties described below. The business, financial condition or results of operations of SMIC could be materially adversely affected by any of these risks. Additional considerations and uncertainties not presently known to the Issuer or which the Issuer currently deems immaterial, may also have an adverse effect on an investment in the Bonds. This risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. An investor should undertake his or her own research and study on the trading of securities before commencing any trading activity. He/she may request information on the securities and issuer thereof from the Commission which are available to the public. An investor should seek professional advice if he or she is uncertain of, or has not understood any aspect of the securities to invest in or the nature of risks involved in trading of securities especially those high risk securities. This section entitled ―Risks Factors‖ does not purport to disclose all of the risks and other significant aspects of investing in these securities. The risks enumerated hereunder are considered to be each of equal importance. The means by which the Company plans to address the risks discussed herein are presented in the sections of this Prospectus entitled ―Description of the Issuer and the Group – Strengths,‖ ―Description of the Issuer and the Group – Strategies,‖ and ―Management‘s Discussion and Analysis of Financial Position and Financial Performance.‖
Risks Relating to the Company
The Issuer is primarily a holding company and payments under the Bonds are structurally
subordinated to all liabilities of the Issuer’s subsidiaries and associates.
The Issuer is primarily a holding company and its ability to make payments in respect of the Bonds or to fund payments by the Issuer depends largely upon the receipt of dividends, distributions, interest payments,
management fees, or advances from its subsidiaries and associates. The ability of such companies to pay dividends and other amounts to the Issuer may be subject to their profitability and to applicable laws and
restrictions on the payment of dividends and other amounts contained in relevant financing and other
arrangements. Payments under the Bonds are effectively subordinated to all existing and future liabilities and obligations of each of the Issuer‘s subsidiaries, jointly controlled entities, and associates. Claims of
creditors of such companies will have priority as to the assets of such companies over the Issuer and its creditors, including holders of the Bonds. As at 31 December 2013, the aggregate outstanding
indebtedness (comprising bank loans, current portion of long-term debt, and long-term debt - net of
current portion) of the Issuer‘s subsidiaries and associates is approximately P237,744.3 million.
The Issuer, as the parent company, is actively involved in the planning and financing activities of its
23
subsidiaries. Also, the Issuer has majority control of these subsidiaries‘ boards of directors, thereby allowing
it to exercise significant influence in the management and policy formulation processes of these subsidiaries in terms of, among others, business strategy, profit generation and dividend declaration.
Any restriction or prohibition on the Issuer’s subsidiaries’ and associates’ ability to distribute
dividends would have a negative effect on its financial condition and results of operations.
The Issuer is a holding company that conducts all of its operations through its subsidiaries and associates.
As a holding company, the Issuer‘s revenues are derived from, among other sources, dividends and management fees paid to the Issuer by its subsidiaries and associates. The Issuer is reliant on such sources
of funds with respect to its obligations and in order to finance its subsidiaries. The ability of the Issuer‘s direct and indirect subsidiaries and associates to pay dividends to their shareholders (including the Issuer)
is subject to applicable law and may be subject to restrictions contained in loans and/or debt instruments of
such subsidiaries and may also be subject to the deduction of taxes.
In addition, the declaration of dividends by Philippine banks is subject to approval by the BSP, thereby affecting the payment of dividends from BDO and China Bank to the Issuer.
Any restriction or prohibition on the ability of some or all of the Issuer‘s subsidiaries or associates to distribute dividends or make other distributions to the Issuer, either due to regulatory restrictions, debt
covenants, operating difficulties or other limitations, could have a negative effect on the Issuer‘s cash flow and therefore its financial condition and results of operations.
As aforementioned, the Issuer, as a parent holding company, has majority control in the management and
in the boards of directors of its subsidiaries. The Issuer can thus exert its influence on matters relating to
these subsidiaries‘ respective managements, compliance with applicable regulatory and contractual restrictions and dividend declaration.
The Issuer is controlled by the Sy Family, whose interests may not be the same as those of
other shareholders.
The Sy Family currently, directly or indirectly, controls approximately 56.17% of the outstanding Shares.
Accordingly, the Sy Family is able to elect members of the Board and pass shareholder resolutions (including special resolutions), both of which under the By-laws generally require a majority vote by its shareholders
(or a two-thirds majority in the case of special resolutions). In addition, members of the Sy Family hold four
out of eight seats on the Board and Mr. Henry Sy, Sr., who is the Chairman, has a casting vote. Accordingly, the Sy Family exercises control over major policy decisions of the Issuer, including its overall strategic and
investment decisions, dividend plans, issuances of securities, adjustments to its capital structure, mergers, liquidation or other reorganization and amendments to its Articles of Incorporation and By-laws. If the
interests of the Sy Family conflict with the interests of other shareholders of the Issuer, there can be no assurance that the Sy Family would not cause the Issuer to take action in a manner which might differ from
the interests of other shareholders.
The Issuer has in place a corporate governance structure which is consistent with requirements set forth by
Philippine regulations. Furthermore, it has three independent directors in its Board who actively participate in enforcing the governance structures‘ mandate to protect the interests of all shareholders, including the
minorities. The Issuer is also professionally managed by executives and officers with expertise in their
respective fields.
24
The Issuer’s businesses have significant levels of related party transactions and are
interdependent, and any material adverse change in one member of the Group could adversely affect the results of operations of other members of the Group, including SMIC.
A significant part of the business undertaken by members of the Group is conducted with other members of
the Group, as well as other affiliated companies owned by the Sy Family which are not within the Group,
such as the Management Companies and the Retail Affiliates. The operations of many members of the Group are interdependent. These transactions include those described under ―Related Party Transactions‖
and the notes to the Financial Statements appearing elsewhere in this Prospectus. In addition, the Issuer expects that in the future, Group companies will continue to enter into transactions with each other as well
as other companies directly or indirectly controlled by or associated with the Sy Family, including the Management Companies and the Retail Affiliates. These transactions may involve conflicts of interest, which,
although not contrary to law, may be detrimental to the Issuer. Conflicts of interest may also arise between
the Sy Family and the Issuer in a number of other areas relating to the Issuer‘s businesses, including:
major business combinations involving the Group, including transfers of affiliated companies into
the Group (see ―Related Party Transactions‖);
plans to develop the respective businesses of the Group and of other entities within the Group; and
business opportunities that may be attractive to both the Sy Family and SMIC.
Such interdependence may mean that any material adverse change in one member of the Group, or
companies which are controlled by the Sy Family, could adversely affect the results of operations of other
members of the Group, including the Issuer.
In addition, certain members of the Group, such as SM Prime, have contractual arrangements with companies controlled by the Sy Family. The Issuer‘s policy is that transactions between Group companies
and companies which are controlled by the Sy Family are undertaken on an arm‘s length commercial basis.
While there are related party transactions which provide synergy between the various subsidiaries, these
are made on arm‘s length commercial market terms. Each subsidiary is managed and operated independently in these transactions and each company is responsible for its results of operations.
The Issuer depends on members of the Sy Family as regards the management of its business.
Members of the Sy Family currently manage the business operations of various entities within the Group including its key subsidiaries. In addition, the Sy Family has a wide range of other commercial interests
outside the Group, many of which are affiliated with members of the Group, including the Management Companies and the Retail Affiliates. There can be no assurance that such other business interests will not
require significant time and commitment from the Sy Family which might reduce their time devoted to their current roles within the Issuer‘s business. Furthermore, as the businesses of the Group expand, there can
be no assurance that the Sy Family will continue to be able to allocate the same or a similar proportion of
their time or other resources to the management or supervision of such businesses.
The Issuer‘s Chairman, Mr. Henry Sy, Sr., is the founder of the Group. Mr. Sy‘s daughter, Teresita T. Sy, and son, Henry T. Sy, Jr., have been appointed Vice Chairperson and Vice Chairman, respectively of the Issuer,
and are involved in the strategic planning and management of the Issuer‘s operations. The Issuer does not
hold any key management insurance for its senior executives, nor does it have any employment contracts containing restrictive covenants with respect to such executives. While Teresita T. Sy, Henry T. Sy, Jr. and
other members of the Sy Family are expected to remain actively involved in the day-to-day operations and management of the Group, except for a provision in the By-laws indicating that no person shall qualify or be
eligible for nomination or election to the Board if he is engaged in any business which competes with or is
antagonistic to that of the Issuer, there are no legal restrictions nor any contractual commitments that
25
would prevent the Sy Family from competing with the Group or individual businesses within the Group.
There can be no assurance that any potential conflicts of interest would be resolved in the best interests of SMIC or the Group, and even if they were, the resolution may be less favorable than if SMIC or the Group
were dealing with an independent party.
The unavailability of continuing services from the Sy Family may adversely affect the financial condition and
results of operations of the Group. In addition, as at 28 February 2014, Mr. Henry Sy, Sr. and his wife Mrs. Felicidad T. Sy held 0.40% and 5.12% of the outstanding issued Shares, respectively, and five of their
children own approximately 5.87% to 8.28% each. There can be no assurance that there will not be any transfer of interests between family members or any sale of Shares to third parties that would not alter the
balance of the family holdings, thereby influencing control.
The Group has professional executives and managers in each of the operating subsidiaries. In addition, it
has engaged several consultants in various fields of competency. At the board of directors‘ level, each of the publicly listed subsidiaries have respected individuals who serve as independent directors and advisors to
these boards of directors.
The Issuer has conducted and may continue to conduct acquisitions, the impact of which
could be less favorable for its activities and results than anticipated, or which could affect its financial situation.
As part of its business strategy, the Issuer has conducted and continues to carry out acquisitions of varying
sizes, some of which are significant at the Group level. These acquisitions involve numerous risks, including the following: (i) the assumptions used in the underlying business plans may not prove to be accurate, in
particular with respect to synergies and expected commercial demand; (ii) the Issuer may not integrate
acquired businesses, technologies, products, personnel and operations effectively; (iii) the Issuer may fail to retain key employees, customers and suppliers of the companies acquired; (iv) the Issuer may be
required or wish to terminate pre-existing contractual relationships, which could be costly and/or on unfavorable terms; and (v) the Issuer may increase its indebtedness to finance these acquisitions. As a
result, it is possible that the expected benefits of completed or future acquisitions may not materialize
within the time periods or to the extent anticipated, or affect the Issuer‘s financial condition.
Prior to pursuing acquisition opportunities, the Issuer undertakes a comprehensive evaluation of these opportunities‘ fit with the Group‘s overall business strategy. Part of this process involves, aside from
determining potential synergies, a determination of the appropriate integration strategies and plans to
adopt in order to effectively realize these potential benefits in efficiencies and synergies. It likewise undertakes a comprehensive due diligence evaluation of potential acquisition or investee companies in
order to determine the necessary governance, strategic and operating plans to adopt in order to mitigate acquisition risks.
Infringement of the SM intellectual property rights would have a material adverse effect on
the Group’s business.
The Group relies on trademarks to establish and protect the SM name, logo and other SM in-house brands.
The Group believes that the trademarks and its intellectual property rights are important to its success and competitive position. There can be no assurance that the actions the Group has taken will be adequate to
prevent brand and product imitation by others or to prevent others from using the SM name as a violation of
its trademarks and other intellectual property rights. In addition, there can be no assurance that others will not assert rights in, or ownership of, the Group‘s trademarks and other intellectual property rights. The
Group‘s business, financial condition and results of operations may be materially and adversely affected by trademark infringements or trademark disputes with others.
The Group registers all its brands to protect its intellectual property rights and actively monitors the validity
26
of these registrations. While the SM brand has goodwill, the Issuer believes that it is still good management
expertise that determines the success of its business undertakings and the success of these brands.
The Group’s debt leverage will be increased following the issue of the Bonds.
As at 31 December 2013, the Group had aggregate indebtedness (comprising bank loans, current portion of
long-term debt, and long-term debt - net of current portion) of P237,744.3 million, on a consolidated basis and total equity (excluding non-controlling interest) of P219,433.8 million, resulting in a debt-equity ratio of
approximately 52:48. Following the issue of the Bonds, the Group‘s indebtedness on a consolidated basis will increase to P247,744.3 million million, and its debt-equity ratio will increase to approximately 53:47 (see
―Capitalization and Indebtedness‖). The increase in the Group‘s level of outstanding debt following this Offer will increase the Group‘s exposure to a number of risks associated with debt financing, including the
risk that cash flows from the Group‘s operations will be insufficient to meet required payments of principal,
the risk that the repayment of the Group‘s foreign currency loans may be adversely affected if the peso depreciates against the US dollar, the risk that the Group will become more vulnerable to general adverse
economic and industry conditions and the risk that it may not be possible to obtain refinancing on favorable terms when required or if at all. Although the Group anticipates that it will be able to repay or refinance
existing debt, and any other indebtedness when it matures, there can be no assurance that it will be able to
do so.
The Group‘s resulting gross debt-equity ratio of 53:47, subsequent to the issue of the Bonds, shall remain well within its maximum permissible ratio of 80:20 as set out in the Group‘s debt covenants.
Risks Relating to the Group’s Malls and Property Businesses
The Philippine property market is cyclical and can be affected by domestic and global economic conditions.
SM Prime derives a substantial portion of its revenue from rents and sales relating to its portfolio of malls,
residential and commercial property developments and other leisure and mixed-use properties,
substantially all of which are located in the Philippines. Accordingly, SM Prime is heavily dependent on conditions in the Philippine property market. In the past, the Philippine property market has been cyclical,
and property values have been affected by the supply of and demand for comparable properties, the rate of economic growth in the Philippines and political and social developments.
Since the second half of 2008, the global financial markets have experienced, and may continue to
experience, significant dislocations, which originated from the liquidity disruptions in the United States and
the European Union credit and sub-prime residential mortgage markets. These disruptions and other events, such as rising government deficits and debt levels, the sovereign credit ratings downgrades and ensuing
public deficit and debt reduction measures of the United States and certain member states of the European Union, the risk of a partial collapse of the Eurozone and slower rates of growth in the Chinese economy
have had and continue to have a significant adverse effect on the global financial markets. In particular, the
global financial crisis in 2008 and 2009 resulted in a generally negative effect on real estate property prices globally, including in the Philippines, and continued uncertainty and volatility in global economic conditions
may result in further adverse impacts to SM Prime. These adverse effects can result in, among others, lower demand and values for real estate in the Philippines, increased difficulties on the part of tenants in meeting
their lease and other financial obligations, and greater difficulties for SM Prime in obtaining financing where necessary to fund the acquisition and development of their real estate projects.
SM Prime‘s growth is largely dependent on its ability to construct profitable malls in new locations in the Philippines. The substantial majority of the aggregate net leasable area in these malls is dedicated to retail
use, exposing SM Prime to risks relating to economic conditions in the Philippines such as trends in
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consumer spending, exchange rates and spending patterns of OFWs and their dependents, and the supply
of, or demand from, tenants for retail space and other competing commercial malls. Declines in consumer spending and other factors that may result in lower demand for retail space could have a material adverse
effect on SM Prime‘s ability to successfully operate and develop existing and future malls.
In addition, demand for new residential projects in the Philippines has fluctuated in the past as a result of
prevailing economic conditions in both the Philippines and in other countries, such as the United States (including overall growth levels and interest rates), the strength of overseas markets (as a substantial
portion of demand comes from Overseas Filipino Workers (―OFWs‖) and expatriate Filipinos), the political and security situation in the Philippines and other related factors.
General cyclical trends in the Philippines and international property markets, as well as significant
uncertainties and volatilities in the domestic, regional and global economic conditions affecting those
property markets, are expected to continue, and accordingly SM Prime‘s results of operations may fluctuate from period to period in accordance with those fluctuations. There can be no assurance that such variances
will not have a material adverse effect on the business, financial condition and results of operations of SM Prime.
SM Prime may face challenges of title to land.
While the Philippines has adopted a system of land registration which is intended to conclusively confirm land ownership, and which is binding on all persons (including the Government), it is not uncommon for
third parties to claim ownership of land that has already been registered and over which a title has been issued. There have also been cases where third parties have produced false or forged title certificates over
land. In particular, Quezon City, Metro Manila and the province of Cavite, have been known to experience
problems with syndicates of squatters and forged or false title holders. Although SM Prime generally conducts extensive title searches before it acquires any parcel of land, from time to time it has defended
itself against third parties who claim to be the rightful owners of land which has been either titled in the name of the persons selling the land to those companies or which has already been titled in those
companies‘ names. In the event a greater number of similar third-party claims are brought against
SM Prime in the future or any such claims involve land that is material to SM Prime‘s malls, residential developments and other real estate assets, SM Prime‘s management may be required to devote significant
time and incur significant costs in defending against such claims. If any such claims are successful, SM Prime may have to either incur additional costs to settle such third-party claims or surrender title to land
that may be material in the context of SM Prime‘s operations. In addition, title claims made by third parties
against SM Prime may have an adverse effect on its reputation.
Furthermore, transfer of title in the Philippines in connection with real estate sales involves a series of registrations and filings, which can require several months to complete. As a result, SM Prime may in some
instances occupy, operate or develop properties for which it has not yet completed all formalities in respect of perfecting title. There can be no assurance that third parties will not in the future challenge SM Prime‘s
rights to properties in similar circumstances where title has not yet been perfected.
SM Prime will continue to compete with other mall operators and commercial and residential
developers.
SM Prime competes with other developers and operators of shopping malls and other commercial
properties and residential properties for tenants, sales customers and land acquisition opportunities, among others.
SM Prime‘s malls compete with other similar malls. Increased competition could adversely affect income
from, and the market values of, the malls. The income from, and market values of, the malls are largely dependent on the ability of the malls to compete against other retail malls in their area in attracting and
28
retaining tenants. In addition, tenants at the malls face increasing competition from specialty stores,
general merchandise stores, discount stores, warehouse outlets and street markets, which may affect the ability or willingness of such tenants to continue renewing their leases. Important factors that affect the
ability of retail malls to attract or retain tenants include the popularity of the malls with retail customers, which is a function the quality of the malls‘ existing tenants and the attractiveness of the building and the
surrounding area. Attracting and retaining tenants and customers often involves refitting, repairing or
making improvements to mechanical and electrical systems and outward appearance. If competing malls of a similar type are built in the areas where the malls are located or similar malls in the vicinity of the malls
are substantially updated and refurbished, the value and net income of the malls could be reduced.
SM Prime‘s income from, and market values of, its residential development projects is largely dependent on these projects‘ popularity when compared to similar projects in their areas, as well as on the ability of
SM Prime to gauge correctly the market for its projects. Important factors that could affect SM Prime‘s
ability to compete effectively include a project‘s relative location versus that of its competitors, particularly proximity to transportation facilities and commercial centers, as well as the quality of the housing and
related facilities offered by SM Prime and the overall attractiveness of the project.
SM Prime‘s commercial investment property business competes with a number of commercial developers.
Competition from other developers of neighboring commercial centers and office spaces may adversely affect SM Prime‘s ability to operate successfully its investment properties or attract and retain tenants, and
continued development by these and other market participants could result in saturation of the market for office space. In addition, SM Prime‘s major competitors may have greater experience, financial resources
and more expertise in developing commercial properties and commercial leasing operations.
SM Prime‘s future growth and development will also depend, in part, on its ability to acquire or enter into
agreements to develop additional tracts of land suitable for the types of mall, residential and commercial real estate projects that SM Prime has developed over the years. SM Prime may experience difficulty
locating parcels of land of suitable size in locations and at prices acceptable to SM Prime, particularly parcels of land located in areas surrounding Metro Manila and in other urban areas throughout the
Philippines. In the event SM Prime is unable to acquire suitable land at acceptable prices, or at all, its
growth prospects could be limited and its business and results of operations could be adversely affected.
As a result of the foregoing, historical operating results of the malls may not be indicative of future operating results and historical market values of the malls may not be indicative of future market values. A
failure by SM Prime to compete effectively against other developers and operators of malls and other
commercial properties and residential properties could result in a loss of market share in the relevant sectors and corresponding decreases in revenues from rentals and property sales, which would in turn
negatively impact SM Prime‘s businesses, financial condition and results of operations. SM Prime is exposed to risks associated with the operation of its mall and commercial businesses.
The operations of SM Prime‘s malls and commercial businesses are subject to risks relating to the ownership of properties for lease and the management of mall and commercial tenants. The performance
of SM Prime‘s malls and commercial properties could be affected by a number of factors, including:
• the national and international economic climate;
• trends in the Philippine commercial and retail industry; • ability to attract leading names in the retail market to SM Prime‘s mall and commercial
developments; • ability to anticipate the future technological and infrastructure needs of Business Process
Outsourcing (―BPO‖) tenants and effectively design properties to meet those needs; • efficiency in collection, property management and tenant relations;
29
• non-renewal of expiring tenancies;
• amount of disposable income and consumer preference; • competition for tenants;
• changes in market rental rates; • the need to periodically renovate, repair and re-let space and the costs thereof;
• the quality and strategy of the management services provided; and
• SM Prime‘s ability to provide adequate security, maintenance and insurance.
In particular, SM Prime‘s commercial development projects comprise three office buildings catering primarily to tenants operating in the BPO industry. Adverse trends in the Philippines‘ BPO industry and
competitive environment could result in the inability of existing BPO tenants to honor their lease commitments, as well as lower demand among potential BPO clients for vacant space.
If SM Prime is unable to lease its mall and commercial properties in a timely manner or collect rent at profitable rates or at all, this could materially and adversely affect SM Prime‘s business, financial condition
and results of operations.
SM Prime faces numerous risks including reputational risk and operational risks relating to its
residential and commercial businesses.
SM Prime‘s operations include the development and sale of residential properties and the development and lease of office and commercial properties. The property development business involves significant risks
distinct from those involved in the ownership and operation of established properties, including the risk that SM Prime may invest significant time and money in a project that may not attract sufficient levels of
demand in terms of anticipated sales or rentals at the expected take-up rate and which may not yield target
returns as anticipated. In addition, obtaining required approvals and permits from various Philippine regulatory agencies may take substantially more time and resources than anticipated and construction of
projects may not be completed on schedule or within budget.
The time and the costs involved in completing the development and construction of projects can be
adversely affected by many factors, including shortages of materials, equipment and labor, adverse weather conditions, peso depreciation, natural disasters, labor disputes with contractors and subcontractors,
accidents, changes in laws or in Government priorities and other unforeseen problems or circumstances. Any of these factors could result in project delays and cost overruns, which could negatively affect SM
Prime‘s margins.
SM Prime‘s reputation could also be adversely affected if projects are not completed on time or if projects
do not meet customers‘ requirements. If any of SM Prime‘s projects experiences construction or infrastructure failures, design flaws, significant project delays, quality control issues or otherwise, this could
negatively affect its brand image and its ability to pre-sell its residential development projects. This would reduce cash flow and impair its ability to meet funding requirements.
Project delays, cost overruns and construction issues could also result in sales and resulting profits from a particular development not being recognized in the year in which it was originally expected to be recognized,
which could adversely affect SM Prime‘s results of operations. Further, the failure by SM Prime to complete construction of a project to its planned specifications or schedule may result in cost overruns and possible
abandonment of projects by contractors, as well as lower returns. Moreover, orders of the Philippine
Department of Agrarian Reform (the ―DAR‖) allowing conversion of agricultural land for development may require a project to complete construction by a prescribed deadline. If SM Prime fails to complete
construction of a project by the stated deadline, the DAR may revoke its order allowing the use of agricultural land for SM Prime‘s intended purpose.
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Property development in the Philippines is capital intensive, and the necessary funding may not be available.
The real estate industry in the Philippines is capital intensive, and market players are required to incur
significant capital expenditures to complete existing projects and commence construction on new
developments. Although historically SM Prime has funded a significant portion of its capital expenditure requirements internally from real estate revenues, it has periodically utilized external sources of financing.
There can be no assurance that, to complete current and future malls and other commercial and residential projects or satisfy other liquidity and capital resources requirements, SM Prime will be able to continue
funding its capital expenditure requirements internally, or that it will be able to obtain sufficient funds externally at acceptable rates to fund its capital expenditure budgets, or at all. Failure to obtain the requisite
funds could delay or prevent completion of projects and materially and adversely affect SM Prime‘s
businesses, financial condition and results of operations.
Malls and other commercial properties owned by SM Prime may be subject to an increase in operating and other expenses.
SM Prime‘s financial condition and results of operations could be adversely affected if operating and other expenses relating to malls and other commercial properties increase without a corresponding increase in
revenues or tenant reimbursements (where applicable) of operating and other expenses. Factors which could increase operating and other expenses include:
• increases in utility expenses; • increases in payroll expenses;
• increases in property taxes and other statutory charges;
• increases in the rate of inflation; • changes in the rate and expense of depreciation and amortization;
• changes in statutory laws, regulations or Government policies that increase the cost of compliance with such laws, regulations or policies;
• increases in management fees or sub-contracted service costs, such as maintenance
and security; • increases in insurance premiums; and
• defects affecting the malls which need to be rectified, leading to unforeseen capital expenditure.
Increased expenses resulting from the foregoing or other factors, to the extent not compensated by
corresponding increases in revenues, could have a material adverse effect on SM Prime‘s businesses, financial condition and results of operations.
SM Prime faces risks relating to the management of its land bank.
SM Prime will need to acquire land for replacement and expansion of land inventory within its current
markets. However, it may not be possible to acquire land in suitable locations and on commercially
reasonable terms. These challenges are exacerbated by the highly competitive real estate industry in Metro Manila and its surrounding areas, where SM Prime competes with other real estate companies, some of
which may have more resources than SM Prime, for land acquisition and the right to participate in land reclamation projects. There can be no assurance of reaching agreement in respect of the lease or purchase
of any specific property or properties. In the event that SM Prime is unable to acquire suitable land, its
growth prospects could be limited.
The risks inherent in purchasing and developing land increase as consumer demand for residential real estate decreases. The market value of land, subdivision lots and housing inventories can fluctuate
significantly as a result of changing market conditions. There can be no assurance that measures employed to manage land inventory risks will be successful. In the event of significant changes in economic, political
31
or market conditions, SM Prime may have to sell subdivision lots and housing and condominium units at
significantly lower margins or at a loss. Changes in economic or market conditions may also require SM Prime to defer the commencement of housing and land development projects, which would require
carrying the cost of acquired but undeveloped land on-balance sheet, as well as reducing the amount of property available for sale. Any of the foregoing events would have a material adverse effect on SM Prime‘s
business, financial condition and results of operations.
SM Prime operates in a highly regulated environment and it is affected by the development
and application of regulations in the Philippines.
The Philippines property development industry is highly regulated. The development of condominium, subdivision and other residential projects, commercial projects and land reclamation projects is subject to a
wide range of government regulations, which, while varying from one locality to another, typically include
zoning considerations as well as the requirement to procure a variety of environmental and construction-related permits. In addition, projects that are to be located on agricultural land, must get
clearance from the DAR so that the land can be reclassified as non-agricultural land and, in certain cases, tenants occupying agricultural land may have to be relocated at a developer‘s expense. Presidential Decree
No. 957, as amended, (―P.D. 957‖), Republic Act No. 4726, as amended, (―R.A. 4726‖), Republic Act
No. 6552 (the ―Maceda Law‖) and Batas Pambansa Blg. 220 (―B.P. 220‖) are the principal statutes which regulate the development and sale of real property as part of a condominium or subdivision project. P.D.
957, R.A. 4726 and B.P. 220 cover subdivision projects for residential, commercial, industrial or recreational purposes and condominium projects for residential or commercial purposes. The Maceda Law governs the
sale of property on installment. The Housing and Land Use Regulatory Board (―HLURB‖) is the administrative agency of the Government which enforces these statutes. Regulations applicable to SM
Prime‘s operations include among others:
• the suitability of the site;
• road access; • necessary community facilities;
• open spaces and common areas;
• water supply; • sewage disposal systems;
• electricity supply; and • unit/lot sizes.
Since 2008, HLURB has required all property developers in the Philippines to partake in the development of socialized housing projects. Under Section 18 of the Republic Act No. 7279, developers of subdivision
projects are required to develop an area for socialized housing equivalent to at least 20% of the total subdivision area or total subdivision project cost, at the option of the developer, within the same city or
municipality, whenever feasible, and in accordance with the standards set by HLURB and other existing laws. Property developers are not allowed to buy credits from property firms already involved in socialized
housing development, rather, they are required to comply with the rule by participating in:
a) development of settlement; b) slum upgrading or renewal of areas for priority development either through zone improvement programs or slum improvement and resettlement programs; c) joint venture
projects with either local government units (―LGUs‖) or any of the housing agencies; or d) participation in the community mortgage program. If SM Prime does not comply with this requirement, it may be subject to
fines or other sanctions which would adversely impact its business and results of operations.
All condominium and subdivision development plans are also required to be filed with and approved by the
LGU with jurisdiction over the area where the project is located. Approval of development plans is conditioned on, among other things, completion of the acquisition of the project site and the developer‘s
financial, technical and administrative capabilities. Alterations of approved plans that affect significant areas of the project, such as infrastructure and public facilities, also require prior approval of the relevant LGU.
32
There can be no assurance that SM Prime will be able to obtain governmental approvals for its projects or
that, when given, such approvals will not be revoked.
In addition, developers, owners of or dealers in real estate projects are required to obtain licenses to sell before making sales or other dispositions of condominium units, subdivision lots and housing units.
Project permits and any license to sell may be suspended, cancelled or revoked by HLURB based on its own
findings or upon complaint from an interested party, and there can be no assurance that SM Prime will in all circumstances receive the requisite approvals, permits or licenses or that such permits, approvals or
licenses will not be cancelled or suspended. Any of the foregoing circumstances or events could affect SM Prime‘s ability to complete projects on time, within budget or at all, and could materially and adversely
affect SM Prime‘s business, financial condition and results of operations.
SM Prime may suffer material losses in excess of insurance proceeds.
SM Prime‘s portfolio of malls, residential properties and other real estate assets could suffer physical
damage caused by fire, flooding, typhoons, earthquakes or other causes, or third-party liability claims, any of which could result in losses (including loss of rent) which may not be fully compensated for by insurance.
SM Prime may also be exposed to liability for damages or injuries from accidents occurring on its properties.
In addition, certain types of risks and insurance cover (such as war risk and acts of terrorism) may be uninsurable or the cost of insurance may be prohibitive when compared to the risk. Should an uninsured
loss or a loss in excess of insured limits occur, SM Prime could lose capital invested in the affected property as well as any anticipated future revenue from such property, and may also remain liable for any debt or
other financial obligation related to such property. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future. The Group faces property development risk.
The property development business involves significant risks distinct from those involved in the ownership
and operation of established properties, including the risks that Government approvals may take more time
and resources to obtain than expected; that construction may not be completed on schedule or budget; and that the properties may not achieve anticipated sales, rents or occupancy levels.
In addition, development projects typically require substantial capital expenditure during construction and it
may take years before property projects generate cash flows. There is the risk that financing for development may not be available under favorable terms, or that construction may not be completed on
schedule or within budget. The time and the costs involved in completing construction can be adversely
affected by many factors, including shortages of materials, equipment and labor; adverse weather conditions; natural disasters; labor disputes with contractors and subcontractors; accidents; changes in
Government priorities; and unforeseen problems or circumstances. The occurrence of any of these factors could give rise to delays in the completion of a project and result in cost overruns. This may also result in
the profit on development for a particular property not being recognized in the year in which it was
originally anticipated to be recognized, which could adversely affect the Group‘s profits recognized for that year. Further, the failure by any Group company to complete construction of a project to its planned
specifications or schedule may result in liabilities, reduced project efficiency and lower returns. No assurance can be given that such events will not occur in a manner that would adversely affect the results
of operations or financial condition of the Group.
Furthermore, properties presently in the name of the Group or those acquired in the future may be subject
to various lawsuits and/or claims, which, if resolved against the Group, will result in the loss or reduction in size of the particular property subject of the lawsuit. Currently, certain properties of the Group such as but
not limited to those in Taal Vista Lodge are subject to such lawsuits, pending hearing in various courts and/or before governmental bodies. See ―Description of the Issuer and the Group — Legal Proceedings‖.
To mitigate these risks, the Group ensures that its project developments are carefully planned. The
33
companies rely on the services of reputable, high quality, independent contractors for their projects and
maintains good business relationships with these contractors. The companies adheres to the strategy of developing each project in phases to minimize exposure to such risks. Further, each company keeps within
a conservative level of leverage. Although the current liquidity and depth of the Philippine credit market renders funding risk as unlikely, the companies have unutilized credit lines as buffer for unanticipated
requirements. The companies also ensure that all required governmental approvals are obtained and kept
updated on any developments in regulations concerning the real estate industry.
Risks Relating to the Retail Operations
The success of the Retail Subsidiaries and Retail Affiliates will be dependent in part on the Issuer’s continued ability to satisfy consumer preferences and spending trends in the markets
in which the Retail Subsidiaries operate.
The success of the Retail Subsidiaries partially depends on their ability to anticipate and respond to
changing consumer preferences in a timely manner. However, it is often difficult to predict changes in consumer preferences, particularly in the area of apparel where fashion trends can be subject to rapid
change. SM Department Stores carry a wide selection of basic merchandise which may be less subject to fashion trends. The SM Department Stores believe they lead mass-market fashion trends in the Philippines
by introducing apparel that has proved popular in places such as Hong Kong and Taiwan, as well as the
United States. The SM Department Stores also tend to introduce more mainstream apparel fashion compared to that introduced by other retailers. Nevertheless, there can be no assurance that consumers in
the Philippines will continue to prefer shopping in department stores over other retail formats such as specialty stores. Furthermore, the Retail Subsidiaries depend to a significant extent on Philippine spending
trends. The sentiments of the Philippine retail industry, consumer preferences and spending patterns are
influenced by external factors including, among others, the state of the Philippine economy and its political environment, the disposable income of Philippine consumers and the market‘s demographic profile. Failure
to accurately predict constantly changing consumer tastes, preferences and spending patterns could adversely affect the short-term and long-term results of the Retail Subsidiaries.
While the Group regularly conducts market research to forecast changes in consumer preferences, and reviews the performance and viability of its portfolio of brands to ensure continued market acceptance,
there is no assurance that its efforts can prepare it adequately to meet changing consumer preferences or spending habits. An inaccurate assessment of, or an untimely response to, changing consumer preferences
could have a material adverse effect on the Issuer‘s financial condition and results of operations.
The Group believes that its focus on quality, variety and value-for-money is its main competitive advantage.
It is the objective of the SM Department Stores to maintain its leadership in the marketplace, to be at the forefront of retail technology, and to grow through effective consumer marketing and product diversification.
The SM Department Stores‘ strategies involve providing value-for-money through their wide variety of competitively priced quality merchandise, thereby achieving high sales turnover. The Group‘s supermarkets
carry extensive lines of both local and imported food and household products sourced from a diversified
group of suppliers. Furthermore, the Group continuously upgrades its retail facilities to keep up with the prevailing trends in the department store business.
The Retail Subsidiaries depend on their ability to retain existing suppliers and secure new
suppliers.
The Retail Subsidiaries have developed close relationships with a large number of suppliers in the
Philippines. However, they do not have any long-term supply agreements with any supplier. The Retail Subsidiaries seek to source their outright merchandise from a broad range of suppliers at competitive prices,
and the Issuer continues to source merchandise from new suppliers to cover larger areas within its
34
department stores and to respond to changes in consumer preference. A significant adverse change in the
relationships and contract arrangements between the Retail Subsidiaries and consignors could also have a material adverse impact on the Issuer‘s financial condition and results of operations.
The Group‘s suppliers are treated as partners in business. The Group ensures that its business partners‘
receivables are settled on time, and strives to continuously maintain good and close relationships with its
suppliers. At the same time, the Retail Subsidiaries are constantly in search for good and reliable suppliers.
Non-renewal of leases or substantial increases in rent for the Issuer’s retail stores may have a material adverse effect on the Issuer.
Some of the retail space in which the Issuer‘s retail stores are located is leased from independent third
parties. There is no assurance that each of these leases will be renewed upon expiry or on terms and
conditions that are acceptable to the Issuer. If such leases cannot be extended or renewed, the Issuer will have to find other appropriate premises and this may have a material adverse effect on its business,
financial condition and results of operations if the new premises are not as appropriate to the Issuer‘s needs as the existing leased premises. Alternatively, if the existing leases can only be renewed on less favorable
terms, this will increase the Issuer‘s operating expenses and thus its business, financial condition and
results of operations may be materially and adversely affected.
The majority of the Group‘s retail facilities are located in its Malls owned by the Group. Those facilities located in properties not owned by the Group have renewable long-term lease contracts.
The future growth of the Retail Subsidiaries will be largely driven by the effectiveness and
success of their expansion strategy.
The expansion strategy of the Retail Subsidiaries involves opening new stores as well as renovating and
expanding existing stores. The successful implementation of such expansion plans depends upon many factors, including the Issuer‘s ability to:
identify, negotiate, finance, obtain, lease or refurbish suitable store sites which may also be largely
dependent on the expansion plans of SM Prime; integrate new stores into existing information systems and operations;
hire, train and retain qualified personnel; and
manage the diversion of resources.
The Issuer cannot guarantee that the Retail Subsidiaries will achieve their targets for opening new stores or for renovating or expanding existing stores, or that such stores will operate profitably when opened. Failure
by the Retail Subsidiaries to implement their expansion strategy effectively could materially and adversely affect their business, financial condition and results of operations, and thereby materially and adversely
affect the Issuer‘s financial condition and results of operations.
The Group‘s expansion strategy involves the identification of strategic locations for the Retail Subsidiaries.
Also, in each Mall owned by the Group, the Retail Subsidiaries are actively involved. In addition, the Group‘s strategy requires that the necessary management for expanded operations, as well as viable financing
plans for these expansions, are well in place prior to any store opening.
The Retail Subsidiaries and Retail Affiliates may be subject to increasing competitive
pressures.
The Retail Subsidiaries are among the leading participants in the Philippine retail industry with a significant
market share in department store and supermarket sales. There are few barriers to prevent new participants, including major international retailers or wholesalers who are ready to invest the necessary
35
time and resources, from entering the retail industry. If an existing or new competitor in the market is
successful in developing and marketing a retail concept that is comparable or more acceptable to the market, the Issuer‘s market share in the relevant market segment will decline and this may result in its
future turnover and profitability being adversely affected.
The Retail Trade Liberalization Act, approved by the Government in March 2000, liberalizes foreign
ownership restrictions in the retail sector and may encourage industry consolidation and greater competition. Any increase in competition could have an adverse effect on the operations of the Retail
Subsidiaries in future periods, including, for instance, slower growth in their sales, lower margins and higher expenses as they seek to compete for new business or in new markets. See ―Description of the
Issuer and the Group - Retailing and Merchandising‖.
The Group believes that it has a strong franchise in the retail market due to its goodwill, locations, and
strategy of regularly diversifying its product mix, upgrading its stores and facilities, and maintaining a diversified group of suppliers.
There can be no assurance that the Retail Subsidiaries are fully insured against unexpected
losses.
The operations of the Retail Subsidiaries carry an inherent risk of loss caused by fire, resulting water
damage, disruptions to electricity supply, terrorist attacks and other circumstances or events affecting their stores or the properties where their stores are located. Any such event, if it were to occur, may result in loss
of life or property, loss of revenues or increased costs and could potentially result in significant litigation against the Retail Subsidiaries. In line with industry practice in the Philippines, the current insurance
coverage does not cover any loss of revenues that the Retail Subsidiaries may suffer as a result of any
disruption to their business. Although the Retail Subsidiaries seek to maintain the most comprehensive insurance coverage that is available at commercially reasonable rates, there can be no assurance that their
insurance coverage will adequately compensate them for all damage and economic losses resulting from any of the events noted above or that they will be able to procure adequate insurance coverage at
commercially reasonable rates in the future.
The Group‘s existing insurance coverage is sufficient to cover for any possible losses in the Retail
Subsidiaries. The Group annually reviews its existing insurance policies to ensure adequacy of coverage. Furthermore, the locations of the retail stores are widely spread throughout the country.
The Retail Subsidiaries’ business activities are subject to seasonality and timing.
The Retail Subsidiaries‘ business experiences seasonal fluctuations in its turnover and operating income and generally records higher turnover in December, due to traditionally higher consumer spending around the
Christmas season, and May, prior to schools opening in June. As a result of these fluctuations, comparisons of sales and operating results between different periods within a single financial year, or between different
periods in different financial years, are not necessarily meaningful and cannot be relied on as indicators of
the Issuer‘s financial and operating performance. Any seasonal fluctuations reported in the future may not match the expectations of investors.
Since the Issuer‘s business operates largely on a seasonal cycle, if the Retail Subsidiaries‘ business is
unsuccessful in selecting the right product mix for a particular season, sales for that entire season could be
significantly affected. In addition, any consequent reputational damage could have a negative impact on the Retail Subsidiaries‘ business sales in future seasons. The Issuer‘s results of operations may also
fluctuate significantly as a result of a number of other factors, including, but not limited to, the timing of opening of new stores, merchandise mix and the timing of advertising and promotional campaigns
depending on each season.
36
The Group believes that seasonality is typical in the retail industry. The Group therefore focuses on
providing the correct product mix and maintaining its leadership in determining consumer preferences and upcoming product trends.
The supermarket and hypermarket industry is highly competitive and characterized by
narrow profit margins.
The supermarket and hypermarket industry is highly competitive and characterized by narrow profit
margins. The Issuer‘s competitors include national and regional supermarket and hypermarket chains, independent and specialty grocers, drug and convenience stores, warehouse club stores, deep discount
drug stores and supercenters. Supermarket and hypermarket chains and SaveMore stores generally compete on the basis of location, quality of products, service, price, product variety and store condition.
The Issuer regularly monitors its competitors‘ prices and adjusts its prices and marketing strategy as
management deems appropriate in light of existing conditions. There can be no assurance that new competitors will not enter the supermarket and hypermarket industry or that the Issuer can maintain its
current market share. The Issuer‘s profitability could be impacted by the pricing, purchasing, financing, advertising or promotional decisions made by competitors.
Narrow profit margins are typical in the supermarket and hypermarket industries. Thus, the Group continuously expands its operations to increase volume turnover and enhance economies of scale, thereby
improving the profitability of its supermarket and hypermarket operations.
As a result of selling food products, the Group faces the risk of exposure to product liability claims and adverse publicity.
The packaging, marketing, distribution and sale of food products purchased from others entail an inherent risk of product liability, product recall and resultant adverse publicity. Such products may contain
contaminants that may be inadvertently redistributed by SM Supermarkets, SM Hypermarkets and SaveMore. These contaminants may, in certain cases, result in illness, injury or death if processing at the
foodservice or consumer level does not eliminate the contaminants. Even an inadvertent shipment of
adulterated products is a violation of law and may lead to an increased risk of exposure to product liability claims. There can be no assurance that such claims will not be asserted against the Group or that the Group
will not be obliged to perform such a recall in the future. If a product liability claim is successful, the Group‘s insurance may not be adequate to cover all liabilities it may incur, and it may not be able to continue to
maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. If the Group does
not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could have a material adverse effect on the Group‘s ability to successfully market its
products and on the Group‘s business, financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any
assertion that the Group‘s products caused illness or injury could have a material adverse effect on the Group‘s reputation with existing and potential customers and on the Group‘s business, financial condition
and results of operations.
The Group‘s typical insurance coverage includes potential losses from product liability claims. In addition,
the Group actively selects appropriate suppliers which are carefully evaluated as reliable in providing quality products.
37
Risks Relating to the Banks
The Philippine banking industry is highly competitive and increasing competition may result in declining margins in the banks’ principal businesses.
BDO and China Bank are subject to significant levels of competition from many other Philippine banks and branches of international banks, including competitors which in some instances have greater financial and
other capital resources, a greater market share and greater brand name recognition than the banks.
The recent mergers and consolidations in the banking industry, as well as the liberalization of foreign
ownership regulations in banks, have allowed the emergence of foreign and bigger local banks in the market. In addition, the proposed ASEAN economic integration by 2015 envisions freer cross-border flows
of financial services (in addition to goods, capital, and manpower) among member nations. This is expected to increase the level of competition both from Philippine banks and branches of international banks. This
may impact the Philippine banks‘ operating margins, but this would also enhance the industry‘s overall efficiency, business opportunities and service delivery. As at September 30, 2013, according to data from
the BSP, there were a total of 36 domestic and foreign commercial banks operating in the Philippines.
In the future, BDO and China Bank may face increased competition from financial institutions offering a
wider range of commercial banking services and products, larger lending limits, greater financial resources and stronger balance sheets than the banks. Increased competition may arise from:
Other large Philippine banks and financial institutions with significant presence in Metro Manila and
large country-wide branch networks; Foreign banks, due to, among other things, relaxed standards which permitted large foreign banks
to open branch offices;
Domestic banks entering into strategic alliances with foreign banks with significant financial and
management resources; and Continued consolidation in the banking sector involving domestic and foreign banks, driven in part
by the gradual removal of foreign ownership restrictions.
There can be no assurance that BDO and China Bank will be able to compete effectively in the face of such
increased competition. Increased competition may make it difficult for the banks to continue to increase the
size of their loan portfolio and deposit base, as well as cause increased pricing competition, which could have a material adverse effect on their growth plans, margins, results of operations and financial condition.
Philippine banks are generally exposed to higher credit risks and greater market volatility
than banks in more developed countries.
Philippine banks are subject to the credit risk that Philippine borrowers may not make timely payment of
principal and interest on loans and, in particular that, upon such failure to pay, Philippine banks may not be able to enforce the security interest they may have. The credit risk of Philippine borrowers is, in many
instances, higher than that of borrowers in developed countries due to:
The greater uncertainty associated with the Philippine regulatory, political, legal and economic
environment;
The vulnerability of the Philippine economy in general to a severe global downturn as it impacts on
its export sector, employment in export-oriented industries, and OFW remittances; The large foreign debt of the Government and the corporate sector, relative to the gross domestic
product (―GDP‖) of the Philippines; and
Volatility of interest rates and US Dollar/Philippine Peso exchange rates.
38
Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine
banks, including BDO and China Bank, to more potential losses and higher risks than banks in more developed countries. In addition, higher credit risk generally increases the cost of capital for Philippine
banks compared to their international counterparts. Such losses and higher capital costs arising from this higher credit risk may have a material adverse effect on BDO's and China Bank‘s financial condition, liquidity
and results of operations. Average non-performing loan ratios exclusive of interbank loans in the Philippine
banking system were 2.4%, 1.9% and 2.2%, as at the years ended 31 December 2011, 2012 and 2013, respectively.
Philippine banks’ ability to assess, monitor and manage risks inherent in its business differs
from the standards of its counterparts in more developed countries.
Philippine banks are exposed to a variety of risks, including credit risk, market risk, portfolio risk, foreign
exchange risk and operational risk. The effectiveness of their risk management is limited by the quality and timeliness of available data in the Philippines in relation to factors such as the credit history of proposed
borrowers and the loan exposure borrowers have with other financial institutions. In addition, the information generated by different groups within each bank, including BDO and China Bank, may be
incomplete or obsolete. BDO and China Bank may have developed credit screening standards in response to
such inadequacies in quality of credit information that are different from, or inferior to, the standards used by its international competitors. As a result, their ability to assess, monitor and manage risks inherent in
their business would not meet the standards of their counterparts in more developed countries. If BDO and China Bank are unable to acquire or develop in the future the technology, skills set and systems available to
meet such standards, it could have a material adverse effect on their ability to manage these risks and on their financial condition, liquidity and results of operations.
However, BSP‘s early adoption of Basel III on 1 January 2014, a year ahead of the Basel Committee‘s recommended implementation timeline, as well as the imposition of higher limits and stricter minimum
requirements for regulatory capital relative to international standards are seen as efforts to further boost the Philippine banking industry‘s resiliency and enhance its ability to absorb risks.
Philippine banks face regulatory pressure to comply with new capital standards.
The BSP Monetary Board approved major revisions to the country‘s risk-based capital adequacy framework on 1 July 2007, to align the current framework with the Basel II standards as issued by the Basel Committee
on Banking Supervision (BCBS), which is an international committee of banking supervisory authorities.
Basel II standards make regulatory capital requirements more risk sensitive and reflective of all, or at least most, of the risks financial institutions are exposed to. In terms of minimum capital requirements, Basel II
standards include the addition of specific capital requirements for credit derivatives, securitization exposures, counterparty risk in the trading book, and operational risk.
In December 2010, a new update to the Basel Accords, known as Basel III, was issued by the BCBS
containing new standards that modify the structure of regulatory capital. The Basel III regulations include
tighter definitions of Tier 1 capital and Tier 2 capital, the introduction of a leverage ratio, changes in the risk weighting of counterparty credit risk, a framework for counter-cyclical capital buffers, and short and
medium-term quantitative liquidity ratios. The revised standards also distinguish further (i) Tier 1 capital, which is also referred to as Going-Concern Capital, and is composed of Common Equity and Additional Tier
1 capital; and (ii) Tier 2 capital, which is also referred to as Gone-Concern capital and establish new
eligibility criteria for such capital instruments previously not implemented in regulatory capital instruments.
To align with the international standards, the BSP adopted part of the Basel Committee's eligibility criteria to determine eligibility of capital instruments to be issued by Philippine banks and quasi-banks as Hybrid Tier
1 capital and Tier 2 with the issuance of BSP Circular No. 709 effective 1 January 2011.
39
In January 2012, the BSP announced that the country‘s universal and commercial banks, including their
subsidiary banks and quasi-banks, will be required to adopt in full the capital adequacy standards under Basel III with effect from 1 January 2014. This thus allowed local banks one full year for a parallel run of the
old and new guidelines prior to the effectiveness of the new standards in 2014, marking an accelerated implementation compared to the Basel Committee's staggered timeline that stretches from January 2013 to
January 2017. On 26 December 2012, the BSP issued the implementing guidelines for the adoption on 1
January 2014 of the revised capital standards under the Basel III accord for universal and commercial banks.
The guidelines set new regulatory ratios for banks to meet specific minimum thresholds for Common Equity
Tier 1 (CET1) capital and Tier 1 (T1) capital in addition to the Capital Adequacy Ratio (CAR). The BSP maintained the minimum CAR at 10.0% and set a minimum CET1 ratio of 6.0% and a minimum T1 ratio of
7.5%. The new guidelines also introduced a capital conservation buffer of 2.5% which shall be made up of
CET1 capital.
In addition, banks which issued capital instruments from 2011 will be allowed to count these instruments as Basel III-eligible until end-2015. However, capital instruments that are not eligible in any of the three
components of capital will be derecognized from the determination of the regulatory capital on 1 January
2014.
Risks Relating to the Philippines
Substantially all of the Group’s operations and assets are based in the Philippines; a slowdown in economic growth in the Philippines could materially adversely affect its
businesses.
Historically, the Group has derived a large majority of its revenue and operating profits from the Philippines
and, as such, is highly dependent on the state of the Philippine economy. Demand for retail, commercial and residential real estate are all directly related to the strength of the Philippine economy (including its
overall growth and income levels), the overall levels of business activity in the Philippines, as well as the amount of remittances received from OFWs and overseas Filipinos.
Factors that may adversely affect the Philippine economy include:
decreases in business, industrial, manufacturing or financial activities in the Philippines, the
Southeast Asian region or globally; scarcity of credit or other financing, resulting in lower demand for products and services provided
by companies in the Philippines, the Southeast Asian region or globally;
exchange rate fluctuations;
inflation or increases in interest rates;
levels of employment, consumer confidence and income;
changes in the Government or of the Government‘s fiscal and regulatory policies;
re-emergence of SARS, avian influenza (commonly known as bird flu), including the H1N1 and
H7N9 strains of the disease, or the emergence of another similar disease in the Philippines or in other countries in Southeast Asia;
natural disasters, including but not limited to tsunamis, typhoons, earthquakes, fires, floods and
similar events;
political instability, terrorism or military conflict in the Philippines, other countries in the region or
globally; and other social, political or economic developments in or affecting the Philippines.
40
There can be no assurance that the Philippines will achieve strong economic fundamentals in the future. Changes in the conditions of the Philippine economy could materially and adversely affect the Group‘s
business, financial condition and results of operations.
Any political instability in the future may have a negative effect on the Group’s financial
results.
The Philippines has from time to time experienced political, social and economic instability. In May 2004, the Philippines held presidential elections as well as elections for the Senate and the House of
Representatives. President Macapagal-Arroyo was elected for a second six-year term. However, certain opposition candidates questioned the election results, alleging massive fraud and disenfranchisement of
voters. On 25 July 2005, the impeachment complaints that were filed by several citizens and opposition
lawmakers in the House of Representatives against President Arroyo, based on the allegations of culpable violation of the Constitution, graft and corruption and betrayal of the public trust, were referred by the
speaker of the House to the Committee on Justice. All impeachment complaints previously filed were ultimately dismissed; however several cases were filed with the Supreme Court questioning the
constitutionality of the decision.
On 24 February 2006, President Arroyo declared a state of emergency after security forces thwarted what
they claimed was a plot to overthrow the President. The purported coup d‘etat coincided with demonstrations marking the 20th anniversary of the ―people power‖ revolution that toppled former
President Marcos. The President lifted the state of emergency on 03 March 2006.
In November 2007, a group of military rebels together with a senator walked out of their trial in Makati City
and occupied the second floor of the Manila Peninsula Hotel calling for President Arroyo to resign. They were soon joined by a few church officials and former Vice President Teofisto Guingona who appealed to the
public for support. After a few hours, the mutinous group agreed to surrender to avoid bloodshed.
Since 2007 the Philippine Senate has been conducting inquiries into the allegedly anomalous US$329
million deal to construct the National Broadband Network. In February 2008, former Philippine Forest Corporation president Rodolfo Noel Lozada Jr. testified in the Senate and accused key allies of President
Arroyo of overpricing the deal and receiving and/or demanding hefty commissions for the implementation of said deal. The controversy fuelled mass protests by various cause-oriented groups calling for the
President to resign. The implementation of the project, in the meantime, has been suspended.
In 2008, the Philippine Senate resumed its Blue Ribbon Committee inquiry into allegedly anomalous
disbursements of P780 million for the purchase of fertilizers by the Department of Agriculture and alleged diversion of said funds to finance the 2004 election of President Arroyo.
In May 2010, the Philippines held its very first automated presidential election, as well as elections for
members of the Senate and the Congress. Consequently, Benigno Aquino III was elected as the new
President of the Philippines, with effect on 30 June 2010.
In December 2011, the 23rd Chief Justice of the Supreme Court of the Philippines, Renato Corona, was impeached by the House of Representatives. The Senate, convened as an impeachment court,
began the trial in January 2012 and consequently found Corona guilty of Article II of the Articles of
Impeachment filed against him pertaining to his failure to disclose to the public his statement of assets, liabilities, and net worth.
On 31 May 2012, the Philippine Senate impeached Renato Corona, then Chief Justice of the Supreme
Court of the Philippines. The impeachment trial, which lasted several months, tried Corona on accusations of improperly issuing decisions that favored former President Arroyo, as well as failure to
41
disclose certain properties, in violation of rules applicable to all public employees and officials.
Although there can be no assurance that President Aquino will continue to implement the economic,
development and regulatory policies favoured by President Arroyo‘s administration, including those policies that have a direct effect on the Group‘s assets and operations, President Aquino‘s administration
has already taken steps towards economic reforms, such as raising government revenues by curbing
tax evasion and other forms of corruption.
No assurance can be given that the future political environment in the Philippines will be stable or that current or future Governments will adopt economic policies conducive to sustaining economic growth.
Political instability in the Philippines could negatively affect the general economic conditions in the Philippines which could have a material impact on the financial results of the Group. In addition, such
adverse factors may affect the Philippine tourism industry, which is the focus of one element of the Group‘s
growth strategy.
Historically, the Group has remained apolitical and cooperates with the country‘s duly constituted government. The Group supports and contributes to nation-building.
SM Group’s businesses may be disrupted by terrorist acts, crime, natural disasters and outbreaks of infectious diseases or fears of such occurrences in Metro Manila or other parts of
the Philippines.
The Philippines has been subject to a number of terrorist attacks in the past several years. The Philippine army has been in conflict with the Abu Sayyaf organization which has been responsible for kidnapping and
terrorist activities in the Philippines, and is alleged to have ties to the Al-Qaeda terrorist network. There
have also been sporadic bombings and prominent kidnappings and slayings of foreigners in the Philippines, including the hijacking of a tourist bus carrying Hong Kong tourists that resulted in the deaths of several
passengers.
There can be no assurance that the Philippines will not be subject to further acts of terrorism and violence
in the future. Terrorist attacks have, in the past, had a material adverse effect on investment and confidence in, and the performance of, the Philippine economy and, in turn, the Group‘s business. The
Group‘s current insurance policies do not cover terrorist attacks. Any terrorist attack or violent acts arising from, and leading to, instability and unrest, could cause interruption to parts of the Group‘s businesses and
materially and adversely affect the Group‘s financial conditions, results of operations and prospects.
Metro Manila has experienced severe natural disasters, and authorities may not be prepared or equipped to
respond to such disasters. On 26 September 2009, Typhoon Ondoy resulted in 341.3 millimeters of rainfall in six hours, causing massive flooding that submerged several areas of Metro Manila and adjacent provinces.
The typhoon caused 464 deaths and approximately ₱86 billion in property damage. On August 6, 2012, a monsoon hit Metro Manila and other nearby provinces which also caused severe flooding and landslides.
Other calamities that have affected Metro Manila in recent years include unusually strong earthquakes and
outbreaks of infectious diseases such as H1N1 influenza (commonly known as swine flu).
Other regions of the Philippines have also experienced severe natural disasters. In December 2011, Typhoon Sendong caused massive flooding in the southern Philippine city of Cagayan de Oro, claiming
thousands of lives and displacing tens of thousands of residents. On December 3, 2012, Typhoon Bopha
struck the southern island of Mindanao as a category five typhoon, triggering widespread flash flooding and landslides throughout the region. Typhoon Bopha killed over 1,000 people and caused an estimated
₱42 billion in property damage.
In October 2013, an earthquake occurred in Central Visayas, Philippines. The magnitude of the earthquake was recorded at Mw 7.2, at the epicenter which was located six kilometers southwest of Sagbayan town, at
42
a depth of 12 kilometers. The seismic event affected the whole Central Visayas region, particularly Bohol
and Cebu. According to recent official reports by the National Disaster Risk Reduction and Management Council, 198 people were reported dead, 11 were missing, and 651 were injured as a result of the
earthquake, making it the deadliest earthquake in the Philippines in 23 years. In all, more than 53,000 structures were damaged or destroyed, including commercial buildings, malls, public edifices, hotels and
churches. SM Prime‘s Radisson Blu Cebu sustained cosmetic damages on tiles and walls, however, the
structural integrity of the building has been certified by three structural engineering companies. As a result, total business lost was estimated at approximately P60 million and forecasted year end occupancy of 74%
had dropped to 66%.
In addition, the Central Philippines experienced a severe typhoon, Typhoon Haiyan (Yolanda), in November 2013 which caused extensive damage and claimed thousands of lives. The typhoon is expected to have a
significant effect on the Philippine economy, which may, among other things, lead to an increase in inflation,
a decrease in the pace of economic growth and/or a reduction in consumer spending, all of which would have an adverse effect on the Group‘s results of operations.
It is not possible to predict the extent to which the Group‘s various businesses will be affected by any future
occurrences such as those described above or fears that such occurrences will take place, and there can be
no assurance that any disruption to its businesses will not be protracted, that property will not be damaged and that any such damage will be completely covered by insurance or at all. Any such occurrences may
disrupt the operations of the Group‘s businesses and could materially and adversely affect their business, financial condition and results of operations. Further, any such occurrences may also destabilize the
Philippine economy and business environment, which could also materially and adversely affect the Group‘s financial position and results of operations.
Volatility in the value of the Peso against the U.S. dollar and other currencies could adversely affect the Group’s businesses.
During the last decade, the Philippine economy has from time to time experienced volatility in the value of the Peso and limited availability of foreign exchange. In July 1997, the BSP announced that it would allow
market forces to determine the value of the Peso. Since 30 June 1997, the Peso experienced periods of
significant depreciation and declined from approximately P29.00 = U.S.$1.00 in July 1997 to a low of P49.90 = U.S.$1.00 for the month ended (period average) December 2000. In recent years, the Peso has
generally appreciated and the exchange rate (period average) was P43.31 in 2011, P42.23 in 2012 and P42.45 in 2013.
The revenues of the Group are predominantly denominated in Pesos, while certain expenses, including fixed debt obligations, are denominated in currencies other than Pesos. Certain of the Group‘s borrowings
are denominated in US dollars and China renminbi and accordingly the Group is exposed to fluctuations in the Peso to US dollar and other foreign currency exchange rates. A depreciation of the Peso against the US
dollar and other foreign currencies will increase the amount of Peso revenue required to service foreign
currency denominated debt obligations.
There can be no assurance that the Peso will not depreciate further against other currencies and that such depreciation will not have an adverse effect on the Philippine economy and on the Group‘s businesses.
In addition, changes in currency exchange rates may result in significantly higher domestic interest rates,
liquidity shortages and capital or exchange controls. This could result in a reduction of economic activity,
economic recession, sovereign or corporate loan defaults, lower deposits and increased cost of funds. The foregoing consequences, if they occur, would have a material adverse effect on the Group‘s financial
condition, liquidity and results of operations.
As a policy, the Group does not engage in foreign currency speculation. Furthermore, the Group minimizes
foreign exchange exposure and fully hedges its foreign currency liabilities.
43
Corporate governance and disclosure standards in the Philippines may differ from those in
more developed countries.
While a principal objective of the Philippine securities laws, SEC regulations and PSE disclosure rules is to promote full and fair disclosure of material corporate information, there may be less publicly available
information about Philippine public companies, such as the Issuer, than is regularly made available by public
companies in the United States and other countries. The Philippines securities market is generally subject to less strict regulatory oversight than securities markets in more developed countries. Improper trading
activities could affect the value of securities and concerns about inadequate investor protection may limit participation by foreign investors in the Philippine securities market. Furthermore, although the Issuer
complies with the requirements of the SEC and PSE with respect to corporate governance standards, these standards may differ from those applicable in other jurisdictions. For example, the Philippine Securities
Regulation Code requires the Issuer to have at least two independent directors or such number of
independent directors as is equal to 20% of the Board, whichever is the lower number. The Issuer currently has three independent directors. Many other jurisdictions require significantly more independent directors.
As a policy, the Group adheres to international standards of corporate governance and disclosure. The
Group has hired a Vice President for Corporate Governance to formulate policies and monitor compliance
thereof, as well as a consultant at the Board level. The Group has received numerous awards for good corporate governance from international publications.
Risks Relating to the Bonds
The priority of debt evidenced by a public instrument.
Under Philippine law, in the event of liquidation of a company, unsecured debt of the company (including
guarantees of debt) which is evidenced by a public instrument as provided in Article 2244 of the Civil Code of the Philippines will rank ahead of unsecured debt of the company which is not so evidenced. Under
Philippine law, a debt becomes evidenced by a public instrument when it has been acknowledged before a notary or any person authorized to administer oaths in the Philippines. Although the position is not clear
under Philippine law, it is possible that a jurat (which is a statement of the circumstances in which an
affidavit was made) may be sufficient to constitute a debt evidenced by a public instrument. So far as the Issuer is aware, none of its debt is evidenced by a public instrument and the Issuer will undertake in the
Terms and Conditions of the Bonds and the Trust Indenture Agreement to use its best endeavors not to incur such debt. Any such debt evidenced by a public instrument may, by mandatory provision of law, rank
ahead of the Bonds in the event of the liquidation of the Issuer.
As a policy, the Group‘s borrowings are clean and are not collateralized by its assets, except for debts that
are required by law to be secured.
An active trading market for the Bonds may not develop.
The Bonds are a new issue of securities for which there is currently no trading market. Even if the Bonds are
listed on the PDEx, trading in securities such as the Bonds may be subject to extreme volatility at times, in response to fluctuating interest rates, developments in local and international capital markets and the
overall market for debt securities among other factors. Although the Bonds are intended to be listed on PDEx as soon as reasonably practicable, no assurance can be given that an active trading market for the
Bonds will develop and, if such a market were to develop the Joint Issue Managers are under no obligations to maintain such a market. The liquidity and the market prices for the Bonds can be expected to vary with
changes in market and economic conditions, the financial position and prospects of the Company and other
factors that generally influence the market prices of securities.
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The Company has no control over this risk as active trading of the Bonds is highly dependent on the
bondholders. The Group actively cooperates in efforts aimed at improving the capital markets in the Philippines.
The Issuer may be unable to redeem the Bonds.
At maturity, the Issuer will be required to redeem all of the Bonds. If such an event were to occur, the Issuer may not have sufficient cash in hand and may not be able to arrange financing to redeem the Bonds in time,
or on acceptable terms, or at all. The ability to redeem the Bonds in such event may also be limited by the terms of other debt instruments. Failure to repay, repurchase or redeem tendered Bonds by the Issuer
would constitute an event of default under the Bonds, which may also constitute a default under the terms of other indebtedness of the Group.
The Group has a very strong business franchise in the Philippines. It has a strong recurring cash flow and maintains a low debt-equity ratio and a high level of liquidity in its balance sheet. The Group believes that it
has sufficient resources which will allow it to service the principal and interest of the Bonds.
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USE OF PROCEEDS The net proceeds from the issue of the Bonds, without the Over-subscription Option (after deduction of
commissions and expenses) are approximately P9,918.4 million and are presently intended to be used by the Issuer to refinance maturing debt obligations and finance expansion projects. Assuming the
Over-subscription Option of up to P5,000,000,000.00 is fully exercised, the Company expects total net
proceeds of approximately P14,883.4 million after fees, commissions and expenses.
Net proceeds from the Offering are estimated to be at least as follows:
For a P10.0 billion Issue Size
Total
Estimated proceeds from the sale of Bonds P10,000,000,000.00 Less: Estimated expenses
Documentary Stamp Tax 50,000,000.00
SEC Registration SEC Registration Fee and Legal Research 4,355,625.00
SEC Publication Fee 100,000.00 Underwriting and Other Professional Fees
Underwriting and Legal Fee 20,650,000.00
Rating Fee 4,200,000.00 Listing Application Fee 224,000.00
Listing Maintenance Fee 336,000.00 Printing Cost 300,000.00
Trustee Fees 130,000.00
Paying Agency and Registry Fees 848,000.00 Miscellaneous fees 500,000.00 81,643,625.00
Estimated net proceeds for P10.0 billion Issue P9,918,356,375.00
For the P5.0 billion Over-Subscription Option
Total
Estimated proceeds from the sale of Bonds P5,000,000,000.00
Less: Estimated expenses
Documentary Stamp Tax 25,000,000.00
Underwriting Fees 10,000,000.00 35,000,000.00
Estimated net proceeds for P5.0 billion Over-Subscription
Option
P4,965,000,000.00
Total Net Proceeds (inclusive of Over-Subscription Option of P5.0 billion) --- P14,883,356,375.00
Aside from the foregoing one-time costs, SMIC expects the following annual expenses related to the Bonds:
1. The Issuer will be charged the first year Annual Maintenance Fee in advance upon the approval of the Listing;
2. The Issuer will pay a yearly retainer fee to the Trustee amounting to P130,000 per annum; and 3. After the Issue Date, a Paying Agency fee amounting to P100,000 is payable every interest
payment date. The Registrar will charge a monthly maintenance fee based on the face value of the
Bonds and the number of Bondholders.
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The net proceeds of the Issue of P9.918 billion, assuming an Issue Size of P10.0 billion, shall be used primarily to refinance existing debt obligations of the Issuer and to finance expansion projects as set out below.
Schedule of Disbursement in 2014
(in million P) 2Q 3Q 4Q Total
Refinance existing debt 9,458 9,458
SM Arena project 30 60 60 150
Asinan project 60 120 130 310
Total 9,548 180 190 9,918
Any shortfall in the net proceeds for the intended uses described above shall be funded by the Issuer from
internal sources.
If the P5.0 billion Over-subscription Option is exercised, the additional net proceeds of P4.965 billion from
the Over-subscription Option shall be used to refinance and prepay existing debt obligations of the Issuer.
Existing Debt Obligations
Nature of Debt Amount
(in million P)
Interest Rate
(per annum)
Maturity Date
Series A Bonds due 2014 9,000 8.25% 26 June 2014
Term Loan with Land Bank
of the Philippines
2,000 2.80% 30 October 2014
Short-term Loan with BDO
Unibank, Inc.
1,000 3.00% 02 May 2014
Term Loan with BDO Unibank, Inc.
3,000 3.50% 08 January 2015
Expansion Projects
SM Arena Project The SM Arena project covers the construction of a commercial building in the SM Arena – Mall of Asia
Complex in Pasay City. Construction of the building, which has a gross floor area of 67,536 sq. m., has been completed. The proceeds from the Issue will be used by SMIC for retention payments due to suppliers and
contractors of the commercial building. SMIC will use internally generated funds to pay for the balance of retention payments that will not be funded from the proceeds of the Issue.
Asinan Project
The Asinan project involves the ongoing construction of a warehouse building on the Issuer‘s Asinan property in La Huerta, Paranaque City, with a gross floor area of 25,000 sq. m. which is being undertaken by
the Issuer. The balance of the project cost that will not be funded from proceeds of the Issue will be
financed by SMIC from internally generated funds.
Pending the above uses, the Company intends to invest the net proceeds from the Issue in short-term and medium-term liquid investments including but not limited to short-term government securities, bank
deposits and money market placements which are expected to earn prevailing market rates.
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The Company undertakes that it will not use the net proceeds from the Issue for any purpose, other than as discussed above. However, the Company‘s plans may change, based on factors including changing
macroeconomic and market conditions, or new information regarding the cost or feasibility of these plans. The Company‘s cost estimates may also change as these plans are developed further, and actual costs may
be different from budgeted costs. For these reasons, timing and actual use of the net proceeds may vary
from the foregoing discussion and the Company‘s management may find it necessary or advisable to reallocate the net proceeds within the categories described above, or to alter its plans, including modifying
the projects described in the foregoing and/or pursuing different projects. In the event of any substantial deviation/adjustment in the planned uses of proceeds, the Company shall inform the SEC and the
stockholders within 30 days prior to its utilization.
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DETERMINATION OF THE OFFER PRICE The Bonds shall be issued at 100% of principal amount or face value.
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PLAN OF DISTRIBUTION BDO Capital, BPI Capital Corporation, China Bank and First Metro Investment Corporation, pursuant to an Underwriting Agreement with SMIC executed on 28 April 2014 (the ―Underwriting Agreement‖), have agreed to act as the Underwriters for the Offer and as such, distribute and sell the Bonds at the Offer Price, and have also committed to underwrite up to P10,000,000,000.00 on a firm basis, in either case subject to the satisfaction of certain conditions and in consideration for certain fees and expenses, with a P5,000,000,000.00 Over-subscription Option.
Each of the Underwriters has committed to underwrite the Offer on a firm basis up to the amount indicated below:
Joint Lead Underwriters Amount
BDO Capital & Investment Corporation P2,500,000,000
BPI Capital Corporation P2,500,000,000
China Banking Corporation P2,500,000,000
First Metro Investment Corporaiton P2,500,000,000
The Joint Lead Underwriters shall have exclusive rights and priority to exercise the Over-subscription Option of up to Five Billion Pesos (P5,000,000,000.00). There is no arrangement for the Underwriters to return to SMIC any unsold Bonds. The Underwriting Agreement may be terminated in certain circumstances prior to payment of the net proceeds of the Bonds being made to SMIC. There is no arrangement as well giving the Underwriters the right to designate or nominate any member to the Board of SMIC. SMIC will pay the Joint Lead Underwriters a fee of 0.20% on the final aggregate nominal principal amount of the Bonds issued, which is inclusive of the fee to be ceded to Participating Underwriters. No fees will be given to Broker-Dealers selling the Bonds. The Underwriters are duly licensed by the SEC to engage in underwriting and distribution of securities to the public. The Underwriters may, from time to time, engage in transactions with and perform services in the ordinary course of business with SMIC or other members of the Group. BDO Capital is the wholly-owned investment banking subsidiary of BDO Unibank, Inc., which, in turn, is an associate of the Group. BDO Capital is a full-service investment house primarily involved in securities underwriting and trading, loan syndication, financial advisory, private placement of debt and equity, project finance, and direct equity investment. Incorporated in December 1998, BDO Capital commenced operations in March 1999. BPI Capital Corporation (―BPI Capital‖) is the wholly-owned investment banking subsidiary of the Bank of the Philippine Islands. BPI Capital is an investment house focused on corporate finance and the securities distribution business. It began operations as an investment house in December 1994 and has grown to be one of the biggest investment banks in the country. China Banking Corporation (―China Bank‖) is one of the largest commercial banks in the Philippines in terms of assets and capital. Commencing operations on August 16, 1920, it is the first privately owned local commercial bank in the Philippines. It provides a wide range of domestic and international banking services including investment banking, lending, treasury and foreign exchange trading, trust and investment management, wealth management, insurance and remittance.
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First Metro Investment Corporation (―FMIC‖) is incorporated in the Philippines in 1972, is the investment banking arm of the Metrobank Group, one of the largest financial conglomerates in the Philippines. FMIC provides investment banking services through its four strategic business units: Investment Banking, Treasury, Investment Advisory and Strategic Finance. FMIC also has a quasi-bank license and is a government securities eligible dealer (GSED) licensed by the Bureau of the Treasury. On September 13, 2011, FMIC received a Certificate of Authority issued by the BSP to engage in Trust and Other Fiduciary Business. FMIC is listed in the Philippine Stock Exchange and is a member of the Investment House Association of the Philippines (IHAP). Except for BDO Capital and China Bank which are associates of the Issuer, the other Joint Lead Underwriters, namely BPI Capital and FMIC have no direct relations with SMIC in terms of ownership. The Underwriters have no right to designate or nominate any member of the Board of SMIC. Sale and Distribution The distribution and sale of the Bonds shall be undertaken by the Underwriters who shall sell and distribute the Bonds to third party buyers/investors. Nothing herein shall limit the rights of the Underwriters from purchasing the Bonds for their own respective accounts. There are no persons to whom the Bonds are allocated or designated. The Bonds shall be offered to the public at large and without preference. The obligations of each of the Underwriters will be several, and not solidary, and nothing in the Underwriting Agreement shall be deemed to create a partnership or joint venture between and among any of the Underwriters. Unless otherwise expressly provided in the Underwriting Agreement, the failure by an Underwriter to carry out its obligations thereunder shall neither relieve the other Underwriters of their obligations under the same Underwriting Agreement, nor shall any Underwriter be responsible for the obligation of another Underwriter. Offer Period The Offer Period shall commence at 9:00 am of 30 April 2014, and end at 12:00 pm of 12 May 2014. Application to Purchase Applicants may purchase the Bonds during the Offer Period by submitting to the Underwriters properly completed Applications to Purchase, together with two signature cards, and the full payment of the purchase price of the Bonds in the manner provided in the said Application to Purchase. Corporate and institutional applicants must also submit, in addition to the foregoing, a copy of their SEC Certificate of Registration of Articles of Incorporation and By-Laws, Articles of Incorporation, By-Laws, and the appropriate authorization by their respective boards of directors and/or committees or bodies authorizing the purchase of the Bonds and designating the authorized signatory(ies) thereof. Individual applicants must also submit, in addition to accomplished Applications to Purchase and its required attachments, a photocopy of any one of the following valid identification cards (ID), subject to verification with the original ID: passport, driver‘s license, postal ID, company ID, SSS/GSIS ID and/or Senior Citizen‘s ID. A corporate and institutional investor who is exempt from or is not subject to withholding tax shall be required to submit the following requirements to the Registrar, subject to acceptance by the Issuer as being sufficient in form and substance: (i) certified true copy of the tax exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue; (ii) a duly notarized undertaking, in the prescribed from,
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declaring and warranting its tax exempt status, undertaking to immediately notify the Issuer of any suspension or revocation of the duly-accepted tax exemption certificates and agreeing to indemnify and hold the Issuer free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax; and (iii) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities; provided that, all sums payable by the Issuer to tax exempt entities shall be paid in full without deductions for taxes, duties, assessments or government charges subject to the submission by the Bondholder claiming the benefit of any exemption of reasonable evidence of such exemption to the Registrar. Completed Applications to Purchase and corresponding payments must reach the Underwriters prior to the end of the Offer Period, or such earlier date as may be specified by the Underwriters. Acceptance by the Underwriters of the completed Application to Purchase shall be subject to the availability of the Bonds and the acceptance by SMIC. In the event that any check payment is returned by the drawee bank for any reason whatsoever or the nominated bank account to be debited is invalid, the Application to Purchase shall be automatically canceled and any prior acceptance of the Application to Purchase shall be deemed revoked.
Minimum Purchase A minimum purchase of Twenty Thousand Pesos (P20,000.00) for each series of the Bonds shall be considered for acceptance. Purchases for each series of the Bonds in excess of the minimum shall be in multiples of Ten Thousand Pesos (P10,000.00) for each series. Allotment of the Bonds If the Bonds are insufficient to satisfy all Applications to Purchase, the available Bonds shall be allotted in accordance with the chronological order of submission of properly completed and appropriately accomplished Applications to Purchase on a first-come, first-served basis, without prejudice and subject to SMIC‘s exercise of its right of rejection. Acceptance of Applications SMIC and the Joint Lead Underwriters reserve the right to accept or reject applications to purchase the Bonds, and in case of oversubscription, allocate the Bonds available to the applicants in a manner they deem appropriate. Refunds If any application is rejected or accepted in part only, the application money or the appropriate portion thereof shall be returned without interest to such applicant through the relevant Underwriter with whom such application to purchase the Bonds was made. Payments The Paying Agent shall open and maintain a Payment Account, which shall be operated solely and exclusively by the said Paying Agent in accordance with the Paying Agency and Registry Agreement, provided that beneficial ownership of the Payment Account shall always remain with the Bondholders. The Payment Account shall be used exclusively for the payment of the relevant interest and principal on each Payment Date. The Paying Agent shall maintain the Payment Account for six (6) months from Maturity Date or date of early redemption. Upon closure of the Payment Account, any balance remaining in such Payment Account shall be returned to the Issuer and shall be held by the Issuer in trust and for the irrevocable benefit of the
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Bondholders with unclaimed interest and principal payments. Purchase and Cancellation The Issuer may purchase the Bonds at any time in the open market or by tender or by contract at any price without any obligation to make pro-rata purchases from all Bondholders. Bonds so purchased shall be redeemed and cancelled and may not be re-issued. Upon listing of the Bonds on PDEx, the Issuer shall disclose any such transactions in accordance with the applicable PDEx disclosure rules. Secondary Market SMIC intends to list the Bonds in the PDEx. SMIC may purchase the Bonds at any time without any obligation to make pro-rata purchases of Bonds from all Bondholders. Registry of Bondholders The Bonds shall be issued in scripless form. A Master Certificate of Indebtedness representing the Bonds sold in the Offer shall be issued to and registered in the name of the Trustee, on behalf of the Bondholders. Legal title to the Bonds shall be shown in the Register of Bondholders to be maintained by the Registrar. Initial placement of the Bonds and subsequent transfers of interests in the Bonds shall be subject to applicable prevailing Philippine selling restrictions. The names and addresses of the Bondholders and the particulars of the Bonds held by them and of all transfers of Bonds shall be entered into the Register of Bondholders. Transfers of ownership shall be effected through book-entry transfers in the scripless Register of Bondholders.
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DESCRIPTION OF THE BONDS The following does not purport to be a complete listing of all the rights, obligations, or privileges of the Bonds. Some rights, obligations, or privileges may be further limited or restricted by other documents. Prospective investors are enjoined to carefully review the Articles of Incorporation, By-Laws and resolutions of the Board of Directors and Shareholders of SMIC, the information contained in this Prospectus, the Trust Indenture Agreement, Underwriting Agreement, and other agreements relevant to the Offer. The issue of up to P10,000,000,000.00 aggregate principal amount of 5.2958% per annum Series E Bonds and 5.6125% per annum Series F Bonds with an oversubscription option of up to P5,000,000,000.00 was authorized by a resolution of the Board of Directors of SMIC dated 17 February 2014. The Bonds shall be constituted by a Trust Indenture Agreement executed on 28 April 2014 (the ―Trust Agreement‖) entered into between the Issuer and Philippine National Bank Trust Banking Group (the ―Trustee‖), which term shall, wherever the context permits, include all other persons or companies for the time being acting as trustee or trustees under the Trust Agreement. The description of the terms and conditions of the Bonds set out below includes summaries of, and is subject to, the detailed provisions of the Trust Agreement. A registry and paying agency agreement was executed on 28 April 2014 (the ―Registry and Paying Agency Agreement‖) in relation to the Bonds among the Issuer, Philippine Depository & Trust Corp. as registrar (the ―Registrar‖) and as paying agent (the ―Paying Agent‖). The Bonds shall be offered and sold through a general public offering in the Philippines, and issued and transferable in minimum principal amounts of Twenty Thousand Pesos (P20,000.00) and in multiples of Ten Thousand Pesos (P10,000.00) thereafter, and traded in denominations of Ten Thousand Pesos (P10,000.00) in the secondary market. The Bonds will be repaid at 100% of Face Value on the respective Maturity Dates of the Series E and Series F Bonds, unless SMIC exercises its early redemption option according to the conditions therefore. See ―Description of the Bonds — Redemption and Purchase‖. The Registrar and Paying Agent has no interest in or relation to SMIC which may conflict with its role as Registrar for the Offer. The Trustee has no interest in or relation to SMIC which may conflict with its role as Trustee for the Bonds. Copies of the Trust Agreement and the Registry and Paying Agency Agreement are available for inspection during normal business hours at the specified offices of the Trustee. The holders of the Bonds (the ―Bondholders‖) are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Agreement and are deemed to have notice of those provisions of the Paying Agency and Registry Agreement applicable to them. Form, Denomination and Title Form and Denomination The Bonds are in scripless form, and shall be issued in denominations of Twenty Thousand Pesos (P20,000.00) each as a minimum, in multiples of Ten Thousand Pesos (P10,000.00) thereafter, and traded in denominations of Ten Thousand Pesos (P10,000.00) in the secondary market. Title Legal title to the Bonds shall be shown in the Register of Bondholders maintained by the Registrar. A notice confirming the principal amount of the Bonds purchased by each applicant in the Offer shall be issued by the Registrar to all Bondholders following the Issue Date. Upon any assignment, title to the Bonds shall pass by recording of the transfer from the transferor to the transferee in the electronic Register of Bondholders maintained by the Registrar. Settlement in respect of such transfer or change of title to the Bonds, including the settlement of any cost arising from such transfers, including, but not limited to, documentary stamps
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taxes, if any, arising from subsequent transfers, shall be for the account of the relevant Bondholder. Bond Rating The Bonds have been rated PRS Aaa by PhilRatings, having considered SMIC‘s diversified business portfolio, business plans, growth prospects and cash flows. A rating of PRS Aaa is assigned to long-term debt securities with the smallest degree of investment risk. The Issuer‘s repayment capacity is extremely strong. A rating of
PRS Aaa is the highest credit rating on PhilRatings‗ long-term credit rating scale. The rating was arrived at after considering the following factors: SMIC‘s diversified business portfolio which includes core companies with strong market positions, sustained earnings, and recurring cash flows; solid brand equity and experienced management team; strong liquidity; and sound capitalization. The ratings also consider the continued positive prospects for the Philippine economy in general, and the industries where the SM Group has primary investments, in particular. The rating is subject to regular annual reviews, or more frequently as market developments may dictate, for as long as the Bonds are outstanding. After Issue Date, the Trustee shall monitor the compliance of the Bonds with the regular annual reviews. Transfer of Bonds
Register of Bondholders
The Issuer shall cause the Register of Bondholders to be kept by the Registrar, in electronic form. The names and addresses of the Bondholders and the particulars of the Bonds held by them and of all transfers of Bonds shall be entered into the Register of Bondholders. As required by Circular No. 428-04 issued by the BSP, the Registrar shall send each Bondholder a written statement of registry holdings at least quarterly (at the cost of the Issuer), and a written advice confirming every receipt or transfer of the Bonds that is effected in the Registrar‘s system (at the cost of the relevant Bondholder). Such statement of registry holdings shall serve as the confirmation of ownership of the relevant Bondholder as of the date thereof. Any requests of Bondholders for certifications, reports or other documents from the Registrar, except as provided herein, shall be for the account of the requesting Bondholder. No transfer of the Bonds may be made during the period commencing on a Record Date as defined in this Section on ―Interest Payment Dates‖.
Transfers; Tax Status
The Bonds may be transferred upon exchange of confirmation of sale and confirmation of purchase, or by book entry in recording platforms maintained by approved securities dealers. The Registrar shall ultimately and conclusively determine all matters regarding the evidence necessary to effect any such transfers. Settlement in respect of such transfers or change of title to the Bonds, including the settlement of any documentary stamps taxes, if any, arising from subsequent transfers, shall be settled directly between the transferee and/or the transferor Bondholders. Subject to the provisions of the Registry and Paying Agency Agreement, Bondholders may transfer their Bonds at any time, regardless of tax status of the transferor vis-ἁ-vis the transferee. Should a transfer between Bondholders of different tax status occur on a day, which is not an Interest Payment Date, tax-exempt entities trading with non tax-exempt entities shall be treated as non tax-exempt entities for the interest period within which such transfer occurred. A Bondholder claiming tax-exempt status is required to submit a written notification of the sale or purchase to the Trustee and the Registrar, including the tax status of the transferor or transferee, as appropriate, together with the supporting documents specified under the Registry and Paying Agency Agreement within three days from the
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settlement date for such transfer. Transfers taking place in the Register of Bondholders after the Bonds are listed on PDEx shall be allowed between tax-exempt and non tax-exempt entities without restriction and observing the tax exemption of tax-exempt entities, if and/or when so allowed under and in accordance with the relevant rules, conventions and guidelines of PDEx and PDTC.
Secondary Trading of the Bonds
The Issuer intends to list the Bonds on PDEx for secondary market trading. The Bonds will be traded in a minimum board lot size of P10,000.00 as a minimum, and in multiples of P10,000.00 in excess thereof for so long as any of the Bonds are listed on PDEx. Secondary market trading in PDEx shall follow the applicable PDEx rules and conventions and guidelines, including rules, conventions and guidelines governing trading and settlement between Bondholders of different tax status, and shall be subject to the relevant fees of PDEx and PDTC. Ranking The Bonds shall constitute the direct, unconditional, unsubordinated and unsecured obligations of the Issuer ranking at least pari passu and ratably without any preference or priority among themselves and with all its other present and future direct, unconditional, unsubordinated and unsecured obligations (other than subordinated obligations and those preferred by mandatory provisions of law). Interest
Interest Payment Dates
The Series E Bonds bear interest on its principal amount from and including Issue Date at the rate of 5.2958% p.a., payable semi-annually in arrears starting on 19 November 2014 for the first Interest Payment Date, and on November 19 and May 19 of each year for each subsequent Interest Payment Date at which the Bonds are outstanding, or the subsequent Business Day, without adjustment for accrued interest, if such Interest Payment Date is not a Business Day. The Series F Bonds bear interest on its principal amount from and including Issue Date at the rate of 5.6125% p.a., payable semi-annually in arrears starting on 19 November 2014 for the first Interest Payment Date, and on November 19 and May 19 of each year for each subsequent Interest Payment Date at which the Bonds are outstanding, or the subsequent Business Day, without adjustment for accrued interest, if such Interest Payment Date is not a Business Day. The cut-off date in determining the existing Bondholders entitled to receive interest or principal amount due shall be two (2) Business Days prior to the relevant Interest Payment Dates (the ―Record Date‖), which shall be the reckoning date in determining the Bondholders entitled to receive interest, principal or any other amount due under the Bonds. No transfers of the Bonds may be made during this period intervening between and commencing on the Record Date and the relevant Interest Payment Dates. Interest Accrual Each Bond shall cease to bear interest from and including the Maturity Date, as defined in the discussion on ―Final Redemption‖, below, unless, upon due presentation, payment of the principal in respect of the Bond then outstanding is not made, is improperly withheld or refused, in which case the Penalty Interest (see ―Penalty Interest‖ below) shall apply.
Determination of Interest Amount
The interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and,
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in the case of an incomplete month, the number of days elapsed on the basis of a month of 30 days. Redemption and Purchase
Final Redemption
Unless previously purchased and cancelled, the Bonds shall be redeemed at par or 100% of face value on their respective Maturity Dates. However, if the Maturity Date is not a Business Day, payment of all amounts due on such date will be made by the Issuer through the Paying Agent, without adjustment for accrued interest, on the succeeding Business Day.
Redemption for Taxation Reasons
If payments under the Bonds become subject to additional or increased taxes other than the taxes and rates of such taxes prevailing on the Issue Date as a result of certain changes in law, rule or regulation, or in the interpretation thereof, and such additional or increased rate of such tax cannot be avoided by use of reasonable measures available to the Issuer, the Issuer may redeem the Bonds in whole, but not in part, on any Interest Payment Date (having given not more than 60 nor less than 30 days‘ notice) at par plus accrued interest. Optional Redemption
Prior to final redemption, the Issuer shall have a one-time option, but shall not be obligated, to redeem in whole, and not a part only, each outstanding series of the Bonds on the tenth (10th) Interest Payment Date of the Series E Bonds and on the fourteenth (14th) Interest Payment Date of the Series F Bonds, respectively (each, an ―Optional Redemption Date‖). The Issuer shall give not less than thirty (30) nor more than sixty (60) calendar days‘ prior written notice of its intention to redeem the Bonds, which notice shall be irrevocable and binding upon the Issuer to effect such early redemption of the Bonds at the Interest Payment Date stated in such notice. The amount payable to the Bondholders in respect of such redemption shall be calculated based on the principal amount of the Bonds being redeemed, as the sum of (i) one hundred two per cent (102%) of the principal amount; and (ii) accrued interest on the Bonds on the Optional Redemption Date. Purchase and Cancellation Upon listing of the Bonds on PDEx, the Issuer shall disclose any such transactions in accordance with the applicable PDEx disclosure rules. The Issuer may at any time purchase any of the Bonds at any price in the open market or by tender or by contract at any price, without any obligation to purchase Bonds pro-rata from all Bondholders. Any Bonds so purchased shall be redeemed and cancelled and may not be re-issued.
Change in Law or Circumstance The following events shall be considered as changes in law or circumstances as it refers to the obligations of the Issuer and the rights and interests of the Bondholders under the Trust Indenture Agreement and the Bonds:
(a) Any government and/or non-government consent, license, authorization, registration or approval now or hereafter necessary to enable the Issuer to comply with its obligations under the Trust Agreement or the Bonds shall be modified, withdrawn or withheld in a manner which, in the reasonable opinion of the Trustee, will materially and adversely affect the ability of the Issuer to comply with such obligations; or
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(b) Any provision of the Trust Indenture Agreement or any of the related documents is or becomes, for
any reason, invalid, illegal or unenforceable to the extent that it becomes for any reason unlawful for the Issuer to give effect to its rights or obligations thereunder, or to enforce any provisions of the Trust Indenture Agreement or any of the related documents in whole or in part; or any law is introduced or any applicable existing law is modified or rendered ineffective or inapplicable to prevent or restrain the performance by the parties thereto of their obligations under the Trust Indenture Agreement or any other related documents; or
(c) Any concessions, permits, rights, franchise or privileges required for the conduct of the business
and operations of the Issuer shall be revoked, cancelled or otherwise terminated, or the free and continued use and exercise thereof shall be curtailed or prevented, in such manner as to materially and adversely affect the financial condition or operations of the Issuer.
Payments
The principal of, interest on, and all other amounts payable on the Bonds shall be paid to the Bondholders by crediting of the settlement accounts designated by each of the Bondholders. The principal of, and interest on, the Bonds shall be payable in Philippine Pesos. SMIC shall ensure that so long as any of the Bonds remains outstanding, there shall at all times be a Paying Agent for purposes of disbursing payments on the Bonds. In the event the Paying Agent shall be unable or unwilling to act as such, SMIC shall appoint a qualified financial institution in the Philippines authorized to act in its place. The Paying Agent may not resign its duties or be removed without a successor having been appointed. Payment of Additional Amounts - Taxation
Interest income on the Bonds is subject to a withholding tax at rates of between 20% and 30% depending on the tax status of the relevant Bondholder under relevant law, regulation or tax treaty. Except for such withholding tax and as otherwise provided, all payments of principal and interest are to be made free and clear of any deductions or withholding for or on account of any present or future taxes or duties imposed by or on behalf of Republic of the Philippines, including, but not limited to, issue, registration or any similar tax or other taxes and duties, including interest and penalties, if any. If such taxes or duties are imposed, the same shall be for the account of the Issuer; provided however that, the Issuer shall not be liable for the following:
a) The withholding tax applicable on interest earned on the Bonds prescribed under the Tax Code, as amended, and its implementing rules and regulations as may be in effect from time to time. An investor who is exempt from the aforesaid withholding tax, or is subject to a preferential withholding tax rate shall be required to submit the following requirements to the Registrar, subject to acceptance by the Issuer as being sufficient in form and substance:
(i) certified true copy of the tax exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue confirming the exemption or preferential rate; (ii) a duly notarized undertaking, in the prescribed form, declaring and warranting its tax-exempt status or preferential rate entitlement, undertaking to immediately notify the Issuer of any suspension or revocation of the tax exemption certificates or preferential rate entitlement, and agreeing to indemnify and hold the Issuer and the Registrar free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax; and (iii) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities which for purposes of claiming tax
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treaty withholding rate benefits, shall include evidence of the applicability of a tax treaty and consularized proof of the Bondholder‘s legal domicile in the relevant treaty state, and confirmation acceptable to the Issuer that the Bondholder is not doing business in the Philippines; provided further that, all sums payable by the Issuer to tax exempt entities shall be paid in full without deductions for taxes, duties, assessments or government charges subject to the submission by the Bondholder claiming the benefit of any exemption of reasonable evidence of such exemption to the Registrar;
b) Gross Receipts Tax under Section 121 of the Tax Code;
c) Taxes on the overall income of any securities dealer or Bondholder, whether or not subject to
withholding; and
d) Value Added Tax (―VAT‖) under Sections 106 to 108 of the Tax Code, and as amended by Republic Act No. 9337.
Documentary stamp tax for the primary issue of the Bonds and the execution of the Bond Agreements, if any, shall be for the Issuer‘s account. Financial Ratios Similar to the covenants contained in other debt agreements of the Issuer, the Issuer shall maintain the following financial ratios:
a) Current Ratio of not less than 0.3:1; and
b) Debt-Equity Ratio of not more than 80:20.
There are no other regulatory ratios that the Issuer is required to comply with. Negative Pledge So long as any Bond or coupon remains outstanding (as defined in the Trust Agreement):
(i) the Issuer will not create or permit to subsist any lien upon the whole or any part of its undertaking, assets or revenues present or future to secure any Indebtedness or any guarantee of or indemnity in respect of any Indebtedness;
(ii) the Issuer shall procure that its Material Subsidiaries will not create or permit to subsist any lien
upon the whole or any part of any Material Subsidiary‘s undertaking, assets or revenues present or future to secure any Public Debt or any guarantee of or indemnity in respect of any Public Debt; and
(iii) the Issuer will procure that no other Person creates or permits to subsist any lien or gives any
guarantee of, or indemnity upon the whole or any part of the undertaking, assets or revenues present or future of that other Person to secure any Public Debt of the Issuer, or any Material Subsidiary or to secure any guarantee of or indemnity in respect of the Public Debt of the Issuer or any Material Subsidiary unless, at the same time or prior thereto, the Issuer‘s obligations under the Bonds and the Trust Indenture Agreement, (a) are secured equally and rateably therewith or benefit from a guarantee or indemnity in substantially identical terms thereto, as the case may be, or (b) have the benefit of such other security, guarantee, indemnity or other arrangement as the Trustee in its absolute discretion shall deem to be not materially less beneficial to the Bondholders or as shall be approved by Extraordinary Resolution of the Bondholders
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provided that this paragraph shall not apply to liens (aa) arising by operation of law; or (bb) created in respect of Indebtedness (for the avoidance of doubt, including Indebtedness in respect of which there is a preference or priority under Article 2244 of the Civil Code of the Philippines as the same may be amended from time to time) in aggregate principal amount not exceeding 20% of Total Consolidated Assets as determined in the Issuer's latest audited consolidated financial statements; or (cc) created in respect of Hedging Transactions; and unless, at the same time or prior thereto, the Issuer‘s obligations under the Bonds, the Coupons and the Trust Agreement, (x) are secured equally and rateably therewith or benefit from a guarantee or indemnity in substantially identical terms thereto, as the case may be, in each case to the satisfaction of the Trustee, or (y) have the benefit of such other security, guarantee, indemnity or other arrangement as the Trustee in its absolute discretion shall deem to be not materially less beneficial to the Bondholders or as shall be approved by Extraordinary Resolution (as defined in the Trust Agreement) of the Bondholders. Events and Consequences of Default If any of the following events occurs (the ―Events of Default‖) and is continuing, the Trustee at its discretion may give notice to the Issuer that the Bonds are, and they shall immediately become, due and payable at their principal amount together with accrued interest:
(a) Payment Default: there is failure to pay the interest on any of the Bonds within 14 days from the due date for payment; or
(b) Breach of Other Obligations: the Issuer defaults in the performance or observance of, or
compliance with, any one or more of its other obligations set out in the Bonds or the Trust Agreement and (except where the Trustee considers, and so notifies in writing to the Issuer, that such default is not capable of remedy, when no such notice or grace period as mentioned below shall be required) such default continues for a period of 30 days after notice of such default shall have been given to the Issuer by the Trustee; or
(c) Cross-Default: (i) any other present or future Indebtedness of the Issuer or any of its Material
Subsidiaries or Subsidiaries for or in respect of moneys borrowed or raised becomes (or becomes capable of being declared) due and payable prior to its stated maturity by reason of any actual or potential default, event of default or the like (howsoever described), or (ii) any such Indebtedness is not paid when due or, as the case may be, within any applicable grace period, or (iii) the Issuer or any of its Material Subsidiaries or Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect of, any moneys borrowed or raised provided that the aggregate amount of the relevant Indebtedness, guarantees and indemnities in respect of which one or more of the events mentioned above in this paragraph (c) have occurred equals or exceeds 20% of the Issuer‘s Total Consolidated Assets; or
(d) Judgement, Decree or Order: a final judgment, decree or order has been entered against the
Issuer or any Material Subsidiary by a court of competent jurisdiction from which no appeal may be made or is taken for the payment of money in excess of 20% of the Issuer‘s Total Consolidated Assets and any relevant period specified for payment of such judgment, decree or order shall have expired without it being satisfied, discharged or stayed; or
(e) Enforcement Proceedings: a distress, attachment, execution or other legal process is levied,
enforced or sued out on or against (in the opinion of the Trustee) any material part of the property, assets or revenues of the Issuer or any Material Subsidiary and is not discharged or stayed within 60 days (or such longer period as the Issuer satisfies the Trustee is appropriate in relation to the jurisdiction concerned) of having been so levied, enforced or sued unless and for so long as the Trustee is satisfied that it is being contested in good faith and diligently; or
(f) Security Enforced: any lien, present or future, created or assumed by the Issuer or any Material
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Subsidiary becomes enforceable and any step is taken to enforce it (including the taking of possession or the appointment of a receiver, administrative receiver, manager or other similar person) and the Indebtedness secured by the lien is not discharged or such steps stayed within 60 days (or such longer period as the Issuer satisfies the Trustee is appropriate in relation to the jurisdiction concerned) of such steps being so taken unless and for so long as the Trustee is satisfied that it is being contested in good faith and diligently; or
(g) Insolvency: the Issuer or any Material Subsidiary (i) is (or is, or could be, deemed by law or a
court to be) insolvent or bankrupt or unable to pay its debts, (ii) stops, suspends or threatens to stop or suspend payment of all or a material part of (or of a particular type of) its debts, (iii) proposes or makes any agreement for the deferral, rescheduling or other readjustment of all of (or all of a particular type of) its debts (or of any part which it will or might otherwise be unable to pay when due), (iv) proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any of such debts, or (v) a moratorium is agreed or declared in respect of or affecting all or any part of (or of a particular type of) the debts of the Issuer or any Material Subsidiary; or
(h) Winding-up: an order of a court of competent jurisdiction is made or an effective resolution
passed for the winding-up or dissolution or administration of the Issuer or any Material Subsidiary, or the Issuer or any Material Subsidiary ceases or threatens to cease to carry on all or substantially all of its business or operations, except for the purpose of and followed by a reconstruction, amalgamation, reorganization, merger or consolidation (i) on terms approved by the Trustee or by a resolution of the Bondholders, or (ii) in the case of a Material Subsidiary, whereby the undertaking and assets of the Material Subsidiary are transferred to or otherwise vested in the Issuer or another Material Subsidiary pursuant to a merger of the Material Subsidiary with the Issuer or such other Material Subsidiary or by way of a voluntary winding-up or dissolution where there are surplus assets in such Material Subsidiary and such surplus assets attributable to the Issuer and/or any other Material Subsidiary are distributed to the Issuer and/or any such other Material Subsidiary; or
(i) Bankruptcy Proceedings: proceedings shall have been initiated against the Issuer or any
Material Subsidiary under any applicable bankruptcy, insolvency or reorganization law and such proceedings shall not have been discharged or stayed within a period of 60 days (or such longer period as the Issuer satisfies the Trustee is appropriate in relation to the jurisdiction concerned) unless and for so long as it is being contested in good faith and diligently; or
(j) Validity: the Issuer shall contest in writing the validity or enforceability of the Trust Agreement or
the Bonds or shall deny generally in writing the liability of the Issuer, under the Trust Agreement or the Bonds; or
(k) Expropriation: any step is taken by any person with a view to the seizure, compulsory acquisition,
or expropriation of all or a material part of the assets of the Issuer or any of its Material Subsidiaries; or
(l) Illegality: it is or will become unlawful for the Issuer to perform or comply with any one or more of
its obligations under any of the Bonds or the Trust Agreement; or (m) Analogous Events: any event occurs which under the laws of any relevant jurisdiction has an
analogous effect to any of the events referred to in any of the foregoing paragraphs provided that in the case of paragraph (c), (h) and (i) in relation to a Subsidiary or the Material Subsidiary (as the case may be), the Trustee shall have certified that in its opinion such event is materially prejudicial to the interests of the Bondholders.
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Notice of Default The Trustee shall, within five (5) days after the occurrence of any Event of Default, give to the Bondholders written notice of such default known to it, unless the same shall have been cured before the giving of such notice; provided that, in the case of payment default, as described in ―Payment Default‖ above, the Trustee shall immediately notify the Bondholders upon the occurrence of such payment default. The existence of a written notice required to be given to the Bondholders hereunder shall be published in a newspaper of general circulation in the Philippines for two consecutive days, further indicating in the published notice that the Bondholders or their duly authorized representatives may obtain an important notice regarding the Bonds at the principal office of the Trustee upon presentment of sufficient and acceptable identification. Penalty Interest In case any amount payable by the Issuer under the Bonds, whether for principal, interest, fees due to Trustee or Registrar or otherwise, is not paid on due date, the Issuer shall, without prejudice to its obligations to pay the said principal, interest and other amounts, pay penalty interest on the defaulted amount(s) at the rate of 2% p.a. (the ―Penalty Interest‖) from the time the amount falls due until it is fully paid. Payment in the Event of Default The Issuer covenants that upon the occurrence of any Event of Default, the Issuer shall pay to the Bondholders, through the Paying Agent, the whole amount which shall then have become due and payable on all such outstanding Bonds with interest at the rate borne by the Bonds on the overdue principal and with Penalty Interest as described above, and in addition thereto, the Issuer shall pay to the Trustee such further amounts as shall be determined by the Trustee to be sufficient to cover the cost and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any reasonable expenses or liabilities incurred without negligence or bad faith by the Trustee hereunder. Application of Payments Any money collected or delivered to the Paying Agent, and any other funds held by it, subject to any other provision of the Trust Agreement and the Paying Agency and Registry Agreement relating to the disposition of such money and funds, shall be applied by the Paying Agent in the order of preference as follows: first, to the payment to the Trustee, the Paying Agent and the Registrar, of the costs, expenses, fees and other charges of collection, including reasonable compensation to them, their agents, attorneys and counsel, and all reasonable expenses and liabilities incurred or disbursements made by them, without negligence or bad faith; second, to the payment of the interest in default, in the order of the maturity of such interest with Penalty Interest; third, to the payment of the whole amount then due and unpaid upon the Bonds for principal, and interest, with Penalty Interest; and fourth, the remainder, if any shall be paid to the Issuer, its successors or assigns, or to whoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. Except for any interest and principal payments, all disbursements of the Paying Agent in relation to the Bonds shall require the conformity of the Trustee. The Paying Agent shall render a monthly account of such funds under its control. Prescription Claims in respect of principal and interest or other sums payable hereunder shall prescribe unless made within ten (10) years (in the case of principal or other sums) or five (5) years (in the case of interest) from the date on which payment becomes due.
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Remedies All remedies conferred by the Trust Agreement to the Trustee and the Bondholders shall be cumulative and not exclusive and shall not be so construed as to deprive the Trustee or the Bondholders of any legal remedy by judicial or extra judicial proceedings appropriate to enforce the conditions and covenants of the Trust Agreement, subject to the discussion below on ―Ability to File Suit‖. No delay or omission by the Trustee or the Bondholders to exercise any right or power arising from or on account of any default hereunder shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence thereto; and every power and remedy given by the Trust Agreement to the Trustee or the Bondholders may be exercised from time to time and as often as may be necessary or expedient. Ability to File Suit No Bondholder shall have any right by virtue of or by availing of any provision of the Trust Agreement to institute any suit, action or proceeding for the collection of any sum due from the Issuer hereunder on account of principal, interest and other charges, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (i) such Bondholder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof and the related request for the Trustee to convene a meeting of the Bondholders to take up matters related to their rights and interests under the Bonds; (ii) the Majority Bondholders shall have decided and made the written request upon the Trustee to institute such action, suit or proceeding in the latter‘s name; (iii) the Trustee for 60 days after the receipt of such notice and request shall have neglected or refused to institute any such action, suit or proceeding; and (iv) no directions inconsistent with such written request shall have been given under a waiver of default by the Bondholders, it being understood and intended, and being expressly covenanted by every Bondholder with every other Bondholder and the Trustee, that no one or more Bondholders shall have any right in any manner whatever by virtue of or by availing of any provision of the Trust Agreement to affect, disturb or prejudice the rights of the holders of any other such Bonds or to obtain or seek to obtain priority over or preference to any other such holder or to enforce any right under the Trust Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all the Bondholders. Waiver of Default by the Bondholders The Majority Bondholders may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, or the Majority Bondholders may decide for and in behalf of the Bondholders to waive any past default, except the events of default defined as a payment default, breach of representation or warranty default, expropriation default, insolvency default, or closure default, and its consequences. In case of any such waiver, the Issuer, the Trustee and the Bondholders shall be restored to their former positions and rights hereunder; provided however that, no such waiver shall extend to any subsequent or other default or impair any right consequent thereto. Any such waiver by the Majority Bondholders shall be conclusive and binding upon all Bondholders and upon all future holders and owners thereof, irrespective of whether or not any notation of such waiver is made upon the certificate representing the Bonds.
Substitution Substitution of the Bonds is not comtemplated.
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Trustee; Notices Notice to the Trustee All documents required to be submitted to the Trustee pursuant to the Trust Agreement and this Prospectus and all correspondence addressed to the Trustee shall be delivered to:
To the Trustee: Philippine National Bank Trust Banking Group Attention: Atty. Josephine Jolejole Address: 3rd Floor, PNB Financial Center D. Macapagal Boulevard, Pasay City
Subject: SMIC Bonds due 2021 and 2024 Facsimile: +63 2 526 3379 All documents and correspondence not sent to the above-mentioned address shall be considered as not to have been sent at all. Notice to the Bondholders
The Trustee shall send all notices to Bondholders to their mailing address as set forth in the Register of Bondholders. Except where a specific mode of notification is provided for herein, notices to Bondholders shall be sufficient when made in writing and transmitted in any one of the following modes: (i) registered mail; (ii) surface mail; (iii) by one-time publication in a newspaper of general circulation in the Philippines; or (iv) personal delivery to the address of record in the Register of Bondholders. The Trustee shall rely on the Register of Bondholders in determining the Bondholders entitled to notice. All notices shall be deemed to have been received (i) ten (10) days from posting if transmitted by registered mail; (ii) fifteen (15) days from mailing if transmitted by surface mail; (iii) on date of publication, or; (iv) on date of delivery, for personal delivery.
Binding and Conclusive Nature
Except as provided in the Trust Agreement, all notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained by the Trustee for the purposes of the provisions of the Trust Agreement, shall (in the absence of willful default, bad faith or manifest error) be binding on the Issuer, and all Bondholders and (in the absence as referred to above) no liability to the Issuer, the Paying Agent or the Bondholders shall attach to the Trustee in connection with the exercise or non-exercise by it of its powers, duties and discretions under the Trust Agreement. Duties and Responsibilities of the Trustee (a) The Trustee is appointed as trustee for and on behalf of the Bondholders and accordingly shall
perform such duties and shall have such responsibilities as provided in the Trust Agreement. The Trustee shall, in accordance with the terms and conditions of the Trust Agreement, monitor the compliance or non-compliance by the Issuer with all its representations and warranties, and the observance by the Issuer of all its covenants and performance of all its obligations, under and pursuant to the Trust Agreement. The Trustee shall observe due diligence in the performance of its duties and obligations under the Trust Agreement. For the avoidance of doubt, notwithstanding any actions that the Trustee may take, the Trustee shall remain to be the party responsible to the Bondholders, and to whom the Bondholders shall communicate with in respect to any matters that must be taken up with the Issuer.
(a) The Trustee shall, prior to the occurrence of an Event of Default or after the curing of all such defaults which may have occurred, perform only such duties as are specifically set forth in the Trust
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Agreement. In case of default, the Trustee shall exercise such rights and powers vested in it by the Trust Agreement, and use such judgment and care under the circumstances then prevailing that individuals of prudence, discretion and intelligence, and familiar with such matters exercise in the management of their own affairs.
(b) None of the provisions contained in the Trust Agreement or Prospectus shall require or be
interpreted to require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers.
Resignation and Change of Trustee (a) The Trustee may at any time resign by giving ninety (90) days‘ prior written notice to the Issuer and
to the Bondholders of such resignation. (b) Upon receiving such notice of resignation of the Trustee, the Issuer shall immediately appoint a
successor trustee by written instrument in duplicate, executed by its authorized officers, one (1) copy of which instrument shall be delivered to the resigning Trustee and one (1) copy to the successor trustee. If no successor shall have been so appointed and have accepted appointment within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor, or any Bondholder who has been a bona fide holder for at least six months (the ―bona fide Bondholder‖) may, for and in behalf of the Bondholders, petition any such court for the appointment of a successor. Such court may thereupon after notice, if any, as it may deem proper, appoint a successor trustee.
(c) A successor trustee should possess all the qualifications required under pertinent laws, otherwise,
the incumbent trustee shall continue to act as such.
(d) In case at any time the Trustee shall become incapable of acting, or has acquired conflicting interest, or shall be adjudged as bankrupt or insolvent, or a receiver for the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its properties or affairs for the purpose of rehabilitation, conservation or liquidation, then the Issuer may within thirty (30) days from there remove the Trustee concerned, and appoint a successor trustee, by written instrument in duplicate, executed by its authorized officers, one (1) copy of which instrument shall be delivered to the Trustee so removed and one (1) copy to the successor trustee. If the Issuer fails to remove the Trustee concerned and appoint a successor trustee, any Bona Fide Bondholder may petition any court of competent jurisdiction for the removal of the Trustee concerned and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper, remove the Trustee and appoint a successor trustee.
(e) The Majority Bondholders may at any time remove the Trustee for cause, and appoint a successor
trustee, by the delivery to the Trustee so removed, to the successor trustee and to the Issuer of the required evidence of the action in that regard taken by the Majority Bondholders.
(f) Any resignation or removal of the Trustee and the appointment of a successor trustee pursuant to
any of the provisions of this Subsection shall become effective upon the earlier of: (i) acceptance of appointment by the successor trustee as provided in the Trust Agreement; or (ii) the effectivity of the resignation notice sent by the Trustee under the Trust Agreement (a) (the ―Resignation Effective Date‖) provided, however, that after the Resignation Effective Date and, as relevant, until such successor trustee is qualified and appointed (the ―Holdover Period‖), the resigning Trustee shall discharge duties and responsibilities solely as a custodian of records for turnover to the successor Trustee promptly upon the appointment thereof by SMIC.
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Successor Trustee (a) Any successor trustee appointed shall execute, acknowledge and deliver to the Issuer and to its
predecessor Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor trustee, without further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and obligations of its predecessor in the trusteeship with like effect as if originally named as trustee in the Trust Agreement. The foregoing notwithstanding, on the written request of the Issuer or of the successor trustee, the Trustee ceasing to act as such shall execute and deliver an instrument transferring to the successor trustee, all the rights, powers and duties of the Trustee so ceasing to act as such. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing as may be necessary to fully vest in and confer to such successor trustee all such rights, powers and duties.
(b) Upon acceptance of the appointment by a successor trustee, the Issuer shall notify the
Bondholders in writing of the succession of such trustee to the trusteeship. If the Issuer fails to notify the Bondholders within 10 days after the acceptance of appointment by the trustee, the latter shall cause the Bondholders to be notified at the expense of the Issuer.
Reports to the Bondholders The Trustee shall submit to the Bondholders on or before February 28 of each year from the relevant Issue Date, until full payment of the Bonds, a brief report dated December 31 of the immediately preceding year with respect to: (i) The funds, if any, physically in the possession of the Paying Agent held in trust for the Bondholders
on the date of such report; and
(ii) Any action taken by the Trustee in the performance of its duties under the Trust Agreement which it has not previously reported and which in its opinion materially affects the Bonds, except action in respect of a default, notice of which has been or is to be withheld by it.
The Trustee shall submit to the Bondholders a brief report within 90 days from the making of any advance for the reimbursement of which it claims or may claim a lien or charge which is prior to that of the Bondholders on the property or funds held or collected by the Paying Agent with respect to the character, amount and the circumstances surrounding the making of such advance; provided that, such advance remaining unpaid amounts to at least ten percent (10%) of the aggregate outstanding principal amount of the Bonds at such time. Inspection of Documents The following pertinent documents may be inspected during regular business hours on any Business Day at the principal office of the Trustee: 1. Trust Indenture Agreement 2. Paying Agency and Registry Agreement 3. Articles of Incorporation and By-Laws of the Company 4. Registration Statement of the Company with respect to the Bonds Meetings of the Bondholders A meeting of the Bondholders may be called at any time for the purpose of taking any actions authorized to be taken by or in behalf of the Bondholders of any specified aggregate principal amount of Bonds under any other provisions of the Trust Indenture Agreement or under the law and such other matters related to the
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rights and interests of the Bondholders under the Bonds.
Notice of Meetings
The Trustee may at any time call a meeting of the Bondholders, or the holders of at least twenty-five percent (25%) of the aggregate outstanding principal amount of Bonds may direct in writing the Trustee to call a meeting of the Bondholders, to take up any allowed action, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Bondholders, setting forth the time and the place of such meeting and the purpose of such meeting in reasonable detail, shall be sent by the Trustee to the Issuer and to each of the registered Bondholders not earlier than forty five (45) days nor later than fifteen (15) days prior to the date fixed for the meeting. However, the Trustee shall send notices in respect of any meeting called by SMIC to obtain consent of the Bondholders to an amendment of the Intercreditor Agreement in the following manner: a notice shall be sent to Bondholders detailing the amendments proposed and consents requested by SMIC not earlier than sixty (60) days nor later than forty five (45) days prior to the date fixed for the meeting, if the Bondholder fails to respond as required by such notice, the Trustee shall send a second notice to such Bondholder not later than fifteen (15) days prior to the date fixed for the meeting. Each of such notices shall be published in a newspaper of general circulation as provided in the Trust Indenture Agreement. All reasonable costs and expenses incurred by the Trustee for the proper dissemination of the requested meeting shall be reimbursed by the Issuer within ten (10) days from receipt of the duly supported billing statement.
Failure of the Trustee to Call a Meeting
In case at any time the Issuer, pursuant to a resolution of its board of directors or executive committee, or the holders of at least twenty five percent (25%) of the aggregate outstanding principal amount of the Bonds shall have requested the Trustee to call a meeting of the Bondholders by written request setting forth in reasonable detail the purpose of the meeting, and the Trustee shall not have mailed and published, in accordance with the notice requirements, the notice of such meeting, then the Issuer or the Bondholders in the amount above specified may determine the time and place for such meeting and may call such meeting by mailing and publishing notice thereof.
Quorum
The Trustee shall determine and record the presence of the Majority Bondholders, personally or by proxy. The presence of the Majority Bondholders shall be necessary to constitute a quorum to do business at any meeting of the Bondholders except for any meeting called by SMIC solely for the purpose of obtaining the consent of the Bondholders to an amendment of the Intercreditor Agreement, where the failure of any Bondholder to transmit an objection to such proposal of SMIC after at least two (2) notices to such Bondholder have been sent by the Trustee, will be considered by the Trustee as an affirmative vote (and such Bondholder will be considered present for quorum purposes by the Trustee) for the proposal of SMIC. Procedure for Meetings (a) The Trustee shall preside at all the meetings of the Bondholders, unless the meeting shall have
been called by the Issuer or by the Bondholders, in which case the Issuer or the Bondholders calling the meeting, as the case may be, shall in like manner move for the election of the chairman and secretary of the meeting.
(b) Any meeting of the Bondholders duly called may be adjourned for a period or periods not to exceed
in the aggregate of one (1) year from the date for which the meeting shall originally have been called and the meeting as so adjourned may be held without further notice. Any such adjournment may be ordered by persons representing a majority of the aggregate principal amount of the Bonds
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represented at the meeting and entitled to vote, whether or not a quorum shall be present at the meeting.
Voting Rights To be entitled to vote at any meeting of the Bondholders, a person shall be a registered holder of one (1) or more Bonds or a person appointed by an instrument in writing as proxy by any such holder as of the date of the said meeting. Bondholders shall be entitled to one vote for every Ten Thousand Pesos (P10,000.00) interest. The only persons who shall be entitled to be present or to speak at any meeting of the Bondholders shall be the persons entitled to vote at such meeting and any representatives of the Issuer and its legal counsel. Voting Requirement All matters presented for resolution by the Bondholders in a meeting duly called for the purpose shall be decided or approved by the affirmative vote of the Majority Bondholders present or represented in a meeting at which there is a quorum except as otherwise provided in the Trust Agreement (please refer to the discussion on ―Quorum‖). Any resolution of the Bondholders which has been duly approved with the required number of votes of the Bondholders as herein provided shall be binding upon all the Bondholders and the Issuer as if the votes were unanimous. Role of the Trustee in Meetings of the Bondholders Notwithstanding any other provisions of the Trust Indenture Agreement, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of the Bondholders, in regard to proof of ownership of the Bonds, the appointment of proxies by registered holders of the Bonds, the election of the chairman and the secretary, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidences of the right to vote and such other matters concerning the conduct of the meeting as it shall deem fit. Amendments SMIC and the Trustee may amend these Terms and Conditions or the Bonds without notice to any Bondholder but with the written consent of the Majority Bondholders (including consents obtained in connection with a tender offer or exchange offer for the Bonds). However, without the consent of each Bondholder affected thereby, an amendment may not:
(1) reduce the amount of Bondholder that must consent to an amendment or waiver;
(2) reduce the rate of or extend the time for payment of interest on any Bond;
(3) reduce the principal of or extend the Maturity Date of any Bond;
(4) impair the right of any Bondholder to receive payment of principal of and interest on such Holder‘s Bonds on or after the due dates therefore or to institute suit for the enforcement of any payment on or with respect to such Bondholders;
(5) reduce the amount payable upon the redemption or repurchase of any Bond under the Terms
and Conditions or change the time at which any Bond may be redeemed;
(6) make any Bond payable in money other than that stated in the Bond;
(7) subordinate the Bonds to any other obligation of SMIC;
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(8) release any Bond interest that may have been granted in favor of the Holders;
(9) amend or modify the Payment of Additional Amounts, Taxation, the Events of Default of the Terms and Conditions or the Waiver of Default by the Bondholders; or
(10) make any change or waiver of this Condition.
It shall not be necessary for the consent of the Bondholders under this Condition to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Condition becomes effective, SMIC shall send a notice briefly describing such amendment to the Bondholders in the manner provided in the section entitled ―Notices‖. Evidence Supporting the Action of the Bondholders Wherever in the Trust Indenture Agreement it is provided that the holders of a specified percentage of the aggregate outstanding principal amount of the Bonds may take any action (including the making of any demand or requests and the giving of any notice or consent or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced by: (i) any instrument executed by the Bondholders in person or by the agent or proxy appointed in writing or (ii) the duly authenticated record of voting in favor thereof at the meeting of the Bondholders duly called and held in accordance herewith or (iii) a combination of such instrument and any such record of meeting of the Bondholders. Non-Reliance Each Bondholder also represents and warrants to the Trustee that it has independently and, without reliance on the Trustee, made its own credit investigation and appraisal of the financial condition and affairs of the Issuer on the basis of such documents and information as it has deemed appropriate and that he has subscribed to the Issue on the basis of such independent appraisal, and each Bondholder represents and warrants that it shall continue to make its own credit appraisal without reliance on the Trustee. The Bondholders agree to indemnify and hold the Trustee harmless from and against any and all liabilities, damages, penalties, judgments, suits, expenses and other costs of any kind or nature against the Trustee in respect of its obligations hereunder, except for its gross negligence or wilful misconduct. Governing Law The Bond Agreements are governed by and are construed in accordance with Philippine law.
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INTERESTS OF NAMED EXPERTS All legal opinion/matters in connection with the issuance of the Bonds which are subject of this Offer shall
be passed upon by Picazo Buyco Tan Fider & Santos Law Offices (―Picazo Law‖), for the Issue Manager and Joint Lead Underwriters, and SMIC‘s Legal Division for the Company. Picazo Law has no direct and indirect
interest in SMIC. Picazo Law may, from time to time, be engaged by SMIC to advise in its transactions and
perform legal services on the same basis that Picazo Law provides such services to its other clients.
Independent Auditors The Company‘s results of operations and financial position have been and will be affected by certain changes to PFRS, which are intended to further align PFRS with International Financial Reporting
Standards.
The Financial Statements of SMIC appearing in this Prospectus have been audited by SyCip Gorres Velayo
and Co. (―SGV & Co.‖), independent auditors, as set forth in their report thereon appearing elsewhere in this Prospectus.
The Company‘s Audit and Risk Management Committee reviews and approves the scope of audit work of
the independent auditor and the amount of audit fees for a given year. The amount will then be presented
for approval by the stockholders in the annual meeting. As regards to services rendered by the external auditor other than the audit of financial statements, the scope of and amount for the same are subject to
review and approval by the Audit and Risk Management Committee.
SMIC‘s audit fees for each of the last two fiscal years for professional services rendered by the external
auditor were P1.8 million and P2.0 million for 2012 and 2013, respectively.
Except for the members of SMIC‘s Legal Affairs Division, there is no arrangement that experts shall receive a direct or indirect interest in SMIC or was a promoter, underwriter, voting trustee, director, officer, or
employee of SMIC.
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CAPITALIZATION AND INDEBTEDNESS
As at 31 December 2013, the authorized capital stock of the Issuer was P12.0 billion divided into 1,190 million common shares and 10.0 million non-voting cumulative and redeemable preferred shares each with
P10 par value per share and its issued capital stock was P8.0 billion consisting of 796,272,268 common
shares of P10 par value each.
The following table sets forth the consolidated capitalization and indebtedness of the Group as at 31 December 2013 and as adjusted to give effect to the issue of the Bonds (assuming the Oversubscription
Option is not exercised). This table should be read in conjunction with the Issuer‘s audited consolidated
financial statements as at and for the year ended 31 December 2013 and notes thereto, included elsewhere in this Prospectus.
As at 31 December 2013 Actual Adjusted
(in P millions)
Short-term debt
Bank loans 27,588 27,588
Current portion of long-term debt 34,567 34,567 Total short-term debt 62,155 62,155
Long-term debt - net of current portion Banks and other financial institutions 175,589 175,589 The Bonds to be issued - 9,918
Total long-term debt - net of current portion 175,589 185,507
Equity Equity Attributable to Equity Holders of the Parent: Capital Stock 7,963 7,963
Additional paid-in capital 57,799 57,799
Equity adjustment from common control transactions (2,584) (2,584) Cost of common shares held by subsidiaries (25) (25)
Cumulative translation adjustment of a subsidiary 1,233 1,233 Remeasurement loss on defined benefit asset obligation (195) (195)
Net unrealized gain on available for sale investments 7,338 7,338
Retained earnings Appropriated 27,000 27,000
Unappropriated 120,905 120,905 Total Equity Attributable to Equity Holders of the Parent 219,434 219,434 Non-controlling interests 80,807 80,807
Total Equity 300,241 300,241 Total capitalization 475,830 485,748
Notes:
(1) Adjusted amount as at 31 December 2013 includes proceeds of P10,000,000,000 principal amount of the Bonds offered hereunder.
(2) Total capitalization is the sum of long-term debt and equity.
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DESCRIPTION OF THE ISSUER AND THE GROUP
Overview The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The
Issuer was incorporated in the Philippines on 15 January 1960. On 03 June 2009, the SEC approved the amendment of SMIC‘s Articles of Incorporation for the extension of the Company‘s corporate life for another
50 years from 15 January 2010. Its registered office is at the 10th Floor, One E-Com Center, Harbor Drive,
Mall of Asia Complex CBP-1A, Pasay City, Metro Manila, Philippines. Through its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses located in the Philippines.
The Group‘s business activities and interests are divided into three principal business segments:
Retail merchandising through its department stores, supermarkets, SaveMore, hypermarkets and
Waltermart (SM Retail);
Property group composed of the following:
- Shopping mall developments, where it is the leading shopping mall operator in the
Philippines (SM Prime);
- Real estate development and tourism (SM Prime and its subsidiaries SMDC, CDHI and
HPI);
- Hotels and conventions (SM Hotels); and
Financial services, through its associate banks that have universal banking licenses in the
Philippines (BDO and China Bank).
As at 31 December 2013, the Issuer has four principal consolidated subsidiaries namely SM Prime, SM Retail,
SVI and SSMI and two principal equity-accounted associates, namely BDO and China Bank, each of whose shares are listed on the PSE, (except for SM Retail, SVI and SSMI), in which the Issuer had effective
interests of 51.60%, 100.0%, 100.0%, 100.0%, 46.7% and 19.6%, respectively.
For the years ended 31 December 2011, 2012 and 2013, the Issuer‘s audited consolidated revenues were
P199,915.6 million, P223,877.3 million and P253,292.8 million, respectively, and its audited consolidated net income attributable to equity holders of the parent were P21,224.6 million, P24,674.4 million and
P27,445.7 million, respectively.
As at 31 December 2011, 2012 and 2013, the Issuer‘s audited consolidated total assets were P449,062.1 million, P561,804.0 million and P632,994.2 million, respectively, and its audited total equity was
P222,286.9 million, P261,645.0 million and P300,240.8 million, respectively.
The principal source of consolidated revenue of the Issuer is from sales of merchandise, primarily from
Retail Subsidiaries, which contributed P148,182.1 million, P158,888.4 million and P180,873.0 million, respectively, or 74.1%, 71.0% and 71.4%, respectively, of its consolidated revenues for the years ended
31 December 2011, 2012 and 2013. Property contributed P42,553.0 million, P53,112.7 million and
P55,691.9 million or 21.3%, 23.7% and 22.0% respectively, of the Issuer‘s consolidated revenues for the years ended 31 December 2011, 2012 and 2013. The Shopping Malls, Real Estate Group and Retail
Subsidiaries contributed P14,611.3 million, P16,180.0 million and P15,626.9 million respectively, of the Issuer‘s consolidated net income attributable to equity holders of the parent for the years ended
31 December 2011, 2012 and 2013.
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History
Mr. Henry Sy, Sr., the founder of the Group, embarked upon his retailing career immediately after the Second World War when, in 1945, he established a small shoe store in Carriedo, Metro Manila. Having
opened six shoe stores, Mr. Sy diversified the business into clothing and soft goods. In 1958, the first
Shoemart store opened in Rizal Avenue, Metro Manila and, following the incorporation of Shoemart in March 1960, additional stores opened in Makati Commercial Centre in 1962, in Cebu in 1965 and in Cubao
in 1967. Four department stores were opened during the 1970s and, with the intention that one-stop shopping convenience be provided to customers, the new stores featured fast food centers and
entertainment areas.
Shoemart operated six SM Department Stores until November 2001, when five stores were transferred to
SM Mart, a 65.0% owned subsidiary through SM Retail with the remaining 35.0% held by the Sy Family. Pursuant to a restructuring of the Issuer‘s department store business in 2002, SM Mart took over most of
Shoemart‘s functions in managing its department store business, such as merchandising, marketing, advertising and certain other services for the SM Department Stores as well as for its Retail Affiliates. In
addition to the five SM Department Stores that are directly owned and operated by SM Mart, the Issuer also
operates 43 SM Department Stores through 14 other subsidiaries. The Group acquired its supermarket and hypermarket operations in June 2006, and its wholesale operations in October 2007. In October 2008, SM
Retail was designated as the holding company for the Group‘s retail and merchandising operations and the Issuer rationalized its retail and merchandising assets under it. As at December 31, 2013, the Issuer,
through SM Retail, operates forty eight SM Department Stores, thirty nine SM Supermarkets, ninety three SaveMore stores, thirty nine SM Hypermarkets and twenty two Waltermart supermarkets.
The Issuer‘s expansion into real estate development commenced in October 1974 with the incorporation of MRDC. MRDC was formed to develop high-rise condominiums and townhouse units in the prime district of
Makati.
In November 1976, Mr. Henry Sy, Sr. acquired Acme Savings Bank, which was renamed Banco De Oro
Savings and Mortgage Bank in August 1977 and then as Banco De Oro Commercial Bank in December 1994. The Bank initially provided services predominantly to suppliers of Shoemart, but has subsequently
developed into a full-service commercial bank. In August 1996, the Bank was renamed Banco De Oro Universal Bank when the BSP granted approval for the Bank to operate as an expanded commercial bank.
BDO undertook its initial public offering and was listed on the PSE in May 2002, raising P2.1 billion. In May
2007, the Bank merged with EPCIB and was subsequently renamed Banco De Oro Unibank, Inc. on 6 February 2008. On 04 November 2011, the Bank was renamed to BDO Unibank, Inc. as part of the
company‘s branding initiatives.
Capitalizing upon the success of the SM Department Stores and as an extension of the concept of one-stop shopping, the first shopping mall, SM City — North EDSA, commenced operations in Quezon City in 1985.
By January 1994, four shopping malls had been opened, including SM Megamall, the largest shopping mall
in the Philippines. SM Prime was incorporated in 1994 for the primary purpose of acquiring from other members of the Group, as well as companies affiliated with the Sy Family, the shopping malls and land
intended for the development of shopping malls and, henceforth, to be the Group‘s designated vehicle for shopping mall operations. SM Prime undertook its initial public offering on the PSE in July 1994, raising
approximately P6 billion. SM Prime currently owns and operates, with the assistance of certain Management
Companies, 48 shopping malls, strategically located nationwide with a total gross floor area of 6.1 million square meters and an average occupancy rate of 97% as at 31 December 2013, with over 13,800 tenants.
In May 2008, SM Prime acquired three malls from the Sy Family in the southern and western parts of China, namely Xiamen, Jinjiang and Chengdu. On 30 November 2008, SM Prime completed the acquisition of
100% ownership in SM Land (China) Limited from Grand China. In 2009, SM Prime opened three new malls, namely SM City Naga, SM Center Las Piñas and SM City Rosario, and undertook three expansion projects,
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SM City Rosales, The Sky Garden at SM North Edsa and SM City Fairview. The Sky Garden made SM City
North Edsa the country‘s largest mall and the world‘s third largest mall. On 3 September 2009, SM Land (China) Limited further completed the acquisition of 100% ownership of Alpha Star from Grand China. SM
Prime began operations of SM City Tarlac in April 2010. SM City San Pablo, SM City Novaliches and SM City Calamba opened in October 2010 and SM City Masinag opened in May 2011 in the Philippines. SM Suzhou
and SM Chongqing in China opened in September 2011 and December 2012, respectively. SM Prime intends
to open SM Zibo in 2014 and SM Tianjin in 2015.
In 1986, the Group obtained majority ownership of SM Fund, Inc., a closed-end investment company listed on the PSE. In May 1996, the SEC approved a change of name of the company to SM Development
Corporation and a change of its purpose to property holding and development. The Group has also diversified into tourism and entertainment with plans for the development of mixed-use complexes in Cebu,
Davao, Tagaytay, Batangas, Baguio and Metro Manila, which include hotels, convention centers, shopping
malls and leisure and entertainment facilities. On 1 August 2007, the Issuer approved the rationalization of Shoemart as the holding entity for the real estate and tourism operations of the Group. On 8 October 2007,
the Issuer and Shoemart entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965 common shares in SMDC in exchange for 372,212 common shares in Shoemart based on an independent
valuation of the respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC
approved the valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212 shares. The share swap resulted in an increase of the Issuer‘s ownership in Shoemart from 64.9% to 66.9%
while the effective ownership in SMDC was reduced to 43.6% from 59.4%. The shares swap also resulted in SMDC becoming a 65.0%-owned subsidiary of Shoemart. On 3 October 2008, the SEC approved the change
in name of Shoemart, Inc. to SM Land, Inc.
On 02 April 2008, SM Hotels was incorporated to further focus on and develop the Group‘s hotel business,
and rationalize the Group‘s hotel and convention assets under one entity. On 29 March 2010, the SEC approved the change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and
Conventions Corp.
On 31 May 2013, the Group embarked on a highly transformational transaction to consolidate all of its real
estate interests under SM Prime, in line with the Group‘s vision to create a leading integrated real estate company in Asia, increase synergies and organizational efficiencies among the Group‘s various real estate
business units, and further enhance the value of the Group‘s real estate businesses. The consolidation involved PSE-listed companies SMDC and HPI, various unlisted Group real estate companies including SM
Land and SM Hotels and various real estate properties owned by SMIC.
The Group initiated the consolidation through the simultaneous tender offers made by SM Land to acquire
100% of the outstanding issued and capital stock of SMDC and HPI which it did not yet own by exchanging SM Prime common shares owned by SM Land for SMDC and HPI common shares of the tendering
shareholders. This was followed by (i) the merger of SM Land with SM Prime with the latter as the surviving entity, (ii) the issuance of new SM Prime common shares to SMIC, Mountain Bliss Resort & Development
Corp. (―Mountain Bliss‖) and the Sy family in exchange for shares in certain real estate companies of the
Group, and (iii) the issuance of new SM Prime common shares to SMIC in exchange for key real estate properties owned by SMIC. Please see the section ―Recent Developments and Prospects‖ on page 133 of
this Prospectus for a more detailed discussion of the consolidation exercise.
SMIC was listed on the PSE on 22 March 2005 and as at 25 April 2014 had a market capitalization of
P587,251 million based on a share price of P734.50 on such date.
Strategy
The Issuer‘s strategy is focused on growing its retail, commercial center, property and financial services businesses, and maintaining or attaining market leadership in each of their respective sectors. The Issuer
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will continue to target the mass market in the Philippines by offering essential goods and services such as
food, clothing, housing and financial services.
The Issuer is responsible for setting Group policy and strategy. The Issuer establishes the financial and operating policies for the Group and supervises and monitors the performance of its subsidiaries and
associates.
Key elements of the Issuer‘s strategy are to:
maintain its leading market share in the shopping mall sector by continuing to expand the Group‘s
mall and retail activities into major centers of population in Metro Manila and particularly in the
provinces, where there are opportunities for growth and capture strategic opportunities overseas particularly China;
continue to capture a significant share of retail spending in the Philippines, including what it
believes is a significant share of approximately US$21.4 billion for 2012 (based on BSP data) in remittances from overseas Filipino workers by ensuring that the Issuer provides the most attractive
retail and leisure facilities to Philippine mass market consumers;
continue to grow its financial services businesses, including through acquisitions by BDO, and
develop further synergies between financial services and its shopping malls and the Retail
Subsidiaries by encouraging its suppliers and retail customers to take advantage of and utilize the financial services offered by BDO and China Bank;
diversify and expand the businesses of the Group (including through acquisition) by developing
opportunities in the property development, tourism and leisure, where it believes there are
significant opportunities for growth as the Philippines becomes a more attractive tourist destination, by leveraging the Group‘s significant and strategically located land bank;
integrate all land banking functions into a centralized department while retaining the highly
successful culture that allowed the Group to reach its strong current land bank position, and continue acquiring land bank that is suitable for mid-to-large scale mixed-use master planned
projects in fast growing areas of the Philippines;
supervise a range of related businesses and investments, providing support, expertise and funding
to its developing businesses and encouraging further growth in its more established businesses;
and
promote the independence of its various businesses in terms of executing set strategies and
encouraging financial independence in terms of external funding.
Strengths
The Issuer believes that the key strengths of the Group and its associates are as follows:
a well-established platform providing quality services from retail to real estate development to
financial services to cater for the domestic consumption growth in the Philippines;
its 56 years of retail experience, which has created significant goodwill among its customers and
suppliers, a well-known brand and image and a reputation for providing value for customers;
its leading market share positions in providing one-stop experience through shopping malls,
department stores and supermarkets and the largest bank in the Philippines in terms of assets;
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fast growing residential development expertise that is sitting at the sweet spot of the local real
estate markets, well-supported by SM-branded shopping malls nearby;
prudent financial management and a strong balance sheet with stable recurring cash flows through
focusing on diverse businesses which are relatively less cyclical;
its experienced management team with a proven track record in the Philippines and abroad, which
has consistently focused on related businesses that promote synergies; and
its overall corporate reputation in the Philippines and abroad, which has brought the Group
numerous awards for corporate excellence, corporate governance and financial management.
Ownership and Corporate Structure
As at the date of this Prospectus, the Sy Family holds 56.17% of the outstanding issued and paid-up share
capital of the Issuer.
The chart in the following page sets forth the Issuer‘s simplified corporate structure, organized by business
sector, including its principal subsidiaries and associates and the direct ownership of each as at 31 December 2013.
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The following table sets forth a breakdown on a consolidated basis of the Group‘s principal businesses in terms of total revenues, total net income attributable to equity holders of the Parent, total assets and total
liabilities for the years ended 31 December 2011, 2012 and 2013 save as stated otherwise:
As at and for the year ended December 31 (in P millions, except percentages) 2011 2012 2013 Revenues
Property (1) 42,553.0 21% 53,112.7 24% 55,691.9 22% Retail (2) 151,217.0 76% 162,664.7 73% 185,643.6 73%
Others (3) 6,145.7 3% 8,099.9 3% 11,957.3 5%
Total 199,915.7 100% 223,877.3 100% 253,292.8 100%
Net Income Attributable to Equity Holders of the Parent
Property (1) 8,298.0 39% 9,286.8 38% 9,737.4 35%
Retail (2) 6,465.9 30% 6,916.6 28% 5,889.5 21% Others (3) 6,460.7 31% 8,470.9 34% 11,818.8 44%
Total 21,224.6 100% 24,674.3 100% 27,445.7 100%
Assets (excluding deferred tax) Property (1) 216,878.9 48% 267,871.8 48% 358,016.5 56%
Retail (2) 60,961.5 14% 67,379.4 12% 67,257.9 11%
Others (3) 170,527.0 38% 225,910.7 40% 205,546.9 33% Total 448,367.4 100% 561,161.9 100% 630,821.3 100%
Liabilities (excluding deferred tax) Property (1) 86,692.7 39% 120,507.0 41% 164,961.5 51%
Retail (2) 27,963.5 13% 32,561.3 11% 36,192.4 11% Others (3) 107,611.0 48% 142,547.8 48% 124,628.9 38%
Total 222,267.2 100% 295,616.1 100% 325,782.8 100%
Notes: (1) Property consists of:
Shopping mall development which includes the relevant financial information of SM Prime. Real estate development and tourism includes the relevant financial information of SMDC, Bellevue Properties, Inc. and
Intercontinental Development Corporation. This also includes the relevant financial information of SM Land (formerly Shoemart) as at 31 December 2011, 2012 and 2013.
(2) Retail includes the relevant financial information of SM Retail, the Department Store Companies, SVI, Sanford, SSMI, Makro and Service Companies as at 31 December 2011, 2012 and 2013. Makro was consolidated in SMIC starting October 2007 and SM Retail was consolidated starting January 2008.
(3) Others include the Parent financials as well as those of its other subsidiaries and equity in earnings of associates including BDO, China Bank, Atlas Consolidated Mining and Development Corp. and Belle Corporation.
The following table sets forth a breakdown of the dividend income from the Issuer‘s principal subsidiaries
and associates for the periods indicated. Under PFRS, dividend income from the Issuer‘s subsidiaries and associates is eliminated at consolidated level.
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As at and for the year ended December 31 (in P millions) 2011 2012 2013
Company
Retail Subsidiaries 5,222.1 5,000.0 8,999.6 SM Prime 812.5 872.7 1,015.7
SM Land (formerly Shoemart) 802.7 428.1 - China Bank 222.6 244.9 269.4
BDO 990.5 79.1 3,155.4 SMDC 0.9 0.5 0.6
Primebridge 440.0 5.2 -
MRDC - 718.2 - Others 25.7 20.0 172.7
Total 8,517.0 7,368.7 13,613.4
Malls and Real Estate
SM Prime Holdings, Inc.
Introduction
SM Prime was incorporated on 06 January 1994 and is a leading integrated Philippine real estate company
with business units focused on malls, residential, commercial, hotels and convention centers, and leisure
and resorts. SM Prime is the surviving company of a series of transactions involving the real estate companies of the Group as a result of the reorganization.
As at 31 December 2013, SM Prime‘s combined total assets stood at P335.68 billion and combined total
liabilities were at P169.14 billion.
For the years ended 31 December 2011, 2012 and 2013, SM Prime contributed approximately 11%
(P22.5 billion), 12% (P26.3 billion) and 21% (P53.2 billion) of the Issuer‘s consolidated revenues, approximately 24% (P5.0 billion), 23% (P5.7 billion) and 32% (P8.8 billion) of its consolidated net income
attributable to equity holders of the parent, and comprised approximately 29% (P130.6 billion), 27% (P150.6 billion) and 52% (P330.2 billion) of the Issuer‘s consolidated total assets (excluding deferred tax)
as at 31 December 2011, 2012 and 2013, respectively.
As at 31 December 2013, SMIC directly and indirectly owned 51.6% of the issued share capital of SM Prime.
SM Prime is listed on the PSE and had a market capitalization of P459.6 billion as at 25 April 2014.
Selected Financial Information
The following table sets forth selected consolidated financial information of SM Prime as at and for the
periods indicated. SM Prime‘s fiscal year end is 31 December.
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Income statement data For the years ended 31 December
2011 2012 2013
(in P millions)
Revenues 50,069 57,215 59,794
Operating expenses 30,772 35,145 35,659
Interest expense 2,933 3,065 3,687
Income before income tax and non-controlling interest 17,043 20,434 20,710
Non-controlling interest 373 441 451
Net income attributable to Equity Holders of the Parent 13,629 16,203 16,275
Balance sheet data As at 31 December 2011 2012 2013 (in P millions)
Assets
Cash and cash equivalents 17,345 21,299 27,142
Short-term investments 877 821 888
Investments held for trading 1,197 1,339 1,151
Receivables 11,623 17,146 27,184
Condominium and residential units for sale 945 2,970 6,103
Land and development – current 5,780 11,673 13,281
Available-for-sale investments - current 1,000 1,000 -
Prepaid expenses and other current assets 11,395 12,014 9,936
Total Current Assets 50,162 68,262 85,685
Available-for-sale investments – net of current 16,053 23,303 23,369
Investment properties 129,972 147,854 171,666
Land and development – net of current 17,862 20,606 21,540
Other non-current assets 13,122 22,433 29,275
Total Non-current Assets 178,701 216,390 249,898
Total Assets 228,863 284,652 335,584
Liabilities
Current portion of long-term debt and loans payable
3,549 12,830 10,637
Total Current Liabilities 32,705 47,892 56,882
Long-term debt 52,382 67,749 95,676
Tenants‘ deposits 7,984 8,969 10,249
Total Noncurrent Liabilities 67,097 86,298 112,480
Total Liabilities 99,802 134,190 169,362
Equity
Total Equity Attributable to Equity Holders of the Parent
126,657 147,628 163,267
Non-controlling interests 2,404 2,834 2,955
Total Equity 129,061 150,462 166,222
Total Liabilities and Equity 228,863 284,652 335,584
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The following table sets out the revenues for each of SM Prime‘s business units for the years ended 31 December 2011, 2012 and 2013:
For the years ended 31 December 31
2011 2012 2013 (in P millions) Mall 26,877 30,652 34,452
Residential 17,507 22,761 20,916 Commercial 4,952 3,077 3,428
Hotels and Convention Centers 1,193 1,456 1,815
Eliminations (460) (731) (817) Combined Total 50,069 57,215 59,794
MALLS
SM Prime develops, operates and maintains modern commercial shopping malls and is involved in all related businesses, such as the operation and maintenance of shopping spaces for rent, amusement
centers and cinema theaters within the compound of the shopping malls. As of the date of this Prospectus, SM Prime owns 48 malls (as listed below) covering a total GFA of approximately 6.1 million sq. m. located
across the Philippine archipelago, attracting an average of approximately 4 million visitors daily. SM Prime is
the leading owner and operator of shopping malls in the Philippines. SM Prime plans to continue to expand its existing malls and develop new ones, with a target of opening approximately three to four new malls in
the Philippines each year for the near term, subject to market conditions.
SM Prime has in the past concentrated on the development of its malls in the Metro Manila area, where it
currently operates eighteen malls. In addition, SM Prime currently plans to develop in the future three plots of land in Metro Manila of which two are owned and one is leased. As the Metro Manila area becomes
increasingly well served by shopping malls, SM Prime‘s strategy is to expand its activities in the provinces, where it currently operates 30 malls and holds an additional 16 plots of land available for development, all
of which are owned.
SM Prime has also expanded its shopping mall operations outside of the Philippines. SM Prime owns five
operational malls located in the cities of Xiamen, Jinjiang, Chengdu, Suzhou and Chongqing in the southern and western parts of China with a total GFA of approximately 0.8 million sq. m., with two additional malls
under development. SM Prime is targeting the acquisition of additional properties in China in the future as it prepares for opportunistic expansion into second and third tier cities. SM prime plans to build one mall in
China per year for the near term, subject to markets conditions.
The principal sources of mall revenue for SM Prime comprise rental income payable by tenants (including its
retail subsidiaries) within the malls, ticket sales derived from the operations of cinemas, and fees payable for the use of SM Prime‘s parking facilities, bowling, ice skating and other leisure facilities. Approximately
50% of SM Prime‘s gross leasable space is currently leased by members of the SM Group or companies who
are affiliated with the Sy family. Such tenants contributed approximately 27% (₱9.3 billion) of SM Prime‘s combined mall revenues of ₱34.5 billion for the year ended 31 December 2013.
SM Prime retains ownership of all of the sites on which the SM Prime malls are built, with the exception of
SM City Bacoor, SM City Manila, SM City Baguio, SM Center Valenzuela, SM Center Molino, SM City Clark, SM Mall of Asia, SM Center Pasig, SM City Taytay, SM Center Muntinlupa, SM City Naga, SM City Tarlac,
SM City San Pablo, SM City Calamba, SM City Olongapo, SM City Consolacion and SM City General Santos,
which are held under long-term leases. SM Megamall is owned by First Asia Realty Development Corporation, a 74.2% owned subsidiary of SM Prime, with the remaining interest being held by an
unaffiliated third party. In addition, the lands where the SM Mall of Asia and SM City Baguio are built are
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owned by SM Prime and SMIC, respectively. The land where SM City San Lazaro is located is owned by San
Lazaro Holdings Corporation, a wholly owned subsidiary.
The following is a brief discussion of each of SM Prime‘s current malls.
Metro Manila Malls SM City North EDSA SM City North EDSA, has a GFA of 482,959 sq. m. featuring 12 cinemas including a 3D IMAX theater with a
total seating capacity of 9,346, 24-computerized synthetic lane bowling center, food court, amusement centers and multi-level car park which provides a total capacity of 3,846 cars, located on a 16.1 hectare site
in Diliman, Quezon City. Following the opening of The Block and renovation of The Annex, The Sky Garden
was unveiled in May 2009. It is a 400-meter elevated walkway shaded by a long sketch of white canopy connecting building to another, with a park-like ambiance and green architecture. The Sky Garden includes
the roof garden, water features, food and retail outlets and sky dome, a 1,000-seat amphitheater for shows and special events. The anchor tenants for SM City North EDSA are SM Department Store, SM Hypermarket
and SM Supermarket.
SM Mall of Asia MOA is located on a 19.5 hectare property overlooking Manila Bay. The MOA complex consists of four
buildings linked by elevated walkways—Main Mall, the North Parking Building, the South Parking Building, and the Entertainment Center Building. The mall measures 406,961 sq. m. Each parking building has
3,984 spaces available for vehicles. The Entertainment Building houses the country‘s first IMAX theater, a
special Director‘s Club screening room for exclusive film showings, seven state-of-the art cinemas, 32-lane bowling facility, an olympic-sized ice skating rink, a Science Discovery Center and Planetarium and fine
dining restaurants and bars. The anchor tenants for MOA are SM Department Store and SM Hypermarket. SM Megamall SM Megamall is located on a 10.5 hectare property in the Ortigas business district of Metro Manila. It stands
along the main EDSA thoroughfare and is near the Metro Rail Transit. The two main buildings, Mega A and Mega B, with the addition of Mega Atrium in 2008 and Building C, which is mainly a parking building, in
2011, have a combined GFA of 405,435 sq. m. and feature 12 cinemas with a seating capacity of 8,079, a
food court, a trade hall, event center and parking for 2,976 vehicles. SM Megamall Building D was completed on January 28, 2014. SM Megamall is the largest mall in the Philippines to date. The anchor
tenants for SM Megamall are SM Department Store and SM Supermarket. SM Aura Premier
SM Aura Premier, opened in May 2013, is a civic center located in Taguig. The mall has a GFA of
234,892 sq. m. The mall is part of an integrated development including office towers, a chapel, a convention center and a mini-coliseum, supported by a retail podium with an upscale look and feel. The
mall also has four cinemas and an IMAX Theater. SM Aura Premier has SM Department Store and SM Supermarket as its anchor tenants.
SM City Southmall
SM City Southmall is a four-level complex with a GFA of 205,687 sq. m. featuring nine cinemas with a seating capacity of 7,060, including a 3D IMAX theater, a food court, ice skating rink, amusement centers
and a car park for 3,068 cars. SM City Southmall is located on a 20.0 hectare site in Las Piñas City and was the first SM supermall in the southern region of Metro Manila. The anchor tenants for SM City Southmall are
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SM Department Store and SM Supermarket.
SM City BF Parañaque SM City BF Parañaque, which is strategically located at the main gate of Parañaque‘s prime residential
village, has a GFA of 120,200 sq. m. The anchor tenants for SM City BF Parañaque are SM Department Store
and SM Supermarket. The mall will be the first mall to have four Director‘s Club cinemas equipped with electronic recliner (lazyboy type) seats that can accommodate up to 200 moviegoers and will also house
two premier cinemas with 180 seats each. The mall was opened on November 29, 2013. SM City Fairview
SM City Fairview is a two-building, four-level complex with a GFA of 188,681 sq. m. located on a
20.2 hectare site in Quezon City, Metro Manila. The mall features 12 cinemas with a seating capacity of 6,533, 20-lane bowling center, food court and amusement areas. In early 2009, the mall launched its annex,
adding 28,600 sq. m. of GFA to the main mall. The anchor tenants for SM City Fairview are SM Department Store, SM Hypermarket and SM Supermarket.
SM City San Lazaro
SM City San Lazaro is located at the center of a densely populated residential area with bustling commercial activities in Sta. Cruz, Manila. The four-storey mall has a GFA of 181,593 sq. m. The mall features a food
court, amusement center, six cinemas with a seating capacity of 3,274, and parking for more than 1,000 vehicles. The anchor tenants for SM City San Lazaro are SM Department Store and SM Supermarket.
SM City Marikina
SM City Marikina on Marcos Highway, Brgy. Calumpang, Marikina City has a GFA of 178,485 sq. m. Marikina is a key city for the SM Group, as its shoemakers became vital partners during its growth years in the sixties
as a shoe store in Carriedo, Manila. It features a food court and eight cinemas with a 3,136 seating capacity.
The anchor tenants for SM City Marikina are SM Department Store and SM Supermarket. SM City Manila
SM City Manila is a five-level mall with a GFA of 167,812 sq. m. The mall is located in downtown Manila next
to Manila City Hall. The mall has 12 cinemas with a seating capacity of 7,554, a food court and a car park available for 920 cars. It has become a major destination for shoppers, given its strategic location and easy
accessibility by the Light Railway Transit and other public transportation. The anchor tenants for SM City Manila are SM Department Store and SM Supermarket.
SM City Sta. Mesa
SM City Sta. Mesa is a seven-level complex with a GFA of 133,563 sq. m. featuring 10 cinemas with a seating capacity of 7,451, a food court, an amusement center, a car park on six levels and outdoor parking
with a total capacity of 1,176 cars located in Quezon City, Metro Manila. The anchor tenants for SM City Sta. Mesa are SM Department Store and SM Supermarket.
SM City Bicutan
SM City Bicutan is a two-building mall located along Doña Soledad Ave. corner West Service Road, Bicutan, Parañaque City. This supermall has a GFA of 113,667 sq. m. It features a food court and four cinemas with
a total seating capacity of 1,368. SM City Bicutan serves nearly half a million residents within a three kilometer radius. The anchor tenants for SM City Bicutan are SM Department Store and
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SM Supermarket.
SM City Sucat SM City Sucat is a two-building mall located on a 10.1 hectare site along Dr. A. Santos Ave. (Sucat Road),
Brgy. San Dionisio, Parañaque City. The mall has a GFA of 96,560 sq. m. and features four cinemas with
total seating capacity of 1,955, a food court and car park with 1,475 slots. The anchor tenants for SM City Sucat are SM Department Store and SM Supermarket.
SM Center Valenzuela SM Center Valenzuela has a total GFA of 70,681 sq. m., situated in Brgy. Karuhatan, Valenzuela City.
SM Center Valenzuela caters to the bustling industrial areas that surround the property. The mall features
four cinemas with a 2,168 seating capacity, a food court and parking for 557 cars. It also features the Fashion Avenue, a multi-shop style center that houses a wide array of apparel, shoes and accessory picks.
The anchor tenant for SM Center Valenzuela is SM Supermarket. SM City Novaliches SM City Novaliches, which has a GFA of 60,560 sq. m., is located along Quirino Highway in Brgy. San
Bartolome, Novaliches, Quezon City. Novaliches, being the largest district in the city, is growing with residential subdivisions and industrial companies. The amenities of the mall include a food court, four
cinemas with 1,610 seats and parking for almost 1,206 vehicles. SM Center Muntinlupa SM Center Muntinlupa is situated in Brgy. Putatan, Muntinlupa City. The two-level mall has a GFA of
54,292 sq. m. and caters to the residents of Muntinlupa City and the growing municipality of San Pedro, Laguna. The mall features a food court, four cinemas with 1,582 seating capacity and an entertainment
plaza for shows and events located at the center of the mall. The anchor tenants for SM Center Muntinlupa
are SM Department Store, SM Supermarket and SM Hypermarket. SM Center Las Piñas
SM Center Las Piñas is located along the Alabang-Zapote Road in Brgy. Talon, Pamplona, Las Piñas City and
has a GFA of 39,788 sq. m. SM Center Las Piñas serves customers in the western section of the city and the nearby provinces of Laguna and Cavite. The anchor tenants for SM Center Las Piñas are SM Department
Store and SM Supermarket. SM Center Pasig
SM Center Pasig is located in Frontera Verde, Pasig City serving residents of the neighboring upscale
subdivisions and customers who regularly pass through the C5 route. Its GFA is 29,602 sq. m., which includes basement parking for almost 300 vehicles. SM Center Pasig has SM Hypermarket as its main
anchor tenant. Malls Outside of Metro Manila SM City Cebu SM City Cebu is a multi-level complex with a GFA of 273,804 sq. m. featuring eight cinemas, including a 3D
IMAX theater, with a total seating capacity of 7,266, a food court, a fully computerized 28-lane bowling center, a trade hall and a car park with a 1,874 car capacity located on a 13.8 hectare site in Cebu Port
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Center, Barrio Mabolo, Cebu City. The anchor tenants for SM City Cebu are SM Department Store and
SM Supermarket. SM City Dasmariñas
SM City Dasmariñas sits on a 12.4 hectare property situated along Governor‘s Drive, approximately
100 meters from the Aguinaldo Highway junction in Dasmariñas, Cavite. The mall has a GFA of 206,231 sq. m. The mall features a food court and four cinemas with a seating capacity of 2,710 people. In
late 2011, the mall launched its annex, adding 36,486 sq. m. of GFA to the main mall. The anchor tenants for SM City Dasmariñas are SM Department Store and SM Supermarket.
SM Lanang Premier
SM Lanang Premier is a four-level mall with a GFA of 144,002 sq. m. The mall is located at J.P. Laurel Avenue, Brgy. Lanang, Davao City. It is the largest and first premier mall development project in Mindanao.
It houses the SMX Davao Convention Center. SM Lanang Premier‘s amenities include five cinemas and an IMAX theater, with a combined seating capacity of 2,695, a bowling center, a Science Discovery Center, and
parking for 1,660 vehicles. It also features a Skygarden with water fountains, art installations, and
landscaping. The anchor tenants for SM Lanang Premier are SM Department Store and SM Supermarket. SM City Clark
The two-storey SM City Clark is located along M.A. Roxas Avenue and is approximately 80 kilometers north of Manila and 60-kilometers east of Subic Bay Freeport, within close proximity of the Clark Special Economic
Zone in Pampanga. The mall has a GFA of 142,585 sq. m. and has six cinemas with a seating capacity of
3,260. With its unique design resembling a coliseum, this mall offers tourists and shoppers a variety of retail, dining, and entertainment establishments. The anchor tenants for SM City Clark are SM Department Store
and SM Hypermarket. SM City Pampanga SM City Pampanga is a 132,484 sq. m. shopping mall with three annexes, straddling the municipalities of
San Fernando and Mexico in Pampanga. It features six state-of-the-art cinemas, a food court and amusement centers. The mall is strategically located at the Olongapo-Gapan Road and serves the city‘s
residents as well as those in the provinces of Bulacan, Tarlac, Bataan, Zambales and Nueva Ecija. The
anchor tenants for SM City Pampanga are SM Department Store and SM Supermarket. SM City Davao
SM City Davao is located on a 13.2 hectare property along Quimpo Boulevard corner Tulip and Eco Drives, Brgy. Matina, Davao City. The supermall has a GFA of 128,145 sq. m. It has six cinemas which can
accommodate 2,374 movie patrons. The supermall is within walking distance from some of the largest
schools in Mindanao such as Ateneo de Davao, University of Mindanao, Philippine Women‘s College and the Agro-Industrial Foundation College. The anchor tenants for SM City Davao are SM Department Store and
SM Supermarket. SM City General Santos SM City General Santos is a three-level mall located at San Miguel St., cor. Santiago Blvd., Lagao District,
General Santos City. The mall has a GFA of 125,245 sq. m. and its amenities include a food court, four cinemas with a combined seating capacity of 1,690, and parking for more than 800 vehicles. The anchor
tenants for SM City General Santos are SM Department Store and SM Supermarket.
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SM City Bacoor
SM City Bacoor is a five level complex with a GFA of 120,202 sq. m. located in General Emilio Aguinaldo Highway corner Tirona Highway, Brgy. Habay, Bacoor City, Cavite. The shopping complex features eight
cinemas with a 4,381 seating capacity, and food court and amusement areas. It is the very first
SM supermall in the entire Luzon region (outside Metro Manila) and the very first in the Cavite province. The anchor tenants of SM City Bacoor are SM Department Store and SM Supermarket.
SM City Baguio SM City Baguio is situated along Session Road in Baguio City. Baguio City is a promising site for SM Prime to
develop its presence in the northern part of Luzon. Known for its cool climate, beautiful scenery and historic
culture, the city offers multifold opportunities for entrepreneurs, retailers and service-oriented establishments. SM City Baguio has a GFA of 107,950 sq. m. It has four cinemas with seating capacity of
1,932. The anchor tenants for SM City Baguio are SM Department Store and SM Supermarket. SM City Iloilo SM City Iloilo is a 105,954 sq. m. supermall constructed on a 17.5 hectare property at the juncture of the
Northwest and the Northeast of the Iloilo-Jaro West Diversion Road in Manduriao, Iloilo City. A quick drive from the airport and from the center of the city, it serves the city‘s residents, as well as those of the rest of
Panay Island and the neighboring islands in the Visayas. SM City Iloilo has eight cinemas with a seating capacity of 4,995. The anchor tenants for SM City Iloilo are SM Department Store and SM Supermarket.
SM City Consolacion
SM City Consolacion is located along the Cebu North Road, Barangay Lamac, Consolacion, Cebu. It has a GFA of 103,489 sq. m. The mall‘s amenities include a food court that seats up to 668 diners, four cinemas
with a combined seating capacity of 1,475, and parking for over 700 vehicles. The anchor tenants for
SM City Consolacion are SM Department Store and SM Supermarket. SM City Tarlac
SM City Tarlac is located along MacArthur Highway, San Roque, Tarlac City. It is the very first SM supermall
in the province of Tarlac. The four-level mall has a GFA of 101,629 sq. m. The mall features a food court, four cinemas with 1,882 seating capacity, and parking for over 800 vehicles. The anchor tenants for SM City
Tarlac are SM Department Store and SM Supermarket. SM City Taytay
SM City Taytay is a two-building mall located in Brgy. Dolores, Taytay, Rizal. The mall has a GFA of
98,928 sq. m. and features a food court, three cinemas with 1,209 seating capacity and a carpark for 985 cars. SM City Taytay is situated as a stopover for travelers, especially those coming from Laguna via the
Marikina-Infanta Road. The anchor tenants for SM City Taytay are SM Department Store and SM Hypermarket.
SM City Marilao
SM City Marilao is the first SM supermall in the Bulacan province with a land area of 20.3 hectare and GFA of 93,910 sq. m. It is located at MacArthur Highway, Brgy. Ibayo, Marilao, Bulacan. The four-level mall
features a food court, event center and four cinemas with seating capacity of 1,200. The anchor tenant for SM City Marilao is SM Department Store.
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SM City Masinag
SM City Masinag is a three-floor mall located along Brgy. Mayamot, Marcos Highway, Antipolo City. It has a GFA of 90,261 sq. m. SM City Masinag‘s amenities include a food court, four cinemas with a combined
seating capacity of 1,148, and parking for more than 450 vehicles. The anchor tenants for SM City Masinag
are SM Department Store and SM Supermarket. SM City Cagayan De Oro
SM City Cagayan De Oro sits along Mastersons Avenue corner Gran Via St., Cagayan de Oro City, Misamis Oriental. The mall has a GFA of 87,837 sq. m. It features four cinemas with a total seating capacity of 1,590.
The anchor tenants for SM City Cagayan De Oro are SM Department Store and SM Supermarket.
SM City Sta. Rosa SM City Sta. Rosa is the first SM supermall in the Laguna province with 86,463 sq. m. of GFA. Located on a
17.1 hectare site in Barrio Tagapo, Sta. Rosa, the two-level mall is a 10-minute drive from the Mamplasan
exit. SM City Sta. Rosa includes a variety of retail establishments, four cinemas and a food court. The anchor tenants for SM City Sta. Rosa are SM Department Store and SM Supermarket.
SM City Batangas SM City Batangas is situated along the National Highway, Brgy. Pallocan West, Batangas City. The mall is
approximately 3.7 kilometers from the Batangas International Port. SM City Batangas has a GFA of
80,350 sq. m. It has four cinemas with a seating capacity of 1,818. The anchor tenants for SM City Batangas are SM Department Store and SM Supermarket.
SM City Lucena
SM City Lucena is located along Maharlika Highway corner Dalahican Road, Brgy. Ibabang Dupay, Lucena City, Quezon. It is the first SM supermall in the province of Quezon. This four-level supermall has a GFA of
78,685 sq. m. It features four cinemas with a total seating capacity of 2,276. The anchor tenants for SM City Lucena are SM Department Store and SM Supermarket.
SM City Lipa
SM City Lipa is a two-level mall strategically located along Lipa‘s Ayala Highway. It occupies 10.3 hectares of land, with 77,261 sq. m. of GFA. Lipa City features natural attractions and is a commercial, educational and
industrial destination. The mall features a food court and four cinemas with 2,482 seating capacity. The anchor tenants for SM City Lipa are SM Department Store and SM Supermarket.
SM City Naga
SM City Naga is located in Central Business District II of Brgy. Triangulo, Naga City. It is the first SM supermall in the Bicol region and has a GFA of 75,652 sq. m. The mall offers a food court and four
cinemas with a combined seating capacity of 1,346. The anchor tenants for SM City Naga are
SM Department Store and SM Supermarket. SM City Bacolod
SM City Bacolod is a two-building mall located along Rizal Street, Reclamation Area, Bacolod City in Negros Occidental. It has a total land area of 16.1 hectare and has a GFA of 71,752 sq. m. The mall features a food
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court, amusement centers and four cinemas with 2,001 seating capacity. The anchor tenants for SM City
Bacolod are SM Department Store and SM Supermarket. SM City Calamba
SM City Calamba is located at National Road, Brgy. Real, Calamba City, approximately 70 meters from the
intersection of Maharlika Highway and Manila South Road. The mall has a GFA of 67,384 sq. m. and features a food court and four cinemas with a combined seating capacity of 1,268. The anchor tenants for
SM City Calamba are SM Department Store and SM Supermarket. SM City Rosales
SM City Rosales in Brgy. Carmen, Pangasinan stands on a 12.2 hectare lot and has a GFA of 63,330 sq. m.
It is the first SM supermall in the province of Pangasinan. The amenities of the mall include a food court and four cinemas with capacity of 1,704 seats. The mall contains a public transport terminal and also serves as
a bus stop of various inter-provincial bus lines. The anchor tenants for SM City Rosales are SM Department Store and SM Hypermarket.
SM City Baliwag
SM City Baliwag is located in Brgy. Pagala, Baliwag, Bulacan, approximately 40 kilometers from the EDSA—Balintawak interchange of the North Luzon Expressway. It has a GFA of 61,262 sq. m. Among the
facilities included are four cinemas with a combined seating capacity of 1,241, a food court and parking for almost 531 vehicles. The anchor tenants for SM City Baliwag are SM Department Store and
SM Hypermarket.
SM City Rosario SM City Rosario is located in Brgy. Tejero in Rosario. Rosario is the site of the Cavite Economic Zone. The
mall serves customers in the north and northwestern parts of Cavite and neighboring provinces as well. It
has a GFA of 59,326 sq. m. and features a food court and four cinemas with a capacity of 1,552 seats. The anchor tenants for SM Rosario are SM Department Store and SM Supermarket.
SM City San Pablo
SM City San Pablo has a GFA of 59,609 sq. m. It is located along Maharlika Highway in Brgy. San Rafael, San Pablo City in the province of Laguna. The mall features a business center, a food court and four cinemas
with seating capacity of 1,560. It also has an atrium for various events. The anchor tenants for SM City San Pablo are SM Department Store and SM Supermarket.
SM Center Molino
SM Center Molino is located at the southern end of Molino Road, Bacoor, Cavite and has a GFA of 52,061 sq. m. SM Center Molino is the first to have the Service Lane, which comprises of different shops
that offer a wide array of services situated outside the mall across the covered parking. The mall features four cinemas with 1,433 seating capacity and parking for 800 vehicles. The mall‘s anchor tenant is
SM Hypermarket.
SM City Olongapo SM City Olongapo, the very first supermall in the province of Zambales, has a GFA of 47,426 sq. m.
Strategically located in Magsaysay Drive Corner Gordon Avenue in the city‘s Central Business District, the mall serves customers in Zambales, Bataan, and other nearby provinces. SM City Olongapo‘s major
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amenities consist of an al fresco dining area, which offers a view of Olongapo‘s mountain landscape, three
state-of-the-art digital cinemas, with a combined seating capacity of 758, and parking for over 300 vehicles. The anchor tenants for SM City Olongapo are SM Department Store and SM Supermarket.
SM City San Fernando
SM City San Fernando is a seven-storey mall located at the Downtown Heritage District, Barangay Sto. Rosario, San Fernando, Pampanga. It has a GFA of 42,625 sq. m. and features a unique facade, a distinctive
exterior design which complies with the architectural theme of a heritage area. The mall‘s amenities include three cinemas with a combined seating capacity of 1,068 and parking slots for over 300 vehicles. The
anchor tenants for SM City San Fernando are SM Department Store and SM Supermarket.
Joint Venture with Waltermart
In 07 January 2013, SM Prime entered into a joint venture with Waltermart, a leading operator of small
scale community malls, a segment SM Prime has not previously catered to. The WalterMart arrangement is a 51%-49% joint venture in favor of SM Prime. The arrangement allows SM Prime to accelerate its
expansion with the addition of Waltermart‘s 19 existing community malls. The Waltermart brand has been
retained for the existing community malls that are located in Metro Manila, North Luzon and South Luzon. This joint venture provides an opportunity for SM Prime to access an additional business segment that is
complimentary to its malls in the Philippines and China.
Land bank
The following table sets forth SM Prime‘s existing land bank owned or available on long-term lease for
development of new malls as at 31 December 2013:
Location Gross Area
(sq. m.)
Owned
Cebu SRP 304,100 Pangasinan (Urdaneta) 175,035 Pangasinan (Dagupan) 149,320 Cabanatuan (Concepcion) 110,242 Roxas City (Baybay) 102,309 Bulacan (San Jose del Monte) 60,193
Palawan (Puerto Princesa) 69,855
Cavite (Trece Martires) 49,498
Agusan del Norte (Butuan) 37,233
Laguna (Sta. Rosa) 42,174
Quezon City / Caloocan 30,073
Cagayan de Oro 28,935
Leyte (Tacloban City) 26,016
Davao del Norte (Tagum City) 24,633 Zamboanga City (Calenar) 21,567 Tuguegarao City 16,181 Rizal (Angono) 12,573 Caloocan (Sangandaan) 10,563
Leased
Commonwealth 19,199
Total 1,289,699
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Principal Tenants
SM Prime enjoys a competitive advantage due to its long-standing retail experience in establishing an
appropriate mix of tenants including its associated anchor tenants. SM Prime controls the tenant mix of each of its malls, which has contributed to the profitability of the malls. The principal anchor tenants in the
malls include SM Department Stores, SM Supermarkets and SM Hypermarkets. Other significant tenants
include National Bookstore, KFC, Jollibee, McDonalds, Chowking, Pizza Hut, Goldilocks, Greenwich, Mang Inasal and Max‘s Restaurant.
As at 31 December 2013, the SM Department Stores occupied in aggregate a gross area of
1,004,807.07 sq. m. within the malls, or 33% of total leasable area. SVI and SSMI operate the SM Supermarkets and SM Hypermarkets occupying in aggregate a gross area of 440,972 sq. m. as at 31
December 2013, or 14% of total leasable area.
In addition to the anchor tenants associated with SM Prime, other retail operations controlled by or in which
the Sy family has a significant interest, such as Ace Hardware, SM Appliance Center, Surplus Shop, Home World, Our Home, Toy Kingdom, BDO, Kultura and Watsons, are also tenants in most of the malls.
During the years ended 31 December 2011, 2012 and 2013, approximately 32%, 33% and 33%, respectively, of the aggregate mall rental revenue received by SM Prime in respect of the malls was from
members of the Group and companies affiliated with the Sy family. Out of the total increase in mall rental revenue of 12% for the year 2013, same store sales contributed 7% while new malls and expansion of
existing malls contributed 5%.
SM Prime believes that all the leases entered into between SM Prime and the Group or companies affiliated
to the Sy family have been entered into on an arm‘s length basis and on commercial terms.
The SM Mall of Asia also hosts some premier tenants, which specialize in higher-end merchandise, such as Mango, Zara, Marks & Spencer, Topshop and Muji.
Leasing Policies
The leasing policy of SM Prime in relation to each of the malls is to screen applicants carefully and to secure an appropriate mix of tenants, both in terms of the nature of their businesses and their size. An average of
less than 3% of tenants per mall did not renew their leases upon expiry or had their leases terminated early
in each of the three years ended 31 December 2011, 2012 and 2013. The high demand for tenancies within the malls means that SM Prime generally has a waiting list sufficient to cover any vacancies that may arise
in the malls.
It is the policy of SM Prime that all leases, whether with members of the SM Group, companies affiliated with the Sy family or unrelated third parties, should be entered into on commercial terms, and SM Prime
considers that the current rentals payable by tenants of the malls that are operational at present reflect
prevailing market rents.
SM Prime‘s tenancies are generally granted for a term of one year, with the exception of some of the larger tenants operating nationally, which are granted initial lease terms of two to five years, renewable on an
annual basis thereafter. Sixty days‘ notice is required of SM Prime‘s tenants for termination of their leases,
and a six-month deposit is paid at the commencement of the lease. Upon expiry of a lease, the rental rates are adjusted to reflect the prevailing market rent. SM Prime charges rent as either a fixed rent per sq. m. or
a variable rate which is a minimum per sq. m. or a base charge plus a percentage of a tenant‘s sales, whichever is higher.
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Management of the Malls
Management and operation of the malls, including the provision of manpower, maintenance and engineering and security, leasing, marketing and other promotional activities, are assumed by
the Management Companies. In addition, the Management Companies negotiate and handle major tenant
issues for the malls, while reporting to and under the direction of SM Prime. The Management Companies also adjust the tenant mix according to instructions given by SM Prime, which is based on a variety of
factors, including the target market, location of the mall, demographics, size of the retail spaces and market positioning, among others. Each of the Management Companies performs specific functions in relation to
each of the malls. All operating expenses relating to the malls are charged directly to SM Prime by the Management Companies. As consideration for the services provided by the Management Companies under
the management contracts between SM Prime and the Management Companies, the Management
Companies are entitled to receive an annual fee which is equivalent to 5% of the annual operating income of each mall before income tax, financial charges and interest expense. The aggregate amount of such
management fees for the years ended 31 December 2011, 2012 and 2013 was ₱795 million, ₱861 million and ₱964 million, respectively, amounting to approximately 3% of total combined revenue in each period.
The entertainment and leisure facilities within the malls, including cinemas, bowling centers and ice skating rinks, are primarily owned by SM Prime, and SM Prime pays management fees to the Management
Companies for managing the operations of the entertainment and leisure facilities within the malls. Certain entertainment facilities, such as amusement rides, are operated by third parties, whereby SM Prime
receives a percentage of the amusement fees.
Competition
SM Prime‘s malls compete with other shopping malls in the geographic areas in which they operate. The
other major shopping mall operators in the Philippines are Robinsons Malls and Ayala Land. SM Prime believes that it is well placed to face increased competition in the shopping mall industry given the
competitive advantages it has, including, among others, the location of its existing malls, SM Prime‘s land
bank, its balance sheet strength, a proven successful tenant mix and selection criteria, and the presence of the SM Department Stores, SM Supermarkets, SM Hypermarkets and retail affiliates of the Group within the
malls. SM Prime believes that its experience and understanding of the retail industry has also been a contributing factor to its competitive advantage in the industry.
Subsidiaries
SM Prime has five wholly-owned mall related Philippine subsidiaries, namely, Premier Central, Inc., Premier Southern Corp., Consolidated Prime Dev. Corp., San Lazaro Holdings Corporation, and Southernpoint
Properties Corp. SM Prime holds its interests in SM City Batangas and SM City Lipa, SM City Dasmariñas, SM City Clark and SM City Lanang through Premier Southern Corp., Consolidated Prime Dev. Corp., Premier
Central, Inc. and Southernpoint Properties Corp., respectively. First Asia Realty Development Corporation is
a 74.2% owned subsidiary of SM Prime, through which SM Prime holds its interest in SM Megamall. First Leisure Ventures Group, Inc. is a 50.0% owned subsidiary of SM Prime, through which SM Prime holds its
interest in SM by the Bay. All malls not otherwise mentioned in this paragraph are owned directly by SM Prime.
SM Prime Malls in China
SM Prime acquired three SM China malls (SM Xiamen, SM Chengdu and SM Jinjiang) from the Sy family in 2007. The acquisition was intended to allow SM Prime to gain a foothold in China and use it as a platform for
long-term growth outside the Philippines. SM Prime has since opened two additional malls in Suzhou and Chongqing, with two more malls under development in Zibo and Tianjin and a recently acquired property in
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Changzhou slated for future development.
Similar to SM Prime‘s approach in the Philippines, construction of the SM Prime malls in China is outsourced
to third-party contractors. The SM Prime malls in China also pay management fees to an affiliate, Shopping Center Management Corporation, for managing the operations of the malls.
The SM Prime malls in China have a similar look and layout to the malls in the Philippines. Among the anchor tenants of the five malls are Wal-Mart, Vanguard and SM Department Store, Cybermart and Wanda
Cinema. Junior anchor tenants include Watsons, McDonald‘s, Zara, Uniqlo, H & M, Muji and a number of international and local brands.
Below is a discussion of each of SM Prime‘s malls in China.
SM City Xiamen
SM City Xiamen in Xiamen City, Fujian Province is situated on a 10.4 hectare lot and has a GFA of 238,125 sq. m. plus an open carpark for 2,188 cars. The mall has as its anchor tenants Wal-Mart, SM Laiya
Department Store, Wanda Cinema plus several junior anchors. The occupancy rate for SM City Xiamen for
the years ended 31 December 2011, 2012 and 2013 was 97%, 98% and 98%, respectively. SM City Jinjiang
SM City Jinjiang in Jinjiang City, Fujian Province is situated on an 11.5 hectare lot and has a GFA of 167,830 sq. m. plus an open carpark for 1,700 cars. The mall has as its anchor tenants Wal-Mart, SM Laiya
Department Store and Wanda Cinema plus several junior anchors. The occupancy rate for SM City Jinjiang
for the years ended 31 December 2011, 2012 and 2013 was 94%, 95% and 94%, respectively. SM City Chengdu
SM City Chengdu in Chengdu City, Sichuan Province is situated on a 4.7 hectare lot and has a GFA of
166,665 sq. m. plus an open carpark for 810 cars. The mall has as its anchor tenants Wal-Mart, SM Laiya Department Store and Wanda Cinema plus several junior anchors. The occupancy rate for SM City Chengdu
for the years ended 31 December 2011, 2012 and 2013 was 97%, 85% and 88%, respectively. SM City Suzhou SM City Suzhou in Wuzhong District, Jiangsu Province is situated on a 4.1 hectare lot and has a GFA of
72,552 sq. m. plus an open carpark for 400 cars. The mall has as its anchor tenants Vanguard Hypermarket, SM Department Store, and Wanda Cinema plus several junior anchors. The occupancy rate for the years
ended 31 December 2011, 2012 and 2013 was 86%, 95% and 94%, respectively. SM City Chongqing SM City Chongqing, located in the Yubei District, Southwest China, has a GFA of 149,429 sq. m. The mall‘s
major anchor tenants are Vanguard Supermarket, SM Department Store and Wanda Cinema plus several junior anchors. SM City Chongqing is a one building structure with five levels. The occupancy rate for SM
City Chongqing for the year ended 31 December 2012 and 2013 was 79% and 87%, respectively.
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Malls Under Development in China
The following table sets forth certain information regarding planned development projects of other malls in China:
Location/Name Proposed Date for
Completion Gross Floor Area
(sq. m.)
Zibo 2014 154,000
Tianjin 2015 540,000
The following table sets forth certain information regarding the contribution of the SM malls in China to SM
Prime‘s total combined revenues and combined net income for the period stated:
For the year ended December 31
2011 2012 2013
(in millions of pesos, except percentage of SM Prime’s total)
Revenue 2,026 4% 2,462 4% 3,121 5%
Net income 735 5% 903 5% 958 6%
SM Prime believes that the five malls will provide a platform for it to expand in the China market. It intends
to continue to develop the SM malls in China through synergies with its existing mall operations and other management expertise. SM Prime intends to continue seeking opportunities for mall developments in
second and third tier cities in China, where the mall can serve to anchor the city center. Although SM Prime
is still developing its expansion plans in China, subject to the availability of suitable locations, SM Prime may initially build one new mall each year over the next five years in China.
RESIDENTIAL
SM Prime‘s residential income is derived primarily from property development and sales, which is conducted by its subsidiary, SMDC. SM Prime‘s revenue from residential operations is derived largely from the sale of
condominium units. SM Prime continues to finance its property projects through internally generated funds and external borrowings, such as through fixed-rate corporate notes, term loans and
contract-to-sell financing.
SM Prime, through its 100% interest in SMDC, owns SM Synergy Properties Holdings, Corp., SM Residences
Corp, Landfactors Incorporated, Vancouver Lands, Inc., Twenty Two Forty One Properties, Inc., Guadix Land Corporation, Lascona Land Company, Inc., Metro South Davao Properties Corporation, SMDC HK
Limited, SMDC International (USA), Inc. and SMDC International (UK) Ltd.
As of the date of this Prospectus, SM Prime has five completed projects and sixteen ongoing residential
property development projects as discussed below:
Completed Residential Projects
The following projects have completed their construction but units are still being sold by SM Prime:
Chateau Elysee Chateau Elysee is a six-cluster, six-storey residential condominium project in a 4.7 hectare lot in Parañaque
City, Metro Manila. This project offers one-bedroom and two-bedroom units. Cluster one, comprising 384 units, was launched in the third quarter of 2003 and completed in December 2004. Construction of
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cluster two with 384 units was completed in May 2006. Construction of cluster three with 400 units was
completed in May 2007. Construction of cluster six with 504 units was completed in December 2008. Construction of cluster five, with 559 units was completed in November 2009. Construction of Cluster four
with 588 units began in February 2010 and was completed in June 2011. Mezza Residences SMDC‘s first high-rise project is the Mezza Residences (―Mezza‖), which is a mixed-use development project
with 38-storey four-tower condominiums and commercial retail area located across from SM City Sta. Mesa, Manila. Each tower has 400 to 800 residential units comprised of one-, two-, three- and four-bedroom
configurations, with floor areas ranging from 21 to 67 sq. m. Mezza consists of 2,332 saleable residential units, each priced between ₱1.7 million to just under ₱6.7 million, and 18 commercial units for lease with
SaveMore store as the anchor tenant. As at 31 December 2013, construction of Mezza towers one to four
was 100% complete and SMDC had sold 95% of the units in Mezza. Berkeley Residences
Berkeley Residences is a 35-storey high-rise condominium project situated just across Miriam College in
Quezon City. Berkeley Residences comprises 1,276 units which were completed in June 2011, of which 99% were sold as at 31 December 2013.
Sea Residences Sea Residences is a 15-storey residential and commercial condominium project comprising of six buildings
with 2,899 residential units and 21 commercial units, located at the MOA Complex Pasay City. Phase One of
Sea Residences comprises 1,159 units of which 99% were sold as at 31 December 2013; construction for Phase 1 started in January 2009 and was completed in March 2012. Phase Two comprises 920 units of
which 94% were sold as at 31 December 2013; construction for Phase Two started in December 2009 and was completed in November 2012. Phase Three of Sea Residences comprises 820 units of which 97% were
sold as at 31 December 2013; construction for Phase Three started in March 2010 and was completed in
December 2012. Princeton Residences
Princeton Residences is a 38-storey high-rise condominium project located along Aurora Blvd., Quezon City
which was completed in March 2013. Princeton Residences comprises 1,096 units of which 75% were sold as at 31 December 2013.
Ongoing Residential Projects
The following projects are still under construction and are being sold by SM Prime:
Grass Residences – Phase 1
Grass Residences – Phase 1 was launched in March 2008, a three-tower 40-storey high-rise condominium project located behind SM City North EDSA, Manila. Tower 1 of Grass Residences comprises 1,988 units,
which were completed in October 2011 and of which 94% were sold as at 31 December 2013. Tower 2
comprises 2,025 units, of which 97% were sold as at December 31, 2013 and is expected to be completed in the fourth quarter of 2014. Tower 3 comprises 1,990 units, of which 98% were sold as at 31 December
2013. Construction of Tower 3 of Grass Residences commenced in February 2010 and was completed in December 2013.
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Grass Residences – Phase 2
Grass Residences – Phase 2 was launched in March 2013, a two-tower 43-storey high-rise condominium project located behind SM City North EDSA, Manila. Tower 4 comprises 1,957 units, of which 28% were sold
as at 31 December 2013. Construction of Tower 4 is expected to commence in early 2014.
Field Residences Field Residences is a residential condominium project that will ultimately consist of ten buildings located
behind SM Sucat, Parañaque. Buildings 1, 2, 3, 7 and 8 of Field Residences comprise 1,974 units of which 88% were sold as at 31 December 2013. Construction of buildings 1, 2, 8 and 3 were completed in
April 2010, April 2011, December 2011 and December 2012, respectively. Building 7 was completed in
September 2013. Construction of the other buildings of Field Residences had not yet started as at 31 December 2013.
Sun Residences
Sun Residences is a project comprising two 40-storey towers located along España Blvd., Quezon City near Welcome Rotonda. Sun Residences Tower 1 comprises 2,057 units of which 89% were sold as at 31
December 2013. Tower 2 comprises 1,982 units of which 73% were sold as at 31 December 2013. Construction of Tower was completed in November 2013; Tower 2 is expected to be completed by the first
quarter of 2014. Jazz Residences Jazz Residences is a mixed use development project comprising four 40-storey towers located at N. Garcia
corner Jupiter, Makati City. Towers A, B, C and D of the project with 5,367 units were 80% sold as at 31 December 2013. Construction of Tower A started in April 2010 and was completed in December 2013 while
construction of Tower C started in October 2010 and is expected to be completed in March 2014. Tower D is
expected to be completed in September 2014. Construction of Tower B started in July 2011 and expected to be completed by October 2014.
Light Residences
Light Residences is a mixed use development project with three 40-storey towers located along EDSA, Mandaluyong City. It has a total of 4,227 units which were 94% sold as at 31 December 2013. Construction
of Phase 1, which consists of the podium and Tower 1, started in March 2010 and was completed in December 2013. Construction of Phase 2 (Tower 3) started in March 2012 and was completed in
December 2013. Construction of Phase 3 (Tower 2) commenced in March 2010 and is expected to be completed in the fourth quarter of 2014.
Wind Residences
Wind Residences is a residential condominium development with ten 21-storey towers located along Emilio Aguinaldo Highway, Tagaytay City. Towers 1 to 4 have a total of 2,874 units which were 89% sold as at 31
December 2013. Towers 1 and 2 were completed in August 2013. Tower 3 was completed in
December 2013. Construction of Tower 4 began in April 2013 and is expected to be completed in 2015. Construction of Tower 5 started in October 2013. The other five towers had not started as at 31 December
2013.
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M Place @ South Triangle
M Place @ South Triangle is a four 23-storey tower condominium in South Triangle, Quezon City. Tower A started construction on January 2011 and was completed in December 2013. Tower A comprises 827 units
of which 88% were sold as at 31 December 2013. Tower B started construction in July 2011 and was
completed in December 2013. Tower B comprises 912 units of which 73% were sold as at 31 December 2013. Tower C comprises 778 units of which 77% were sold as at 31 December 2013; construction of Tower
C began in January 2012 and is expected to be completed in the fourth quarter of 2014. Tower D comprises of 920 units of which 48% were sold as at 31 December 2013. Construction of Tower D commenced in
December 2011 and is expected to be completed in the fourth quarter of 2014. Blue Residences Blue Residences is a 41-storey residential condominium situated across from Ateneo De Manila University in
Quezon City. Construction of Blue Residences started in October 2010. It comprises 1,591 units of which 80% were sold as at 31 December 2013 and is expected to be completed in the first quarter of 2014.
Mezza II Residences
Mezza II Residences is a 40-storey residential condominium located just beside the first Mezza Residences in Quezon City. Construction of Mezza II started in December 2010. It comprises 1,324 units of which 59%
were sold as at 31 December 2013 and is expected to be completed in September 2014. Shine Residences Shine Residences is a 22-storey residential condominium located in Pasig City. Construction of Shine
Residences commenced in January 2013 and is expected to be completed in 2015. It comprises 892 units of which 76% were sold as at 31 December 2013.
Green Residences
Green Residences is a 50-storey residential condominium situated on Taft Avenue, Manila near De La Salle University. Construction of Green Residences started in August 2011 and is expected to be completed in the
third quarter of 2015. Green Residences comprises 3,378 units, of which 89% were sold as at 31 December
2013. Shell Residences
Shell Residences is a 16-storey residential and commercial condominium project and is located at the MOA Complex in Pasay City. It comprises four buildings with 3,093 residential units, of which 95% were sold as
at 31 December 2013. Construction of Shell Residences commenced in May 2012 and is expected to be
completed by the first quarter of 2015. Breeze Residences
Breeze Residences is a 38-storey residential and commercial condominium project and is located along
Roxas Boulevard in Pasay City. Breeze Residences comprises 2,133 units, of which 74% were sold as at 31 December 2013. Construction of Breeze Residences commenced in June 2013 and is expected to be
completed by fourth quarter of 2015.
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Grace Residences
Grace Residences is a residential condominium development with four towers located along Levi Mariano Avenue in Taguig City. Towers 1, 2 and 3 have a total of 2,452 units and were 58% sold as at 31 December
2013. Construction of Tower 1 started in May 2013 and is expected to be completed in December 2014.
Construction of Tower 2 will commence in October 2013 and is expected to be completed in June 2016. The other two towers had not started as at 31 December 2013.
Trees Residences Trees Residences is a residential condominium development with nineteen 7-storey towers located in
Quezon City. Buildings 2, 3, 5, 6, 7 have a total of 1,769 units and were 19% sold as at 31 December 2013.
Construction of Buildings 5, 6, 7 will commence in the first quarter of 2014. The project is expected to be completed by the fourth quarter of 2018.
Shore Residences
Shore Residences is a residential condominium development with four towers located at the MOA Complex in Pasay City. Shore residences comprises 5,709 units, of which 19% were sold as at 31 December 2013.
Construction of Shore Residences will commence in the second quarter of 2014 and is expected to be completed by the first quarter of 2018.
For the year ended 31 December 2013, SM Prime launched four expansion projects: Grass Residences
Phase 2 Tower 4, Wind Residences Tower 5, Grace Residences Tower 3 and Field Residences Building 4, and
two new projects: Trees Residences in Quezon City and Shore Residences in the MOA Complex, Pasay City. Land Bank
SM Prime continues to invest in properties that it believes are in prime locations across the Philippines for
existing and future property development projects. It is important to SM Prime to have access to a steady supply of land for future projects.
Potential land acquisitions are evaluated against a number of criteria, including the attractiveness of the
acquisition price relative to the market and the suitability or the technical feasibility of the planned
development. SM Prime identifies land acquisitions through active search and referrals.
As at 31 December 2013, SM Prime owned or controlled, through its subsidiary SMDC, 156 hectares of undeveloped land for the development of its various projects. SM Prime believes this land bank is sufficient
to sustain the next several years of development and sales.
The table below sets forth the locations of SM Prime‘s residential undeveloped land inventory as at
31 December 2013.
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Location Area (sq. m.)
Metro Manila
Quezon City 228,887 Makati City 100,311
Pasay City 94,046 Parañaque City 86,866
Taguig City 2,489
Cainta Rizal 54,687 Las Piñas City 46,900
Mandaluyong 39,599 Valenzuela City 19,452
Manila 19,211
Metro Manila Total 692,448
Outside Metro Manila
Batangas City 804,711
Davao City 62,300
Outside Metro Manila Total 867,011
Grand Total 1,559,459
SM Prime continually seeks to increase its raw land inventory in various parts of the Philippines for future
residential development through direct acquisitions.
COMMERCIAL
SM Prime is engaged in the development and leasing of office buildings in prime locations in Metro Manila,
as well as the operations and management of such buildings and other land holdings.
SM Prime‘s flagship project is the MOA complex in Pasay City, a 60-hectare master planned bayside
development with the renowned SM Mall of Asia as its anchor tenant and main attraction, among other commercial, business, and entertainment establishments within the estate. Most recently, a major
attraction in the complex is the landmark 16,000-indoor seating SM Mall of Asia Arena, as well as its
adjacent annex building that houses additional parking spaces as well as office levels. The MOA complex is also the site of SM Prime‘s signature business complex, the E-com Centers, a series of modern and iconic
office buildings mostly targeting technology-based industries, BPO companies and shipping companies. Other similar office building developments catering to the BPO industry include the SM Cyber Buildings, a
mix of build-to-suit and ready-to-use office spaces in Makati City, Quezon City, and soon in other emerging locations. SM Prime is also involved in the leasing and management of properties and buildings housing
selected branches of SM Retail operations, such as its department stores and supermarkets, including the
warehouses that support these various retail operations. SM Prime also manages the MOA complex. As of the date of this Prospectus, SM Prime has three completed commercial properties and three ongoing commercial property development projects as discussed below:
Completed Commercial Properties
Two E-com Center
Two E-com Center is a 15-storey office and commercial building housing BPOs and technology-intensive businesses, as well as location-based firms such as shipping and logistics. This iconic structure located in
the MOA complex in Pasay City offers approximately 70,000 sq. m. of office and commercial space, and
premium views of Manila Bay and the Makati skyline. It is designed by Miami-based Arquitectonica, with FS
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Lim & Associates as local architect of record. Commercial spaces are located at both the ground floor and
the fourth floor podium level called the Prism Plaza. Current tenants of the building include SMDC, EXL Service, Sky Logistics/Kitchen, World Energy Corporation, OOCL Philippines, XO Minerals, Microsourcing,
Stream International Global Services Philippines Inc., ACS of the Philippines, Ben Line Agencies/Simba Logistics, Klaveness, SITC, IGT, Asia Pilot Capital Holdings, Ocwen Business Solutions, Altisource Business
Solutions, Teletech Global, Belle Corporation, CMA CGM, Altron Logistics Inc./Enzo Express
Logistics Inc./DSF Consolidated Freight Services Inc., Anscor Swire Ship Management Corporation and Esco Global.
SM Makati Cyber One SM Makati Cyber One is a four-storey office building with GFA of approximately 18,800 sq. m. The
development rises along Zodiac Street corner Gil Puyat Avenue and is visible along major routes such as
EDSA, Gil Puyat and the Kalayaan overpass. Current tenants of the building include Perimeter Internet Working Corporation, Bayantrade Inc. & ABM Computech Enterprises, K Force Global Solutions Inc. and
Startek International.
SM Makati Cyber Two SM Makati Cyber Two is a four-storey office building with GFA of approximately 16,900 sq. m. The
development is along corners of Sen. Gil J. Puyat Avenue (Buendia)/Jupiter/Zodiac Streets, Makati City. The major tenant of the building is VXI Global Holdings B.V. (Philippines). SM Prime also owns the land SM
Makati Cyber Two is built upon.
Future Commercial Developments
Five E-Com Center Five E-com Center, which broke ground in the first quarter of 2012, is targeted for completion by the
first quarter of 2015. Similar to its predecessor Two E-com Center, Five E-com Center will feature
architectural designs of Miami-based firm Arquitectonica, with FS Lim & Associates as the local architect of record. The 15-level office building will cover a GFA of over 125,000 sq. m. and an estimated gross lettable
area (―GLA‖) of 79,000 sq. m. Floor plates are at an average of 6,800 sq. m., one of the most expansive in the local office leasing market. Similar to Two E-com Center as well, Five E-com Center will also feature a
mixed-use component on its fourth level podium.
Three E-Com Center Three E-com Center will be a 15-storey office building with a three level parking podium and the ground
level designed to cater the commercial and retail tenants. Similar to Two E-com Center and Five E-com Center, Three E-com Center will feature architectural designs of Miami-based firm Arquitectonica. The GFA
is expected to be approximately 100,000 sq. m. The project is targeted to break ground by 2014.
SM Cyber Series A new standalone office building development in the SM Cyber series, this future development will be a
15-level office building development located on a highly visible and prime 2,910 sq. m. owned property at
the corner of EDSA and West Avenue. Dubbed SM Cyber West Avenue, the building will cover a GFA of more than 42,000 sq. m., with approximately 22,700 sq. m. of GLA for office space. The remaining leasable area
in the ground and second levels will feature a SaveMore supermarket and other support retail and commercial establishments. Additionally, it will be linked via bridgeways to the SM North EDSA mall as well
as nearby MRT stations. The project is targeted for completion by the first quarter of 2014 and is 100% committed for occupancy under two signed leases.
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Makati Avenue Commercial Building
The building is located at Makati Avenue corner Anza St., Makati City with a GFA of 1,869 sg. m. The construction of the two-storey commercial building started in September 2013 and is expected to be
completed by the third quarter of 2014.
Department Stores and Supermarkets
SM Prime also owns several department store and supermarket buildings with a total GFA of approximately
291,000 sq. m. The major tenant of these buildings is the SM Retail Group. The following table sets forth certain information regarding SM Prime‘s department store and supermarket buildings as at 31 December
2013:
Department Store Location
Gross Floor Area
(sq. m.) Occupancy
SM Cubao Quezon City 103,035 98% SM Makati Makati City 109,667 97%
SM Iloilo Iloilo City 34,382 99%
Supermarkets (Hypermarket and
Savemore) Location
Gross Floor Area
(sq. m.) Occupancy
Caloocan Caloocan City 12,011 100% Del Monte Quezon City 1,854 100%
Novaliches Quezon City 5,123 100%
Tandang Sora Quezon City 1,358 100% Kamias Quezon City 2,071 100%
P. Tuazon Quezon City 2,082 100% Adriatico Manila City 14,769 100%
Pedro Gil Manila City 1,379 100% Jaro Iloilo Iloilo City 3,759 100%
Except for the department stores and the Adriatico and Jaro Supermarkets, SM Prime also owns the land on which the retail establishments listed in the table above are situated.
SM Prime also owns several warehouses with a total GFA of approximately 37,000 sq. m. and total lot area
of approximately 65,000 sq. m. that are strategically located in various areas that support the retail
operations.
SM Prime owns a parcel of land located in Parañaque City with a lot area of 50,584 sq. m. The property is leased to SMIC where the Asinan warehouses currently stand.
Other Properties
SM Prime also owns several properties for future leasing or commercial project development including the following:
Laon Laan Property
The property is located at Laon Laan corner Blumentritt Streets, Sampaloc District, City of Manila. The building GFA is 1,372 sq. m, with a lot area of 1,211 sq. m. This property is currently vacant.
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Caloocan Lot Caloocan lot is located at the corners of McArthur Highway/Samson Road/Gen. P. Valenzuela Street,
Barangay 78, Zone 7, District 1, Caloocan City with a lot area of 1,400 sq. m. San Miguel District Lot San Miguel District lot is located at Carlos Palanca, San Miguel District, City of Manila with a lot area of
1,033 sq. m. Jaro Lot
Jaro Lot is located at 98 E. Libertad, Jaro, Iloilo City and has a lot area of 2,561 sq. m.
Jetty Terminal SM Prime owns Jetty Terminal located in MOA Complex. SM Prime is currently developing a breakwater
project to further improve the Jetty Terminal service.
Sky Ranch SM Prime has also ventured into certain lifestyle-oriented mixed-use developments. Sky Ranch will be an
entertainment venue in Tagaytay. The nearly four-hectare property is adjacent to the Taal Vista Hotel, and was developed to complement the hotel‘s strong presence as a well-known destination in the area. To
maximize the site‘s premium views and distinctive natural environment, a social events venue is included
which will be complemented by casual, family-style dining establishments, as well as a mini-amusement theme park for kids and other recreational facilities such as horseback riding. The property is currently
operational but will be expanded further in 2014. SM Arena The SM Arena is a five-storey, first-class multipurpose venue for sporting events, concerts, entertainment
shows, and other similar events. The arena has a seating capacity of approximately 16,000. It occupies approximately two hectares of land and has a GFA of approximately 68,000 sq. m. It is adjacent to the Mall
of Asia Annex (Carpark) of the MOA and is right in front of the SMX Convention Center Manila. The SM
Arena is connected to a large platform parking plaza and park that will be built in between the SMX Convention Center Manila and the arena itself. Provisions for two future office blocks are also included in the
arena‘s master plan. Mall of Asia Arena Annex (Carpark)
MOA Arena Annex is an 11-storey building with total GFA of 95,273 sq. m. It is designed to serve the
parking needs of MOA Arena with 1,469 parking slots from ground to 7th floor. The 8th to 11th floors, with approximately 30,000 sq. m., are leased out as office space. The current tenants are SM Affiliates occupying
16,000 sq. m. The remaining vacant spaces are scheduled to be occupied by a company in March 2014 and a BPO company in August 2014. The occupancy rate for the MOA Arena Annex for the nine months ended
September 30, 2013 was 51%. This property is still awaiting certification from the Philippine Economic Zone
Authority (―PEZA‖). Occupancy is expected to rise after the receipt of such certification. Tagaytay Lot
Tagaytay lot is located along Gen. Emilio Aguinaldo Highway, within Barangays Mahabang Kahoy and Kaybagay, Tagaytay City with total land area of 117,992 sq. m., of which, 45,264 sq. m. was developed by
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SM Prime as ―The Sky Ranch‖. The rest of the area is vacant. The Tagaytay Lot was unoccupied for each of
the three years ended December 31, 2011, 2012 and 2013 except for the area occupied by ―The Sky Ranch‖ which opened in 2013.
Corporate Office Buildings A to F
Corporate Office buildings are composed of Buildings A to F with a total GFA of 46,883 sq. m. Buildings A to E are leased to SM Affiliates while Building F is leased to Teletech Customer Care Management Corp. The
occupancy rate for Corporate Office buildings A to F for the years ended December 31, 2011, 2012 and 2013 was 100%, 85% and 98%, respectively.
Tagaytay Resort and Development Corporation
Tagaytay lot is owned by Tagaytay Resort Development Corporation and is located along Gen. Emilio Aguinaldo Highway, within Barangays Mahabang Kahoy and Kaybagay, Tagaytay City with total land area of
182,857 sq. m. As at 31 December 2013, 9,444 sq. m. of the total area is occupied by the Tagaytay building owned by SM Prime. The remainder of the property is currently vacant.
Tagaytay Building
Tagaytay Building is located along Gen. Emilio Aguinaldo Highway, within Barangays Mahabang Kahoy and Kaybagay, Tagaytay City with total GFA of 19,394 sq. m. Its only tenant is Philippine Amusement and
Gaming Corp. for a 25-year lease term ending on 2033. The occupancy rate for Tagaytay Building for each of the three years ended December 31, 2011, 2012 and 2013 was 100%.
Prime Metro Estate Inc.
Prime Metro Estate Inc. acts as a landlord for the properties listed below and is part of SM Prime‘s commercial business unit. SM Prime holds a 60% interest in Prime Metro Estate, Inc.
Cainta Lot
Cainta lot is located at Imelda Avenue, Cainta Rizal and Int. Imelda Avenue, Rosario, Pasig City with a total land area of approximately 41,000 sq. m. The property is leased by SM Food Retail Group.
Imus Lot
Imus lot is located at Anabu I-B Imus, Cavite with a total land area of approximately 37,000 sq. m. and is leased to SM Food Retail Group.
Novaliches Lot
Novaliches lot is located at Quirino Highway, Talipapa, Balintawak Quezon City with a total land area of approximately 30,000 sq. m. and is leased to SM Food Retail Group.
Sucat Lot
Sucat lot is located at East Service Road Sucat, Muntinlupa City with a total land area of approximately 40,000 sq. m. and is leased to SM Food Retail Group.
Tondo Lot Tondo lot is located at Manila Harbour Center, Tondo, Manila City with a total land area of approximately
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26,000 sq. m. and is leased to SM Food Retail Group.
Cebu Lot Cebu lot is located at II-A; II-B & Lot 1; Along H. Cortes ext., Subangdaku, Mandaue City with a total land
area of approximately 36,000 sq. m. and is leased to SM Food Retail Group.
Davao Lot Davao lot is located at Km.7 McArthur Highway, Bangkal, Davao City with a total land area of approximately
34,000 sq. m. and is leased to SM Food Retail Group. Land Bank Prime Metro Estate, Inc. has invested in various properties located in prime location across the Philippines.
As at 31 December 2013, Prime Metroestate, Inc. owned 97,929 sq. m of land slated for future development.
The table below sets forth the locations of Prime Metroestate, Inc.‘s land inventory as at 31 December 2013:
Location
Area
(sq. m.)
Caruncho St, Malinao, Pasig City 2,777 Brgy Villasis/Poblacion, Santiago City, Isabela 4,383
Palacio Real, Brgy Makiling, Calamba City 40,000 Rosario, Batangas 7,189
Barangay Bucandala, Imus, Cavite 34,283
Molo, Iloilo 9,297
Total 97,929
Competition
SM Prime‘s top competitors for commercial properties are Ayala Land and Megaworld. SM Prime believes its commercial business unit competes primarily on the location of the properties (proximity to schools, malls
and public transportation) and aggressive pricing.
HOTELS AND CONVENTION CENTERS
SM Prime‘s hotels and convention centers business unit is operated through SM Hotels, formerly SM Hotels
Corp., which was incorporated in April 2008. The primary purpose of SM Hotels is to develop and manage the various hotel and convention properties of SM Prime.
Hotels
The following table sets forth certain information regarding SM Prime‘s hotel properties for the periods
indicated.
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Name and Year Opened Number of Rooms Total Revenue
As at 31 December
2013 For the year 2013
(₱ millions)
Taal Vista Hotel (2003) 261 187,227
Radisson Blu Hotel Cebu (2010) . 396 351,028 Pico Sands Hotel (2011) 154 93,430
Park Inn by Radisson Davao (2013)* 204 77,645
* Figures for the Park Inn by Radisson Davao are for the nine month period ended 31 December 2013 as the hotel opened in March 2013.
Taal Vista Hotel Taal Vista is a 261 room hotel located in Tagaytay. The hotel is a short walk from the PAGCOR Casino. The hotel features a spa, outdoor pool, gym, restaurant and function rooms.
In 2009, Taal Vista Hotel‘s newly constructed east wing with 133 guest rooms (making it a total of
261 rooms) and a 1,000-seater ballroom became fully operational. Radisson Blu Hotel Cebu In the last quarter of 2010, SM Hotels launched the 400-room Radisson Blu Hotel in Cebu, the first hotel
managed by Carlson International in the Asia-Pacific region to be classified under its ―Blu‖ upscale hotel brand category. The property has been classified as a deluxe hotel category by the Department of Tourism
(―DOT‖), and its facilities include an in-house spa, fitness center, business center, 800-sq. m. swimming
pool, club lounge, two ballrooms and a number of smaller meeting rooms. The hotel is strategically located beside SM City Cebu and is adjacent to the international port area.
Pico Sands Hotel The Pico Sands Hotel opened in August 2011. This hotel is a 154-room resort-type hotel in Hamilo Coast in
Nasugbu, Batangas. The hotel has an outdoor pool, fitness center, spa, bar, restaurant and meeting and
banquet facilities. Park Inn by Radisson Davao
In March 2013, the Park Inn by Radisson Davao opened an eight-storey, 204-room hotel located in Lanang,
Davao City adjacent to SM Lanang. The hotel has an outdoor swimming pool, gym, fitness center, meeting rooms and a 24-hour dining restaurant bar and grill. The Park Inn brand is one of the hotel brands under
Carlson International and is the largest mid-market brand for hotels under development in Europe. Conrad Manila
SM Hotels intends to open a Conrad Hotel within the MOA complex in 2015. This hotel is expected to be a
seven-storey hotel with approximately 347 guest rooms. The hotel is expected to feature a swimming pool, business center, fitness club, spa, three restaurants, ballroom and other function and meeting spaces.
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Convention Centers SMX Convention Center Manila
SMX Convention Center Manila, inaugurated in November 2007, is a three-storey structure with a GFA of
46,647 sq. m. with basement parking that can accommodate up to 400 cars and a leasable area of 21,000 sq. m. The building is made up of two large exhibit floors which can be divided into multiple
exhibition and function halls. Meeting and break-out rooms are provided in support of trade and function requirements. SM Hotels intends for SMX Convention Center to serve as a venue for major conferences,
trade exhibitions and shows and similar activities in Metro Manila. SMX Convention Center Davao SMX Convention Center Davao, the sister facility of SMX Convention Center Manila, is located on the third
level of SM Lanang Premier Mall, which was inaugurated on 28 September 2012. The facility has a total floor area of 7,835 sq. m., with 5,240 sq. m. of function space, divisible into three rooms, and a 1,292 sq. m.
pre-function lobby with a concierge counter. This mixed-use complex is complemented by Park Inn by
Radisson Davao, and is located 2.4 kilometers from Davao International Airport. SMX Convention Center Taguig
SMX Convention Center Taguig is the third property under the SMX brand. Located inside the SM Aura Premier Mall, it has three function rooms and eight meeting rooms. The 6,358 sq. m. building is the first
Leadership in Energy & Environmental Design-certified convention facility in the Philippines.
Megatrade Hall Megatrade Hall, located inside SM Megamall, offers 3,878 sq. m. of flexible hall space for various types of
events. This space can also be divided into three different halls, depending on the type of event and client
requirements. An additional 336 sq. m. conference center is also available for meetings, conferences, and seminars.
Cebu Trade Hall
Cebu Trade Hall, located inside SM City Cebu, offers 1,810 sq. m. of hall space that is also divisible into three halls. An additional 255 sq. m. conference center, that can be divisible into three meeting rooms, is
also available for smaller functions.
In addition, SM Hotels is assessing the feasibility of establishing additional conference centers, in conjunction with its mid-market hotels, by using existing land bank situated around SM Prime‘s
existing malls.
Competition
The primary competitor‘s of SM Prime‘s existing hotels are the Marriot in Cebu, the Marco Polo Waterfront in
Batangas and Seda Hotel in Davao. Once completed, the Conrad Manila is expected to compete with the
Shangri-La Makati, Solaire and the Sofitel Manila. SM Prime‘s primary competitor for its convention centers is PICC Convention Center.
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LEISURE AND RESORTS
SM Prime, through its subsidiary HPI, owns leisure and resort developments including properties located in the Tagaytay Highlands and Tagaytay Midlands golf clubs in Laguna, Tagaytay City and Batangas. In
addition, SM Prime, through Costa de Hamilo, is the developer of Pico de Loro Cove, the first residential
community within Hamilo Coast, a master planned coastal resort township development in Nasugbu Batangas.
Residential Developments SM Prime‘s past and present projects as at 31 December 2013 consist of the following:
The Woodridge Place Phase I at Tagaytay Highlands
The construction of the seven condominiums of The Woodridge Place was completed, and all 71 units were turned over to unit owners in December 2010. HPI generated approximately ₱1.0 billion in revenue from
the sale of the 71 units.
The Hillside at Tagaytay Highlands Site development for lots began in the fourth quarter of 2007 and was completed in December 2009.
Approximately 94% of the 156 lots had been sold as at 31 December 2013. The Woodlands Point at Tagaytay Highlands SM Prime has completed site development and construction of 24 log houses, 22 of which have already
been sold as at 31 December 2013. The Horizon at Tagaytay Midlands This is a medium-density residential condominium development located inside The Tagaytay Midlands
mountain resort community. The development overlooks the Tagaytay Midlands golf course, Taal lake and Volcano in the west, Mt. Makiling in the south east and the mountain range of Batangas in the south. This
has 6 buildings with 108 units of approximately 137 to 150 sq. m. each. The project was launched in 2004
and was fully completed and 86% sold as at 31 December 2013. Pueblo Real at Tagaytay Midlands
The development is adjacent to The Horizon, situated on a six hectare property and has 88 lots with an average lot size of 400 sq. m. Approximately 69% of the lots had been sold as at 31 December 2013.
Woodridge Place Phase 2
This is a condominium project at Tagaytay Highlands that was introduced to the market in May 2010. This project consists of two mid-rise buildings with 177 condominium residential units with areas ranging from
85 to 212 sq. m. per unit. Approximately 52% and 16% of the units in the first and second towers,
respectively, had been sold as at 31 December 2013. Sierra Lago
This is a lot subdivision development located at Tagaytay Midlands that was launched in November 2010. This development has 186 lots with sizes of approximately 200 to 300 sq. m. Approximately 83% of the lots
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have been sold as at 31 December 2013.
Aspen Hills Launched in the summer of 2012, this 27 hectare leisure lot development offers lot sizes from 320 to 800 sq.
m. The surrounding village is expected to include the Meadows Community Clubhouse, the Little Ranch
playground, the Sunshine Picnic Grove and Spinner‘s Trail. Approximately 21% of the lots have been sold as at 31 December 2013.
Land Bank SM Prime owns 555 hectares of land located around the vicinity of Tagaytay Highlands International Golf
Club in Tagaytay City, Cavite and Tagaytay Midlands Golf Club in Batangas.
The table below sets forth the location and area (in sq. m.) of SM Prime‘s land bank in the vicinity of
Tagaytay as at 31 December 2013:
Properties Area (sq. m.)
Tanauan City Property 383,006 Talisay Property—Site I 1,330,034
Talisay Property—Site II 1,158,924 Talisay Property—Site III 136,823
Talisay Property—Site IV 211,061 Talisay Property—Site V 6,510
Talisay Property—Site VI-VII 100,237
Talisay Property—Site VIII 18,241 Talisay Property—Site IX-X 132,707
Tagaytay Midlands 820,009 Bgy. Iruhin, Tagaytay City-Site I 547,534
Bgy. Iruhin, Tagaytay City-Site II 303,319
Tagaytay Midlands 10,178 Bgy. Iruhin 317,586
Tagaytay Midlands 78,821
TOTAL 5,554,990
Hamilo Coast
Pico de Loro is located in a 40-hectare valley within Hamilo Coast situated near mountains and a protected cove. Hamilo Coast features 13 coastal coves, a 31-kilometer coastline, and 5,900 hectares of land. The
completed projects include the four-condominium cluster project, Jacana, Myna, Miranda and Carola, as
well as club shares of Pico de Loro Beach and Country Club. The Pico Sands Hotel is also located on the Pico de Loro property. Pico de Loro is the first residential community at the Hamilo Coast property in Nasugbu
Batangas.
Several facilities have been added at the beach of Pico de Loro Cove to enhance the experience of the
residents, club members and guests. For improved accessibility from Metro Manila, a seasonal ferry service from the MOA is available, and the Nasugbu-Ternate road was completed in 2013. With the opening of the
Nasugbu-Ternate road, the travel distance from Metro Manila to Hamilo Coast was shortened from approximately 133 kilometers, or 2.3 to 3 hours travel time, to approximately 73 kilometers, or 1.5 to 2
hours travel time.
In line with the objective of addressing the emerging local middle-income and upper-income markets and
the goal of tapping the regional market, there are plans to widen the product offering of Costa del Hamilo
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by introducing projects adjacent to the existing development which will complement the development and
enhance the beach resort living concept.
Costa del Hamilo‘s projects are listed below: Jacana Jacana is a residential and commercial condominium project located at Pico De Loro Cove, Nasugbu,
Batangas. It is comprised of two buildings, building A with six floors and building B with seven floors. Of the total 246 residential units, 93% were sold as at 31 December 2013. Construction of Jacana commenced in
August 2007 and was completed in February 2010. Myna Myna is a residential and commercial condominium project located at Pico De Loro Cove, Nasugbu,
Batangas. It comprises two buildings, building A with six floors and building B with seven floors. Of the total 246 residential units, 95% were sold as at 31 December 2013. Construction of Myna commenced in
May 2008 and was completed in June 2010.
Carola Carola is a residential and commercial condominium project located at Pico De Loro Cove, Nasugbu,
Batangas. It comprises two buildings, building A with six floors and building B with seven floors. Of the total 248 residential units, 70% were sold as at 31 December 2013. Construction of Carola commenced in
August 2009 and was completed in August 2012.
Miranda Miranda is a residential and commercial condominium project located at Pico De Loro Cove, Nasugbu,
Batangas. It comprises two buildings, building A with six floors and building B with seven floors. Of the total
of 248 residential units, 86% were sold as at 31 December 2013. Construction of Miranda commenced in August 2009 and was completed in June 2012.
Pico de Loro Beach and Country Club
Pico de Loro Beach and Country Club is a leisure facility located at Pico de Loro Cove. Costa del Hamilo, as developer, executed a deed of conveyance of the titles to the lots and buildings, and in return owns
4,000 shares, of which 30% were sold as at 31 December 2013. The beach club was completed and opened in 2009, while the country club was completed in June 2010.
Land Bank Of the 40-hectare property bounded by Pico de Loro Cove, 19.6 hectares remain undeveloped for future residential and recreational development opportunities.
SM Prime intends to purchase additional land bank for development within the Hamilo Coast area in the
near to medium term.
Competition
SM Prime‘s competes with other developers of leisure properties within a three hour drive of Metro Manila.
Primary competitors include Landco and Ayala Land.
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Retailing and Merchandising
SM Retail, Inc. (―SM Retail‖) was incorporated in June 2002 and started operations in January 2008 and is designated as the holding company for the Group‘s retail and merchandising operations.
On 31 July 2008, the SEC approved the increase in authorized capital stock of SM Retail from P0.1 million to P1,500.0 million. The increase was necessary to provide adequate capital to absorb the transfer of the retail
merchandising operations to SM Retail. On 30 September 2008, the respective board of directors of SM Retail and the Issuer entered into an agreement pursuant to which SM Retail issued 12,836,170 shares with
par value of P100 per share, in exchange for the ownership interest of SMIC over SVI, SSMI, Marketwatch,
MH Holdings, Sanford, Henfels, HMS, Romer and SM Mart. This resulted in the increase in ownership interest of the Issuer over SM Retail from 99% to 100%.
SM Retail organizes its retail and merchandising operations broadly into two categories: non-food retail
operations and food retail operations. Non-food retail operations consist of the business of SM Department Stores conducted through the Department Store Companies (as defined below) and SM Mart. Food retail
operations comprise the supermarkets, SaveMore, hypermarkets, Waltermart stores and wholesale
businesses conducted through SVI, Sanford, SSMI and Waltermart, respectively.
SM Retail currently has a total of 241 stores consisting of 48 SM Department Stores, 39 supermarkets, 93 savemore stores, 39 SM Hypermarkets and 22 WalterMart stores as at 31 December 2013.
For the years ended 31 December 2011, 2012 and 2013, SM Retail (through its subsidiaries) contributed approximately 75.7%, 73.0% and 73.3% of the Issuer‘s consolidated revenues and approximately 30.5%,
28.0% and 21.5% respectively, of its consolidated net income. SM Retail (through its subsidiaries) comprised approximately 13.6%, 12.0% and 10.7% respectively, of the Issuer‘s consolidated total assets
and approximately 12.6%, 11.0% and 11.1% respectively, of its consolidated total liabilities as at 31
December 2011, 2012 and 2013, respectively.
Non-food Retail Operations
The SM Stores
Introduction
The Group‘s retailing business began in 1945 when Mr. Henry Sy, Sr., the founder of the Group, first
established a small shoe store in Carriedo, Metro Manila. The original Shoemart, incorporated in March 1960, was the Sy Family‘s first major step into the retailing business.
In 2001, five of the Group Stores were transferred to a subsidiary, SM Mart. Pursuant to a restructuring of
the Issuer‘s department store business in 2002, SM Mart took over most of Shoemart‘s functions in managing the SM Department Stores, such as merchandising, marketing, advertising and certain other
services for the SM Department Stores and the Group‘s Retail Affiliates. These support services together with
all in-house products such as SM Card, gift card and gift cheque were later transferred to SM Retail in January 2008. As at 31 December 2013, in addition to the five SM Department Stores that are directly owned
and operated by SM Mart, the Issuer also operates 43 SM Department Stores through 14 other subsidiaries (the ―Department Store Companies‖). The Group opened two additional SM Department Stores in 2013.
These new stores are SM Aura Premier and SM BF Paranaque. The Group plans to open an average of three
additional SM Department Stores for each year thereafter, subject to market conditions.
As at 31 December 2013, the Issuer, through SM Retail, owned 65% of SM Mart‘s issued share capital while
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the Sy Family owns the remaining 35%.
For the years ended 31 December 2011, 2012 and 2013, the Department Store Companies and SM Mart
contributed approximately 31.7%, 31.1% and 29.0% respectively, of the Issuer‘s consolidated revenues and approximately 6.4%, 5.6% and 5.8% respectively, of its consolidated net income attributable to equity
holders of the parent. The Department Store Companies and SM Mart comprised approximately 3.4%,
3.1% and 3.0% respectively, of the Issuer‘s consolidated total assets (excluding deferred tax) and approximately 5.6%, 4.9% and 5.2% respectively, of its consolidated total liabilities (excluding deferred tax)
as at 31 December 2011, 2012 and 2013, respectively.
Selected Financial Information
The following table sets out combined selected non-consolidated financial information for the Department
Stores Companies and SM Mart as at and for the years indicated (1):
As at and for the years ended December 31
(in P millions) 2011 2012 2013
Revenue Net Sales 63,192 67,786 71,550
Other Income 244 1,042 1,056
Cost and Expenses Cost of Sales 47,353 51,295 54,068
Operating Expenses 14,135 15,977 17,176
Net Income 1,354 1,555 1,361
Assets 15,441 17,656 18,639
Liabilities 12,475 14,556 16,701
Stockholders´ Equity 2,966 3,100 1,938 Notes:
(1) The financial information presented above includes the financial condition and results of operations of the five SM Department Stores directly operated by SM Mart.
SM Department Stores
For 50 years, the SM Department Stores have provided quality products and services at competitive prices
and the Issuer believes that it has led mass-market fashion trends to meet the ever-changing needs of the Philippine public. It is the objective of the SM Department Stores to maintain their leadership in the
marketplace, to be at the forefront of retail technology and to grow through consumer marketing and
product diversification. The SM Department Stores‘ strategies involve providing value for money through the wide variety of quality merchandise sold at reasonable prices in order to achieve a high sales turnover.
Sales in the SM Department Stores are cyclical and driven by seasonality. Historically, sales have peaked
during the Christmas period each year, with sales in the month of December comprising approximately 18% of sales for the entire year, and in May, prior to the opening of school in June.
20 SM Department Stores are located in Metro Manila and 28 are located in the provinces. Five SM Department Stores are stand-alone stores (SM Quiapo, SM Cubao, SM Makati, SM Harrison and SM Delgado)
and 43 SM Department Stores are based in the Malls. The land for the three SM Department Stores operated by the Issuer (SM Makati, SM Cubao and SM Delgado) is subleased from third parties through SM
Prime, with the SM Quiapo and SM Harrison buildings also being leased. The shortest of these long-term
leases expires in 2021. The remaining 43 SM Department Stores are leased from SM Prime pursuant to annual leases, apart from the SM North EDSA lease which is a 25-year term expiring in 2019.
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Since the opening of SM North EDSA in 1985, and partly because mall-based department stores tend to enjoy higher customer traffic than stand-alone SM Department Stores, it has been the policy of the Group
to establish an SM Department Store as an Anchor Tenant in every new Mall where there is sufficient floor space.
The Issuer‘s policy is to construct department stores in prime locations. It has opened two new SM Department Stores in 2013. The Issuer plans to open three more SM Department Stores in 2015 and
approximately average of three new SM Department Stores opening annually thereafter for the next few years, subject to market conditions.
A periodic review of sales per store is conducted regularly and, if needed, a reduction of the selling area of
a store is implemented to improve sales productivity. Each SM Department Store is renovated approximately
once every seven years. Credit Card Sales
As part of SM Department Stores‘ efforts to promote the ―SM‖ brand and provide its customers with
additional shopping convenience, the SM Department Stores offer an ―SM In-house Card‖, a credit card for SM Department Store customers and all Retail Affiliates. The ―SM In-house Cards‖ are marketed by third
parties who are required to fully guarantee the obligations of the cardholders with real estate or money market placements as collateral. SM Retail is responsible for administering this credit card programme. In
addition, BDO also offers its customers a similar ―SM In-house Card‖. Credit card sales attributable to the ―SM In-house Card‖ and other major credit cards accounted for approximately 25% of SM Department
Stores‘ total sales for the year ended 31 December 2013.
Operational and Management Support
SM Retail have provided operational support to all of the SM Department Stores, as well as to other retail
stores affiliated with the Sy Family, such as Home World, Supplies Station, Inc., Baby Company, Ace
Hardware, Watsons, Sports Central, Toy World, Signature Lines and Kultura. Such support includes merchandising, marketing and advertising, information technology, controllership, operations and human
resource services. SM Retail levies a management fee for the provision of such services. In addition, each SM Department Store pays the Issuer a management fee for advisory and consultancy services, including
legal, tax and treasury services.
Merchandising
SM Retail undertakes the merchandising for all the SM Department Stores and the Group‘s Retail Affiliates,
as well as managing third party store consignors (―Store Consignors‖). Each SM Department Store adopts a localization strategy based on demographic model and operates between 25 to 35 departments from
apparel, shoes, accessories, home furnishings, hardware, stationery supplies, music, cosmetics to native
handicrafts.
Part of the merchandise sold by each department is sourced by SM Retail from its pool of suppliers internally categorized as ―preferred‖, ―secondary‖ and ―seasonal‖ and purchased outright for SM Department Stores.
Outright inventory is owned by the SM Department Stores. The SM Department Stores‘ outright
merchandise includes in-house private label brands such as SM Exclusive for Men, SM Basics and SM Smart Buys for basic staple items, Coco Cabana for Women, Gigi Amore Ladies Intimates, Salvatore Mann and
Parisian for Men‘s and Ladies Shoes, respectively. These private label brands provide customers of the SM Department Stores with comparable quality as moderately priced alternatives to the higher priced branded
items sold by Store Consignors and Major Consignors, as described below.
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Store Consignors are basically distributors or licensees of national and global brands manufactured or
distributed by the consignors. Store Consignors are allocated selling space based on their sales per square meter productivity. The Store Consignors own the inventory and the SM Department Stores‘ obligation to
pay for the inventory arises only on sale of the goods. As at 31 December 2013, there were over 881 Store Consignors operating in the SM Department Stores. Some of the main Store Consignors include globally
known brands such as Guess, Wrangler, Lee, Arrow, Triumph, Wacoal, Jockey, Nike, Adidas, Candies,
Rayban, Victorinox, Samsonite, Disney and others.
In addition, SM Department Stores have areas which are operated and run by Major Consignors which are affiliated to the Group. Major Consignor merchandise within the SM Department Stores consists of
merchandise that is sold by the Major Consignors under their respective brand names within SM Department Stores. The Major Consignors are allocated designated areas within the SM Department Stores
and essentially operate and manage their respective speciality departments within the department store.
SM Retail seeks to maintain a good merchandise mix of sales made in the SM Department Stores on an
outright basis, or via Store Consignors and Major Consignors to meet customers‘ needs and wants in terms of style, quality and price.
The SM Department Stores generate gross margins based on net sales from their Store Consignors and Major Consignors. The Issuer believes that the margins charged to the Store Consignors and Major
Consignors are at levels comparable to others in the retailing industry taking into account volumes achievable in the stores. In addition, Store Consignors and Major Consignors are charged store
reimbursable for operational facilities provided by the SM Department Stores.
In each billing cycle, Store Consignors are paid monthly, and Major Consignors are paid semi-monthly. The
SM Department Stores indirectly recognizes the net sales and cost of sales of both the Store Consignors and the Major Consignors in its Financial Statements.
Store Consignors and Major Consignors constitute an important part of SM Department Stores, contributing
more than 80% of sales realized by the SM Department Stores as at 31 December 2013.
Marketing
The SM Department Stores remain the leading retailers in the Philippines, carrying a full line of merchandise.
All stores carry the full fashion merchandise range from Men‘s, Ladies and Children‘s apparel and footwear, to bags, accessories, as well as cosmetics, home furnishings and toys.
The SM Department Stores continue to offer a wide assortment of global and local brands along with private
labels. Merchandise remains fashion forward, creating distinction/differentiation while maintaining
commitment to a value-for-money proposition through competitive price points across different categories. Strategic focus remains on growth/development of in-house brands and private labels via continuous
product innovations and aggressive promotional efforts, as well as strengthening of supplier base. To reinforce the SM Department Stores‘ position as the preferred one stop shop for consumers, the SM
Business Center Operations has continually adding to its menu of products and services, as well as through
aggressive recruitment of new public-private partners and biller-companies.
The SM Department Stores continue to strengthen their fashion image through regular roll-out of fashion collection highlights, seasonal campaigns such as summer, back-to-school, and Christmas, and fashion
brand image campaigns. To cement their position further, SM Department Stores have actively participated in Philippine Fashion Week. The Group has tapped selected celebrities and media authorities as brand
ambassadors to build strong affinity to its target markets. The SM Department Stores have engaged their
consumers in the digital space via online tools such as Facebook, while growing their Twitter fanbase and exploring emerging sites such as Instagram and Pinterest.
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SM Retail has continued to augment the Department Stores‘ value proposition through integrated ―drive-to-store‖ efforts, using a variety of promotional methods including visual merchandising, multi store
events and promotions, and social media engagements. Nationwide promotions across all departments are being implemented to include seasonal promotions and category highlights. Departmental campaigns
bundle customer benefits with various purchase incentives. Merchandise themed sale events continue to be
initiated in order to give freshness to the promotions calendar. Sale events are purposely timed to capitalise on auspicious calendar dates such as extended weekends due to local and national holidays. In parallel, the
SM Department Stores have launched credit card promotions to tap the market for more affluent consumers and ease financial strain on the mass based clientele.
The SM Department Stores remain committed to improve their customer reach through store openings in
city neighborhoods and fast-growing provincial cities, addressing the continued growth in customer
demand for convenience and accessibility. The SM Department Stores will continue to support the SM Mall‘s expansion strategy, with the opening of SM BF Paranaque in November 2013 as the latest. In parallel, we
continue to make ongoing improvements to our existing stores, with the aim of both improving aesthetics and increasing customer convenience. Current initiatives include the development of new and exciting store
designs and innovative display fixtures meant to enhance the presentation of our merchandise collections.
SM Retail also continues to explore and implement new marketing efforts. The SM Advantage Card is the
largest loyalty program in the Philippines with about 500 partner establishments nationwide and cardholder base of 8.7 million as at 31 December 2013. In 2005, the Group launched a program to provide discounts to
shoppers using certain major credit cards at the SM Department Stores and 450 Petron outlets and currently has a strategic alliance with MasterCard. In 2007, SM Retail, in coordination with all major credit
card companies, launched installment program for qualified purchases by the cardholders.
Suppliers SM Retail coordinates and manages the sourcing of merchandise for the SM Department Stores and the Group‘s Retail Affiliates. The majority of the products carried by the SM Department Stores are made in the
Philippines. The outright merchandise sold by SM Department Stores are directly sourced from local importers, distributors and manufacturers. Accordingly, the SM Department Stores are not directly exposed
to foreign exchange risks on purchases of merchandise. The SM Department Stores source their outright merchandise from over 3,000 active suppliers. SM Retail,
through its merchandising team, has over the years developed close partnership with a large number of suppliers in the Philippines. However, SM has opened its doors for new potential suppliers. For the year
ended 31 December 2013, SM Retail sourced approximately 80% of its merchandise by value from 20% of its suppliers. SM Retail does not rely on one supplier or a small group of suppliers and, for the year ended
31 December 2013, no single supplier supplied more than 2% of SM Retail‘s purchase orders by value.
For the year ended 31 December 2013, approximately 60% of SM Department Stores‘ outright purchases
were made on credit with an average credit period of 60 days following delivery, with the balance comprising purchases made on a cash-on-delivery basis (which entitles the SM Department Stores to a
minimum of a 5% reduction in the purchase price) or a credit period of between 15 to 45 days from the
date of delivery with a 2% to 5% discount. Upon the issuance of the relevant purchase order, SM Retail‘s suppliers generally deliver the ordered products within 30 to 45 days for new and repeat order products
that need to be manufactured, and within five days for ready-made products in stock. The SM Department Stores reserve the right to return defective goods subject to an agreed minimum return amount. For the
year ended 31 December 2013, less than 2% of SM Department Stores‘ outright purchases by value were returned. SM Department Stores generally will give written notice to the relevant supplier to collect the
defective item and payment for the defective item is automatically deducted by SM Department Stores
when they pay for that order or their next order with the supplier, depending on when the defect is
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detected.
Competition
The retailing industry is very competitive, and this is no different in the Department Store format. Strong Local players: Rustans, Robinsons, Landmark and the Gaisano Group in the Southern Philippines have been
equally aggressive in their expansion programs in key cities nationwide. In recent years, we have also seen the entry of large Mono Branded fast fashion retailers: Zara, Forever 21, and Uniqlo that are gaining share
in the apparel business.
In spite of the expansion of established Department Store chains as well as the entry of foreign brands, the
SM Store has maintained its market leadership in the Department store format. This can be attributed to product innovations, new brand entries, and the growth of in-house brands that make the offerings of the
store unique to competition. Moreover, innovative store designs and improved customer service and amenities ensure that the SM Store is a cut above the rest of the retailers in the country. These
improvements in the brand mix of The SM Store have garnered recognition from local and International
Associations. Testament to this is the Best of the Best Award from Retail Asia for the past five consecutive years, and the elevation of The SM Store as a Hall of Fame Awardee.
Food Retail Operations SM Supermarkets
Introduction
SVI was established in 1985. SVI was previously a Retail Affiliate of the Issuer, but was acquired by the Issuer from the Sy Family and a non-controlling partner with effect from June 2006 through a share-swap
agreement.
SVI currently operates 39 SM Supermarkets and four distribution centers. It opened its first supermarket in
Ayala Center, Makati and has since expanded nationwide, with 15 branches in Metro Manila. The Issuer opened two additional supermarkets in 2013, with plans to open one to two additional supermarkets for
each of the next few years thereafter, subject to market conditions. On 1 January 2010, SVI sold the 20 SaveMore Market stores to an affiliate, Sanford.
The Issuer, through SM Retail, owns 100% in SVI‘s issued share capital.
For the year ended 31 December 2013, SVI‘s revenues (comprising sales and other income) increased by 3.8% to P42,117.0 million (P40,579.7 million in 2012) mainly due to the opening of two additional stores.
As at 31 December 2013, SVI had 10 million authorized and outstanding shares at a par value of P100 per share. In 2011, SEC approved the P500 million increase in authorized capital stock through the issuance of
stock dividend.
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Selected Financial Information
The following table sets forth selected financial information of SVI as at and for the periods indicated:
As at and for the years ended 31 December
(in P millions)
2011 2012 2013
Sales 38,666 39,861 41,465 Cost of sales 30,093 29,912 32,220 Gross profit 8,573 9,949 9,245 Selling and administrative expenses 6,607 7,419 6,832 Other Operating expenses 152 150 159 Other income 1,378 814 659 Income before income tax 3,192 3,194 2,913 Net income 2,413 2,287 2,055 Assets 11,754 11,223 10,629 Liabilities 9,222 9,404 8,775 Equity 2,532 1,819 1,854
As at the date of this Prospectus, SVI has no outstanding bank debt and its operations and expansion plans
to date have been primarily supported through internally generated funds.
Operations
The supermarkets carry an extensive line of food and household products, with over 40,000 stock-keeping
units (―SKU‖) on hand. Additionally, all supermarkets host other product ranges such as pharmacies, bakeries, photo shops, wine and liquor stores, Chinese delicatessens, snack and ice cream kiosks. Certain
shops also carry furniture, apparel, shoes, books and a home center. As with SM Department Stores, sales
in the SM Supermarkets are cyclical and driven by seasonality.
SVI‘s 39 ―SM Supermarket‖ stores are located within SM Malls.
The product mix in the supermarkets is a combination of local and imported goods. However, as the
majority of imported goods are purchased locally in the Philippines, there is no foreign exchange risk. Furthermore, all purchases are Peso-denominated. SVI has approximately 2,098 active suppliers.
The Issuer plans to open one SM supermarket in 2014, with approximately two new supermarkets opening
annually thereafter for the next few years, subject to market conditions. The following table sets forth the SM Supermarket that the Issuer plans to open, its location and projected date of opening:
Location of SM Supermarkets Location Projected Date of Opening
Cauayan, Isabela Within SM Mall 2nd quarter of 2014
Operational and Management Support
SVI relies on an experienced management team to keep its advantage over its competitors. Members of
senior management have combined retail experience of more than 30 years.
Each supermarket is handled by a store manager who supervises a maximum of three stores. Day-to-day operations are handled directly by an assistant store manager and officer-in-charge. The store managers
report directly to the operations managers who also serve as the link to the national head office support
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department and services. There are currently eight operations managers who are assigned to specific areas
in the Philippines and report directly to two Assistant Vice Presidents for Operations.
Merchandising
SVI undertakes the merchandising and approves the merchandise sold by third party store consignors
(―Supermarket Consignors‖). The majority of the merchandise carried by each department is sourced by SVI and purchased outright from distributors and manufacturers. The SM Supermarkets‘ outright
merchandise includes in-house brands such as ―SM Bonus‖. These in-house brand products provide customers of the SM Supermarkets with quality, moderately-priced alternatives to the more expensive
branded items sold by Supermarket Consignors. Approximately 7% of SM Supermarkets‘ sales are from these in-house products.
SM Supermarkets‘ product mix is generally categorized as follows:
Product As a Percentage of Total Products
Sold in SM Supermarkets
Fresh 28%
Food 66% Dry goods 6%
Total 100%
Supermarket Consignor merchandise consists of branded merchandise manufactured or distributed by
Supermarket Consignors. Supermarket Consignors are allocated a portion of the selling area within the
relevant departments of the SM Supermarket to sell their merchandise. Supermarket Consignors are responsible for their own inventory at the store and SVI‘s obligation is to pay for the portion of inventory
already sold. As at 31 December 2013, there were 873 Supermarket Consignors operating in the SM Supermarkets.
SVI seeks to maintain a balanced mix of sales made in the SM Supermarkets on an outright basis, or via
Supermarket Consignors. One of the main considerations for SVI when approving Supermarket Consignors‘
items for sale in the SM Supermarkets is the products‘ salability, handling and merchandising. This is to ensure that such items meet SM‘s standards in terms of pricing, design and quality.
SVI charges its Supermarket Consignors a margin based on net sales. Such margin is determined according
to the categories of products being sold. SVI indirectly recognizes the net sales and cost of sales of the
Supermarket Consignors in its financial statements.
Supermarket Consignors constitute an important part of the business of SM Supermarkets; the percentage of outright sales and consignments sales is approximately 67% against 33% of SM Supermarket‘s net sales
for the year ended 31 December 2013.
Suppliers
The SM Supermarkets source their outright merchandise from over 1,000 suppliers. Although SVI, through
its merchandising managers, has, over the years, developed close relationships with a large number of suppliers in the Philippines, it does not have any long-term supply agreements with any supplier. This policy
is to ensure that SVI is able to source merchandise from a broad range of suppliers at competitive prices. All
products supplied by such suppliers are purchased by SVI pursuant to the terms of the relevant purchase order. During the year ended 31 December 2013, SVI sourced approximately 33% of its merchandise by
value from its top 10 suppliers. SVI does not rely on one supplier or a small group of suppliers and, for the year ended 31 December 2013, no single supplier supplied more than 8% of SVI‘s purchase orders by
value.
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For the year ended 31 December 2012 and 2013, all of SVI‘s outright purchases were made on credit with an average credit period of 30 days following delivery. SVI offers a credit period ranging from one to seven
days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of delivery with no discount. Upon the issuance of the relevant purchase order, SVI‘s suppliers generally deliver the ordered
products within 15 to 30 days. SVI retains the right to return defective goods subject to an agreed minimum
return price. All fresh produce is delivered to the relevant SM Supermarkets by the suppliers directly.
Centralized Services and Distribution
Centralized services include planning and forecasting, budgeting, internal audit, site development, policy and procedures formulation, training and development, staffing and capital expenditures, technology
development, risk management, central approval of purchases and disbursements and processing of store
set-ups.
SVI has a national distribution center network with the main center located in Sucat, Parañaque and three
regional centers that service Iloilo, Cebu and Davao. The main center, which was established in 2002 at an estimated cost of P500 million, was able to address the supermarkets‘ stock-out problem and has increased
sales. This current distribution network can handle up to 100 supermarket and hypermarket sites. In 2012,
an extension in the main centre in Sucat, Parañaque was built at an estimated cost of P200 million to
service additional stores.
In 2000, SVI implemented a SAP system that enabled it to increase efficiency and reduce costs by reducing manpower and stock levels. It also enabled SVI to decrease its store opening time frame from six months to
one month due to the implementation of a standard store set-up plan and better data evaluation and
prompt implementation of strategies. In addition, the SAP system facilitated faster collection of receivables.
Marketing
SM Supermarkets had regular as well as seasonal promotions to increase sales and provide additional shopping incentives. The initiatives include the yellow tag special, five-day sale, SWIPE promos and launch
pad, among others.
Competition
SM Supermarkets‘ competitors include national and regional supermarket chains, independent and
specialty grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and
supercenters. Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. SM Supermarkets regularly monitors its competitors‘ prices and
adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions.
The other major players in the industry include Puregold, Robinson‘s Supermarket, Shopwise and Gaisano
Supermarkets, Waltermart, SM Hypermarkets and SaveMore Markets.
SaveMore Markets Introduction
Sanford Marketing Corporation, formerly Sanford Investments Corp., a holding company, was registered with the SEC on September 2000. In November 2009, Sanford Investments amended its corporate name,
primary purpose, articles of incorporation and principal place of business to fit its purpose to operate ―SaveMore Markets‖, a modernised neighbourhood or community store.
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As at 31 December 2013, Sanford operated 93 SaveMore Markets. It opened its first SaveMore Market in Taft Ave. cor. T.M. Kalaw St., Ermita in October 2009. On 1 January 2010, 20 SaveMore Markets that were
previously owned by SVI, a related party, were sold to Sanford. In 2011, 2012 and 2013 Sanford opened 25, 18 and 15 SaveMore Markets respectively, bringing the total to 93 stores. The Issuer plans to open 10 - 15
additional SaveMore Markets annually, subject to market conditions.
The Issuer, through SM Retail, owns 99.6% in Sanford‘s issued share capital.
For the year ended 31 December 2013, Sanford‘s issued share capital amounted to P1.2 billion. For the year
ended 31 December 2013, Sanford‘s revenues (comprising sales and other income) for the 93 SaveMore
Markets amounted to P25.786 billion. As at 31 December 2013, Sanford had 12,000,000 authorized and outstanding shares at a par value of P100 per share.
Selected Financial Information
The following tables set forth selected consolidated financial information of Sanford as at and for the periods indicated:
As at and for the year ended
(in P millions) 2011 2012 2013
Sales 16,444 21,054 25,326 Cost of Sales 11,731 14,772 19,460
Gross profit 4,713 6,282 5,866 Selling and administration
expenses
3,925 5,148
5,618
Other operating expenses - - - Other Income 283 359 435
Income before income tax 1,038 1,422 629 Net income 727 996 442
Assets 7,689 9,818 9,944 Liabilities 5,414 7,547 7,041
Stockholders’ Equity 2,275 2,270 2,892
As at 31 December 2013, Sanford has outstanding bank debt of P2.2 billion.
Operations
The SaveMore Markets carry an extensive line of food and household products, with a low of 15,000 SKU on
hand for small stores to a high of 30,000 SKU on hand for big stores. Additionally, all SaveMore Markets host other product ranges such as pharmacies, bakeries, photo shops, wine and liquor stores, Chinese
delicatessens, snack and ice-cream kiosks. Certain shops also carry appliances, furniture, apparel, shoes, magazines and a home centre. SaveMore Markets also offer services such as foreign exchange and bills
payment. As with SM Department Stores, sales in the SaveMore Markets are cyclical and driven by
seasonality.
Out of Sanford‘s 93 SaveMore Markets, 38 are mall-based (located within malls), 2 are condo-based and the
remaining 53 are stand-alone as at 31 December 2013.
The product mix in the SaveMore Markets is a combination of local and imported goods. However, as the
majority of imported goods are purchased locally in the Philippines, there is no foreign exchange risk. Furthermore, all purchases are Peso-denominated. Sanford has approximately 1,900 active suppliers.
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The following table sets forth the SaveMore Markets that the Issuer plans to open, their location and projected date of opening:
Location of SaveMore Market Location Projected Date of Opening
Savemore Santiago 2 Mabini, Santiago City May 2014
Savemore Bayombong Bayombong Nueva Viscaya May 2014
Savemore Solano 2 Barangay Quirino, Nueva Viscaya May 2014
Savemore Carcar Carcar, Cebu City June 2014
Savemore La Trinidad La Trinidad, Benguet Second Half 2014
Savemore Dinalupihan Dinalupihan, Bataan Second Half 2014
Savemore Bambang Bambang Nueva Viscaya Second Half 2014
Savemore Light Residence Boni, Mandaluyong City Second Half 2014
Savemore Binangonan Binangonan, Rizal Second Half 2014
Savemore Agora Agora, Lucena City Second Half 2014
Savemore Muzon San Jose Del Monte Second Half 2014
Operational and Management Support
Sanford relies on an experienced management team (from SVI) to maintain its market position. Members of
senior management have combined retail experience of more than 30 years. Each SaveMore Markets is handled by a store manager who supervises a maximum of three stores. Day-to-day operations are handled
directly by an assistant store manager and officer-in-charge. The store managers report directly to the operations managers who also serve as the link to the national head office support department and services.
There are currently six operations managers who are assigned to specific areas in the Philippines and report
directly to the President of Operations. Assisting the President of Operations is one Assistant Vice President. Merchandising
Sanford undertakes the merchandising and approves the merchandise sold by third-party store consignors (―SaveMore Consignors‖). The majority of the merchandise carried by each department is sourced by
Sanford and purchased outright from distributors and manufacturers. The SaveMore Markets‘ outright merchandise includes in-house brands such as ―SM Bonus‖. These in-house brand products provide
customers of the SaveMore Markets with quality as moderately priced alternatives to the more expensive branded items sold by SaveMore Consignors. Approximately 9.48% of SaveMore Markets‘ sales are of these
in-house products.
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Sanford‘s product mix is generally categorized as follows:
Product As a Percentage of Total Products Sold in SaveMore Markets
Fresh 30.61%
Food 65.31%
Dry goods 4.08%
Total 100.00%
SaveMore Consignor merchandise consists of branded merchandise manufactured or distributed by
SaveMore Consignors. SaveMore Consignors are allocated a portion of the selling area within the relevant
departments of the SaveMore Market to sell their merchandise. SaveMore Consignors are responsible for their own inventory at the store and Sanford‘s obligation is to pay for the portion of inventory already sold.
As at 31 December 2013, there were over 658 SaveMore Consignors operating in the SaveMore Markets.
Sanford seeks to maintain a balanced mix of sales made in the SaveMore Markets on an outright basis, or
via SaveMore Consignors. One of the main considerations for Sanford when approving SaveMore Consignors‘ items for sale is the products‘ saleability, handling and merchandising. This is to ensure that
such items meet SM‘s standards in terms of pricing, design and quality.
Sanford charges its SaveMore Consignors a margin based on net sales. Such margin is determined
according to the categories of products being sold. Sanford indirectly recognises the net sales and cost of sales of the SaveMore Consignors in its financial statements.
SaveMore Consignors constitute an important part of the business of SaveMore Markets; the percentage of
outright sales and consignments sales is approximately 68% against 32% of SaveMore Market‘s net sales for the year ended 31 December 2013.
Suppliers
The SaveMore Markets source their outright merchandise from over 1,336 suppliers. Although Sanford, through SVI‘s merchandising managers, has, over the years, developed close relationships with a large
number of suppliers in the Philippines, it does not have any long-term supply agreements with any supplier. This policy is to ensure that Sanford is able to source merchandise from a broad range of suppliers at
competitive prices. All products supplied by such suppliers are purchased by Sanford pursuant to the terms
of the relevant purchase order. During the year ended 31 December 2013, Sanford sourced approximately 44.2% of its merchandise by value from its top 10 suppliers. Sanford does not rely on one supplier or a
small group of suppliers and, for the year ended 31 December 2013, no single supplier supplied more than 12.8% of Sanford‘s purchase orders by value.
For the year ended 31 December 2012 and 2013, all of Sanford‘s outright purchases were made on credit with an average credit period of 30 days following delivery. Sanford offers a credit period ranging from one
to seven days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of delivery with no discount. Upon the issuance of the relevant purchase order, Sanford‘s suppliers generally
deliver the ordered products within 15 to 30 days. Sanford retains the right to return defective goods subject to an agreed minimum return price. All fresh produce is delivered to the relevant SaveMore Markets
by the suppliers directly.
Centralized Services and Distribution
Centralized services include planning and forecasting, budgeting, internal audit, site development, policy and procedures formulation, training and development, staffing and capital expenditures, technology
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development, risk management, central approval of purchases and disbursements and processing of store
set-ups.
Sanford shares a national distribution centre network with SVI with the main centre located in Sucat, Parañaque and two regional centres that service Iloilo and Cebu. The current distribution network can
handle up to 100 supermarket and hypermarket sites.
Marketing
SaveMore Markets have regular as well as seasonal promotions to increase sales and provide additional shopping incentives. The initiatives include the yellow tag special, bag-a-bonus, three-day sale and special
display sections known as launch pads, among others.
Competition
SaveMore Markets‘ competitors include national and regional supermarket chains, independent and
speciality grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and super centers. Supermarket chains generally compete on the basis of location, quality of products, service,
price, product variety and store condition. SaveMore Markets regularly monitors its competitors‘ prices and
adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions.
The other major players in the industry include Puregold, Robinson‘s Supermarket, Shopwise, Gaisano Supermarkets and SM Supermarkets.
SM Hypermarkets Introduction
SSMI was established in 2001. SSMI was previously a Retail Affiliate of the Issuer but was acquired by the Issuer with effect from 6 June 2006 through a share-swap agreement.
SSMI operates its hypermarkets under the brand ―SM Hypermarket‖. It opened its first hypermarket in
SM City Sucat in 2001. The newest SM Hypermarket store which opened in 2013 were located in Jazz,
Makati and FTI-Taguig.
As at 31 December 2013, the Issuer directly owns 99.99% in SSMI‘s issued share capital through SM Retail.
For the year ended 31 December 2013, SSMI‘s revenues (comprising sales and other income) increased by 5.2% to P30,326.3 million (P28,828.7 million for the same period in 2012). Net income decreased from
P1,131.5 million for the year ended 31 December 2012 to P855.8 million for the year ended 31 December
2013, representing a decline of 24.4%.
As at 31 December 2013, SSMI had 10 million authorized issued and outstanding shares at a par value of P100 per share.
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Selected Financial Information
The following table sets forth selected financial information of SSMI as at and for the periods indicated:
As at and for the years ended 31 December
(in P millions)
2011 2012 2013
Sales 26,725 28,396 29,849 Cost of sales 19,937 20,568 22,543 Gross profit 6,788 7,828 7,306 Selling and administrative expenses 5,674 6,654 6,570 Other Income 380 433 477 Income before income tax 1,494 1,607 1,213 Net Income 1,057 1,131 856
Assets 8,124 9,813 9,611 Liabilities 7,430 7,987 7,926 Equity 694 1,826 1,685
SSMI‘s initial capital investment was P100 million. The company as at 31 December 2013 has an external
bank loan of P1.35 billion and all future site openings are expected to be funded using internally generated funds and external borrowings.
Operations
SM Hypermarkets provide one-stop shopping convenience specially designed to meet the growing needs of the shoppers. The hypermarkets offer a wide range of products covering groceries, health and beauty
products, shoes, ready-to-wear apparel, furniture, appliances, hardware, kitchenware, toys, office supplies, bakery products, wine and liquor. They also offer services such as foreign exchange and bills payment. As
with SM Department Stores, sales in the SM Hypermarkets are cyclical and driven by seasonality.
All SM Hypermarkets have modern, spacious facilities, customer friendly display racks and more than 40
check-out lanes each. What makes SM Hypermarkets distinctive for consumers is that they sell food, fresh and frozen items such as those found in a conventional supermarket, as well as general merchandise
products found in conventional department stores.
SM Hypermarkets also offer services such as delivery services and price verifier kiosks.
The Issuer plans to open more SM Hypermarkets both within Malls and on a stand-alone basis. After
opening 2 SM Hypermarkets in 2013, it currently plans to open three SM Hypermarkets in 2014. It intends to open at least three new SM Hypermarkets annually thereafter for the next few years, subject to market
conditions. The following table sets forth the SM Hypermarkets that the Issuer plans to open, their location and projected date of opening:
Location of SM Hypermarket Location Projected Date of Opening
Daet Camarines Norte February 2014
Sun Residences Quezon City 2nd Quarter 2014
Rosario Cavite 4th Quarter 2014
Operational and Management Support
The management team of SSMI has significant local and international work experience in the hypermarkets
business. In addition, SMIC and SSMI entered into an agreement whereby SMIC provides various services
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of the key management personnel to SSMI for which SMIC receives a management fee equivalent to a
certain percentage of SSMI‘s net sales.
Merchandising
SM Hypermarkets‘ merchandise is a mix between local and imported goods, with over 30,000 SKUs. SSMI
undertakes the merchandising and also approves the merchandise sold by third-party store consignors (―Hypermarket Consignors‖). Part of the merchandise carried by each department is sourced by SSMI and
purchased outright by the SM Hypermarkets. SM Hypermarkets‘ outright merchandise includes in-house brands such as ―SM Bonus‖. These in-house products provide customers of the SM Hypermarkets with
quality, moderately priced alternatives to the more expensive branded items sold by Hypermarket Consignors. Approximately 5% of SM Hypermarkets‘ sales is composed of these in-house products.
SM Hypermarkets‘ product mix is generally categorized as follows:
Product As a Percentage of Total Products Sold in SM Hypermarkets
Fresh and Frozen 27% Food 56%
Non-Food 17%
Total 100%
Hypermarket Consignor merchandise consists of branded merchandise manufactured or distributed by Hypermarket Consignors. Hypermarket Consignors are allocated a portion of the selling area within the
relevant departments of the SM Hypermarkets to sell their merchandise. Hypermarket Consignors are responsible for their own inventory and the SSMI‘s obligation is to pay for the portion of inventory already
sold. As at 31 December 2013, there were over 730 Hypermarket Consignors operating in SM
Hypermarkets.
SSMI seeks to maintain a balanced mix of sales made in SM Hypermarkets on an outright basis, or via Hypermarket Consignors. One of the main considerations for SSMI when approving the Hypermarket
Consignors‘ items for sale in SM Hypermarkets is the products‘ salability, handling and merchandising. This
is to ensure that such items meet SSMI‘s standards in terms of pricing, design and quality.
SSMI charges its Hypermarket Consignors a margin based on net sales. Such margin is determined according to the categories of products being sold. SSMI indirectly recognizes the net sales and cost of sales
of the Hypermarket Consignors in its financial statements.
Hypermarket Consignors constitute an important part of the business of SM Hypermarkets; the percentage
of outright sales and consignments sales is approximately 61% against 39% of SM Hypermarkets‘ net sales as at 31 December 2013.
Suppliers
The SM Hypermarkets source their outright merchandise from approximately 800 suppliers. Although SSMI, through its merchandising managers, has, over the years, developed close relationships with a large
number of suppliers in the Philippines, it does not have any long-term supply arrangements with any supplier. This policy is to ensure that SSMI is able to source merchandise from a broad range of suppliers at
competitive prices. All products supplied by such suppliers are purchased by SSMI pursuant to the terms of
the relevant purchase order. For the year ended 31 December 2012 and 2013, SSMI sourced approximately 80% of its merchandise by value from 12% of its suppliers. SSMI does not rely on one supplier or a small
group of suppliers and, for the year ended 31 December 2013, no single supplier supplied more than 12% of SSMI‘s purchase orders by value.
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For the year ended 31 December 2012 and 2013, approximately 77% of SSMI‘s outright purchases were made on credit with an average credit period of 30 days following delivery, with the balance comprising
purchases made on a cash-on-delivery basis, a self-remittance term (―SRT‖) basis, for a period of up to three days, a credit period of up to seven days, or a statement based billing system (―SBBS‖) basis for a
period of up to 30 days, from the date of delivery with a 3% to 4% discount. Upon the issuance of the
relevant purchase order, SSMI‘s suppliers generally deliver the ordered products within 15 to 30 days. SSMI retains the right to return defective goods subject to an agreed minimum return amount. All fresh produce
is delivered to the relevant SM Hypermarket by the suppliers directly.
Centralized Services and Distribution Centralized services include planning and forecasting, budgeting, internal audit, site development, policy
and procedures formulation, training and development, staffing and capital expenditures, technology development, risk management, central approval of purchases and disbursements and processing of store
set-ups. SSMI started its crossdocking services with SVI during the fourth quarter of 2007 to serve its suppliers
better through centralized receiving and distribution of merchandise. The crossdocking services are located in an offsite warehouse located in Sucat, Parañaque which it leases from SVI. The gross area leased is
11,763 square meters.
In addition, SSMI also leases a warehouse near its crossdocking facilities from SVI for the purpose of storing
its value pack items. The gross area leased is 804 square meters.
In October 2007, SSMI implemented a SAP system that enabled it to increase efficiency and reduce costs by reducing manpower and stock levels. It also enabled SSMI to decrease its store opening time frame from six
months to one month due to the implementation of a standard store set-up plan and better data evaluation
and prompt implementation of strategies. In addition, the SAP system facilitated faster collection of receivables.
Marketing
SM Hypermarkets have regular as well as seasonal promotions to increase sales and provide additional shopping incentives. The initiatives include the mailer items, ―Shop ‗N Win‖, value packs, ―Scratch & Win‖,
and three-day sales among others. SSMI also has a loyalty program (via the SM Advantage Card) as well as
various other promotions to boost sales.
Competition
SM Hypermarkets‘ competitors include national and regional supermarket chains, independent and
speciality grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and supercentres. Hypermarket chains generally compete on the basis of location, quality of products, service,
price, product variety and store condition. SM Hypermarkets regularly monitor their competitors‘ prices and adjust their prices and marketing strategy as management deems appropriate in light of existing conditions.
Other local players in the hypermarket format include Puregold, Robinsons, Shopwise and S&R.
The Issuer believes that future competition from the major foreign competitors is not likely given that the
Philippine market may not be large enough for these companies to achieve economies of scale. However, one potential source of foreign competition may be from secondary players in China, which may decide to
enter the Philippine market given the high level of competition in the China domestic market.
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Financial Services
BDO Unibank, Inc.
BDO Unibank, Inc. is a universal bank which provides a wide range of corporate and retail banking services.
These services include traditional loan and deposit products, as well as treasury, trust banking, investment banking, private banking, cash management, leasing and finance, remittance, insurance, retail cash cards
and credit cards.
The Bank grew through a series of mergers and acquisitions, the largest of which was the merger between
Banco de Oro Universal Bank, Inc. and EPCIB, which took effect on May 31, 2007. As at December 31, 2013, the Bank ranked as the number one bank in the Philippines in terms of total assets, gross customer loans,
deposits, capital and total trust funds under management. Its consolidated total assets stood at P1.7 trillion while total capital funds stood at P164.4 billion as of December 31, 2013.
The Bank‘s principal markets are the top-tier corporate market, the middle-market banking segment
(consisting of medium-sized corporations and small- and medium-size enterprises (―SMEs‖)) and the
retail/consumer market. The Bank‘s customers are based primarily in the Philippines and include large multinational corporations with local operations. As of December 31, 2013, the Bank had an operating
network of 814 domestic branches and one foreign branch (in Hong Kong), with 27 more domestic branch licenses for deployment. Its network includes 13 overseas remittance offices and 2,263 automated teller
machines (―ATMs‖). The Group is the Bank‘s largest shareholder group, with an equity interest of
approximately 57.6% of the Bank‘s issued share capital.
As of 25 April 2014, the Bank had a market capitalization on the Philippine Stock Exchange (―PSE‖) of approximately P311,894 million.
The Bank has a Bank Financial Strength Rating of D+ and a Baa3 rating for its long-term local currency bank deposits from Moody‘s Investor Services. The Bank also has an Issuer/Debt Rating (long-term) of BB+
from Fitch Ratings.
Business Strategies
To attain its objectives, the Bank implements its core business strategies focused on three areas as follows:
To build a strong, diversified and sustainable earnings stream through focused loan growth and
branch expansion (for a diversified asset and funding mix), as well as the steady stream of recurring
income from its fee-based service businesses;
To create operating leverage to achieve scale advantage through the following: strong branding;
broad market coverage through additional branches, business centers and account officers; and the
effective use of technology as business enabler.
To continue to prudently manage the Bank‘s balance sheet through the following: conservative
provisioning; the reduction in non-performing assets (ROPA sales); and sound capital management.
Competitive Strengths
The Bank believes it has the following competitive strengths compared to its peers:
Leading brand name and banking franchise in the Philippines;
Diversified business model providing full-service operations;
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Customer-centric culture complemented by strategic distribution platform;
Scalable infrastructure platform for sustained growth;
Strong and experienced management team; and
Synergies with its controlling shareholder group.
Recent Developments
On November 14, 2013, the Bank disclosed that it entered into a definitive agreement to acquire Citibank Savings, Inc. The acquisition is still subject to the necessary closing conditions and regulatory approvals.
On 24 February 2014, the Bank disclosed that it had entered into a definitive agreement for the acquisition
of the trust business of Deutsche Bank AG's Manila Branch comprising trust, fiduciary and investment
management activities. The transaction is still subject to closing conditions and applicable regulatory approvals.
Selected Financial Information
The following table sets forth selected consolidated financial information of the Bank as at and for the periods indicated:
For the years ended 31 December
(in P millions)
2011
2012
2013
Resources 1,094,187 1,241,527 1,672,778
Loans and other receivables 673,927 760,500 922,553
Deposit liabilities 858,569 931,641 1,345,333
Equity 93,800 154,371 164,354
Net income 10,844 14,542 22,646
The China Banking Corporation
China Bank was incorporated on 20 July 1920 and commenced business on 16 August of the same year
as the first privately owned local commercial bank in the Philippines. It resumed operations after World
War II on 23 July 1945 and played a key role in the post-war reconstruction and economic recovery by
providing financial services to businesses and entrepreneurs. China Bank was listed on the local stock
exchange in 1947 and acquired its universal banking license in 1991. China Bank started by catering
mainly to the Chinese-Filipino commercial sector, but has since expanded its market scope to include
retail and consumer segments. Its core banking franchise stems mainly from its 93-year history in the
Philippines, a factor that has enabled it to become deeply entrenched within the socioeconomic fabric
of the Chinese-Filipino community. China Bank's market comprises the corporate, commercial and
consumer markets. It provides a wide range of domestic and international banking services, and is one
of the largest commercial banks in the country in terms of assets and capital.
China Bank offers a wide range of financial products and services through its network of 368 branches
(including 73 branches of China Bank Savings) as at December 31, 2013. Complementing this branch
network are convenient and secure electronic banking channels for day and night banking service –
China Bank TellerCard ATM, China Bank Online (mobile and internet banking), and China Bank
TellerPhone (phone banking).
China Bank won the Bell Awards for Corporate Governance for two consecutive years in 2012 and 2013.
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The Bell Awards was established by the PSE to recognize publicly-listed companies and trading
participants for adhering to high standards of corporate governance. For the second year in a row,
China Bank is the only bank among the top five awardees in the publicly-listed company category.
The Monetary Board of the BSP approved on November 21, 2013, the merger between China Bank
Savings, Inc. (―CBS‖) and Pampanga-based rural lender Unity Bank, with CBS as the surviving bank.
Exactly a year ago, BSP approved China Bank‘s acquisition of 99.95% of Unity Bank‘s outstanding
subscribed capital stock.
2013 also paved the way for the signing of a Memorandum of Agreement (―MOA‖) for Planters
Development Bank (―Plantersbank‖) and China Bank which calls for the purchase by China Bank of more
than two-thirds of Plantersbank‘s shares, subject to approval of the bank‘s shareholders and regulatory
bodies. The Plantersbank deal bolsters China Bank‘s current strategy in two areas – growing its middle
market/SME portfolio and its network expansion program. China Bank is in the midst of the most rapid
expansion in its history.
In addition, Fitch Ratings affirmed its national rating of AA- which is one notch below the top bank
rating in the country. Capital Intelligence rating agency also affirmed its credit rating on China Bank
(Financial Strength BBB-) and recently upgraded its Foreign Currency Long-Term rating to BBB- from
BB+ following the upgrade in the Philippines‘ sovereign rating.
For 2014, China Bank will continue to build up its core businesses - corporate, consumer, middle market
and SMEs. China Bank aims to tap the synergy with its shareholder, the Group, and affiliates such as
The Manufacturers Life Insurance Co. (Phils.) Inc. (―Manulife‖) as well their suppliers and retailers as a
means of expanding its share of the consumer and commercial sectors. China Bank will build a
competitive Treasury organization by diversifying its investment portfolio to include triple A corporate
issues and increase the velocity of securities trading. The growth in existing fee-based revenues will be
augmented by diversifying the sources of its revenue streams and client base. China Bank‘s credit card
business will be launched during the third quarter of 2014. This will not only broaden revenue sources
for China Bank but serve as a strategic tool for better customer engagement. Credit cards are expected
to build greater loyalty among customers and accelerate the customer acquisition effort through China
Bank‘s subsidiaries (CBS, Manulife, among others) and the Group.
The merger between Unity Bank and CBS and the recent acquisition of Plantersbank which had 78
branches, enabled China Bank to meet its target of 400 branches earlier than 2014. The China Bank
Group, composed of China Bank, CBS, Unity Bank and Plantersbank, ended 2013 with 448 branches
(295 branches of China Bank, 73 branches of CBS and 80 branches of Plantersbank). This rapid branch
expansion will be the impetus to acquire new customers, increase client relationships and strengthen
the distribution capacity of the branches to cross sell various products within a tota l relationship
framework. The branch network will be the main platform for delivering financial products and
services to the commercial and consumer segments. Electronic channels such as ATMs, kiosks, online
and mobile banking will be upgraded for more efficient distribution of banking services to its retail and
consumer clients.
Building a stronger and more responsive organization is a prerequisite for achieving China Bank‘s
corporate goals. To strengthen China Bank‘s organizational capability, it will implement tighter
accountability and performance monitoring, centralization of support and achieve industry best
Turnaround Time (―TAT‖) in key customer processes. The upgrading of the core banking system is the
centerpiece of China Bank‘s 3-year technology plans. China Bank will focus on the integration of various
products and channel systems to provide customers with an enhanced service level on 24x7 basis,
multi-channel banking and straight-through processing via technology-driven channels. It will also
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continue to upgrade its technology platforms – Core Banking system, ATM Switch, Credit Card / Debit
Card system, Treasury, ALM systems, Data Warehouse, CRM systems – to be able to serve its customers
with satisfaction while delivering superior returns to its stakeholders.
Insurance, Environment, Health and Safety
The Group‘s insurance arrangements are effected through BDO Insurance Brokers, Inc. (as broker). The Issuer believes that each of its subsidiaries is adequately insured, both in terms of the insured risks and
the amount which is covered. The Issuer ‘s commercial all risks insurance policy is underwritten by Prudential Guarantee Assurance Company and Generali Pilipinas Insurance Company. These insurance
companies are supported by a panel of reinsurers whose minimum rating from Standard & Poor ‘s Rating
Services, a division of The McGraw-Hill Companies, is ―A‖.
The Issuer ‘s policy covers any potential loss of property. Loss of revenue under the loss of rent coverage resulting from fire, water damage and acts of God including earthquake, typhoon and flood is provided
for SM Prime as a mall operator. Retail Affiliates operating inside the Malls do not have their own loss of revenue/business interruption insurance cover.
In addition, the comprehensive general liability insurance coverage extends to third-party liability, including loss of life and its corresponding litigation expenses.
The Issuer is, and, so far as it is aware, each of its principal subsidiaries is, in material compliance with
all applicable environmental, health and safety regulations.
Legal Proceedings The Issuer and the Group may be subject to various legal proceedings and claims that arise in the
ordinary course of business. Save as set out below, as of the date of this Offering Circular the Issuer and the Group are not engaged in or subject to any litigation or arbitration proceedings nor, to the knowledge
of the Directors, is any litigation or claim threatened against the Issuer or the Group which is material in
the context of the offering and issue of the Bonds or which, if determined adversely against the Issuer or the Group, would have a material adverse effect on their results of operations or financial position.
Investments and Property The Issuer ‘s current assets, consisting of cash and cash equivalents, time deposits and short-term
investments, investments held for trading and sale, receivables, merchandise inventories, and other current assets, amounted to P145,886.1 million and P162,939.0 million as at 31 December 2012 and
2013, respectively. As at 31 December 2012 and 2013, the Issuer ‘s investments in shares of stock of associates and joint
ventures amounted to P128,453.7 million and P138,994.4 million, respectively. These investments pertain to investments in shares of stock of associates and joint ventures such as BDO, China Bank, Belle
Corporation, Atlas Consolidated Mining and Development Corporation (―Atlas‖) and Waltermart Malls. The Issuer ‘s investment properties amounted to P149,970.7 million and P192,609.2 million as at 31
December 2012 and 2013, respectively. These investments consist mainly of land, shopping malls and improvements.
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The carrying amount of the Issuer ‘s consolidated property and equipment was P17,186.5 million and
P18,323.4 million as at 31 December 2012 and 2013, respectively. These consist of store and office land,
buildings and improvements, furniture and fixtures, software, data processing and wide area network
equipment, and real property. The Issuer ‘s consolidated non-current time deposits amounted to
P29,432.8 million and P27,081.0 million as at 31 December 2012 and 2013, respectively. The Issuer
leases from SM Prime the land on which its offices in SM Mall of Asia Complex are located. The lease
covers four parcels of land with a total area of 106,850 square metres. The 60-hectare land in SM Mall
of Asia Complex had a net book value of P2,123.8 million and P2,180.6 million as at 31 December 2012
and 2013, respectively.
Intellectual Property The Issuer owns the trademarks ―SM‖, ―SM Shoemart‖ and ―Shoemart‖, which are all registered with the
Philippine Intellectual Property Office (―IPO‖) for use in connection with goods and services. The Issuer has granted the use of trademarks to certain affiliates such as Premier Southern Corporation, Consolidated Prime Dev. Corporation and First Asia Realty Development Corporation pursuant to the
Memorandum of Agreements executed with them. These agreements, which are due to expire in 2020,
do not provide for payment of monetary consideration to the Issuer for the use of the trademarks.
Capital Expenditure The Group has made, and expects to continue to make, substantial capital expenditures in connection with the construction of new Malls, opening of new stores, development of SM Mall of Asia Complex,
Hamilo Coast and its residential developments. The following table sets forth the Group‘s total capital expenditure for the periods indicated:
As at 31 December
(in P millions) 2011 2012 2013
Capital Expenditure 39,975 48,248 72,983
For the years ended 31 December 2011, 2012 and 2013, out of the P39,975.0 million, P48,247.6 million and P72,983.2 million, respectively, that the Issuer incurred for capital expenditure on a consolidated
basis, P16,642 million, P20,711 million and P20,255 million respectively, was invested in the construction
of shopping malls.
The Retail Subsidiaries incurred capital expenditure of approximately P4,770 million in 2013 related to opening new stores for department stores, supermarkets, savemore and hypermarkets.
SM Prime incurred capital expenditure (excluding China operations) of approximately P43,583 million in 2013 related to construction of shopping malls and land banking activities, project development costs of condominium buildings and resort facilities, and hotel development costs .
Capital expenditures of BDO for 2013 are expected to be minimal as the major investments in information
technology, office renovation and branch expansion have already been completed in previous years.
China Bank has allocated P1.9 billion in capital expenditures for 2013, with about P562 million for branch expansion (both China Bank and China Bank Savings). Apart from the substantial capital expenditures
allotted for branch expansion, about half of the capital expenditure budget for 2013 will be invested in
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key infrastructure projects such as the acquisition of a new core banking system, ATM/card switch
management system, a new phone banking/call centre software, servers upgrade and enhancements to cash management platform to include supply chain functionalities.
In aggregate, the Group expected to incur capital expenditure of P76,628 million in 2013 to finance projects related to property development, banking, retail, tourism and leisure and general investments,
subject to the overall performance of the Philippine economy. Approximately 41% of these capital
expenditures shall be financed from internally generated funds, while approximately 59% shall be financed from borrowings.
Government Regulations and Authorizations
The Issuer possesses, and each of its principal subsidiaries possesses, all Government authorizations and approvals necessary to conduct their respective businesses and the Issuer is, and each of its
principal subsidiaries is, in material compliance with such authorizations and approvals.
Employees
As at 31 December 2013, the Issuer had 270 regular employees and the Group (excluding the Issuer)
had approximately 56,971 regular employees. The employees are classified as follows:
No. of Employees Rank and file 39,072
Junior/ mid-level managers 16,018 Senior executive officers 2,151
The Issuer and certain of its subsidiaries have a funded non-contributory pension plan covering all full-time employees considered as having regular employment status. As at 31 December 2013, defined
benefit liability amounted to P154.3 million. In addition, healthcare benefits are also provided to the Issuer ‘s employees and those of its subsidiaries.
As at 31 December 2013, the Retail Subsidiaries had more than approximately 24,187 regular employees, of whom approximately 14,928, 2,064, 2,407 and 2,817 were directly employed at the SM Department
Stores, SaveMore stores, SM Supermarkets, and SM Hypermarkets, respectively. The SM Department Stores hire seasonal employees when there is an increase in business, which is generally during the
Christmas season and in May, prior to school opening in June.
The Retail Subsidiaries have a retirement plan covering all regular employees, which was launched in
2000. In addition, healthcare benefits are also provided to regular employees of the Retail Subsidiaries.
Approximately 1,965 employees at five SM Department Stores are members of Bargaining Units. The
latest bargaining agreement for such employees was signed in June 2012 for a term of five years. The Issuer considers its relations with the Retail Subsidiaries employees to be generally good, and there have
been no instances of major strikes, lockouts or other disruptive labour disputes within the last five years. The Issuer is not aware of any impending strikes, lockouts or other disruptive labour disputes.
The average age of SMIC‘s officers and employees is 36 years and the average tenure of SMIC‘s
employees is five years. The mandatory retirement age for the Issuer ‘s employees is 60.
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Related Party Transactions The Issuer is the ultimate holding company of the Group, and, as at 31 December 2013, it was 49.8%
owned by Mr. Henry Sy, Sr., the founder of the Group, and other members of the Sy Family. The Issuer and certain of its subsidiaries, associates and affiliates currently have contractual arrangements with each
other. The principal ongoing related party transactions within the Group as at 31 December 2013 are
summarized below.
Related party transactions SMIC Receives management fees from SM Mart, SM Department
Stores, SVI and SSMI and certain Retail Affiliates for the
provision of management services including tax, legal and
treasury services
Leases from SM Prime the land for its corporate headquarters
at SM Mall of Asia Complex in the Manila Bay area
SMIC and a number of its subsidiaries maintain banking
facilities with BDO, including deposits and loans
Receives rental income from subsidiaries with respect to
rental of offices at the head office
Pays management fees, based on a percentage of rent
revenue, to one of the Management Companies owned by
members of the Sy Family for management of the head office
SM Prime
Receives rental income, based on a percentage of net sales,
pursuant to the leases of SM Department Stores in the Malls
Receives rental income, based on a percentage of net sales,
from SM Supermarkets, SM Hypermarkets and certain other
Retail Affiliates
Pays management fees, based on a percentage of operating
income, to Management Companies for management of each
of the major revenue streams generated by the Malls
SM Retail Receives a percentage of net sales from SM Mart and SM
Department Stores for operational support and services,
including for credit cards. Such operational support includes
merchandising, marketing and advertising, information
technology, controllership, operations and human resource
services
SM Mart and Department Store
Companies
Pays SMIC management fees for, among other matters, tax
and legal services as well as the right to use certain
intellectual property rights
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SM Department Stores pay SM Prime a percentage of net
sales for the department store space rented in the Malls
Pay SM Retail a percentage of net sales for operational
support and services
BDO and China Bank Receives fee income and interest for the provision of banking
services including loans to Group companies, affiliates of the
Group and their suppliers and pays interest on deposits.
DOSRI loans amounted to P37,196.6 million,
P32,021.6 million and P22,180.0 million as at 31 December
2011, 2012 and 2013, respectively
Pays dividends on preferred shares to SM Prime
Retail Affiliates Pay SMIC a percentage of net sales as management fees
Pay SM Prime a variable percentage of net sales as rent
SM Supermarkets/Hypermarkets Pay SMIC a percentage of net sales as management fees
Pay SM Prime a variable percentage of net sales as rent
Specific details of these transactions are set forth below:
SMIC and SM Prime have existing lease agreements for office and commercial space with related
companies. Total rent revenues amounted to P2,985.5 million, P4,054.9 million and P4,534.7 million for the years ended 31 December 2011, 2012 and 2013, respectively, and related rent
receivable amounted to P1,268.1 million, P1,518.6 million and P2,614.4 million as at 31 December
2011, 2012 and 2013, respectively. • The Group pays management fees to Shopping Center Management Corporation, Leisure Center,
Inc., West Avenue Theaters Corporation and Family Entertainment Center, Inc. for the
management of the office and mall premises. Total management fees for the years ended
31 December 2011, 2012 and 2013 amounted to P779.8 million, P872.8 million and P976.4
million respectively. • SMIC, SM Land and SM Retail receive management fees from related companies for providing
management and consultancy services. As consideration for the services provided, the Issuer
receives annual management fees based on a certain percentage of the related companies‘
net income as defined in the management contracts. Total management fees earned amounted
to P564.2 million, P713.2 million and P309.3 million for the years ended 31 December 2011, 2012
and 2013, respectively. Accrued management fees receivable amounted to P95.9 million, P154.2
million and P54.5 million as at 31 December 2011, 2012 and 2013, respectively. • The Group has certain bank accounts and cash placements that are maintained with BDO and
China Bank, and earns interest based on prevailing market interest rates. Cash placements with
BDO and China Bank and investment in debt securities of BDO and China Bank amounted to
P88,519.4 million, P114,014.2 million and P99,621.6 million as at 31 December 2011, 2012 and 2013.
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Related accrued interest receivable amounted to P841.4 million, P1,012.0 million and
P798.7 million as at 31 December 2011, 2012 and 2013, respectively. • The Group, in the normal course of business, had outstanding advances amounting to
P10,046.5 million, P2,466.0 million and P1,334.1 million as at 31 December 2011, 2012 and 2013,
respectively, due from related companies. Amounts due to related companies amounted to
P2,734.4 million, P3,265.0 million and P2,091.3 million as at 31 December 2011, 2012 and 2013,
respectively.
The Issuer considers each of its subsidiaries and associates to be responsible for its own profits or losses
and that each such corporation is independent of the Sy Family, and accordingly requires that any
contractual arrangements referred to above should be entered into on an arm‘s length basis. In
particular, all loans by BDO to related parties are within the statutory limits required by the BSP and are
on an arm‘s length basis. See ―Note 22 — Related Party Transactions‘‘ to the consolidated financial
statements as at and for the year ended 31 December 2012 and 2013, respectively, included elsewhere
in this Prospectus.
Material Contracts
As of the date of this Prospectus, the Company is not a party to any material contracts, except for contracts entered into in the ordinary course of business.
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RECENT DEVELOPMENTS AND PROSPECTS
SMIC
On May 31, 2013, the Group embarked on a transaction to consolidate all of its real estate interests
under SM Prime, in line with the Group‘s vision to create a leading integrated real estate company in Asia, increase synergies and organizational efficiencies among the Group‘s various real estate business units,
and further enhance the value of the Group‘s real estate businesses. The consolidation involved SMDC and HPI, various unlisted Group real estate companies including SM Land and SM Hotels and
Conventions Corporation and various real estate properties owned by SMIC.
The Group initiated the consolidation through the simultaneous tender offers made by SM Land to
acquire 100% of the outstanding issued and capital stock of SMDC and HPI it did not yet own by exchanging SM Prime common shares owned by SM Land for SMDC and HPI common shares of the
tendering SMDC and HPI Shareholders (the ―Tender Offers‖). This was followed by the following key transactions: (i) the merger of SM Land with SM Prime with the latter as the surviving entity (the
―Merger‖), (ii) the issuance of new SM Prime common shares to SMIC, Mountain Bliss Resort &
Development Corp. (―Mountain Bliss‖), and the Sy family, principal shareholders of SMIC and Group real estate companies, in exchange for shares in certain real estate companies of the Group (the ―Share for
Share Swap‖), and (iii) the issuance of new SM Prime common shares to SMIC in exchange for key real estate properties (―Property for Share Swap‖) owned by SMIC.
The Tender Offers were completed on 12 August 2013, and the shares of SMDC and HPI were delisted from the PSE on 05 November 2013. The Merger was approved by the SEC on 10 October 2013. On the
same date, the SEC also approved SM Prime‘s acquisition of SMIC‘s and the Sy Family‘s unlisted real estate companies, including SM Hotels and Conventions Corp., SM Arena Complex Corporation, Costa del
Hamilo, Inc., Prime Metro Estate, Inc. and Tagaytay Resort and Development Corporation through the
issuance of new SM Prime shares, as well as SM Prime‘s acquisition of certain real property assets of SMIC through the issuance of new SM Prime shares to SMIC. On 17 February 2014, SMIC signed an Investment and Shareholders Agreement for the acquisition of
34% ownership interest in CityMall Commercial Center, Inc. (―CityMall‖). The remaining 66% of the outstanding capital of CityMall is held by DoubleDragon Properties Corporation.
BDO
On 14 November 2013, the Bank disclosed that it entered into a definitive agreement to acquire Citibank Savings, Inc. The acquisition is still subject to the necessary closing conditions and regulatory approvals.
On 24 February 2014, the Bank disclosed that it had entered into a definitive agreement for the acquisition of the trust business of Deutsche Bank AG's Manila Branch comprising trust, fiduciary and investment
management activities. The transaction is still subject to closing conditions and applicable regulatory approvals.
China Bank
On 21 November 2013, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved the merger
between China Bank Savings, Inc. (CBS) and Pampanga-based rural lender Unity Bank, with CBS as the surviving bank. Exactly a year ago, BSP approved China Bank‘s acquisition of 99.95% of Unity Bank‘s
outstanding subscribed capital stock.
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In 2013, a Memorandum of Agreement was also signed for the purchase by China Bank of more than two-thirds of the issued and outstanding shares of Planters Development Bank (Plantersbank), subject to
approval of the China Bank‘s shareholders and the regulatory bodies. The acquisition of Plantersbank bolsters China Bank‘s current strategy of growing its middle market/SME portfolio and its network expansion
program.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prospective investors should read the following discussion and analysis of the Issuer‘s consolidated financial position and financial performance together with (i) the report of independent auditors, and (ii) the audited consolidated financial statements for the years ended of 31 December 2011, 2012 and 2013 and the notes thereto. Overview
The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The
Issuer was incorporated in the Philippines on 15 January 1960. On 29 April 2009, the Company‘s shareholders approved the amendment of SMIC‘s Articles of Incorporation, extending the Company‘s
corporate life for another 50 years from 15 January 2010. Its registered office is at the 10th Floor, One
E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City, Metro Manila, Philippines. Through its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses
located in the Philippines.
The Group‘s business activities and interests are divided into three principal business sectors:
Retail merchandising through its department stores, supermarkets, SaveMore, hypermarkets and
Waltermart (SM Retail);
Property group composed of the following:
- Shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM Prime);
- Real estate development and tourism (SM Prime and its subsidiaries SMDC, CDHI and HPI); - Hotels and conventions (SM Hotels); and
Financial services, through its associate banks that have universal banking licenses in the
Philippines (BDO and China Bank).
Basis of Preparation
Basis of Preparation
The consolidated financial statements of the Group have been prepared on the historical cost basis, except
for derivative financial instruments, investments held for trading and available-for-sale (AFS) investments, which have all been measured at fair value. The consolidated financial statements are presented in
Philippine peso, which is the Group‘s functional and presentation currency under Philippine Financial Reporting Standards (PFRS). All values are rounded to the nearest thousand, except when otherwise
indicated.
Statement of Compliance
The consolidated financial statements have been prepared in compliance with PFRS. PFRS includes
statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting
Standards Council (FRSC).
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Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following amended PFRS, which were adopted starting January 1, 2013. The adoption of
the following amended standards and interpretations did not have any impact on the Group‘s consolidated
financial statements, except when otherwise indicated:
PFRS 7, Financial Instruments: Disclosures – Offsetting Financial Statements and Financial Liabilities (Amendments)
PFRS 10, Consolidated Financial Statements
PFRS 11, Joint Arrangements
PFRS 12, Disclosure of Interests in Other Entities
PFRS 13, Fair Value Measurement
PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income or OCI (Amendments)
PAS 19, Employee Benefits (Revised)
PAS 27, Separate Financial Statements (as revised in 2011)
PAS 28, Investments in Associates and Joint Ventures (as revised in 2011)
Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine
Philippine Interpretations Committee Q&A No. 2013-03, Accounting for Employee Benefits under a Defined Contribution Plan Subject to Requirements of Republic Act 7641, The Philippine Retirement Law
2012 improvements to PFRSs, effective 2013.
Adoption of Revised PAS 19
For defined benefit plans, the Revised PAS 19 requires all remeasurements actuarial gains and losses to be
recognized in other comprehensive income and unvested past service costs previously recognized over the average vesting period to be recognized immediately in profit or loss when incurred.
Prior to adoption of the Revised PAS 19, the Group recognized actuarial gains and losses as income or
expense when the net cumulative unrecognized gains and losses for each individual plan at the end of the
previous period exceeded 10% of the higher of the defined benefit obligation and the fair value of the plan assets and recognized unvested past service costs as an expense on a straight-line basis over the average
vesting period until the benefits become vested.
Upon adoption of the Revised PAS 19, the Group changed its accounting policy to recognize all
remeasurements in other comprehensive income, which will not be reclassified to profit or loss in subsequent periods, and all past service costs in profit or loss in the period they occur. Moving forward,
the Group will retain the remeasurements in other comprehensive income and will not transfer this to other items of equity.
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The revised PAS 19 replaced the interest cost and expected return on plan assets with the concept of net interest on defined benefit liability or asset which is calculated by multiplying the net balance sheet defined
benefit liability or asset by the discount rate used to measure the employee benefit obligation, each as at the beginning of the annual period.
The revised PAS 19 also amended the definition of short-term employee benefits and requires employee benefits to be classified as short-term based on expected timing of settlement rather than the employee‘s
entitlement to the benefits. In addition, the Revised PAS 19 modifies the timing of recognition for termination benefits. The modification requires the termination benefits to be recognized at the earlier of
when the offer cannot be withdrawn or when the related restructuring costs are recognized.
The changes to the definition of short-term employee benefits and the timing of recognition for termination
benefits do not have any impact to the Group‘s financial position and financial performance.
The Group reviewed its existing employee benefits and determined that the amended standard has an impact on its accounting for pension benefits. The effect of the adoption of the Revised PAS 19 as at
January 1, 2013 amounted to P=283.7 million. This was recorded in the current year profit or loss as
reduction pension benefit expense, instead of a retrospective adjustment as required by the Revised PAS 19, as the impact is not material (see Note 26). On this basis, the Group‘s consolidated statement of financial
position at the beginning of the earliest comparative period was also not presented.
The adoption increased earnings per share by P=0.36 in 2013 (see Note 31). It did not have an impact on the consolidated statement of cash flows for the year ended December 31, 2013.
Financial Performance
Year ended 31 December 2013 vs. year ended 31 December 2012
Consolidated revenues grew by 13.1% to P253.3 billion, as against last year‘s P223.9 billion. Income from operations increased by 9.4% to P51.3 billion from last year‘s P46.9 billion. Operating income margin and
net profit margin is at 20.2% and 10.8%, respectively. Net income attributable to equity holders of the Parent for the year ended December 31, 2013 increased by 11.2% to P27.4 billion compared to
P24.7 billion of the same period last year.
Retail Sales accounts for 71.4% or P180.9 billion of the total revenues for the year. Consolidated Retail sales
grew by 13.8% from P158.9 billion to P180.9 billion for the year ended December 31, 2013. The increase is attributable to the acquisition of Waltermart stores in 2013 as well as the opening of the following new
stores in 2013:
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SM Department Stores
SM Supermarkets
SaveMore Stores SM
Hypermarkets
1 SM Aura Aura SaveMore Zabarte Jazz
2 SM BF Parañaque BF Parañaque SaveMore Bajada Plaza FTI
3 - - SaveMore Parola Cainta -
4 - - SaveMore TM
Centerpoint -
5 - - SaveMore Acacia
6 - - SaveMore Project 8 -
7 - -
SaveMore Sta. Maria
Ilocos -
8 - - SaveMore ARCC Bacoor -
9 - - SaveMore Pili -
10 - - SaveMore San Ildefonso -
11 - - SaveMore Marulas -
12 - - SaveMore Free Choice -
13 - - SaveMore Star J -
14 - - SaveMore Lumina -
15 - - SaveMore Meridien -
Of the P180.9 billion and P158.9 billion retail sales in 2013 and 2012, respectively, the non-food group and
food group contributed 40.7% and 59.3%, respectively in 2013 and 43.8% and 56.2%, respectively in 2012.
As at December 31, 2013, SM Investments‘ retail subsidiaries have 241 stores. These consist of 48
department stores, 39 supermarkets, 93 SaveMore stores, 39 hypermarkets and 22 Waltermart
supermarkets.
Real estate sales for the year ended December 31, 2013, derived mainly from SM Development Corporation, amounted to P21.2 billion or a decrease of 5.6% compared to last year of P22.5 billion. The decrease in
real estate sales is primarily due to lower sales take up of projects in 2013 compared to last year. This is
attributable to project launches in 2010 and 2011 which were more ―blockbusters‖ namely, Shell, Green and Jazz compared to launches in 2012 of Breeze and Grace. Projects launched in the last quarter of 2013,
namely: Grass Phase 2, Shore and Trees are expected to contribute significantly to revenues starting in 2014.
Rent revenue for the year ended December 31, 2013, derived mainly from mall operations of SM Prime Holdings, Inc. (SM Prime), increased by 13.1% to P27.9 billion in 2013 from P24.7 billion in 2012. SM
Prime is the country‘s leading shopping mall developer and operator which owns 48 malls in the Philippines with a total gross floor area of 6.2 million sqm and five malls in China with a total gross floor area of 0.8
square meters as at December 31, 2013. The increase in rental revenues is primarily due to the full-year effect of new malls opened in 2012 namely SM City Olongapo, SM City Consolacion, SM City San Fernando,
SM City General Santos, SM Lanang Premier, and the opening in 2013 of SM Aura Premier and SM BF
Paranaque. Excluding the new malls and expansions, rental revenues grew by 7.0%. The full year recognition of revenues from TwoE-Com, which began operations in mid-2012 and is now 98% occupied,
also helped push up rental revenues from commercial operations.
For the year 2013, cinema ticket sales and amusement revenues increased by 2.5% to P4.9 billion in 2013
from P4.9 billion in 2012 largely due to opening of additional digital cinemas at the new malls, opening of new amusement rides in SM by the Bay and the Sky Ranch in Tagaytay. Amusement revenues is mainly
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composed of amusement income from rides, bowling and ice skating operations including the SM Science
Discovery Center and the SM Storyland.
Equity in net earnings of associates increased by 50.4% to P13.6 billion in 2013 from P9.0 billion in 2012, primarily due to the 56% increase in the net income of BDO to P22.6 billion, in an environment marked by
high system liquidity and volatility in the capital markets. BDO‘s primary commercial banking businesses
continued its robust growth with net interest income leading the way with a 20% rise, customer loans expanding 19% and an upsurge of 44% on total deposits led by steady growth in low-cost deposits as well
as the inflow of maturing Special Deposit Accounts (SDA) funds from the Bangko Sentral ng Pilipinas (BSP). Further, non-interest income increased by 30% on the double digit expansion in both fee based income and
trading and foreign exchange gains. BDO‘s continued branch expansion enabled it to keep cost of funds tempered with low cost deposits growing over 20%. With the Philippine economy expected to sustain its
growth momentum in 2014, BDO is fully equipped to realize the promising growth opportunities in its
customer segments by capitalizing on its established business franchise and wide distribution network.
Gain on sale of available-for-sale investments and fair value changes on investments held for trading increased to P0.1 billion in 2013 from P0.002 billion in 2012 primarily due to the gain on sale of
available-for-sale investments of the Group in 2013.
Dividend income increased by P0.3 billion or 40.6% in 2013 to P0.9 billion from P0.6 billion in 2012 due to
increase in dividends received from investees. Management and service fees, which is computed based on percentage of sales, increased by P0.3 billion or 29.2% from P1.1 billion in 2012 to P1.4 billion in 2013
mainly due to increase in sales of retail affiliates.
Other revenues, which comprise mainly of income for the promotional activities highlighting products,
commission from bills payment, prepaid cards and show tickets, advertising income and sponsorship revenues remained at P2.2 billion in 2013 and 2012.
Total cost and expenses went up by 14.1% to P202.0 billion for the year ended December 31, 2013
compared to 2012. Retail cost of sales increased by 17.7% from P117.9 billion to P138.7 billion mainly due
to the increase in retail sales. Real estate cost of sales decreased by 13.3% from P14.1 billion to P12.2 billion due primarily to lower recognized real estate costs in line with lower recognized real estate sales in
2013 and tighter cost controls during project engineering and stricter monitoring of project costs which resulted to improved gross margins. Selling, general and administrative expenses increased by 13.5%
from P45.0 billion in 2012 to P51.0 billion in 2013. The increase is primarily associated with mall
expansions, new malls, department stores, supermarkets, hypermarkets, SaveMore and Waltermart stores, as well as store renovations and current real estate projects.
Other charges of P7.6 billion in 2013 increased by 28.6% or P1.8 billion from last year‘s P5.9 billion. Gain on
disposal of investments and properties decreased by 58.0% to P0.5 billion in 2013 from P1.3 billion in 2012 due mainly to the deferred gain on Belle-PLAI share swap that was realized in 2012. Gain (loss) on fair value
changes on derivatives decreased by 28.9% to P1.0 billion in 2013 from P1.4 billion in 2012 resulting mainly
from the fair value changes of the embedded derivatives related to the US$250.0 million convertible bonds of SMIC in 2013 (refer to Note 20 of the consolidated financial statements). Interest expense increased by
1.2% or P0.1 billion to P10.9 billion in 2013 from P10.8 billion in 2012. Interest income decreased by 16.0% to P3.7 billion in 2013 from P4.4 billion in 2012 due mainly from the decrease in interest rates and lower
average balance of temporary investments in 2013 compared to 2012. Foreign exchange gains decreased
by 89.5% from P0.6 billion in 2012 to P0.1 billion in 2013 due mainly to the increase in foreign exchange rate to P44.395:US$1.00 in 2013 from P41.05:US$1.00 in 2012.
Provision for income tax decreased by 17.2% to P5.4 billion for the year 2013 from P6.5 billion in 2012
resulting mainly from the SM Property group restructuring transaction.
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Non-controlling interest increased by 11.0% to P10.8 billion in 2013 from P9.7 billion in 2012 due to the
increase in net income of certain subsidiaries.
Year ended 31 December 2012 vs. year ended 31 December 2011
Consolidated revenues grew by 12.0% to P223.8 billion, as against last year‘s P199.9 billion. Income from
operations increased by 26.6% to P46.9 billion from last year‘s P37.0 billion. Operating income margin and Net profit margin is at 20.9% and 11.0%, respectively. Net income attributable to equity holders of the
Parent for the year ended December 31, 2012 increased by 16.3% to P24.7 billion compared to P21.2 billion of the same period last year.
Retail Sales accounts for 71.0% or P158.9 billion of the total revenues for the year. Consolidated Retail
sales grew by 7.2% from P148.2 billion to P158.9 billion for the year ended December 31, 2012 due mainly
to the opening of the following new stores in 2012:
SM Department
Stores
SM Supermarkets/
SaveMore Stores SM Hypermarkets
1 Olongapo Consolacion Cebu Alabang, Zapote Road Las
Pinas*
2 Consolacion Cebu San Fernando Pampanga East Service Road Muntinlupa*
3 San Fernando
Pampanga
General Santos Monumento Caloocan City
4 General Santos Lanang Davao Cainta Rizal*
5 Lanang Davao SaveMore LGZ Silver Screen Heroes‘ Hall Laoag Ilocos Norte
6 - SaveMore Basak Antipolo City
7 - SaveMore Nova Plaza Cadiz, Negros Occidental
8 - SaveMore Bangkal -
9 - SaveMore Sorsogon -
10 - SaveMore Baclaran -
11 - SaveMore Malinta -
12 - SaveMore San Jose -
13 - SaveMore Parian -
14 - SaveMore Camarin -
15 - SaveMore Avenida -
16 - SaveMore LB Centro -
17 - SaveMore Sta. Rosa -
18 - SaveMore Maribago -
19 - SaveMore MD Fuente -
20 - SaveMore Talisay -
21 - SaveMore Kawit -
22 - SaveMore Santiago -
*These were formerly Makro stores which were converted into Hypermarket stores.
Excluding the full year sales of Makro in 2011, the retail sales growth would be 9.3% from P145.4 billion in 2011 to P158.9 billion in 2012. Of the 2012 total retail sales, the non-food group, which is composed of
SM Department stores, contributed 43.8% or P69.6 billion, while the food group, composed of
SM Supermarkets, SM SaveMore stores and SM Hypermarkets contributed 56.2% or P89.3 billion.
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As at December 31, 2012, SM Investments‘ retail subsidiaries have 202 stores. These consist of 46
department stores, 37 supermarkets, 82 SaveMore stores and 37 hypermarkets.
Real estate sales for the year ended December 31, 2012, derived mainly from condominium projects of SMDC, grew by 30.7% to P22.5 billion. The market continues to show strong acceptance of SM Residences
and M Place products, backed by a deeper confidence on SMDC‘s proven ability to complete its projects,
thereby fueling to a large extent SMDC‘s notable 2012 results. The consistent offerings of high-quality and well-designed residential units built by an experienced team composed of the country‘s top contractors,
engineers, architects, and interior designers also allowed SMDC to gain further traction and brand recognition. SMDC has a total of 19 residential projects as at December 31, 2012. In 2012, SMDC
introduced in the real estate market Breeze Residences in Pasay City and Grace Residences in Taguig City. For the whole of 2012, SMDC pre-sold 12,614 residential condominium units worth approximately P31.7
billion. Compared to the same period in 2011, the number of units pre-sold increased by 8%.
The other ongoing projects of SMDC are the following: Grass Residences beside SM City North Edsa; Field
Residences in Sucat, Paranaque; Princeton Residences along Aurora Boulevard in Quezon City; Jazz Residences near Jupiter Road in Makati City; Sun Residences right beside the Mabuhay (formerly Welcome)
Rotunda near Quezon Avenue; Light Residences near Pioneer Street in Mandaluyong; Wind Residences
along the Emilio Aguinaldo Highway in Tagaytay City; Blue Residences, which is located at Loyola Heights in Quezon City; M Place South Triangle in Panay Avenue, Quezon City; Mezza II Residences in Sta. Mesa
Quezon City; Rose Residences in Pasig City; Green Residences along Taft Avenue, Manila; Shell Residences near Mall of Asia Complex in Pasay City; Breeze Residences in Roxas Boulevard, Pasay City; and Grace
Residences in Taguig City. Currently, SMDC has five fully completed projects namely Mezza Residences, a 38-storey four-tower high rise condominium across SM City Sta. Mesa, Quezon City; Chateau Elysee, a
midrise condominium project in Parañaque City; Berkeley Residences in Katipunan Road, Quezon City; Sea
Residences near the Mall of Asia Complex in Pasay City and Lindenwood Residences, a residential subdivision in Muntinlupa City. Further contributions to the growth in real estate sales were provided by the
sale of condominium units of Costa del Hamilo and club shares in Pico de Loro.
Rent revenue for the year ended December 31, 2012, derived mainly from mall operations of SM Prime
Holdings, Inc. (SM Prime), increased by 18.5% to P24.7 billion in 2012 from P20.8 billion in 2011. SM Prime is the country‘s leading shopping mall developer and operator which owns 46 malls in the Philippines and
five malls in China as at December 31, 2012. The increase in rental revenues is largely due to rentals from new SM Supermalls which opened in 2011 and 2012, namely SM City Masinag, SM City Olongapo, SM City
Consolacion, SM City San Fernando, SM City General Santos and SM Lanang Premier, with a total gross floor
area of 527,000 square meters. Excluding the new malls and expansions, same store rental growth is at 8.0%.
The four malls in China contributed P2.5 billion in 2012 and P2.0 billion in 2011, or 10.3% and 9.8%,
respectively, of SMIC‘s consolidated rental revenue. The rental revenue of these four malls in China increased by 24.4% in 2012 compared to the same period in 2011 largely due to improvements in the
average occupancy rate, lease renewals and the opening of the SM Xiamen Lifestyle and SM Suzhou which
added 182,000 sqm of gross floor area. SM Chongqing, the fifth mall in China, opened in December 2012 with a gross floor area of 149,000 square meters. Average occupancy rate for the four malls is now at 92%.
For the year 2012, cinema ticket sales and amusement revenues increased by 16.6% to P4.8 billion in 2012
from P4.1 billion in 2011 largely due to more blockbuster movies both local and international, conversion of
all screens to digital and roll-out of cinema turnstile system which made the cinema viewing experience more convenient for customers that altogether led to an increase in foot traffic. Amusement revenues is
mainly composed of amusement income from rides, bowling and ice skating operations including the SM Science Discovery Center and the SM Storyland.
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Equity in net earnings of associates increased by 40.9% to P9.0 billion in 2012 from P6.4 billion in 2011,
primarily due to the increase in the net income of BDO which is attributed to the bank‘s robust expansion in its lending, deposit-taking, and fee-based businesses. Net interest income was up 7.5% even as volume
growth was offset by the impact of regulatory changes and excess system liquidity. Total non-interest income rose 17% contributed substantially by trading gains from treasury activities. BDO was able to
capitalize on market opportunities and realize exceptional gains from its investment portfolio. With the
Philippine economy expected to sustain its growth momentum, BDO looks forward to tapping the promising growth opportunities in customer segments, capitalizing on its established business franchise and wide
distribution network.
Gain on sale of available-for-sale investments and fair value changes on investments held for trading decreased by 95.4% to P0.002 billion in 2012 from P0.04 billion in 2011 primarily due to the gain on sale of
available-for-sale investments of certain subsidiaries in 2011.
Dividend income increased by P0.2 billion or 70.3% in 2012 to P0.6 billion from P0.4 billion in 2011 due to
increase in dividends received from investees. Management and service fees, which is computed based on percentage of sales, increased by P0.2 billion or 26.3% from P0.9 billion in 2011 to P1.1 billion in 2012
mainly due to increase in sales of retail affiliates.
Other revenues, which comprise mainly of income for the promotional activities highlighting products,
commission from bills payment, prepaid cards and show tickets, increased by P0.3 billion or 18.8% from P1.8 billion in 2011 to P2.2 billion in 2012.
Total cost and expenses went up by 8.7% to P177.0 billion for the year ended December 31, 2012
compared to 2011. Retail cost of sales increased by 5.1% from P112.2 billion to P117.9 billion while real
estate cost of sales and others increased by 37.3% from P10.3 billion to P14.1 billion mainly due to the increase in sales. Selling, general and administrative expenses increased by 11.3% from P40.4 billion in
2011 to P45.0 billion in 2012. Major contributors to the increase in selling, general and administrative expenses are personnel cost, depreciation and amortization, utilities, rent, taxes and licenses, outside
services, advertising and promotion and repairs and maintenance totaling to P39.4 billion in 2012 which
accounts for 87.7% of total selling, general and administrative expenses for the year ended December 31, 2012. The increase is primarily associated with new malls, department stores, supermarkets, savemore,
hypermarkets and residential projects.
Other charges of P5.9 billion in 2012 increased by 346.5% or P4.6 billion from last year‘s other charges of
P1.3 billion. Gain on disposal of investments and properties decreased by 50.4% to P1.3 billion in 2012 from P2.6 billion in 2011 due mainly to the gain on Belle-PLAI share swap in 2011 of P1.5 billion (net of minority
interest). Gain (loss) on fair value changes on derivatives decreased by 483.3% to loss of P1.4 billion in 2012 from gain of P0.4 billion in 2011 resulting mainly from the fair value changes of the embedded
derivatives related to the US$250.0 million convertible bonds of SMIC in 2012 (refer to Note 19 of the consolidated financial statements). Interest expense increased by 22.4% or P2.0 billion to P10.8 billion in
2012 from P8.8 billion in 2011 due mainly to new loans availed of in 2012 (refer to Note 19 of the
consolidated financial statements). These were offset by the increase in interest income by 3.3% to P4.4 billion in 2012 from P4.3 billion in 2011 and increase in foreign exchange gains by 132.7% from P0.2 billion
in 2011 to P0.6 billion in 2012 due mainly to the decrease in foreign exchange rate from P43.93:US$1.00 in 2011 to P41.05:US$1.00 in 2012.
Provision for income tax increased by 19.1% to P6.5 billion for the year 2012 from P5.5 billion in 2011 due mainly to the increase in taxable income.
Minority interest increased by 8.4% to P9.7 billion in 2012 from P9.0 billion in 2011 due to the increase in
net income of certain subsidiaries.
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Year ended 31 December 2011 vs. year ended 31 December 2010
Consolidated revenues grew by 13.0% to P199.9 billion, as against last year‘s P176.9 billion. Income from
operations increased by 15.9% to P37.0 billion from last year‘s P31.9 billion. Operating income margin and net profit margin is at 18.5% and 10.6%, respectively. Net income attributable to equity holders of SMIC for
the year ended December 31, 2011 increased by 15.1% to P21.2 billion compared to P18.4 billion of the
same period last year.
Retail sales accounts for 74.0% or P148.2 billion of the total revenues for the year. Consolidated retail sales grew by 9.3% from P135.6 billion to P148.2 billion for the year ended December 31, 2011 due mainly to the
opening of the following new stores in 2011:
SM Department Stores
SM Supermarkets/
SaveMore Stores SM Hypermarkets
1 SM City Masinag SM City Masinag Mandaue, Cebu*
2 Megamall A JMall, Mandaue, Cebu
3 Olongapo Imus*
4 SaveMore Muntinlupa Sucat-Lopez
5 SaveMore Jackman Marketmall
6 SaveMore Capistrano
7 SaveMore Bayambang
8 SaveMore Malhacan
9 SaveMore Kauswagan*
10 SaveMore Araneta
11 SaveMore Sta. Ana
12 SaveMore Apalit
13 SaveMore Sta. Maria
14 SaveMore Binan
15 SaveMore Tuguegarao
16 SaveMore Halang
17 SaveMore Shoe Ave.
18 SaveMore Balibago
19 SaveMore Canduman
20 SaveMore Maguikay
21 SaveMore Pedro Gil
22 SaveMore Iba, Zambales
23 SaveMore Kanlaon
24 SaveMore Ilagan
25 SaveMore A. Avenue
26 SaveMore Laoag
27 SaveMore Salitran
28 SaveMore Blumentritt
* Formerly Makro stores which were converted to Hypermarket stores
Excluding the full year sales of Makro, the retail sales growth would be 12.4% from P129.4 billion in 2010 to P145.4 billion in 2011. Of the total retail sales, the non-food group, which is composed of SM Department
stores, contributed 42.9% or P63.5 billion, while the food group, composed of SM Supermarkets, SM SaveMore stores, SM Hypermarkets, and Makro outlets, contributed 57.1% or P84.6 billion.
As at December 31, 2011, SMIC‘s retail subsidiaries had 168 stores. These consist of 41 department stores, 33 supermarkets, 64 SaveMore stores and 30 hypermarkets.
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Real estate sales for the year ended December 31, 2011, derived mainly from condominium projects of
SMDC, surged by 64.0% to P17.2 billion. The market continues to show strong acceptance of SM Residences and M Place products, backed by a deeper confidence on SMDC‘s proven ability to complete its
projects, thereby fueling to a large extent SMDC‘s notable 2011 results. The consistent offerings of high-quality and well-designed residential units built by an experienced team composed of the country‘s top
contractors, engineers, architects, and interior designers also allowed SMDC to gain further traction and
brand recognition. SMDC has a total of 17 residential projects as at December 31, 2011. In 2011, SMDC launched Mezza II Residences in Quezon City, Green Residences in Manila, Shell Residences in Pasay City
and M Place Ortigas in Pasig City. For the whole of 2011, SMDC pre-sold 11,726 residential condominium units worth approximately P26.3 billion. Compared to the same period in 2010, the number of units pre-sold
increased by 14% and exceeded SMDC‘s sales target of P23.6 billion by 11%.
The other ongoing projects of SMDC are the following: Grass Residences beside SM City North Edsa; Sea
Residences near the Mall of Asia Complex in Pasay City; Field Residences in Sucat, Paranaque; Princeton Residences along Aurora Boulevard in Quezon City; Jazz Residences near Jupiter Road in Makati City; Sun
Residences right beside the Mabuhay (formerly Welcome) Rotunda near Quezon Avenue; Light Residences near Pioneer Street in Mandaluyong; Wind Residences along the Emilio Aguinaldo Highway in Tagaytay City;
Blue Residences, which is located at Loyola Heights in Quezon City and M Place South Triangle in Panay
Avenue, Quezon City. Currently, SMDC has four fully completed projects namely Mezza Residences, a 38-storey four-tower high rise condominium across SM City Sta. Mesa, Quezon City; Chateau Elysee, a
mid-rise condominium project in Parañaque City; Berkeley Residences in Katipunan Road, Quezon City; and Lindenwood Residences, a residential subdivision in Muntinlupa City. Further contributions to the growth in
real estate sales were provided by the sale of condominium units of Costa del Hamilo and club shares in Pico de Loro.
Rent revenue for the year ended December 31, 2011, derived mainly from mall operations of SM Prime, increased by 16.4% to P20.8 billion in 2011 from P17.9 billion in 2010. SM Prime is the country‘s leading
shopping mall developer and operator which owns 41 malls in the Philippines and four malls in China as at December 31, 2011. The increase in rental revenues is largely due to rentals from new SM Supermalls. In
2010, SM City Tarlac, SM City San Pablo, SM City Calamba and SM City Novaliches were opened. In 2011,
SM Masinag was also opened. The new malls added 380,000 square meters (sqm) to total gross floor area. Excluding the new malls and expansions, same store rental growth is at 7.0%.
The four malls in China contributed P2.1 billion in 2011 and P1.4 billion in 2010, or 9.8% and 7.7%,
respectively, of SMIC‘s consolidated rental revenue. The rental revenue of these four malls in China
increased by 46.4% in 2011 compared to the same period in 2010 largely due to improvements in the average occupancy rate, lease renewals and the opening of the SM Xiamen Lifestyle and SM Suzhou which
added 182,000 sqm of gross floor area. Average occupancy rate for the four malls is now at 95%.
For the year 2011, cinema ticket sales and amusement revenues increased by 11.1% to P4.1 billion in 2011 from P3.7 billion in 2010 largely due to the success of local blockbuster movies shown in 2011 compared to
2010 and higher sponsorship revenues in 2011. Amusement revenues is mainly composed of amusement
income from bowling and ice skating operations including the SM Science Discovery Center and the SM Storyland.
Equity in net earnings of associates increased by 17.9% to P6.4 billion in 2011 from P5.4 billion in 2010,
primarily due to the increase in the net income of BDO which is attributed to the bank‘s recurring fee-based
income from its service businesses which rose 18%. Amid a volatile external environment, BDO generated a 4% decrease in trading and foreign exchange gains. Along with other miscellaneous income, BDO
recorded a 17% growth in non-interest income. BDO continues to derive bulk of its operating income from core lending and deposit-taking business and fee-based service activities. Having completed its investment
in capacity, BDO is now starting to benefit from scale with operating expenses increasing only moderately by 3% with ongoing initiatives to enhance operational efficiency.
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Gain on sale of available-for-sale investments and fair value changes on investments held for trading and derivatives decreased by 55.7% to P0.04 billion in 2011 from P0.9 billion in 2010 primarily due to the gain
on sale of various available-for-sale investments of certain subsidiaries in 2010.
Dividend income increased by P0.1 billion or 21.5% in 2011 to P0.4 billion from P0.3 billion in 2010 due to
increase in dividends received from investees. Management and service fees, which is computed based on percentage of sales, increased by P0.1 billion or 9.1% from P0.8 billion in 2010 to P0.9 billion in 2011
mainly due to increase in sales of retail affiliates.
Other revenues, which comprise mainly of income for the promotional activities highlighting products, commission from bills payment, prepaid cards and show tickets, slightly decreased by P 0.06 billion or
3.8%.
Total cost and expenses went up by 12.3% to P162.9 billion for the year ended December 31, 2011
compared to 2010. Retail cost of sales increased by 8.4% from P103.5 billion to P112.2 billion while real estate cost of sales and others increased by 71.6% from P6.0 billion to P10.3 billion mainly due to the
increase in sales. Selling, general and administrative expenses increased by 13.8% from P35.5 billion in
2010 to P40.4 billion in 2011. Major contributors to the increase in selling, general and administrative expenses are personnel cost, depreciation and amortization, utilities, rent, taxes and licenses, outside
services, advertising and promotion and repairs and maintenance totaling to P34.2 billion in 2011 or a growth of 14.8% from P29.8 billion in 2010. The increase is primarily associated with new malls,
department stores, supermarkets, savemore and hypermarkets and residential projects.
Other charges of P1.3 billion in 2011 decreased by 10.9% or P0.2 billion from last year‘s other charges of
P1.9 billion. Gain on disposal of investments and properties increased by 61.3% to P2.6 billion from P1.6 billion mainly due to the gain on the share swap of Belle Corporation and Premium Leisure and Amusement
Inc. in 2011 of P1.5 billion (net of non-controlling interest). Interest income increased by 15.0% to P4.3 billion in 2011 from P3.7 billion in 2010 mainly due to higher average balance of temporary investments and
time deposits and higher interest rates during 2011. These were offset by the increase in interest expense
by 15.5% or P1.2 billion to P8.8 billion in 2011 from P7.6 billion in 2010 mainly due to new loans availed of in 2011 (refer to Note 20 of the audited consolidated financial statements) and the decrease in foreign
exchange gains by 40.4% from P0.4 billion in 2010 to P0.2 billion in 2011 mainly from restatement of loans availed during the year wherein foreign exchange rate of peso to dollar is lower as compared with year-end
exchange rate.
Provision for income tax increased by 1.7% to P5.5 billion for the year 2011 from P5.4 billion in 2010 mainly
due to the increase in taxable income.
Non-controlling interest increased to P9.0 billion in 2011 from P6.4 billion in 2010 due to the increase in net income of certain subsidiaries.
Financial Condition 2013 vs. 2012
Consolidated total assets as at December 31, 2013 amounted to P633.0 billion, higher by 12.7% from P561.8 billion in previous year. On the other hand, consolidated total liabilities grew by 10.9% to
P332.8 billion in 2013 from P300.2 billion in previous year.
Total current assets increased by 11.7% to P162.9 billion as at December 31, 2013 from P145.9 billion as at
last year. Cash and cash equivalents decreased by 17.3% to P50.2 billion in 2013 from P60.7 billion in 2012
146
while time deposits and short term investments decreased by 0.6% to P28.9 billion in 2013 from
P29.1 billion in 2012 due mainly to payment of bank loans, capital expenditures and new investments. Investments held for trading and sale decreased by 60.8% to P1.1 billion in 2013 from P2.8 billion in 2012
due to maturity of certain investments in bonds. Receivables increased by 62.8% to P26.6 billion from P16.4 billion due primarily to increase in receivable from tenants and real estate buyers. Other current
assets increased by 82.6% to P42.8 billion in 2013 from P23.4 billion in 2012 resulting mainly from the
reclassification to current from non-current of ongoing land and development projects of the property group and increase in condominium units for sale, input tax and other prepayments.
Total consolidated noncurrent assets amounted to P470.0 billion as at December 31, 2013, an increase of
13.0% from last year‘s P415.9 billion. Investments in shares of stock of associates and joint ventures increased by 8.2% or P10.6 billion to P139.0 billion from P128.4 billion due mainly to additional investments
in shares of stock of associates and joint ventures and equity share in bank‘s net income. The increase in
investment properties and property and equipment by 28.4% or P42.6 billion and 6.6% or P1.1 billion, respectively, arose from new mall constructions and new store openings. Deferred tax assets increased by
238.4% to P2.2 billion in 2013 from P0.6 billion in 2012 resulting mainly from the SM Property Group restructuring transaction. Other noncurrent assets increased by 2.5% to P28.4 billion from P27.8 billion
while intangibles increased by 31.9% to P20.2 billion from P15.4 billion resulting mainly from goodwill
recognized from business combinations. These were partially offset by the decrease in investments available for sale by 2.4% and by the decrease in land and development by P4.5 billion or 15% to P25.7
billion in 2013 from P30.2 billion in 2012 due mainly from the reclassification of ongoing projects to current portion. The 8.0% or P2.4 billion decrease in time deposits represents reclassification to current portion of
maturing time deposits.
Total consolidated current liabilities increased by 25.7% to P132.1 billion as at December 31, 2013 mainly
due to increase in accounts payable and other current liabilities by 17.7% to P68.1 billion in 2013 from P57.9 billion in 2012 mainly arising from trade transactions, payables to mall and residential contractors and
suppliers related to ongoing projects and accrued operating expenses. Bank loans decreased by 13.2% or P4.2 billion to P27.6 billion in 2013 from P31.8 billion in 2012 due to settlement of loans. See note 18 to the
audited consolidated financial statements for further discussion regarding bank loans. Income tax payable
increased by 9.4% to P1.6 billion in 2013 from P1.5 billion in 2012 due mainly to higher taxable income in 2013. The 149.4% or P20.7 billion increase in current portion of long-term debt is due mainly to the
reclassification from Long-term debt of loans which will mature in 2014. See Note 20 to the audited consolidated financial statements for further discussion regarding long-term debt. The 116.1% increase in
dividends payable represents dividends to minority stockholders of certain subsidiaries.
Total Noncurrent Liabilities increased by 2.9% or P5.6 billion to P200.7 billion in 2013 from P195.1 billion in
2012. Long-term debt – net of current portion increased by P1.1 billion or 0.6% to P175.6 billion in 2013 from P174.5 billion in 2012. See Note 20 to the audited consolidated financial statements for further
discussion regarding long-term debt. Noncurrent derivative liability decreased by P0.08 billion to P0.16 billion in 2013 from P0.24 billion 2012 due to mark-to-market gains on interest rate swaps used to hedge
interest rate exposure on loans. The P2.4 billion or 53.4% increase in deferred tax liabilities arose from
capitalized borrowing costs, unrealized gross profit on sale of real estate, fair value gain on investment property, unrealized foreign exchange gains and accrued rental income. Tenants‘ deposits and others
increased by 14.1% to P18.0 billion in 2013 from P15.7 billion in 2012 due mainly to new malls and expansions and new condominium projects of the real estate group.
The Group‘s average borrowing cost for its long-term debt is 5.2% in 2013 and 6.0% in 2012.
The loan agreements provide certain restrictions and requirements principally with respect to the maintenance of the following loan covenants:
Maintain Current Ratio of not less than 0.50:1.
Maintain Debt-Equity Ratio of not more than 75:25.
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Sy Family maintains 51% equity ownership in SMIC, directly and indirectly.
No changes in the material subsidiaries of SMIC.
As at December 31, 2013 and 2012, the Group is in compliance with the terms of its loan covenants.
Total equity amounted to P300.2 billion as at December 31, 2013, while total equity attributable to equity holders of the parent amounted to P219.4 billion. Additional paid-in capital increased by P14.9 billion or
34.9% to P57.8 billion in 2013 from P42.9 billion in 2012 due mainly to the conversion of US$ bonds to SMIC
shares amounting to P8.4 billion and top-up placement amounting to P6.4 billion. The P0.3 billion increase in Equity adjustments from common control transactions resulted from the SM Property Group restructuring
transaction. The P1.0 billion increase in cumulative translation adjustment is related to the translation of the financial accounts of SM China malls from China Yuan Renminbi to Philippine peso and from unrealized
mark-to-market gains on cross currency swap transactions designated as a cash flow hedge. Cost of common shares held by a subsidiary decreased to P0.02 billion from P0.1 billion due mainly to the disposal
by subsidiaries of parent common shares during the year. The P4.4 billion decrease in net unrealized gain
on available-for-sale investments resulted from the decrease in the market value of AFS investments of bank associates. The P0.2 billion remeasurement loss on defined benefit asset/obligation is the result of the
valuation of the Group‘s retirement plan. Non-controlling interest increased by 9.8% to P80.8 billion in 2013 from P73.6 billion in 2012 due mainly to increase in net assets of certain subsidiaries. See Note 21 to
the audited consolidated financial statements for further discussion regarding the equity.
2012 vs. 2011
Consolidated total assets as at December 31, 2012 amounted to P561.8 billion, higher by 25.1% from
P449.1 billion in previous year. On the other hand, consolidated total liabilities grew by 32.4% to P300.2 billion in 2012 from P226.8 billion in previous year.
Total current assets increased by 44.1% to P145.9 billion as at December 31, 2012 from P101.3 billion as of last year. Cash and cash equivalents increased by 8.3% to P60.7 billion in 2012 from P56.1 billion in 2011
while time deposits and short term investments increased by 3207.9% to P29.1 billion in 2012 from P0.9 billion in 2011 due mainly to proceeds from loan availments during the year and reclassification from
noncurrent to current of time deposits which will mature in 2013. Receivables increased by 39.1% to P16.4
billion from P11.8 billion due primarily to increase in receivable from tenants and real estate buyers. Other current assets increased by 36.5% to P23.5 billion from P17.2 billion resulting mainly from condominium
units for sale of the real estate group, prepaid taxes and other prepayments and nontrade receivables.
Total consolidated noncurrent assets amounted to P415.9 billion as at December 31, 2012, a growth of 19.6% from P347.8 billion as at December 31, 2011. Investments available for sale increased by 35.8% to
P16.9 billion in 2012 from P12.4 billion in 2011 mainly due to additional investments in bonds during the
year. Investments in shares of stock increased by 45.3% to P128.4 billion in 2012 from P88.4 billion in 2011 mainly due to additional investment in shares of stock of associates, increase in equity in banks and
additional share in the unrealized gain on AFS investments of associates in 2012. The increase in investment properties, property and equipment and land and development by 14.2% or P18.7 billion,
13.9% or P2.1 billion and 31.2% or P7.2 billion, respectively, arose from new mall constructions, real estate
developments and purchase of commercial lots in 2012. Other noncurrent assets increased by 15.3% to P27.8 billion from P24.1 billion mainly due to the non-current receivable from real estate buyers, deposits
and advance rentals and non-current portion of advances for project development. These were partially offset by the decrease in deferred tax assets to P0.64 billion in 2012 from P0.69 billion in 2011 and decrease
in time deposits by 21.3% to P29.4 billion in 2012 from P37.4 billion in 2011 due mainly from reclassification
to current portion of maturing time deposits.
Total consolidated current liabilities increased by 31.7% to P105.1 billion as at December 31, 2012 mainly due to availment of bank loans which increased by 23.5% to P31.8 billion in 2012 from P25.7 billion in 2011
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and increase in accounts payable and other current liabilities by 29.3%% to P57.9 billion in 2012 from P44.7
billion in 2011 mainly arising from trade transactions, payable arising from acquisition of land, and current derivative liability. See note 17 to the audited consolidated financial statements for further discussion
regarding bank loans. Income tax payable increased by 10.7% to P1.5 billion in 2012 from P1.3 billion in 2011 due mainly to higher taxable income in 2012. The 75.0% or P5.9 billion increase in current portion of
long-term debt is due mainly to the reclassification from long-term debt of loans which will mature in 2013.
See note 19 to the audited consolidated financial statements for further discussion regarding long-term debt. The 278.6% increase in dividends payable represents dividends to minority stockholders of certain
subsidiaries.
Total noncurrent liabilities increased by P48.1 billion to P195.1 billion in 2012 from P147.0 billion in 2011. Long-term debt – net of current portion increased by P46.1 billion or 35.9% to P174.5 billion in 2012 from
P128.5 billion in 2011 due mainly from bond issuances of SMIC and corporate notes issued by SMDC and
SMPHI. See note 19 to the audited consolidated financial statements for further discussion regarding long-term debt. Noncurrent derivative liability remained at P0.2 billion in 2012 and 2011. Defined benefit
liability decreased by P0.05 billion or 63.0% to P0.03 billion from P0.08 billion in 2011. Tenants‘ deposits and others increased by 14.6% to P15.7 billion in 2012 from P13.7 billion in 2011 due mainly to new malls
and expansions and new condominium projects of the real estate group.
Total equity amounted to P261.6 billion as at December 31, 2012, while total equity attributable to equity
holders of the parent amounted to P188.1 billion. The 37.6% or P0.1 billion decrease in cumulative translation adjustment is related to the translation of the financial accounts of SM China malls from China
Yuan Renminbi to Philippine peso. Cost of common shares held by a subsidiary decreased by 52.2% to P0.1 billion from P0.3 billion due mainly to the disposal by subsidiaries of parent common shares during the year.
Minority interest increased by 13.8% to P73.6 billion in 2012 from P64.6 billion in 2011 due mainly to
increase in net assets of certain subsidiaries. See Note 20 to the audited consolidated financial statements for further discussion regarding the equity.
2011 vs. 2010
Consolidated total assets as at December 31, 2011 amounted to P449.1 billion, higher by 10.2% from P407.4 billion in previous year. On the other hand, consolidated total liabilities grew by 8.2% to
P226.8 billion in 2011 from P209.6 billion in previous year.
Total current assets decreased by 2.9% to P101.3 billion as at December 31, 2011 from P104.3 billion as at
last year. Cash and cash equivalents decreased by 16.3% to P56.1 billion in 2011 from P67.0 billion in 2010 mainly due to payments for investment acquisitions and capital expenditures. This was partially offset by
the increase in receivables by 19.7% to P11.8 billion from P9.8 billion primarily due to increase in receivable from tenants and real estate buyers. Merchandise inventories increased by 28.1% to P13.4 billion from
P10.5 billion primarily due to new departments stores, supermarkets, savemore and hypermarkets. Other current assets increased by 21.6% to P17.2 billion from P14.1 billion resulting mainly from the advances to
contractors of the real estate group from its current projects.
Total consolidated non-current assets amounted to P347.8 billion as at December 31, 2011, a growth of
14.8% from P303.1 billion as at December 31, 2010. Investments available for sale increased by 12.2% to P12.5 billion in 2011 from P11.1 billion in 2010 mainly due to additional investments in bonds during the
year. Investments in shares of stock increased by 24.8% to P88.4 billion in 2011 from P70.9 billion in 2010
mainly due to additional investment in and purchase of shares of stock of associates, increase in equity in banks and additional share in the unrealized gain on AFS investments of associates in 2011. As disclosed in
Note 13 to the audited consolidated financial statements, in April 2011, the Group increased its ownership interest in Belle Corporation (Belle), an associate, by 20.78% and 12.58% gross and effective ownership,
respectively, via share swap wherein the outstanding shares of Premium Leisure and Amusement Inc. (PLAI, a subsidiary) were exchanged for certain number of common shares of Belle valued at P1.95 per share.
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The valuation of the PLAI shares was made by an independent appraiser and approved by the SEC on
October 6, 2010. This is the same valuation used in 2011. Upon receipt of the approval from the Bureau of Internal Revenue on March 31, 2011 and issuance of stock certificates by Belle on April 14, 2011, the Group
recorded the share swap in its 2011 financial statements. The increase in investment properties, property and equipment and land and development by 15.5% or P17.6 billion, 12.9% or P1.7 billion and 16.8% or
P3.3 billion, respectively, arose from new mall constructions, real estate developments and purchase of
commercial lots in 2011. As at December 31, 2011, the Group has no idle property and equipment and the carrying amount of fully depreciated property and equipment still in use amounted to P2,869.7 million.
Deferred tax assets increased by 20.5% to P0.7 billion in 2011 from P0.6 billion in 2010 mainly due to tax effect of unrealized foreign exchange loss, unamortized past service cost and defined benefit liability and
accrued leases. Other noncurrent assets increased by 14.4% to P24.1 billion from P21.0 billion mainly due to the non-current receivable from real estate buyers. As disclosed in Note 17 to the audited consolidated
financial statements, Other noncurrent assets include receivable from a related party and escrow fund
amounting to P8.1 billion in 2011. The related party and SMIC have common stockholders. As disclosed in Note 17, the receivable from related party pertains to various cash advances in 2009 for payment of interest,
purchase of shares and other operating requirements totaling to P6,000.0 million, which bears a fixed interest of 7.0%, payable semi-annually and will mature in 2013. Further, as disclosed in Note 22, ―the
Group did not make any provision for doubtful accounts relating to amounts owed by related parties‖ and
that ―there have been no guarantees provided or received for any related party receivables or payables.‖ As disclosed in Note 17, intangibles include trademarks and brand names amounting to P6.1 billion. These
trademarks and brand names pertain to that of the supermarket and hypermarket business of the Group which were acquired in 2006 and valued using the Relief-from-Royalty Method. The royalty rate was 3.5%,
which was the prevailing royalty rate in 2006 in the retail assorted category where the two entities fall.
Total consolidated current liabilities increased by 27.8 % to P79.8 billion as at December 31, 2011 mainly
due to availment of bank loans which increased by 26.2% to P25.7 billion in 2011 from P20.4 billion in 2010 and increase in accounts payable and other current liabilities by 14.6% to P44.7 billion in 2011 from P39.0
billion in 2010 mainly arising from trade transactions, subscriptions payable and accrued expenses. See Note 18 to the audited consolidated financial statements for further discussion regarding bank loans.
Income tax payable increased by 12.3% to P1.3 billion in 2011 from P1.2 billion in 2010 mainly due to
higher taxable income in 2011. The 348.3% or P6.2 billion increase in current portion of long-term debt is mainly due to the reclassification from long-term debt of loans which will mature in 2011. See Note 20 to
the audited consolidated financial statements for further discussion regarding long-term debt. The 5.8% increase in dividends payable represents dividends to non-controlling stockholders of certain subsidiaries.
Total non-current liabilities slightly decreased by P0.1 billion to P147.0 billion in 2011 from P147.1 billion in 2010. Defined benefit liability decreased by P0.1 billion or 57.1% to P0.1 billion from P0.2 billion in 2010.
Deferred tax liabilities decreased by 2.8% to P4.5 billion in 2011 from P4.6 billion in 2010. Non-current derivative liability decreased by 82.4% to P0.2 billion from P1.4 billion mainly due to non-deliverable
forwards entered into in 2010 which matured in 2011 and unwinding of interest rate swaps as a result of the prepayment of the underlying loans. See Note 30 to the audited consolidated financial statements for
further discussion regarding derivative transactions. Long-term debt – net of current portion decreased by
P0.1 billion or 0.1% to P128.5 billion in 2011 from P 128.6 billion in 2010. See Note 20 to the audited consolidated financial statements for further discussion regarding long-term debt. These were partially
offset by the increase in tenants‘ deposits and others by 10.8% to P13.7 billion in 2011 from P12.4 billion in 2010 mainly due to new malls and expansions and from new condominium projects of the real estate
group.
Total equity amounted to P222.3 billion as at December 31, 2011, while total equity attributable to equity
holders of the parent amounted to P157.7 billion. The 48.0% or P0.1 billion increase in cumulative translation adjustment is related to the translation of the financial accounts of SM China malls from Chinese
yuan renminbi to Philippine pesos. Non-controlling interest increased by 14.8% to P64.6 billion in 2011 from
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P56.3 billion in 2010 mainly due to increase in net assets of certain subsidiaries. See Note 21 to the audited
consolidated financial statements for further discussion regarding the stockholders‘ equity.
In the reconciliation of retained earnings available for dividend declaration, which is attached to SEC Form 17-A Annual Report as of December 31, 2011, the beginning balance of unappropriated retained earnings
as of December 31, 2010 amounting to P29,017.4 million was adjusted to reflect the following adjustments:
(1) P248 million regarding rental income from straight line amortization in excess of actual rental payments in compliance with PAS 17 Leases and (2) P324 million regarding the accretion of tenants‘ deposits,
exchanged bonds and convertible bonds in compliance with PAS 39 Financial Instruments. After the said adjustments, the beginning balance of unappropriated retained earnings amounted to P29,093.3 million.
Key Performance Indicators
The following are the major financial ratios of the Issuer for the years ended December 31, 2011, 2012 and 2013:
Year ended December 31
2011 2012 2013
Current Ratio 1.27 1.39 1.23
Debt-equity Ratios:
On Gross Basis 47:53 54:46 52:48
On Net Basis 28:72 33:67 37:63
Return on Equity 14.2% 14.3% 13.5%
Net Income to Revenue 10.6% 11.0% 10.8%
Revenue Growth 13.0% 12.0% 13.1%
Net Income Growth 15.1% 16.3% 11.2%
EBITDA (in P billions) P44.6 P54.9 P60.8
Interest Rate Coverage 5.1x 5.5x 5.2x
The manner by which the Company calculates the foregoing indicators is as follows:
1. Current Ratio Current Assets
Current Liabilities
2. Debt – Equity Ratio
Gross Basis Total Interest Bearing Debt
Total Equity Attributable to Equity Holders of the Parent + Total Interest Bearing Debt
Net Basis Total Interest Bearing Debt less cash and cash equivalents excluding cash on hand, time deposits, investment in bonds held for trading
and available for sale______________________________________ Total Equity Attributable to Equity Holders of the Parent + Total
Interest Bearing Debt less cash and cash equivalents excluding cash
on hand, time deposits, investments in bonds held for trading and available for sale
3. Return on Equity Net Income Attributable to Equity Holders of the Parent
Average Equity Attributable to Equity Holders of the Parent
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4. Net Income to Revenue Net Income Attributable to Equity Holders of the Parent
Total Revenues
5. Revenue Growth Total Revenues (Current Period) - 1 Total Revenues (Prior Period)
6. Net Income Growth Net Income Attributable to Equity Holders of the Parent (Current Period) - 1
Net Income Attributable to Equity Holders of the Parent (Prior Period)
7. EBITDA Income from operations + Depreciation & Amortization
8. Interest Rate Coverage EBITDA Interest paid
Expansion Plans / Prospects for the Future
In 2014, SM Prime will open three new malls located in Cauayan and Angono in the Philippines and Zibo in China, as well as undertake the expansion of four existing malls. By the end of the year, SM Prime malls
will have an estimated 7.5 million square meters of total gross floor area.
In 2014, SMDC plans to launch over five new and expansion projects that will yield around 10,600 condominium units.
In the last quarter of 2015, SM Hotels will be opening Park Inn by Radisson in Clarkfield, Pampanga. This is the second Park Inn Hotel to be managed by Carlson Rezidor. This 150-room hotel is located within the
Clarkfield Air Base in Pampanga. In addition, construction of the 347-room Conrad Hotel in the Mall of Asia Complex will be continuing in 2014. This is the first Conrad Hotel in the Philippines, and it will be managed
by Hilton Worldwide. Conrad Hotel Manila is scheduled to start operations in the last quarter of 2015.
The Property Group‘s land banking initiatives will continue in 2014.
The Retail Group will be opening one department store, one supermarket, fifteen SaveMore branches and
three hypermarkets in 2014.
The above expenditures will be funded through internally generated sources and other capital raising initiatives such as bond issuances and loan availments.
The Company has no known direct or contingent financial obligation that is material to the Company,
including any default or acceleration of an obligation. There were no contingent liabilities or assets in the Company‘s balance sheet. The Company has no off-balance sheet transactions, arrangements, obligations
during the reporting year as at balance sheet date.
There are no known trends, events, material changes, seasonal aspects or uncertainties that are expected
to affect the Company‘s continuing operations.
There are no known trends or any known demands, commitments, events or uncertainties that will result in
or that are reasonably likely to result in the Issuer‘s liquidity increasing or decreasing in any material way. The Issuer does not anticipate having any cash flow or liquidity problems within the next twelve months.
There are no significant elements of income or loss arising outside of the Issuer‘s continuing operations.
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The Issuer is not in default or breach of any note, loan, lease or other indebtedness or financing arrangement.
There are no significant amounts of the Issuer‘s trade payables that have not been paid within the stated
trade terms.
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DESCRIPTION OF PROPERTIES
The Issuer‘s principally owned properties consist of malls and lands. The land improvements, buildings,
equipment, owned by the Issuer have a net book value of P249,142.3 million as at 31 December 2013. The
locations and general descriptions of these properties and equipment are described below.
Supermalls
The Issuer has 48 malls as at 31 December 2013 in the following locations:
SM City North EDSA
Edsa cor. North Ave., Quezon City
SM City Sta. Mesa
Ramon Magsaysay Boulevard cor Araneta, Quezon City, Metro Manila
SM Megamall
EDSA Corner Julia Vargas Avenue, Ortigas Business District, Mandaluyong City, Metro Manila
SM City Cebu
North Reclamation Area, Cebu City, Cebu
SM City Southmall
Alabang-Zapote Road, Almanza, Las Piñas City
SM City Bacoor
General Aguinaldo Highway cor. Tirona Highway, Brgy. Habay, Bacoor, Cavite
SM City Fairview
Quirino Highway cor. Regalado Ave., Greater Lagro, Quezon City
SM City Iloilo
Benigno Aquino Jr. Avenue, West Diversion Road, Mandurriao, Iloilo City
SM City Manila
Concepcion corner Arroceros and San Marcelino Streets, Manila
SM City Pampanga
Olongapo-Gapan Road, Brgy. San Jose, San Fernando City, Pampanga
SM City Sucat
Dr. A. Santos Avenue, Brgy. San Dionisio, Parañaque City
SM City Davao
Quimpo Boulevard corner Tulip Drive, Ecoland Subdivision, Brgy. Matina, Davao City
SM City Bicutan
Doña Soledad Avenue corner West Service Road, Brgy. Don Bosco, Bicutan, Parañaque City
SM City Cagayan de Oro
Masterson's Ave, Puebloe de Oro Business Park, Carmen, Cagayan de Oro City
SM City Lucena
Dalahican Road, corner Maharlika Highway Brgy. Ibabang Dupay, Lucena City
SM City Baguio
Luneta Hill, Upper Session Road corner Governor Pack Road, Baguio City, Benguet
SM City Marilao
Km 21 Mc Arthur Highway, Brgy. Ibayo, Marilao Bulacan
SM City Dasmariñas
Governors Drive, Brgy. Pala-Pala, Dasmarinas, Cavite
SM City Batangas
Pastor Village, Brgy Pallocan Kanluran, Batangas City
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SM City San Lazaro
Felix Huertas Street corner A.H. Lacson Extension, Sta. Cruz, Manila
SM Center Valenzuela
Mc Arthur Highway, Brgy. Karuhatan, Valenzuela City
SM Center Molino
Molino Road, Molino 4, Bacoor, Cavite
SM City Santa Rosa
National Road, Barrio Tagapo, Sta. Rosa, Laguna
SM City Clark
M.A. Roxas Highway, Brgy. Malabanias, Angeles City, Pampanga
SM Mall of Asia
J.W. Diokno Boulevard, Mall of Asia Complex, 1300 Pasay City, Philippines
SM Center Pasig
Frontera Verde, C5, Brgy. Ugong, Pasig City
SM City Lipa
Ayala Highway, Lipa City, Batangas
SM City Bacolod
Rizal St., Bacolod City, Negros Occidental 2
SM City Taytay
Manila East Road, Brgy. Dolores,Taytay, Rizal
SM Center Muntinlupa
National Road, Brgy. Tunasan, Muntinlupa City
SM City Marikina
Marcos Highway, Brgy. Kalumpang, Marikina City
SM City Rosales
MacArthur Highway, Brgy. Carmen East, Rosales, Pangasinan
SM City Baliwag
Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
SM City Naga
Central Business District II, Brgy. Triangulo, Naga City
SM Center Las Piñas
Alabang Zapote Rd., Brgy. Talon Dos, Las Piñas City
SM City Rosario
General Trias Drive, Brgy. Tejeros, Rosario, Cavite
SM City Tarlac
Mc Arthur Highway, Brgy. San Roque, Tarlac City
SM City San Pablo
National Highway, Brgy. San Rafael, San Pablo City
SM City Calamba
National Road, Brgy. Real, Calamba, Laguna
SM City Novaliches
Quirino Highway Brgy. San Bartolome, Novaliches, Quezon City
SM City Masinag
Marcos Highway, Brgy. Mayamot, Antipolo City
SM City Olongapo
Magsaysay Drive corner Gordon Avenue, Brgy. Pag-Asa, Olongapo City, Zambales
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SM San Fernando
V. Tiomco Street, Brgy. Poblacion, San Fernando City, Pampanga
SM General Santos
Cor. Santiago Boulevard and San Miguel Street, Barangay Lagao, General Santos City
SM Lanang
J P Laurel Avenue Lanang, Brgy. San Antonio, Davao City, Davao del Sur
SM City Consolacion
North Road, Brgy. Lamac, Consolacion, Cebu
SM Aura Premier
26th Street corner McKinley Parkway, Brgy. Fort Bonifactio, Global City, 1630 Taguig City
SM City BF Parañaque
Dr. A. Santos Ave. cor Presidents Ave., Brgy. BF Homes, 1700 Parañaque City
The Issuer has office buildings located at Harbor Drive, Mall of Asia Complex, Pasay City. As of the date of
this Prospectus, there are no mortgages, liens or encumbrances over any of the properties owned by the Issuer.
Land and Development
Land and development costs pertain to the SMDC‘s ongoing residential condominium projects. Estimated cost to complete the projects amounted to P29,013.0 million and P32,645.0 million as at 31 December 2012 and 2013, respectively. SMDC also acquired several parcels of land for future development with aggregate carrying values of P7,444.6 million and P3,136.6 million as at December 31, 2012 and 2013, respectively. These costs are included as part of land and development costs. SMDC acquired Landfactors for P300.0 million in 2009, Vancouver Lands, Inc. (VLI) for P566.6 million in 2010 and Twenty Two Forty One Properties, Inc. (TTFOPI) for P195.6 million in 2011 and became its wholly-owned subsidiaries. The purchase of Landfactors, VLI and TTFOPI were accounted for as an acquisition of asset. Landfactors, VLI and TTFOPI own parcels of land which are being developed into commercial/residential condominium projects. On 30 June 2004, SMDC entered into a joint venture agreement with the Government Service Insurance System (GSIS) for the development of a residential condominium project on a parcel of land owned by GSIS. Under the joint venture agreement, GSIS shall contribute all its rights, title and interest in and to the property in consideration of its receipt of allocated units, which is 15% of the value of the total saleable units in the project, in return for its contribution. In turn, SMDC shall provide financing for the implementation of the project in consideration for 85% of the value of the total saleable units in the project. On 14 July 2005, SMDC submitted to GSIS a Letter of Intent to change the GSIS subject for development. On 7 September 2005, the GSIS Board of Trustees approved the proposal of SMDC to change the GSIS subject for development. Under the amended joint venture agreement, the property will now be 14,430 square meters, more or less, a portion of the Tree Park Area of the GSIS-Baguio Convention Center. Under the amended joint venture agreement, in the event of a decrease in the investment commitment but not below the amount of P1,100.0 million, there will be no adjustment in the sharing or allocation percentage of both parties as agreed upon based on the original joint venture agreement. In case the reduction goes lower than P1,100.0 million, there shall be a corresponding adjustment in the sharing or allocation percentage of both parties, which shall be subject to the agreement of both parties. As at 31 December 2013, the development of the project has not yet started.
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Costa del Hamilo, Inc., a subsidiary of SM Prime CDHI‘s construction projects located at Hamilo Coast in Nasugbu, Batangas consist of condominium buildings and beach and country club. As at 31 December 2010, the Company completed the construction of two condominium projects and the beach and country club. The completed condominium projects were reclassified as inventories in 2010 while the ownership of beach and country club was transferred to Pico de Loro in June 2010. The total estimated liability on completed projects amounts to P=364.2 million and P=400.1 million as at 31
December 2012 and 2013, respectively.
Depending on market conditions in the next 12 months, the Company may acquire additional properties for
its commercial center, retailing and/or real estate development and tourism businesses. These potential acquisitions will depend, among others, on the execution strategies for the Group‘s expansion plans, and
the availability of suitable properties at reasonable market prices.
Leased Properties
As at 31 December 2013, the Issuer and its subsidiaries had 31 leased properties with the following details set forth below:
Leased Properties Annual Lease Expiration Date Renewal Option
SM Valenzuela 23,838,470 July 2043 No provision
SM Baguio 53,210,070 October 2053 No provision
SM Muntinlupa 24,408,013 March 2055 No provision
SM Mall of Asia 165,003,836 December 2030 renewable for another 25 years
SM Pasig 41,432,911 July 2020 No provision
SM Bacoor 13,737,406 December 2043; December 2044 automatically renewed for another 25 years
SM San Lazaro 7,938,000 July 2028 renewable for another 25 years
SM Calamba 32,319,196 February 2054; April 2060 automatically renewed for another 25 years
SM Pampanga 13,447,212 October 2053 No provision
SM San Pablo 28,418,333 September 2058 automatically renewed for another 25 years
SM Tarlac 10,319,878 April 2054 No provision
SM Taytay 21,316,787 January 2055 No provision
SM Naga 16,220,097 December 2056 No provision
SM Bacolod 220,000 February 2032 renewable for another 25 years
SM Taytay 5,314,342 August 2034 automatically renewed for another 25 years
SM Masinag 1,570,023 April 2036 automatically renewed for another 25 years
SM Taguig Aura ( Head Office ) 27,858,857 November 2032; July 2033 automatically renewed for another 25 years
SM Hypermarket Sucat Lopez 7,356,232 October 2034 renewable upon agreement
SM Marketmall Dasmariñas 7,142,857 March 2035 automatically renewed for another 25 years
SM Consolacion Cebu (Head Office ) 31,666,464 September 2060 automatically renewed for another 25 years
SM General Santos (Head Office) 21,977,420 February 2059 No provision
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Leased Properties Annual Lease Expiration Date Renewal Option
SM Calamba Real (Head Office ) 1,285,714 February 2054 No provision
SM Olongapo 6,578,685 December 2035 No provision
SM Megamall 189,111 December 2031 No provision
SM Clark 65,631,739 June 2028; May 2058 renewable
SM By The Bay 25,719,465 November 2017 No provision
SM Dasmariñas 9,585,884 August 2050 No provision
SM Molino 12,857,143 May 2056 Automatically renewed for another 25 years
SM Manila 23,060,294 2047 Automatically renewed for another 25 years
Total Lease Payments 699,624,441
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BOARD OF DIRECTORS AND MANAGEMENT OF THE ISSUER Directors and Executive Officers The following table sets forth the persons who served as a Director and/or executive officer of SMIC as
at the date of this Prospectus:
Name Position Citizenship Age
Henry Sy, Sr. Chairman Filipino 89
Teresita T. Sy Vice Chairperson Filipino 63
Henry T. Sy, Jr. Vice Chairman Filipino 60
Harley T. Sy Director and President Filipino 54
Jose T. Sio Director, Executive Vice President and CFO Filipino 74
Vicente S. Perez, Jr. Independent Director Filipino 55
Ah Doo Lim Independent Director Singaporean 64
Joseph R. Higdon Independent Director American 72
Grace F. Roque Treasurer Filipino 63
Corazon I. Morando Senior Vice President, Compliance Officer and Assistant Corporate Secretary
Filipino 72
Franklin C. Gomez Senior Vice President Filipino 44
Marianne Malate-Guerrero Senior Vice President Filipino 49
Elizabeth Anne C. Uychaco Senior Vice President Filipino 58
Cecilia Reyes-Patricio Senior Vice President Filipino 56
Corazon Pilar P. Guidote Senior Vice President Filipino 53
Frederic C. DyBuncio Senior Vice President Filipino 54
Emmanuel C. Paras Corporate Secretary Filipino 64
Management
Board of Directors
The Directors of the Issuer 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.
The following describes the background and business experience of the Issuer ‘s Directors and Executive
Officers during the last five years:
Henry Sy, Sr., is the Chairman of the Board of Directors of SMIC. He is the founder of the SM Group and
is currently Chairman of SM Prime, SM Development, and Highlands Prime Inc., among others. Mr. Sy opened the first ShoeMart store in 1958 and has since evolved into a dynamic group of companies with five
lines of businesses - shopping malls, retail, financial services, real estate development and tourism, hotels and conventions. He is likewise Chairman Emeritus of BDO Universal Bank, Inc. and Honorary Chairman of
China Banking Corporation.
Teresita T. Sy, is the Vice Chairperson of SMIC. She has varied experiences in retail merchandising, mall
development and banking businesses. A graduate of Assumption College, she was actively involved in
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Shoemart‘s development. At present, she is the Chairman of the Board of Directors of BDO Unibank, Inc.
She also holds board positions in several companies within the SM Group.
Henry T. Sy, Jr., is the Vice Chairman of SMIC. He is also the Vice Chairman – President of Highlands Prime, Inc., Vice Chairman of SM Development Corporation, Director of SM Prime Holdings, Inc. and BDO
Unibank, Inc. He is likewise the President of National Grid Corporation of the Philippines. He is responsible
for the real estate acquisitions and development activities of the SM Group which include the identification, evaluation and negotiation for potential sites as well as the input of design ideas. He graduated with a
Management degree from De La Salle University.
Harley T. Sy, is the President of SMIC. He is a Director of China Banking Corporation and other companies within the SM Group and Adviser to the Board of Directors of BDO Private Bank. He is the Executive
Vice-president for Merchandising of SM Retail, Inc. He holds a degree in Bachelor of Science, Major in
Finance from De La Salle University.
Jose T. Sio, is the Executive Vice President and Chief Finance Officer of SMIC. He is also a Director of China Banking Corporation, Belle Corporation, SM Keppel Land, Inc., Manila North Tollways Corporation, and
Atlas Consolidated Mining and Development Corporation as well as other companies within the SM Group.
Mr. Sio is also Adviser to the Board of Directors of BDO Unibank, Inc. and SM Development Corporation. Mr. Sio holds a master‘s degree in Business Administration from New York University, is a certified public
accountant and was formerly a senior partner at Sycip Gorres Velayo & Co.
Vicente S. Perez, Jr., is an Independent Director of SMIC. His career has ranged from international banker, debt trader, investment bank partner, private equity investor to cabinet secretary. He is the Chief
Executive Officer of Alternergy Partners, a renewable power company for emerging Asian countries,
Chairman of Merritt Partners, an energy advisory firm, and Vice-Chairman of Ten Knots Philippines, the resort operating company of El Nido Resorts. He was the youngest and longest serving Secretary of the
Department of Energy. He had also briefly served as Undersecretary for Industry and Investments at the Department of Trade and Industry and Managing Head of the Board of Investments. He is Chairman of
WWF Philippines and member of the WWF-International Board. Mr. Perez is a member of the advisory
boards of Coca-Cola FEMSA Phils., Pictet Clean Energy Fund, Roxas Holdings, and Yale Center for Business and Environment. He obtained his master‘s degree in Business Administration from the Wharton School of
the University of Pennsylvania, and his bachelor‘s degree in Business Economics from the University of the Philippines. He was a 2005 World Fellow at Yale University where he lectured an MBA Class on renewable
power in emerging countries.
Ah Doo Lim, a Singaporean, is an Independent Director of SMIC. He is currently a Director and Chairman
of the Audit Committee of Sembcorp Marine Ltd., a world leading rig builder in the offshore marine and engineering sector, and of ARA-CWT Trust Management (Cache) Ltd., GP Industries Ltd., Linc Energy
Limited, and U Mobile Sdn Bhd. He is also a Director of Sateri Holdings Limited, a world leader in the specialty cellulose industry. He obtained a degree in Engineering from Queen Mary College, University of
London in 1971, and a Master‘s Degree in Business Administration from Cranfield School of Management,
England in 1976.
Joseph R. Higdon, an American, is an Independent Director of SMIC. Until his retirement, he was a Senior Vice-President of Capital Research and Management Company, a United States investment company.
He joined Capital Research in 1974 and worked there until 2006. He analyzed Philippine Stocks from 1989
until 2006. He was a US Peace Corps volunteer in the Philippines from 1962 to 1964. He is also an Independent Director of International Container Terminal Services, Inc. and Security Bank Corporation.
Until last year, he served as a member of the Advisory Board for the Coca-Cola Bottling Company, Philippines.
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Period of Directorship:
Name Period Served
Henry Sy, Sr. 1960 – present
Teresita T. Sy 1979 – present
Henry T. Sy, Jr. 1979 – present
Harley T. Sy 1993 – present
Jose T. Sio 2005 – present
Vicente S. Perez, Jr. 2005 – present
Ah Doo Lim 2008 – present
Joseph R. Higdon 2010 – present
Executive Officers
Grace F. Roque is the Treasurer of SMIC. She is also the President and Chairman of Metro Manila Shopping Mecca and President and Director of HFS Corporation and Mercantile Stores Group, Inc. She
holds a Bachelor Degree in Economics from Maryknoll College and a Masters in Business Administration Degree from the University of the Philippines.
Corazon I. Morando, is Senior Vice President, Corporate Legal Affairs, Compliance Officer and Assistant Corporate Secretary of SMIC. She is also the Vice President and Corporate Secretary of China Banking
Corporation and Corporate Secretary and Compliance Officer of Highlands Prime, Inc.; Senior Vice President - Corporate Legal Affairs, Assistant Corporate Secretary and Compliance Officer of SM Prime; and the
Corporate Secretary of Pico de Loro Beach and Country Club, Inc. She holds a Bachelor of Laws degree
from the University of the Philippines and took up graduate studies under the MBA-Senior Executive Program in the Ateneo de Manila University. She was formerly Director of the Corporate and Legal Department of
the Securities and Exchange Commission in the Philippines.
Franklin C. Gomez is Senior Vice President for Finance of SMIC. Prior to joining SM Investments, Mr. Franklin Gomez spent over 20 years at Unilever where he held several senior positions, his last being Finance
Director and Chief Financial Officer of Unilever Indonesia since May 2009. His previous senior posts in the
same company include National Finance Director at Unilever Philippines; Innovation and Learning Director at the Finance Excellence Centre in London; and Finance Director of Selecta Wall‘s Ice Cream, Philippines. Mr.
Gomez holds a Bachelor of Arts in Economics and BSC in Accounting from De La Salle University, Manila.
Elizabeth Anne C. Uychaco, is Senior Vice President, Corporate Services of SMIC. She is also a Board
Director of Belle Corporation, Megawide Construction Corporation, Republic Glass Holdings Corp., Asia Pacific College, Generali Pilipinas Holding Company, Inc., and Premium Leisure & Amusement, Inc. She
was formerly Senior Vice President and Chief Marketing Officer of Philippine American Life Insurance Company and Board Director of Philam Call Center. Prior to that, she was Vice President of Globe Telecom,
Inc., Kuok Philippine Properties, Inc. and Transnational Diversified Corp. Ms. Uychaco graduated from St. Scholastica‘s College in 1978 with a Bachelor of Arts Degree. She obtained a Master‘s Degree in Business
Economics from the University of Asia and Pacific in 1988 and a Master‘s Degree in Business Administration
from the Ateneo Business School in 1992.
Cecilia Reyes-Patricio is the Senior Vice President, Corporate Tax Department of SMIC. Prior to joining SMIC in 1988, she was a financial and tax auditor at SyCip, Gorres Velayo & Co. She holds a Master of
Science degree (with highest honors) in Commerce, Major in Taxation, from the Manuel Luis Quezon
University. A Certified Public Accountant, she graduated magna cum laude with a Bachelor of Science degree in Business Administration from the University of the East.
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Marianne Malate-Guerrero, is Senior Vice President, Legal Department Head of SMIC. She formerly
worked as Senior Vice President and Legal Department Head of United Overseas Bank Philippines. Previous to that, she was Vice President and Legal Officer of Solidbank Corporation. She began her practice with the
law firm of Castillo Laman Tan & Pantaleon Law office. She graduated from the Ateneo School of Law in 1988.
Corazon P. Guidote is Senior Vice President for Investor Relations of SMIC. She was formerly a Presidential Consultant for Investor Relations and Executive Director of the Investor Relations Office of the
Republic of the Philippines. Prior to government service, she was a Director and Chief Operating Officer of ABN AMRO Asia Securities Philippines, Group Vice President for Corporate Communications and Investor
Relations at Metro Pacific Corporation, and Managing Director of Citibank Securities, Philippines, Inc and UBS Securities Phils., Inc. Ms. Guidote also served as Equities Research Head in Peregrine Securities, Inc.,
Barclays de Zoete Wedd (BZW), and Vickers da Costa. A Certified Public Accountant, Ms. Guidote is a
Bachelor of Science graduate of the University of Santo Tomas. She holds a Master in Applied Business Economics degree from the University of Asia and the Pacific and is a Chevening Fellow of the United
Kingdom Foreign and Commonwealth Office. She is also a fellow at the Institute of Corporate Directors.
Frederic C. DyBuncio is Senior Vice President, Investments Portfolio of SMIC. Prior to joining SMIC, he
was a career banker who spent over 20 years with JPMorgan Chase and its predecessor institutions. During his stint in the banking industry, he was assigned to various managerial/executive positions where he gained
substantial professional experience in the areas of credit, relationship management and origination, investment banking, capital markets, and general management. He has worked and lived in several major
cities including New York, Seoul, Bangkok, Hong Kong and Manila. He obtained his undergraduate degree in Business Management from the Ateneo de Manila University, and his master‘s degree in Business
Administration from the Asian Institute of Management.
Emmanuel C. Paras, is the Corporate Secretary of SMIC and other companies within the SM Group. He
holds a Bachelor of Law degree from Ateneo de Manila University and is a senior partner and Head of the Corporate Services Department of the Sycip, Salazar, Hernandez and Gatmaitan Law Offices.
Period of Officership:
Name Period Served
Grace F. Roque 2010 – present
Corazon I. Morando 2005 – present
Franklin C. Gomez 2013 – present
Elizabeth Anne C. Uychaco 2009 – present
Marianne Malate-Guerrero 2006 – present
Cecilia Reyes-Patricio 2010 – present
Corazon P. Guidote 2011 – present
Frederic C. DyBuncio 2011 – present
Emmanuel C. Paras 2005 – present
Involvement in Legal Proceedings
The Issuer is not aware of any of the following events having occurred during the past five years up to the date of this Offering Circular that are material to an evaluation of the ability or integrity of any
director, nominee for election as Director, executive officer, underwriter or controlling person of the
Issuer:
(a) any bankruptcy petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within two years prior to that
162
time;
(b) any conviction by final judgement, including the nature of the offense, in a criminal proceeding,
domestic or foreign, or being subject to a pending criminal proceeding, domestic or foreign,
excluding traffic violations and other minor offenses;
(c) being subject to any order, judgement or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type of business,
securities, commodities or banking activities;
(d) being found by a domestic or foreign court of competent jurisdiction (in a civil action), the SEC
or comparable foreign body, or a domestic or foreign exchange or other organized trading
market or self-regulatory organization, to have violated a securities or commodities law or
regulation, and the judgement has not been reversed, suspended or vacated; and
(e) a securities or commodities law or regulation, and the judgement has not been reversed,
suspended or vacated.
Corporate Governance The Issuer‘s platform of governance remains rooted in its Manual on Corporate Governance and its Code of
Ethics. The Manual on Corporate Governance (the ―Governance Manual‖), which was revised in compliance with the SEC Revised Code of Corporate Governance in March 2010, institutionalizes the principles of good
corporate governance in the entire organization. It lays down the Issuer‘s compliance system and identifies
the responsibilities of the Board and management in relation to good corporate governance. The Governance Manual also provides for the Issuer‘s policies on disclosure and transparency, the conduct of communication
and training programs on corporate governance, the rights of all shareholders, and the protection of the interests of non-controlling shareholders. Under the Governance Manual, it is the Board‘s responsibility to
foster the long term success of the Issuer and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it shall exercise with the highest standards of corporate governance, in
the best interests of the Issuer, its shareholders and other stakeholders.
The Code of Ethics (the ―Code‖) serves as a guiding principle for the Issuer‘s directors, officers and
employees in the performance of their duties and responsibilities, and in their business transactions with investors, creditors, customers, contractors, suppliers, regulators, and the public. The Code also reflects the
Issuer‘s mission, vision and values statement.
To align with the Code, the Issuer adopted policies on acceptance of gifts, insider trading, conflict of interest,
related-party transactions, to name a few. The Issuer continues to align itself with corporate governance best practices through the continuous review and development of its policies and programs. The Issuer
recently released its whistleblowing policy, referred to as the Policy on Accountability, Integrity and Vigilance (PAIV), which was adopted to create an environment where concerns and issues, made in good faith, may
be raised freely within the organization. Furthermore, the Issuer continues to enhance its enterprise risk
management systems.
The Board is composed of eight (8) directors, three (3) of whom are non-executive independent directors, in the persons of Mr. Vicente S. Perez, Jr., Mr. Ah Doo Lim, and Mr. Joseph R. Higdon. Under the Issuer‘s
Governance Manual, an independent director must possess all of the qualifications and none of the
disqualifications of a regular director. He must also be independent of Management, substantial shareholdings and material relations, whether it be business or otherwise, which could reasonably be
perceived to impede the performance of independent judgment.
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The Board is supported in its corporate governance functions by three committees: the Compensation and
Remuneration Committee, the Nomination Committee and the Audit and Risk Management Committee. All Board Committees have adopted their respective charters which identify the Committees‘ composition, roles
and responsibilities, as culled from the Issuer‘s Governance Manual.
Committees of the Board
Audit and Risk Management Committee. The Audit and Risk Management Committee provides an oversight of financial management functions, specifically in the areas of managing credit, market,
liquidity, operational, legal and other risks and is primarily responsible for monitoring the statutory requirements of the Issuer. The Audit and Risk Management Committee is responsible for the setting up
of an internal audit department and for the appointment of an internal auditor, as well as an independent external auditor. It monitors and evaluates the adequacy and effectiveness of the Group‘s internal
control systems. It ensures that the Board is taking appropriate corrective action in addressing control
and compliance functions with regulatory agencies. It oversees the policies and procedures relating to the identification, analysis, management, monitoring and reporting of financial and non-financial risks.
It also ensures the Issuer‘s adherence to corporate governance principles, best practices and compliance with the Governance Manual. The Audit and Risk Management Committee was constituted in April 2005
and is currently composed of Vicente S. Perez, Jr., Henry T. Sy, Jr., Jose T. Sio, Atty. Serafin U. Salvador
and Atty. Corazon I. Morando. Vicente S. Perez, Jr. is an independent director and the Chairman of the Committee.
Nomination Committee. The Nomination Committee is primarily responsible for the review and
evaluation of the qualifications of all persons nominated to positions requiring appointment by the Board and the assessment of the Board‘s effectiveness in directing the process of renewing and replacing
Board members. The Nomination Committee was constituted in April 2005 and is currently composed of
Henry T. Sy, Jr., Ah Doo Lim and Atty. Corazon I. Morando. Henry T. Sy, Jr. is the Chairman of the Committee.
Compensation and Remuneration Committee. The Compensation and Remuneration Committee
is primarily responsible for establishing a formal and transparent process for developing policies on
executive remuneration and for fixing the remuneration packages of corporate officers. It is responsible for providing oversight of remuneration of senior management and other key personnel and ensuring
that compensation is consistent with the Group‘s core values, strategy and control environment. The Compensation and Remuneration Committee was constituted in April 2005 and is currently composed of
Teresita T. Sy, Jose T. Sio and Vicente S. Perez, Jr. Teresita T. Sy is the Chairman of the Committee.
Under the supervision of the Nomination Committee, the Issuer conducts an annual evaluation of the
Board and President, respectively, based on their duties and responsibil ities under the Governance Manual and the Issuer‘s By-Laws. The evaluation also includes a rating of support services provided to
the Board, such as the quality and timing of information given to the Board, and the frequency and conduct of meetings. The directors were also requested to identify trainings, programs or any other
assistance they may need in the performance of their duties as director. The results of the annual
evaluation were then presented to the Board and President to identify strengths and weaknesses and possible areas for improvement.
The Corporate Governance Department of the Issuer strives to keep pace with best practices in
corporate governance through the further development of policies and projects and the continued
conduct of orientation and training programs. The Corporate Governance Department also remains committed to support the advocacy and networking initiatives of public and private institutions that seek
to improve corporate governance standards.
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Executive Compensation For the year ended 31 December 2013, the Board of Directors received a total of =P72.6 million as
compensation and allowances.
Aggregate compensation paid to SMIC‘s Chief Executive Officer and senior executive officers as a group
for the last two f iscal years and the est imate for the ensuing year are as follows:
Compensation of Executive Officers and Directors (In P millions)
Name Principal Position Year Salary Bonus Other Annual Compensation
Harley T. Sy President
Jose T. Sio Executive Vice President & CFO
Elizabeth Anne
C. Uychaco
Senior Vice President –
Corporate Services
Franklin C.
Gomez
Senior Vice President -
Finance
Frederic C. DyBuncio
Senior Vice President – Investments Portfolio
President and 4 most highly compensated
executive officers
2014 (estimated)
2013 2012
59.0
51.0 41.0
10.0
8.0 7.0
2.0
2.0 2.0
All other officers and Directors as a group unnamed
2014 (estimated) 2013
2012
163.0 142.0
110.0
27.0 23.0
18.0
7.0 6.0
4.0
Total 2014 (estimated) 2013
2012
222.0 193.0
151.0
37.0 31.0
25.0
9.0 10.0
6.0
Other Arrangements
There are no standard or other arrangements pursuant to which the directors of the Issuer are
compensated, or are to be compensated, directly or indirectly, by the Issuer for services rendered by such directors as of the date of this Prospectus.
There are no employment contracts between the Issuer and any named executive officer.
There is no compensatory plan nor arrangement with respect to an executive officer which shall result or will result from the resignation, retirement or any other termination of such executive officer‘s
employment with the Company, or from a change-in-control of the Company, or a change in an executive officer‘s responsibilities following a change-in-control of the Company.
Warrants and Options Outstanding
As of the date of this Prospectus, there are no outstanding warrants or options in respect of the Issuer‘s shares held by the Issuer‘s President, named executive officers and all directors and officers as a group.
Significant Employees
The Issuer has no individual employee who is not an executive officer but who is expected to make a significant contribution to the business.
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Family Relationships
Mr. Henry Sy, Sr. is the father of Teresita T. Sy, Elizabeth T. Sy, Henry T. Sy, Jr., Hans T. Sy, Herbert T. Sy
and Harley T. Sy. All other directors and officers are not related either by consanguinity or affinity. There are no other family relationships known to the registrant other than the ones disclosed herein.
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MARKET PRICE OF AND DIVIDENDS ON THE ISSUER’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Holders of the Issuer’s Common Shares
As at 31 December 2013, the following are the top 20 stockholders of the Issuer.
Stockholder Name No. of shares
% to
Total
1 PCD Nominee Corp. (Non-Filipino) 279,375,617 35.08%
2 Hans T. Sy 65,960,450 8.28%
3 Herbert T. Sy 65,960,450 8.28%
4 PCD Nominee Corp. (Filipino) 64,439,746 8.09%
5 Harley T. Sy 58,528,292 7.35%
6 Henry T. Sy, Jr. 58,460,450 7.34%
7 Teresita T. Sy 57,085,450 7.17%
8 Elizabeth T. Sy 46,715,484 5.87%
9 Syntrix Holdings, Inc. 31,250,000 3.92%
10 Felicidad T. Sy 25,522,060 3.20%
11 Sysmart Corporation 19,281,455 2.42%
12 Henry Sy Foundation, Inc. 15,000,000 1.88%
13 Felicidad T. Sy Foundation, Inc. 7,500,000 0.94%
14 Susana Fong 301,999 0.04%
15 Value Plus, Inc. 101,413 0.01%
16 Alberto S. Yao 52,135 0.01%
17 Belle Corporation 32,585 0.00%
18 Hector Yap Dimacali 26,068 0.00%
19 Hans Sy FAO Wonderfoods Corp. 26,068 0.00%
20 Benito Gapuz Te 26,068 0.00%
As at 31 December 2013, the Issuer has 1,249 shareholders of its common shares. The foreign ownership level in the Issuer is 35.09%.
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Dividends and Dividend Policy
As at 31 December 2013, there are no restrictions that would limit the ability of the Issuer to pay dividends to the common stockholders, except with respect to P108.3 billion, representing accumulated
equity in net earnings of subsidiaries. These earnings are not available for dividend distribution until
such time that the Issuer receives the dividends from the subsidiaries.
On April 25, 2013, the Board approved the declaration of cash dividends of 118.0% of the par value or P11.80 per share for a total amount of P7,423.0 million in favor of stockholders on record as at May 24,
2013. This was paid on June 20, 2013.
On the same date, the Board approved the declaration of 25% stock dividends in favor of stockholders
on record to be fixed by the SEC. On June 24, 2013 and July 12, 2013, SEC approved the issuance of 157,000,000 and 629,986 shares as stock dividends to stockholders on record as at July 8, 2013. The
stock dividends were issued on August 1, 2013.
On April 26, 2012, the Board of Directors approved the declaration of cash dividends of P10.40 per share
in favor of stockholders on record as at May 26, 2012. This was paid on June 21, 2012.
The amount of dividend declaration annually by SMIC and its subsidiaries depend on the net income, cash availability and the investment projects as approved by the Board of Directors of SMIC and each of
the subsidiaries.
Market Price of Issuer’s Common Equity
The registrant‘s common equity is principally traded at the Philippine Stock Exchange. The high and low
sales prices for each period are indicated in the table below.
2013 2012
(in P) High Low High Low
1st Quarter 892.00 720.00 553.60 447.20
2nd Quarter 962.40 728.00 584.00 512.00
3rd Quarter 961.50 634.00 606.40 564.00
4th Quarter 863.00 695.00 720.40 582.40
The total number of stockholders as at 31 December 2013 was 1,249. Market price of the Issuer‘s Shares as at 25 April 2014 was P734.50 per share.
Recent Sales of Unregistered or Exempt Securities
The following securities were issued as exempt from the registration requirements of the Securities Regulation Code (SRC) and therefore have not been registered with the SEC:
(a) On October 17, 2012, SMIC issued US$500.0 million 4.25% Senior Bonds due 2019. The Senior Bonds, which were listed in the SGX-ST, are considered as exempt security pursuant to Section
10 (1) of R.A. No. 8799. The lead underwriters were Citigroup Global Markets Limited, Deutsche
Bank AG, Singapore Branch and J.P. Morgan Securities Plc, and the total underwriting fees and expenses amounted to US$2.5 million.
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(b) On February 15, 2012, SMIC issued US$250.0 million 1.625% Convertible Bonds due 2017. The
Convertible Bonds, which were listed in the Singapore Stock Exchange, are considered as exempt security pursuant to Section 10 (1) of R.A. No. 8799. The lead underwriters were
Citigroup Global Markets Limited and J.P. Morgan Securities Limited and the tota l underwriting fees and expenses amounted to US$3.1 million.
(c) On September 26, 2011, SMIC issued corporate notes comprised of 7-year notes (Series A) and
10-year notes (Series B) amounting to P916.0 million and P4,084.0 million, respectively. Series A and Series B notes will mature on September 26, 2018 and September 26, 2021, respectively,
and bear fixed interest rate of 5.75% and 6.625% per annum, respectively. Interests in arrears
are payable semi-annually starting March 26, 2012. The corporate notes, which were issued to less than 20 entities, are considered as exempt pursuant to Rule 9.2.2(B) of the Amended
Implementing Rules and Regulations of R.A. No. 8799. The arrangers were BDO Capital, FMIC and The Hongkong and Shanghai Banking Corporation (HSBC) Limited and the total arrangers
fees amounted to P18.8 million.
(d) On February 7, 2011, SMIC issued fixed rate notes amounting to P7,000.0 million which bear a
fixed interest rate of 6.165% per annum, payable semi-annually. The fixed rate notes will mature
on February 8, 2016. The fixed rate notes, which were issued pursuant to Rule 9.2.2(B) of the Amended Implementing Rules and Regulations of R.A. No. 8799. The arrangers were ING Bank
N.V., BPI Capital Corporation, Allied Banking Corporation, FMIC, RCBC Capita l Corporation and
United Coconut Planters Bank and the total arrangers fees amounted to P 24.1 million.On October 13, 2010, SMIC issued US$400.0 million bonds which bear a fixed interest rate of 5.5%
per annum, payable semi-annually in arrears. The bonds will mature on October 13, 2017. Of this amount, US$82.9 million and US$130.8 million were exchanged from the existing US$350.0
million 6.75% bonds due 2013 and US$500.0 million 6.00% bonds due 2014, respectively. The
balance of US$186.3 million represents the new money component. The bonds, which were listed in the Singapore Stock Exchange, are considered as exempt pursuant to Rule 9.2.2(B) of
the Amended Implementing Rules and Regulations of R.A. No. 8799. The underwriters were BDO Capital, Citibank and HSBC and the total underwriting fees and expenses amounted to
US$1.7 million.On September 22, 2009, SMIC issued US$500.0 million bonds which bear a fixed interest rate of 6.0% per annum, payable semi-annually in arrears. The bonds will mature on
September 22, 2014. The bonds, which were listed in Singapore Stock Exchange, are considered
as exempt security pursuant to Section 10 (1) of RA No. 8799. The underwriters were Barclays Capital and Citibank and the total underwriting fees and expenses amounted to US$2.1 million.
(e) On July 17, 2008, SMIC issued a US$350.0 million 6.75% bonds due on July 18, 2013. The bonds,
which were listed in the Singapore Stock Exchange, are considered as exempt security pursuant to Section 10 (l) of R.A. No. 8799. The sole underwriter is UBS and the total underwriting fees
and expenses amounted to US$1.5 million.On August 6, 2007 and November 6, 2007, SMIC issued Series 1 and Series 2 of non-convertible, non-participating, non-voting preferred shares
amounting to P3,300.0 million and P200.0 million, respectively. The preferred shares issued to
financial and non-financial institutions are considered as exempt security pursuant to Section 9.2 of R.A. No. 8799. The lead underwriter was ING Manila N.V. and the total underwriting fees
and expenses amounted to P17.0 million. On February 7, 2011, SMIC prepaid the Series 1 preferred shares amounting to P 3,300.0 million.
(f) On March 19, 2007, SMIC issued a US$300.0 million Convertible Bonds due on March 20, 2012.
The Convertible Bonds, which were listed in the Singapore Stock Exchange, are considered as exempt security pursuant to Section 10(g) of R.A. No. 8799. The lead underwriters were Citibank
and Macquarie Securities and the total underwriting fees and expenses amounted to US$3.3
million.
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Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Record and Beneficial Owners
As at 28 February 2014, the following are the owners of the Issuer‘s common stock in excess of 5% of
total outstanding shares:
Title of
Class
Name & address of
record
owner & relationship
with Issuer
Name of beneficial
owner &
relationship with record
owner
Citizenship No. of shares
held
Percent
Common
Stock
Felicidad T. Sy
(shareholder of Issuer)
No. 63
Cambridge Circle, Forbes
Park, Makati
City
Same as the
record owner
Filipino 40,730,173 5.12%
Common
Stock
Teresita T. Sy
(Director and
Vice
Chairperson)
No. 63
Cambridge
Circle, Forbes Park, Makati
City
Same as the
record owner
Filipino 57,085,450 7.17%
Common
Stock
Harley T. Sy
(Director and
President)
No. 63
Cambridge Circle,
Forbes Park,
Makati City
Same as the record owner
Filipino 58,528,292 7.35%
Common
Stock
Hans T. Sy
(Shareholder
of Issuer)
No. 11
Harvard Road,
Forbes Park,
Makati City
Same as the
record owner
Filipino 65,969,521 8.28%
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Title of
Class
Name &
address of
record owner &
relationship with Issuer
Name of
beneficial
owner &
relationship
with record
owner
Citizenship No. of shares
held
Percent
Common
Stock
Henry T. Sy, Jr.
(Director and
Vice
Chairperson)
No. 63
Cambridge
Circle,
Forbes Park,
Makati City
Same as the
record owner
Filipino 58,460,450 7.34%
Common
Stock
Herbert T. Sy
(Shareholder
of Issuer)
No. 63
Cambridge
Circle,
Forbes Park,
Makati City
Same as the
record owner
Filipino 65,960,450 8.28%
Common
Stock
Elizabeth T. Sy
(Shareholder
of Issuer)
No. 63
Cambridge
Circle,
Forbes Park,
Makati City
Same as the
record owner
Filipino 46,722,988 5.87%
Common
Stock
PCD Nominee
Corp. (Non-
Filipino)
Various clients1 Foreign 279,374,017 35.09%
Common
Stock
PCD Nominee
Corp.
(Filipino)
Various clients1 Filipino 46,022,368 5.78%
(1) The Issuer has no information as to the beneficial owners of the shares of stocks held by PCD
Nominee Corp. The clients of PCD Nominee Corp. have the power to decide how their shares are to
be voted.
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Security Ownership of Management
As at 28 February 2014, the following are the number of Shares owned of record by the Issuer‘s directors
and key executive officers:
Title of Class Name of Beneficial Owner Citizenship
Amount and
Nature of
Beneficial Ownership
(d) Direct
Percent of Class
Common Stock Henry Sy, Sr. Filipino 3,182,550 (d) 0.40%
Common Stock Teresita T. Sy Filipino 57,085,450 (d) 7.17%
Common Stock Harley T. Sy Filipino 58,528,292 (d) 7.35%
Common Stock Henry T. Sy, Jr. Filipino 58,460,450 (d) 7.34%
Common Stock Jose T. Sio Filipino 14 (d) 0.00%
Common Stock Vicente S. Perez, Jr. Filipino 14 (d) 0.00%
Common Stock Ah Doo Lim Singaporean 125 (d) 0.00%
Common Stock Joseph R. Higdon American 125 (d) 0.00%
Common Stock Grace F. Roque Filipino 0 Nil
Common Stock Corazon I. Morando Filipino 0 Nil
Common Stock Elizabeth Anne C. Uychaoco Filipino 0 Nil
Common Stock Marianne M. Guerrero Filipino 0 Nil
Common Stock Cecilia Reyes-Patricio Filipino 0 Nil
Common Stock Luis Y. Benitez Filipino 0 Nil
Common Stock Corazon P. Guidote Filipino 2,125 (d) 0.00%
Common Stock Frederic C. Dybuncio Filipino 0 Nil
Common Stock Emmanuel C. Paras Filipino 0 Nil
Directors and Executive Officers as a group 177,259,145 22.26%
Voting Trust Holders of 5% or More
There are no persons holding more than 5% of a class of shares under a voting trust or any similar
agreements.
Change in Control
No change in control in the Issuer has occurred since the beginning of its last fiscal year.
Warrants and Options
As of the date of this Prospectus, there are no existing or planned stock options / stock warrant
offerings.
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DESCRIPTION OF DEBT
The Company is subject to covenants under agreements evidencing or governing its outstanding
indebtedness, including but not limited to those set forth in loan agreements with local banks and financial
institutions. Under these loans, the Company undertook to maintain a Current Ratio of not less than 0.5:1 and Debt-Equity Ratio not exceeding 75:25.
The Company does not believe that these covenants will impose constraints on its ability to finance its
capital expenditure program or, more generally, to develop its business and enhance its financial
performance. The Company is in full compliance with the covenants required by the creditors.
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TAXATION The statements herein regarding taxation are based on the laws in force as of the date of this Prospectus and are subject to any changes in law occurring after such date, which changes could be made on a retroactive basis. The following summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase, own or dispose of the Bonds and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities or commodities) may be subject to special rules. Prospective purchasers of the Bonds are advised to consult their own tax advisers concerning the overall tax consequences of their ownership of the Bonds.
Philippine Taxation As used in this section, the term ―non-resident alien‖ means an individual whose residence is not within the
Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within the
Philippines for an aggregate period of more than 180 days during any calendar year is considered a ―non-resident alien doing business in the Philippines‖; however, a non-resident alien who is actually within
the Philippines for an aggregate period of 180 days or less during any calendar year may be considered a ―non-resident alien not engaged in trade or business within the Philippines‖. A ―non-resident foreign
corporation‖ is a foreign corporation not engaged in trade or business within the Philippines.
TAXATION OF INTEREST
The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine sourced
income subject to Philippine income tax. Interest income derived by Philippine citizens and alien resident individuals from the Bonds is thus subject to income tax, which is withheld at source, at the rate of 20%
based on the gross amount of interest. Generally, interest on the Bonds received by non-resident aliens
engaged in trade or business in the Philippines is subject to a 20% final withholding tax while that received by non-resident aliens not engaged in trade or business is subject to a final withholding tax rate of 25%.
Interest income received by domestic corporations and resident foreign corporations from the Bonds is subject to a final withholding tax rate of 20%. Interest income received by non-resident foreign
corporations from the Bonds is subject to a 30% final withholding tax.
The foregoing rates are subject to further reduction by any applicable tax treaties in force between the
Philippines and the country of residence of the non-resident owner. Most tax treaties to which the Philippines is a party generally provide for a reduced tax rate of 15% in cases where the interest which
arises in the Philippines is paid to a resident of the other contracting state. However, most tax treaties also
provide that reduced withholding tax rates shall not apply if the recipient of the interest who is a resident of the other contracting state, carries on business in the Philippines through a permanent establishment and
the holding of the relevant interest-bearing instrument is effectively connected with such permanent establishment.
TAX-EXEMPT STATUS OR ENTITLEMENT TO PREFERENTIAL TAX RATE
Bondholders who are exempt from or are not subject to final withholding tax on interest income or entitled to be taxed at a preferential rate may claim such exemption or avail of such preferential rate by submitting
the necessary documents. Said Bondholder shall submit the following requirements: (i) certified true copy of the tax exemption certificate, ruling or opinion issued by the BIR, confirming the exemption or
preferential rate; (ii) with respect to tax treaty relief, a certified true copy of the ruling issued by the
International Tax Affairs Division of the BIR, confirming that the preferential tax treatment sought by the Bondholder is applicable; (iii) a duly notarized undertaking to immediately notify the Issuer, the Registrar
and the Paying Agent of any suspension or revocation of the tax exemption certificate, certificate, ruling or
174
opinion issued by the BIR, executed using the prescribed form, with a declaration and warranty of its tax
exempt status or entitlement to a preferential tax rate, and an agreement to indemnify and hold the Issuer, the Registrar and the Paying Agent free and harmless against any claims, actions, suits, and liabilities
resulting from the non-withholding or incorrect withholding of the required tax; and (iv) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or
other authorities; provided, that the Issuer, the Registrar and the Paying Agent shall have the exclusive
discretion to decide whether the documents submitted are sufficient for purposes of applying the exemption or the reduced rate being claimed by the Bondholder on the interest payments to such
Bondholder; provided further that, all sums payable by the Issuer to tax-exempt entities shall be paid in full without deductions for taxes, duties, assessments, or government charges, subject to the submission by
the Bondholder claiming the benefit of any exemption of the required documents and of additional reasonable evidence of such tax-exempt status to the Registrar.
The foregoing requirements shall be submitted, (i) in respect of an initial issuance of Bonds, to the underwriters or selling agents who shall then forward the same with the Application to Purchase to the
Registrar; or (ii) in respect of a transfer from a Bondholder to a purchaser, to the Registrar within three days from settlement date.
VALUE-ADDED TAX
Gross receipts arising from the sale of the Bonds in the Philippines by dealers in securities shall be subject to a 12% value-added tax.
GROSS RECEIPTS TAX
Bank and non-bank financial intermediaries performing quasi-banking functions are subject to gross receipts tax on gross receipts derived from sources within the Philippines in accordance with the following
schedule:
On interest, commissions and discounts from lending activities as well as income from financial leasing, on
the basis of remaining maturities of instruments from which such receipts are derived:
Maturity period is five years or less 5% Maturity period is more than five years 1%
Non-bank financial intermediaries not performing quasi-banking functions doing business in the Philippines are likewise subject to gross receipts tax. Gross receipts of such entities derived from sources within the
Philippines from interests, commissions and discounts from lending activities are taxed in accordance with the following schedule based on the remaining maturities of the instruments from which such receipts are
derived:
Maturity period is five years or less 5%
Maturity period is more than five years 1%
In case the maturity period of the instruments held by banks, non-bank financial intermediaries performing quasi-banking functions and non-bank financial intermediaries not performing quasi-banking functions is
shortened through pre-termination, then the maturity period shall be reckoned to end as of the date of
pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly.
Net trading gains realized within the taxable year on the sale or disposition of the Bonds by banks and nonbank financial intermediaries performing quasi-banking functions shall be taxed at 7%.
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DOCUMENTARY STAMP TAX
A documentary stamp tax is imposed upon the issuance of debt instruments issued by Philippine companies, such as the Bonds, at the rate of P1.00 for each P200, or fractional part thereof, of the issue price of such
debt instruments; provided that, for debt instruments with terms of less than one year, the documentary
stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to 365 days.
The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted, or
transferred, when the obligation or right arises from Philippine sources, or the property is situated in the Philippines. Any applicable documentary stamp taxes on the original issue shall be paid by the Issuer for its
own account.
TAXATION ON SALE OR OTHER DISPOSITION OF THE BONDS
Income Tax
Any gain realized from the sale, exchange or retirement of bonds will, as a rule, form part of the gross income of the sellers, for purposes of computing the relevant taxable income subject to the regular rates of
32%, 25%, or 30%, as the case may be. If the bonds are sold by a seller, who is an individual and who is not a dealer in securities, who has held the bonds for a period of more than 12 months prior to the sale,
only 50% of any capital gain will be recognized and included in the sellers‗ gross taxable income.
However, under the Tax Code, any gain realized from the sale, exchange or retirement of bonds, debentures
and other certificates of indebtedness with an original maturity date of more than five years (as measured from the date of issuance of such bonds, debentures or other certificates of indebtedness) shall not be
subject to income tax.
Moreover, any gain arising from such sale, regardless of the original maturity date of the bonds, may be
exempt from income tax pursuant to various income tax treaties to which the Philippines is a party, and subject to procedures prescribed by the Bureau of Internal Revenue for the availment of tax treaty benefits.
Estate and Donor‘s Tax
The transfer by a deceased person, whether a Philippine resident or a non-Philippine resident, to his heirs of the Bonds shall be subject to an estate tax which is levied on the net estate of the deceased at progressive
rates ranging from 5% to 20%, if the net estate is over P200,000. A Bondholder shall be subject to donor‗s tax based on the net gift on the transfer of the Bonds by gift at either (i) 30%, where the donee or
beneficiary is a stranger, or (ii) at progressive rates ranging from 2% to 15% if the net gifts made during the calendar year exceed P100,000 and where the donee or beneficiary is not a stranger. For this purpose, a
stranger is a person who is not a: (a) brother, sister (whether by whole or half-blood), spouse, ancestor or
lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth degree of relationship.
The estate or donor‗s taxes payable in the Philippines may be credited with the amount of any estate or
donor's taxes imposed by the authority of a foreign country, subject to limitations on the amount to be
credited, and the tax status of the donor.
The estate tax and the donor‗s tax, in respect of the Bonds, shall not be collected (a) if the deceased, at the time of death, or the donor, at the time of the donation, was a citizen and resident of a foreign country
which, at the time of his death or donation, did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) if the
176
laws of the foreign country of which the deceased or donor was a citizen and resident, at the time of his
death or donation, allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in the foreign
country.
In case the Bonds are transferred for less than an adequate and full consideration in money or money's
worth, the amount by which the fair market value of the Bonds exceeded the value of the consideration may be deemed a gift and may be subject to donor‗s taxes.
Documentary Stamp Tax
No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds, trading the
Bonds in a secondary market or through an exchange. However, if the transfer constitutes a renewal of the
Bonds, documentary stamp tax is payable anew.
177
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE ISSUER
Audited Financial Statements as at and for the years ended 31 December 2011, 2012 and 2013 for the Group and the Issuer Independent Auditors‘ Report SM Investments Corporation and Subsidiaries Consolidated Balance Sheets as at 31 December 2013 and 2012 SM Investments Corporation and Subsidiaries Consolidated Statements of Income for the years ended
31 December 2011, 2012 and 2013 SM Investments Corporation and Subsidiaries Consolidated Statements of Comprehensive Income for
the years ended 31 December 2011, 2012 and 2013 SM Investments Corporation and Subsidiaries Consolidated Statements of Changes in Equity for the
years ended 31 December 2011, 2012 and 2013 SM Investments Corporation and Subsidiaries Consolidated Statements of Cash Flows for the years ended 31 December 2011, 2012 and 2013 SM Investments Corporation and Subsidiaries Notes to Financial Statements
SM Investments Corporation and Subsidiaries
Consolidated Financial StatementsDecember 31, 2013 and 2012and Years Ended December 31, 2013, 2012 and 2011
and
Independent Auditors’ Report
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INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of DirectorsSM Investments Corporation
We have audited the accompanying consolidated financial statements of SM Investments Corporationand Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2013 and 2012,and the consolidated statements of income, statements of comprehensive income, statements ofchanges in equity and statements of cash flows for each of the three years in the period endedDecember 31, 2013, and a summary of significant accounting policies and other explanatoryinformation.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with Philippine Financial Reporting Standards, and for such internal controlas management determines is necessary to enable the preparation of the consolidated financialstatements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on ouraudits. We conducted our audits in accordance with Philippine Standards on Auditing. Thosestandards require that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free from materialmisstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresin the consolidated financial statements. The procedures selected depend on the auditors’ judgment,including the assessment of the risks of material misstatement of the consolidated financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the entity’s preparation and fair presentation of the consolidated financial statements inorder to design audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity’s internal control. An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.
SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines
Tel: (632) 891 0307Fax: (632) 819 0872ey.com/ph
BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015
A member firm of Ernst & Young Global Limited
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- 2 -
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, thefinancial position of SM Investments Corporation and Subsidiaries as at December 31, 2013 and 2012,and their financial performance and their cash flows for each of the three years in the period endedDecember 31, 2013 in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Belinda T. Beng HuiPartnerCPA Certificate No. 88823SEC Accreditation No. 0923-AR-1 (Group A), March 25, 2013, valid until March 24, 2016Tax Identification No. 153-978-243BIR Accreditation No. 08-001998-78-2012, June 19, 2012, valid until June 18, 2015PTR No. 4225152, January 2, 2014, Makati City
March 3, 2014
A member firm of Ernst & Young Global Limited
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SM INVESTMENTS CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Amounts in Thousands)
December 312013 2012
ASSETSCurrent AssetsCash and cash equivalents (Notes 7, 29 and 30) P=50,209,657 P=60,714,720Time deposits and short-term investments (Notes 8, 29 and 30) 28,912,650 29,090,335Investments held for trading and sale (Notes 9, 29 and 30) 1,118,980 2,854,541Receivables (Notes 10, 29 and 30) 26,637,734 16,365,552Merchandise inventories - at cost (Note 23) 13,232,308 13,402,762Other current assets (Notes 11, 29 and 30) 42,827,624 23,458,208 Total Current Assets 162,938,953 145,886,118Noncurrent AssetsAvailable-for-sale investments (Notes 12, 29 and 30) 16,499,092 16,912,646Investments in shares of stock of associates and joint ventures (Note 13) 138,994,366 128,453,744Time deposits (Notes 8, 29 and 30) 27,080,950 29,432,850Property and equipment (Note 14) 18,323,380 17,186,517Investment properties (Notes 15 and 20) 192,609,189 149,970,690Land and development (Note 16) 25,666,930 30,197,862Intangibles (Note 17) 20,255,055 15,354,200Deferred tax assets - net (Note 27) 2,172,799 642,105Other noncurrent assets (Notes 17, 29 and 30) 28,453,455 27,767,236 Total Noncurrent Assets 470,055,216 415,917,850
P=632,994,169 P=561,803,968
LIABILITIES AND EQUITYCurrent LiabilitiesBank loans (Notes 18, 22, 29 and 30) P=27,588,259 P=31,793,975Accounts payable and other current liabilities (Notes 19, 29 and 30) 68,088,327 57,865,876Income tax payable 1,612,784 1,474,045Current portion of long-term debt (Notes 20, 29 and 30) 34,566,619 13,859,558Dividends payable (Notes 29 and 30) 210,189 97,282 Total Current Liabilities 132,066,178 105,090,736Noncurrent LiabilitiesLong-term debt - net of current portion (Notes 15, 20, 22, 29 and 30) 175,589,418 174,532,871Derivative liabilities (Notes 29 and 30) 159,974 244,330Deferred tax liabilities - net (Note 27) 6,970,527 4,542,918Tenants’ deposits and others (Notes 15, 26, 29 and 30) 17,967,224 15,748,135 Total Noncurrent Liabilities 200,687,143 195,068,254 Total Liabilities 332,753,321 300,158,990Equity Attributable to Owners of the ParentCapital stock (Note 21) 7,962,723 6,229,746Additional paid-in capital (Note 21) 57,799,360 42,858,920Equity adjustments from common control transactions (Note 21) (2,584,210) (2,332,796)Cost of Parent common shares held by subsidiaries (Note 21) (25,386) (125,906)Cumulative translation adjustment of a subsidiary 1,233,177 266,915Remeasurement loss on defined benefit asset/obligation (Note 26) (195,074) –Net unrealized gain on available-for-sale investments (Notes 12 and 13) 7,338,500 11,718,559Retained earnings (Note 21): Appropriated 27,000,000 35,000,000 Unappropriated 120,904,727 94,458,694 Total Equity Attributable to Owners of the Parent 219,433,817 188,074,132Non-controlling Interests 80,807,031 73,570,846 Total Equity 300,240,848 261,644,978
P=632,994,169 P=561,803,968
See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Amounts in Thousands, Except Per Share Data)
Years Ended December 312013 2012 2011
REVENUESales: Merchandise P=180,873,042 P=158,888,415 P=148,182,071 Real estate 21,242,138 22,499,679 17,215,075Rent (Notes 15, 22 and 28) 27,929,390 24,695,579 20,832,729Equity in net earnings of associates and joint ventures
(Note 13) 13,602,269 9,042,034 6,415,424Cinema ticket sales, amusement and others 4,945,795 4,824,228 4,138,053Management and service fees (Note 22) 1,437,561 1,112,302 880,679Gain on sale of available-for-sale investments and fair
value changes on investments held for trading - net(Notes 9, 12 and 30) 141,163 2,055 44,368
Dividend income (Note 22) 883,494 628,385 368,919Others 2,237,952 2,184,597 1,838,330
253,292,804 223,877,274 199,915,648COST AND EXPENSESCost of sales: Merchandise (Note 23) 138,720,368 117,896,688 112,192,756 Real estate 12,243,534 14,124,779 10,289,007Selling, general and administrative expenses (Note 24) 51,043,797 44,978,822 40,412,750
202,007,699 177,000,289 162,894,513
OTHER INCOME (CHARGES)Interest expense (Notes 25 and 29) (10,943,401) (10,811,736) (8,836,013)Interest income (Note 25) 3,709,484 4,416,746 4,274,640Gain on disposal of investments and properties - net
(Notes 15) 546,552 1,301,888 2,623,864Gain (loss) on fair value changes on derivatives - net
(Notes 20 and 30) (997,576) (1,403,411) 366,154Foreign exchange gain - net (Note 29) 59,411 565,132 242,862
(7,625,530) (5,931,381) (1,328,493)
INCOME BEFORE INCOME TAX 43,659,575 40,945,604 35,692,642
PROVISION FOR (BENEFIT FROM) INCOME TAX(Note 27)
Current 7,367,602 6,453,836 5,534,187Deferred (1,947,105) 91,250 (39,369)
5,420,497 6,545,086 5,494,818
NET INCOME P=38,239,078 P=34,400,518 P=30,197,824
Attributable toOwners of the Parent (Note 31) 27,445,682 P=24,674,381 P=21,224,592Non-controlling interests 10,793,396 9,726,137 8,973,232
P=38,239,078 P=34,400,518 P=30,197,824
Earnings Per Common Share (Note 31)Basic P=34.85 P=31.76 P=27.57Diluted 34.85 31.76 27.55
See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in Thousands)
Years Ended December 312013 2012 2011
NET INCOME P=38,239,078 P=34,400,518 P=30,197,824
OTHER COMPREHENSIVE INCOME (LOSS)Items that will be reclassified to profit or loss in
subsequent periodsShare in unrealized gain (loss) on available-for-sale
investments of associates - net (Notes 12 and 13) (2,756,754) 1,514,343 440,127Net unrealized gain (loss) on available-for-sale investments
(Note 12) 2,290,960 4,753,031 (434,299)Cumulative translation adjustment of a subsidiary 892,452 (205,702) 177,178Income tax relating to items to be reclassified to profit or
loss in subsequent periods (2,841,627) 3,772 207,106(2,414,969) 6,065,444 390,112
Items not to be reclassified to profit or loss insubsequent periods
Remeasurement loss on defined benefit obligation(Note 26) (201,304) – –
Income tax relating to items to be reclassified to profit orloss in subsequent periods 60,391 – –
(140,913) – –
TOTAL COMPREHENSIVE INCOME P=35,683,196 P=40,465,962 P=30,587,936
Attributable toOwners of the Parent P=23,836,811 P=29,223,730 P=21,573,362Non-controlling interests 11,846,385 11,242,232 9,014,574
P=35,683,196 P=40,465,962 P=30,587,936
See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(Amounts in Thousands, Except Per Share Data)
Equity Attributable to Owners of the Parent
Capital StockAdditional
Paid-in Capital
EquityAdjustments
from CommonControl
Transactions
Cost of ParentCommon
Shares Heldby Subsidiaries
CumulativeTranslationAdjustment
of a Subsidiary
Net UnrealizedGain on
Available-for-SaleInvestments
Remeasurementloss on defined
benefit asset /obligation
AppropriatedRetainedEarnings
UnappropriatedRetainedEarnings Total
Non-controllingInterests
TotalEquity
Balance at December 31, 2012 P=6,229,746 P=42,858,920 (P=2,332,796) (P=125,906) P=266,915 P=11,718,559 P=– P=35,000,000 P=94,458,694 P=188,074,132 P=73,570,846 P=261,644,978Net income for the year – – – – – – – – 27,445,682 27,445,682 10,793,396 38,239,078Other comprehensive income – – – – 966,262 (4,380,059) (195,074) – – (3,608,871) 1,052,989 (2,555,882)Total comprehensive income for the year – – – – 966,262 (4,380,059) (195,074) – 27,445,682 23,836,811 11,846,385 35,683,196Issuance of Parent common shares (Note 21) 156,404 14,802,328 – – – – – – – 14,958,732 – 14,958,732Disposal of Parent common shares held by subsidiaries (Note 21) – 138,112 – 100,520 – – – – – 238,632 – 238,632Cash dividends - P=11.80 a share (Note 21) – – – – – – – – (7,423,076) (7,423,076) – (7,423,076)Stock dividends (Note 21) 1,576,573 – – – – – – – (1,576,573) – – –Reversal of appropriation during the year (Note 21) – – – – – – – (8,000,000) 8,000,000 – – –Increase in non-controlling interests – – – – – – – – – – 1,830,497 1,830,497Common control transactions (Notes 5 and 21) – – (251,414) – – – – – – (251,414) (2,083,843) (2,335,257)Cash dividends received by non-controlling interests – – – – – – – – – – (4,356,854) (4,356,854)Balance at December 31, 2013 P=7,962,723 P=57,799,360 (P=2,584,210) (P=25,386) P=1,233,177 P=7,338,500 (P=195,074) P=27,000,000 P=120,904,727 P=219,433,817 P=80,807,031 P=300,240,848
Balance at December 31, 2011 P=6,121,640 P=35,536,615 (P=2,332,796) (P=263,195) P=428,058 P=7,008,067 P=– P=5,000,000 P=106,167,942 P=157,666,331 P=64,620,530 P=222,286,861Net income for the year – – – – – – – – 24,674,381 24,674,381 9,726,137 34,400,518Other comprehensive income – – – – (161,143) 4,710,492 – – – 4,549,349 1,516,095 6,065,444Total comprehensive income for the year – – – – (161,143) 4,710,492 – – 24,674,381 29,223,730 11,242,232 40,465,962Issuance of Parent common shares (Note 21) 108,106 7,216,451 – – – – – – – 7,324,557 – 7,324,557Disposal of Parent common shares held by subsidiaries (Note 21) – 105,854 – 137,289 – – – – – 243,143 52,402 295,545Cash dividends - P=10.40 a share (Note 21) – – – – – – – – (6,383,629) (6,383,629) – (6,383,629)Appropriation during the year (Note 21) – – – – – – – 30,000,000 (30,000,000) – – –Decrease in non-controlling interests – – – – – – – – – – (235,336) (235,336)Cash dividends received by non-controlling interests – – – – – – – – – – (2,108,982) (2,108,982)Balance at December 31, 2012 P=6,229,746 P=42,858,920 (P=2,332,796) (P=125,906) P=266,915 P=11,718,559 P=– P=35,000,000 P=94,458,694 P=188,074,132 P=73,570,846 P=261,644,978
Balance at December 31, 2010 P=6,119,826 P=35,456,200 (P=2,332,796) (P=263,195) P=289,260 P=6,798,095 P=– P=5,000,000 P=90,475,674 P=141,543,064 P=56,274,415 P=197,817,479Net income for the year – – – – – – – – 21,224,592 21,224,592 8,973,232 30,197,824Other comprehensive income – – – – 138,798 209,972 – – – 348,770 41,342 390,112Total comprehensive income for the year – – – – 138,798 209,972 – – 21,224,592 21,573,362 9,014,574 30,587,936Issuance of Parent common shares 1,814 80,415 – – – – – – – 82,229 – 82,229Cash dividends - P=9.04 a share – – – – – – – – (5,532,324) (5,532,324) – (5,532,324)Increase in non-controlling interests – – – – – – – – – – 1,562,422 1,562,422Cash dividends received by non-controlling interests – – – – – – – – – – (2,230,881) (2,230,881)Balance at December 31, 2011 P=6,121,640 P=35,536,615 (P=2,332,796) (P=263,195) P=428,058 P=7,008,067 P=– P=5,000,000 P=106,167,942 P=157,666,331 P=64,620,530 P=222,286,861
See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in Thousands)
Years Ended December 312013 2012 2011
CASH FLOWS FROM OPERATING ACTIVITIESIncome before income tax P=43,659,575 P=40,945,604 P=35,692,642Adjustments for: Interest expense (Note 25) 10,943,401 10,811,736 8,836,013 Depreciation and amortization (Notes 14, 15 and 24) 9,513,584 8,057,871 7,193,100 Equity in net earnings of associates (Note 13) (13,602,269) (9,042,034) (6,415,424) Interest income (Note 25) (3,709,484) (4,416,746) (4,274,640) Gain on disposal of investments and properties - net
(Notes 15 and 21) (546,552) (1,301,888) (2,623,864) Loss (gain) on fair value changes on derivatives - net
(Note 30) 997,576 1,403,411 (366,154) Gain on available-for-sale investments and fair value
changes on investments held for trading - net(Notes 12 and 31) (141,163) (2,055) (44,368)
Dividend income (883,494) (628,385) (368,919) Unrealized foreign exchange loss (gain) 1,213,565 (93,811) 190,586 Provision for (reversal of) impairment loss
(Notes 10, 11 and 13) (1,018,156) (2,743,711) 72,567Income before working capital changes 46,426,583 42,989,992 37,891,539Decrease (increase) in: Land and development (20,763,530) (13,700,945) (14,042,798) Merchandise inventories 870,608 33,694 (2,950,553) Receivables (2,268,025) (1,809,471) (1,861,758) Other current assets (6,220,848) (6,043,200) (405,838)Increase (decrease) in: Accounts payable and other current liabilities 14,279,355 13,469,449 4,362,657 Tenants’ deposits and others 3,600,244 2,390,156 1,300,123 Defined benefit liability (Note 27) 126,011 (48,178) (101,787)Net cash generated from operations 36,050,398 37,281,497 24,191,585Income tax paid (7,220,176) (6,314,700) (5,390,172)Net cash provided by operating activities 28,830,222 30,966,797 18,801,413
CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sale of: Investments in shares of stock of associates 1,108,036 1,870,174 289,416 Property and equipment 374,196 161,834 265,060 Investment properties 8,596 236,210 141,361 Available-for-sale investments and held for trading 1,646,038 2,233,812 84,604Additions to: Investment properties (Note 15) (25,885,092) (27,932,103) (21,140,911) Investments in shares of stock of associates
and joint venture (5,492,653) (28,261,006) (7,109,378) Property and equipment (Note 14) (5,131,795) (6,614,570) (4,791,062) Available-for-sale investments – (3,237,646) (1,619,334) Time deposits – (23,005,702) –Decrease in: Other noncurrent assets 4,817,513 1,984,796 1,923,878 Pledged time deposits 5,572,971 – –Interest received 3,924,505 4,208,464 4,152,181Acquisition of subsidiaries, net of cash acquired (Note 5) (16,750,597) – –Dividends received 4,758,493 795,953 1,910,255Net cash used in investing activities (31,049,789) (77,559,784) (25,893,930)
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Years Ended December 312013 2012 2011
CASH FLOWS FROM FINANCING ACTIVITIESAvailments of: Long-term debt P=66,196,550 P=71,638,384 P=27,594,082 Bank loans 60,249,390 62,039,335 23,428,370Payments of: Long-term debt (47,783,598) (14,495,495) (21,874,200) Bank loans (70,185,745) (55,910,180) (18,228,800) Interest (11,608,952) (9,918,610) (8,747,952) Dividends (13,243,597) (8,421,026) (7,761,796)Proceeds from issuance of new common shares (Note 21) 6,424,666 6,329,678 –Disposal of Parent common shares held by subsidiaries
(Note 21) 100,520 295,546 –Increase (decrease) in non-controlling interests 1,830,497 (235,336) 1,562,422Net cash provided by (used in) financing activities (8,020,269) 51,322,296 (4,027,874)
NET INCREASE (DECREASE) IN CASHAND CASH EQUIVALENTS (10,239,836) 4,729,309 (11,120,391)
EFFECT OF EXCHANGE RATE CHANGESON CASH AND CASH EQUIVALENTS (265,227) (64,911) 209,703
CASH AND CASH EQUIVALENTSAT BEGINNING OF YEAR 60,714,720 56,050,322 66,961,010
CASH AND CASH EQUIVALENTSAT END OF YEAR P=50,209,657 P=60,714,720 P=56,050,322
See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
SM Investments Corporation (SMIC or Parent Company) was incorporated in the Philippines onJanuary 15, 1960. On June 3, 2009, the Philippine Securities and Exchange Commission (SEC)approved the amendment of SMIC’s articles of incorporation for the extension of the Company’scorporate life for another 50 years from January 15, 2010. Its registered office address is 10thFloor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City 1300.
The Parent Company and its subsidiaries (collectively referred to as the Group), and its associatesare involved primarily in the property, retail and financial services and other businesses.
The Parent Company’s shares of stock are publicly traded in the Philippine Stock Exchange(PSE).
The accompanying consolidated financial statements were authorized for issue by the Board ofDirectors (BOD) as approved and recommended for approval by the Audit Committee onMarch 3, 2014.
2. Basis of Preparation and Statement of Compliance
Basis of PreparationThe consolidated financial statements of the Group have been prepared on a historical cost basis,except for derivative financial instruments, investments held for trading and available-for-sale(AFS) investments which have been measured at fair value. The consolidated financial statementsare presented in Philippine peso, which is the Parent Company’s functional and presentationcurrency under Philippine Financial Reporting Standards (PFRS). All values are rounded to thenearest thousand, except when otherwise indicated.
Statement of ComplianceThe consolidated financial statements have been prepared in compliance with PFRS. PFRSincludes statements named PFRS and Philippine Accounting Standards (PAS), including theinterpretations issued by the Philippine Financial Reporting Standards Council (PFRSC).
Basis of ConsolidationThe consolidated financial statements comprise the financial statements of the Parent Companyand all of its subsidiaries as at December 31, 2013. Control is achieved when the Group isexposed, or has rights, to variable returns from its involvement with the investee and has theability to affect to those returns through its power over the investee. Specifically, the Groupcontrols an investee, if and only if, the Group has:
§ Power over the investee (i.e. existing rights that give it the current ability to direct the relevantactivities of the investee)
§ Exposure, or rights, to variable returns from its involvement with the investee, and§ The ability to use its power over the investee to affect its returns.
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When the Group has less than a majority of the voting or similar rights of an investee, the Groupconsiders all relevant facts and circumstances in assessing whether it has power over an investee,including:
§ The contractual arrangement with the other vote holders of the investee§ Rights arising from other contractual arrangements, and§ The Group’s voting rights and potential voting rights.
The Group re-assesses whether or not it controls an investee if facts and circumstances indicatethat there are changes to one or more of the three elements of control. Consolidation of asubsidiary begins when the Group obtains control over the subsidiary and ceases when the Grouploses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired ordisposed of during the year are included in the statement of comprehensive income from the datethe Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (OCI) are attributed to theequity holders of the parent of the Group and to the non-controlling interests, even if this results inthe non-controlling interests having a deficit balance. When necessary, adjustments are made tothe financial statements of subsidiaries to bring their accounting policies into line with the Group’saccounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flowsrelating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as anequity transaction. If the Group loses control over a subsidiary, it:
§ Derecognizes the assets (including goodwill) and liabilities of the subsidiary;§ Derecognizes the carrying amount of any non-controlling interest;§ Derecognizes the cumulative translation differences recorded in equity;§ Recognizes the fair value of the consideration received;§ Recognizes the fair value of any investment retained;§ Recognizes any surplus or deficit in profit or loss;§ Reclassifies the Parent Company’s share of components previously recognized in other
comprehensive income to profit or loss or retained earnings, as appropriate.
The consolidated financial statements include the accounts of the Parent Company and thefollowing subsidiaries. The subsidiaries listed below were all incorporated in the Philippines.
Percentage of Ownership2013 2012
Company Principal Activities Direct Indirect Direct IndirectPropertySM Prime Holdings, Inc. (SM Prime) and
Subsidiaries Real estate development 51 – 22 41 SM Land, Inc. (SM Land) and
Subsidiaries*: Real estate development – – 67 – SM Development Corporation (SMDC)
and Subsidiaries Real estate development – 100 – 65 Magenta Legacy, Inc. (Magenta) Real estate development – 100 – 99 Associated Development Corporation Real estate development – 100 – 100 Highlands Prime, Inc. (HPI) Real estate development – 100 – – Summerhills Home Development Corp.
(SHDC) Real estate development – 100 – – CHAS Realty and Development
Corporation and Subsidiaries Real estate development – 100 – – Costa del Hamilo, Inc. Real estate development – 100 – 100
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Percentage of Ownership2013 2012
Company Principal Activities Direct Indirect Direct Indirect Prime Metro Estate, Inc. (PMI) Real estate development – 100 10 90 Rappel Holdings, Inc. (Rappel) and
Subsidiaries Real estate development – 100 100 – SM Arena Complex Corporation Conventions – 100 100 – SM Hotels and Conventions Corp. (SM
Hotels) and Subsidiaries Hotel and tourism – 100 100 – Tagaytay Resort Development Corporation Real estate development – 100 33 25Mountain Bliss Resort and Development
Corporation (Mt. Bliss) and Subsidiaries Real estate development 100 – 100 –Belleshares Holdings, Inc. (formerly SM
Commercial Properties, Inc.) andSubsidiaries Real estate development 59 40 59 –
Intercontinental Development Corporation(ICDC) Real estate development 97 3 72 28
Prime Central, Inc. (Prime Central) andSubsidiaries Real estate development 100 – 100 –
Bellevue Properties, Inc. Real estate development 62 – 62 –Net Group (see Note 5) Real estate development 90 – – –Sto. Roberto Marketing Corp. Real estate development 100 – – –Nagtahan Property Holdings, Inc. (formerly
AD Farming) Real estate development 100 – 100 –
RetailSM Retail, Inc. (SM Retail) and Subsidiaries Retail 100 – 100 –
OthersPrimebridge Holdings, Inc. (Primebridge) Investment 80 20 80 20Asia Pacific Computer Technology Center, Inc. Education 52 – 52 –Multi-Realty Development Corporation
(MRDC) Investment 91 – 91 –Henfels Investments Corp. Investment 99 – 99 –
*On October 10, 2013, SM Land was merged with SM Prime via a share-for-share swap
Material partly-owned SubsidiaryThe non-controlling interests of SM Prime is material to the Group. Non-controlling interest holds49% and 51% as at December 31, 2013 and 2012, respectively.
The summarized financial information of SM Prime are provided below. This information isbased on amounts before inter-company eliminations.
Summarized consolidated statements of financial position:
December 312013 2012
(In Thousands)
Total current assets P=85,685,323 P=68,262,333Total noncurrent assets 249,898,359 216,389,783Total current liabilities 56,882,069 47,892,141Total noncurrent liabilities 112,506,024 86,297,990Total equity P=166,195,589 P=150,461,985Attributable to:
Owners of the Parent P=84,759,750 P=94,791,051Non-controlling interests 81,435,839 55,670,934
P=166,195,589 P=150,461,985
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Summarized consolidated statements of income:
Years Ended December 312013 2012 2011
(In Thousands)
Revenue P=59,794,410 P=57,215,094 P=50,069,243Costs and expenses 35,658,865 35,145,277 30,771,982Other income (charges) (3,425,454) (1,635,923) (2,254,419)Income before income tax 20,710,091 20,433,894 17,042,842Provision for income tax 3,984,163 3,790,461 3,040,709Net income P=16,725,928 P=16,643,433 P=14,002,133Attributable to:Owners of the Parent P=8,530,223 P=10,485,363 P=8,821,344Non-controlling interests 8,195,705 6,158,070 5,180,789
P=16,725,928 P=16,643,433 P=14,002,133
Summarized consolidated statements of cash flows:
Years Ended December 312013 2012 2011
(In Thousands)
Operating P=22,184,513 P=6,587,695 P=11,623,633Investing (30,238,315) (20,527,706) (15,513,817)Financing 13,865,755 17,907,072 (3,158,723)Effect of exchante rate
changes on cash and cash equivalents 30,187 (13,005) 60,652Net increase (decrease)
in cash and cash equivalents P=5,842,140 P=3,954,056 (P=6,988,255)
3. Summary of Significant Accounting Policies, Changes and Improvements
The principal accounting adopted in the preparation of the consolidated financial statements are asfollows:
Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquidinvestments that are readily convertible to known amounts of cash with original maturities of threemonths or less from acquisition date and are subject to an insignificant risk of change in value.
Time Deposits and Short-term InvestmentsTime deposits and short-term investments are cash placements, shown under current assets, withoriginal maturities of more than three months but less than one year. Time deposits which willmature twelve months after the reporting period are presented under noncurrent assets.
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Determination of Fair ValueFair value is the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. The fair valuemeasurement is based on the presumption that the transaction to sell the asset or transfer theliability takes place either:
§ in the principal market for the asset or liability, or§ in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible to the Group.
The fair value of an asset or a liability is measured using the assumptions that market participantswould use when pricing the asset or liability, assuming that market participants act in theireconomic best interest.
A fair value measurement of a nonfinancial asset takes into account a market participant’s abilityto generate economic benefits by using the asset in its highest and best use or by selling it toanother market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for whichsufficient data are available to measure fair value, maximizing the use of relevant observableinputs and minimizing the use of unobservable inputs.
Assets and liabilities for which fair value is measured or disclosed in the consolidated financialstatements are categorized within the fair value hierarchy, described as follows, based on thelowest level input that is significant to the fair value measurement as a whole:
§ Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities;§ Level 2 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is directly or indirectly observable; and§ Level 3 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is unobservable.
For assets and liabilities that are recognized in the consolidated financial statements on a recurringbasis, the Group determines whether transfers have occurred between Levels in the hierarchy byre-assessing categorization (based on the lowest level input that is significant to the fair valuemeasurement as a whole) at the end of each reporting period.
The Group determines the policies and procedures for both recurring and non-recurring fair valuemeasurements. For the purpose of fair value disclosures, the Group has determined classes ofassets and liabilities on the basis of the nature, characteristics and risks of the asset or liability andthe level of the fair value hierarchy.
The Group recognizes transfers into and transfers out of fair value hierarchy levels by re-assessingcategorization (based on the lowest level input that is significant to the fair value measurement asa whole) as at the date of the event or change in circumstances that caused the transfer.
“Day 1” Difference. Where the transaction price in a non-active market is different from the fairvalue of other observable current market transactions in the same instrument or based on avaluation technique whose variables include only data from observable market, the Grouprecognizes the difference between the transaction price and fair value (a “Day 1” difference) in theconsolidated statement of income unless it qualifies for recognition as some other type of asset orliability. In cases where use is made of data which is not observable, the difference between the
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transaction price and model value is only recognized in the consolidated statement of incomewhen the inputs become observable or when the instrument is derecognized. For each transaction,the Group determines the appropriate method of recognizing the “Day 1” difference amount.
Financial Instruments - Initial Recognition and Subsequent Measurement
Date of Recognition. The Group recognizes a financial asset or a financial liability in theconsolidated balance sheets when it becomes a party to the contractual provisions of theinstrument. In the case of a regular way purchase or sale of financial assets, recognition andderecognition, as applicable, are done using settlement date accounting. Regular way purchases orsales are purchases or sales of financial assets that require delivery of assets within the periodgenerally established by regulation or convention in the market place. Derivatives are recognizedon a trade date basis.
Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fairvalue, which is the fair value of the consideration given (in case of an asset) or received (in case ofa liability). The initial measurement of financial instruments, except for those classified as fairvalue through profit or loss (FVPL), includes transaction cost.
Subsequent to initial recognition, the Group classifies its financial instruments in the followingcategories: financial assets and financial liabilities at FVPL, loans and receivables, HTMinvestments, AFS investments and other financial liabilities. The classification depends on thepurpose for which the instruments are acquired and whether they are quoted in an active market.Management determines the classification at initial recognition and, where allowed andappropriate, re-evaluates this classification at every reporting date.
Financial Assets and Liabilities at FVPL. Financial assets and liabilities at FVPL includefinancial assets and liabilities held for trading and financial assets and liabilities designated uponinitial recognition as at FVPL.
Financial assets and liabilities are classified as held for trading if they are acquired for the purposeof selling or repurchasing in the near term. Gains or losses on investments held for trading arerecognized in the consolidated statement of income under “Gain on sale of available-for-saleinvestments and fair value changes on investments held for trading - net” account. Interest incomeearned on investment held for trading are recognized in “Interest income” account in theconsolidated statement of income.
Financial assets and liabilities may be designated by management at initial recognition as FVPLwhen any of the following criteria is met:
§ the designation eliminates or significantly reduces the inconsistent treatment that wouldotherwise arise from measuring the assets and liabilities or recognizing gains or losses on adifferent basis; or
§ the assets and liabilities are part of a group of financial assets, financial liabilities or bothwhich are managed and their performance are evaluated on a fair value basis, in accordancewith a documented risk management or investment strategy; or
§ the financial instrument contains an embedded derivative, unless the embedded derivativedoes not significantly modify the cash flows or it is clear, with little or no analysis, that itwould not be separately recorded.
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The Group’s investments held for trading and derivative assets are classified as financial assets atFVPL, while the Group’s derivative liabilities arising from issuance of convertible bonds andderivative financial instruments with negative fair values are also included as financial liabilities atFVPL.
Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They are not entered into with theintention of immediate or short-term resale and are not designated as AFS investments or financialassets at FVPL.
After initial measurement, loans and receivables are subsequently measured at amortized costusing the effective interest method, less allowance for impairment. Amortized cost is calculatedby taking into account any discount or premium on acquisition and fees that are an integral part ofthe effective interest rate. Gains and losses are recognized in the consolidated statement ofincome when the loans and receivables are derecognized and impaired, as well as through theamortization process. Loans and receivables are included under current assets if realizability orcollectibility is within twelve months after the reporting period. Otherwise, these are classified asnoncurrent assets.
The Group’s cash and cash equivalents, time deposits and short-term investments (includingnoncurrent portion) and receivables (including noncurrent portion of receivables from real estatebuyers), advances and other receivables (included under “Other current assets” account),receivable from a related party and long-term notes (included under “Other noncurrrent assets”account) are classified under this category.
HTM Investments. HTM investments are quoted nonderivative financial assets with fixed ordeterminable payments and fixed maturities for which the Group’s management has the positiveintention and ability to hold to maturity. Where the Group sells other than an insignificant amountof HTM investments, the entire category would be tainted and reclassified as AFS investments.After initial measurement, these investments are measured at amortized cost using the effectiveinterest method, less impairment in value. Amortized cost is calculated by taking into account anydiscount or premium on acquisition and fees that are an integral part of the effective interest rate.Gains and losses are recognized in the consolidated statement of income when the HTMinvestments are derecognized or impaired, as well as through the amortization process. Assetsunder this category are classified as current assets if maturity is within twelve months fromreporting period. Otherwise, these are classified as noncurrent assets.
The Group’s investment in quoted Philippine government treasury bonds are classified under thiscategory.
AFS Investments. AFS investments are nonderivative financial assets that are designated underthis category or are not classified in any of the other categories. These are purchased and heldindefinitely, and may be sold in response to liquidity requirements or changes in marketconditions. Subsequent to initial recognition, AFS investments are carried at fair value in theconsolidated balance sheets. Changes in the fair value of such assets are reported as net unrealizedgain or loss on AFS investments in the consolidated statement of comprehensive income under“Net unrealized gain (loss) on available-for-sale investments” account until the investment isderecognized or the investment is determined to be impaired. On derecognition or impairment,the cumulative gain or loss previously reported in consolidated statement of comprehensiveincome is transferred to the consolidated statement of income. Interest earned on holding AFSinvestments are recognized in the consolidated statement of income using the effective interestmethod. Assets under this category are classified as current assets if expected to be disposed of
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within 12 months after the reporting period and as noncurrent assets if expected date of disposal ismore than 12 months after the reporting period.
The Group’s investments in shares of stock, bonds and corporate notes, redeemable preferredshares and club shares are classified under this category. The current portion is included under“Investments held for trading and sale” account in the consolidated balance sheets.
Other Financial Liabilities. This category pertains to financial liabilities that are not held fortrading or not designated as at FVPL upon the inception of the liability. These include liabilitiesarising from operations or borrowings.
Other financial liabilities are recognized initially at fair value and are subsequently carried atamortized cost, taking into account the impact of applying the effective interest method ofamortization (or accretion) for any related premium, discount and any directly attributabletransaction costs. Gains and losses on other financial liabilities are recognized in the consolidatedstatement of income when the liabilities are derecognized, as well as through the amortizationprocess.
The Group’s bank loans, accounts payable and other current liabilities, dividends payable,long-term debt and tenants’ deposits and others are classified under this category.
Classification of Financial Instruments Between Liability and EquityA financial instrument is classified as liability if it provides for a contractual obligation to:
§ deliver cash or another financial asset to another entity; or
§ exchange financial assets or financial liabilities with another entity under conditions that arepotentially unfavorable to the Group; or
§ satisfy the obligation other than by the exchange of a fixed amount of cash or another financialasset for a fixed number of own equity shares.
If the Group does not have an unconditional right to avoid delivering cash or another financialasset to settle its contractual obligation, the obligation meets the definition of a financial liability.
The components of issued financial instruments that contain both liability and equity elements areaccounted for separately, with the equity component being assigned the residual amount afterdeducting from the instrument as a whole the amount separately determined as the fair value of theliability component on the date of issue.
Redeemable Preferred SharesIn determining whether a preferred share is a financial liability or an equity instrument, the Groupassesses the particular rights attaching to the share to determine whether it exhibits thefundamental characteristic of a financial liability. A preferred share that provides for mandatoryredemption by the Group for a fixed or determinable amount at a fixed or determinable futuredate, or gives the holder the right to require the Group to redeem the instrument at or after aparticular date for a fixed or determinable amount, is a financial liability.
The redeemable preferred shares of the Group exhibit the characteristics of a financial liability andare thus recognized as a liability under “Long-term debt” account in the consolidated balancesheets, net of transaction costs. The corresponding dividends on the shares are charged as interestexpense in the consolidated statement of income.
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Transaction costs are amortized over the maturity period of the preferred shares using the effectiveinterest method.
Debt Issue CostsDebt issue costs are presented as reduction in long-term debt and are amortized over the terms ofthe related borrowings using the effective interest method.
Derivative Financial InstrumentsThe Group uses derivative financial instruments such as long-term currency swaps, foreigncurrency call options, interest rate swaps, foreign currency range options and non-deliverableforwards to hedge the risks associated with foreign currency and interest rate fluctuations.Derivative financial instruments, including bifurcated embedded derivatives, are initiallyrecognized at fair value on the date on which the derivative contract is entered into and aresubsequently re-measured at fair value. Derivatives are carried as assets when the fair value ispositive and as liabilities when the fair value is negative.
The Group’s derivative instruments provide economic hedges under the Group’s policies but arenot designated as accounting hedges. Consequently, any gains or losses arising from changes infair value are taken directly to profit or loss for the year.
Cash Flow Hedges. Cash flow hedges are hedges of the exposure to variability in cash flows thatis attributable to a particular risk associated with a recognized asset, liability or a highly probableforecast transaction and could affect the consolidated statements of income. Changes in the fairvalue of a hedging instrument that qualifies as a highly effective cash flow hedge are recognizedas “Cumulative translation adjustment of a subsidiary” in the consolicated statements ofcomprehensive income, whereas any hedge ineffectiveness is immediately recognized in theconsolidated statements of income under “Gain (loss) on fair value changes on derivatives”account (see Note 30).
Amounts taken to equity are transferred to the consolidated statements of income when the hedgedtransaction affects profit or loss, such as when the hedged financial income or financial expense isrecognized. However, if an entity expects that all or a portion of a loss recognized in othercomprehensive income will not be recovered in one or more future periods, it shall reclassify fromequity to profit or loss as a reclassification adjustment the amount that is not expected to berecovered.
Hedge accounting is discontinued prospectively when the hedge ceases to be highly effective.When hedge accounting is discontinued, the cumulative gains or losses on the hedging instrumentthat has been reported as “Cumulative translation adjustment of a subsidiary” is retained in theother comprehensive income until the hedged transaction impacts the consolidated statements ofincome. When the forecasted transaction is no longer expected to occur, any net cumulative gainsor losses previously reported in the consolidated statements of comprehensive income isrecognized immediately in the consolidated statements of income.
Other Derivative Instruments Not Accounted for as Hedges. Certain freestanding derivativeinstruments that provide economic hedges under the Company’s policies either do not qualify forhedge accounting or are not designated as accounting hedges. Changes in the fair values ofderivative instruments not designated as hedges are recognized immediately under “Gain (loss) onfair value changes on derivatives - net” account in the consolidated statements of income (seeNote 30). Derivatives are carried as assets when the fair value is positive and as liabilities whenthe fair value is negative.
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Embedded Derivative. An embedded derivative is a component of a hybrid (combined)instrument that also includes a nonderivative host contract with the effect that some of the cashflows of the combined instrument vary, in a way similar to a stand-alone derivative. The Groupassesses whether embedded derivatives are required to be separated from host contracts when theGroup first becomes a party to the contract. An embedded derivative is separated from the hostcontract and accounted for as a derivative if all of the following conditions are met: a) theeconomic characteristics and risks of the embedded derivative are not closely related to theeconomic characteristics and risks of the host contract; b) a separate instrument with the sameterms as the embedded derivative would meet the definition of a derivative; and c) the hybrid orcombined instrument is not recognized as at FVPL.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract thatsignificantly modifies the cash flows that otherwise would be required under the contract, in whichcase reassessment is required. The Group determines whether a modification to cash flows issignificant by considering the extent to which the expected future cash flows associated withembedded derivative, the host contract or both have changed and whether the change is significantrelative to the previously expected cash flows on the contract.
Options arising from the Group’s investment in bonds and convertible bonds payable are theGroup’s bifurcated embedded derivatives.
Derecognition of Financial Assets and Liabilities
Financial Assets. A financial asset (or, where applicable a part of a financial asset or part of agroup of similar financial assets) is derecognized when:
§ 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 anobligation 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) hastransferred substantially all the risks and rewards of the asset, or (b) has neither transferred norretained substantially all the risks and rewards of the asset, but has transferred control of theasset.
When the Group has transferred its rights to receive cash flows from an asset and has neithertransferred nor retained substantially all the risks and rewards of the asset, the asset is recognizedto the extent of the Group’s continuing involvement in the asset. Continuing involvement thattakes the form of a guarantee over the transferred asset is measured at the lower of originalcarrying amount of the asset and the maximum amount of consideration that the Group could berequired to repay.
Financial Liabilities. A financial liability is derecognized when the obligation under the liabilityis discharged or cancelled or has expired.
When an existing financial liability is replaced by another from the same lender on substantiallydifferent terms, or the terms of an existing liability are substantially modified, such modification istreated as a derecognition of the original liability and the recognition of a new liability, and thedifference in the respective carrying amounts is recognized in profit or loss.
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Impairment of Financial AssetsThe Group assesses at each reporting period whether a financial asset or a group of financial assetsis impaired. A financial asset or a group of financial assets is deemed to be impaired, if and onlyif, there is objective evidence of impairment as a result of one or more events that occurred afterthe initial recognition of the asset (an incurred loss event) and that loss event has an impact on theestimated future cash flows of the financial asset or a group of financial assets that can be reliablyestimated. Objective evidence of impairment may include indications that the borrower or a groupof borrowers is experiencing significant financial difficulty, default or delinquency in interest orprincipal payments, the probability that they will enter bankruptcy or other financialreorganization and where observable data indicate that there is measurable decrease in theestimated future cash flows, such as changes in arrears or economic conditions that correlate withdefaults.
Financial Assets Carried at Amortized Cost. The Group first assesses whether objective evidenceof impairment exists for financial assets that are individually significant, and individually orcollectively for financial assets that are not individually significant. If it is determined that noobjective evidence of impairment exists for an individually assessed financial asset, whethersignificant or not, the asset is included in a group of financial assets with similar credit riskcharacteristics and that group of financial assets is collectively assessed for impairment. Assetsthat are individually assessed for impairment and for which an impairment loss is or continues tobe recognized are not included in the collective impairment assessment.
If there is objective evidence that an impairment loss on loans and receivables carried at amortizedcost has been incurred, the amount of the loss is measured as the difference between the asset’scarrying amount and the present value of estimated future cash flows (excluding future creditlosses that have not been incurred) discounted at the financial asset’s original effective interestrate (i.e., the effective interest rate computed at initial recognition).
The carrying amount of the impaired asset shall be reduced through the use of an allowanceaccount. The amount of the loss shall be recognized in the consolidated statement of income.Interest income continues to be accrued on the reduced carrying amount based on the originaleffective interest rate of the asset. Loans and receivables together with the associated allowanceare written off when there is no realistic prospect of future recovery and all collateral, if any, hasbeen realized or has been transferred to the Group. If, in a subsequent period, the amount of theimpairment loss increases or decreases because of an event occurring after the impairment wasrecognized, the previously recognized impairment loss is increased or decreased by adjusting theallowance account. If a future write-off is later recovered, the recovery is recognized in theconsolidated statement of income to the extent of the carrying amount that would have beendetermined had no impairment loss been recognized.
Financial Assets Carried at Cost. If there is objective evidence that an impairment loss has beenincurred in an unquoted equity instrument that is not carried at fair value because its fair valuecannot be reliably measured, or on a derivative asset that is linked to and must be settled bydelivery of such an unquoted equity instrument, the amount of the loss is measured as thedifference between the asset’s carrying amount and the present value of estimated future cashflows discounted at the current market rate of return for a similar financial asset.
AFS Investments. The Group assesses at each reporting period whether there is objective evidencethat an investment or a group of investments is impaired. In the case of equity investmentsclassified as AFS investments, an objective evidence of impairment would include a significant orprolonged decline in the fair value of the investments below its cost. Significant decline in fairvalue is evaluated against the original cost of the investment, while prolonged decline is assessed
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against the periods in which the fair value has been below its original cost. Where there isevidence of impairment, the cumulative loss, measured as the difference between the acquisitioncost and the current fair value, less any impairment loss on that financial asset previouslyrecognized in the consolidated statement of income, is removed from the consolidated statementof comprehensive income and recognized in the consolidated statement of income. Impairmentlosses on equity investments are not reversed through the consolidated statement of income;increases in fair value after impairment are recognized directly in the consolidated statement ofcomprehensive income.
In the case of debt instruments classified as AFS investments, impairment is assessed based on thesame criteria as financial assets carried at amortized cost. Future interest income is based on thereduced carrying amount of the asset and is accrued based on the rate of interest used to discountfuture cash flows for the purpose of measuring impairment loss. Such accrual is recorded as partof “Interest income” account in the consolidated statement of income. If, in subsequent year, thefair value of a debt instrument increased and the increase can be objectively related to an eventoccurring after the impairment loss was recognized in the consolidated statement of income, theimpairment loss is reversed through the consolidated statement of income.
Offsetting Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount is reported in theconsolidated balance sheets if, and only if, there is a currently enforceable legal right to offset therecognized amounts and there is an intention to settle on a net basis, or to realize the asset andsettle the liability simultaneously. This is not generally the case with master netting agreements,and the related assets and liabilities are presented at gross in the consolidated balance sheets.
Merchandise InventoriesMerchandise inventories are valued at the lower of cost and net realizable value. Cost, whichincludes all costs directly attributable to acquisition, such as purchase price and transport costs, isprimarily determined using the weighted average method. Net realizable value is the estimatedselling price in the ordinary course of business, less estimated costs necessary to make the sale.
Land and Development and Condominium Units for SaleLand and development and condominium units for sale (included under “Other current assets”account in the consolidated balance sheets) are stated at the lower of cost and net realizable value.Net realizable value is the selling price in the ordinary course of business, less costs to completeand the estimated cost to make the sale. Cost includes those costs incurred for development andimprovement of the properties.
Land and development includes properties held for future development and properties beingconstructed for sale in the ordinary course of business, rather than to be held for rental or capitalappreciation. Cost incurred for the development and improvement of the properties includes thefollowing:
§ Land cost
§ Amounts paid to contractors for construction and development
§ Borrowing costs, planning and design costs, costs of site preparation, professional fees,property transfer taxes, construction overheads and other related costs.
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Investments in Shares of Stock of Associates and Joint VenturesAn associate is an entity over which the Group has significant influence. Significant influence isthe power to participate in the financial and operating policy decisions of the investee, but is notcontrol or joint control over those policies.
A joint venture is a joint arrangement whereby the parties that have joint control of thearrangement have rights to the net assets of the arrangement. Joint control is the contractuallyagreed sharing of control of an arrangement, which exists only when decisions about the relevantactivities require unanimous consent of the parties sharing control.
The considerations made in determining significant influence or joint control are similar to thosenecessary to determine control over subsidiaries.
The Group’s investments in shares of stock of associates and joint ventures are accounted forunder the equity method of accounting.
Under the equity method, investment in an associate or a joint venture is carried in theconsolidated balance sheets at cost plus post-acquisition changes in the Group’s share in net assetsof the associate or joint venture.
On acquisition of the investment, any difference between the cost of the investment and theinvestor’s share in the net fair value of the associate’s or joint venture’s identifiable assets,liabilities and contingent liabilities is accounted for as follows:
a. goodwill relating to an associate or joint venture is included in the carrying amount of theinvestment. However, amortization of that goodwill is not permitted and is therefore notincluded in the determination of the Group’s share in the associate’s or joint venture’s profitsor losses.
b. any excess of the Group’s share in the net fair value of the associate’s and joint venture’sidentifiable assets, liabilities and contingent liabilities over the cost of the investment isincluded as income in the determination of the investor's share of the associate's or jointventure’s profit or loss in the period in which the investment is acquired.
The consolidated statement of income reflect the share in the results of operations of the associateor joint venture. Where there has been a change recognized directly in the equity of the associateor joint venture, the Group recognizes its share in any changes and discloses this in theconsolidated statement of comprehensive income. Profits and losses resulting from transactionsbetween the Group and the associate or joint venture are eliminated to the extent of the Group’sinterest in the associate or joint venture.
Also, appropriate adjustments to the investor’s share of the associate’s or joint venture’s profit orloss after acquisition are made to account for the depreciation of the depreciable assets based ontheir fair values at the acquisition date and for impairment losses recognized by the associate orjoint venture, such as for goodwill or property, plant and equipment.
After application of the equity method, the Group determines whether it is necessary to recognizeany impairment loss with respect to the Group’s net investment in the associate or joint venture.
The Group discontinues the use of equity method from the date when it ceases to have significantinfluence over an associate or joint control over a joint venture and accounts for the retainedinvestment in accordance with PAS 39, from that date, provided the associate or joint venture doesnot become a subsidiary. Upon loss of significant influence over the associate or joint control
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over the joint venture, the Group measures and recognizes any retained investment at its fair value.Any difference in the carrying amount of the associate or joint venture upon loss of significantinfluence or joint control and the fair value of the retained investment and proceeds from disposalis recognized in the consolidated statement of income. When the Group’s interest in aninvestment in associate or joint venture is reduced to zero, additional losses are provided only tothe extent that the Group has incurred obligations or made payments on behalf of the associate orjoint venture to satisfy obligations of the investee that the Group has guaranteed or otherwisecommitted. If the associate or joint venture subsequently reports profits, the Group resumesrecognizing its share of the profits only after its share of the profits equals the share of net lossesnot recognized.
The financial statements of the associates and joint ventures are prepared for the same reportingperiod as the Parent Company. The accounting policies of the associates and joint venturesconform to those used by the Group for like transactions and events in similar circumstances.
Property and EquipmentProperty and equipment, except land, is stated at cost less accumulated depreciation andamortization and any accumulated impairment in value. Such cost includes the cost of replacingpart of the property and equipment at the time that cost is incurred, if the recognition criteria aremet, and excludes the costs of day-to-day servicing. Land is stated at cost less any impairment invalue.
The initial cost of property and equipment consists of its purchase price, including import duties,taxes and any directly attributable costs necessary in bringing the asset to its working conditionand location for its intended use. Cost also includes any related asset retirement obligation andinterest incurred during the construction period on funds borrowed to finance the construction ofthe projects. When each major inspection is performed, its cost is recognized in the carryingamount of the property and equipment as a replacement if the recognition criteria are satisfied.Expenditures incurred after the item has been put into operation, such as repairs, maintenance andoverhaul costs, are normally recognized as expense in the period such costs are incurred. Insituations where it can be clearly demonstrated that the expenditures have improved the conditionof the asset beyond the originally assessed standard of performance, the expenditures arecapitalized as additional cost of property and equipment.
Depreciation and amortization are calculated on a straight-line basis over the following estimateduseful lives of the assets:
Buildings, condominium units and improvements 5–25 yearsStore equipment and improvements 5–10 yearsData processing equipment 5 yearsFurniture, fixtures and office equipment 3–10 yearsMachinery and equipment 5–10 yearsLeasehold improvements 5–10 years or term of the lease,
whichever is shorterTransportation equipment 5–10 years
The residual values, useful lives and method of depreciation and amortization of the assets arereviewed and adjusted, if appropriate, at the end of each reporting period.
The carrying values of property and equipment are reviewed for impairment when events orchanges in circumstances indicate that the carrying values may not be recoverable.
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Fully depreciated assets are retained in the accounts until they are no longer in use and no furtherdepreciation and amortization is credited or charged to current operations.
An item of property and equipment is derecognized when either it has been disposed or when it ispermanently withdrawn from use and no future economic benefits are expected from its use ordisposal. Any gains or losses arising on the retirement and disposal of an item of property andequipment are recognized in the consolidated statement of income in the period of retirement ordisposal.Investment PropertiesInvestment properties are measured initially at cost. The cost of a purchased investment propertycomprises of its purchase price and any directly attributable costs. Subsequently, investmentproperties, except land, are measured at cost, less accumulated depreciation and amortization andaccumulated impairment in value. The carrying amount includes the cost of replacing part of anexisting investment property at the time that cost is incurred if the recognition criteria are met, andexcludes the costs of day-to-day servicing of an investment property. Land is stated at cost lessany impairment in value.
Property under construction or development for future use as an investment property is classifiedas investment property.
Depreciation and amortization are calculated on a straight-line basis over the following estimateduseful lives of the assets:
Land improvements 3–5 yearsLand use rights 40–60 yearsBuildings and improvements 10–35 yearsBuilding equipment, furniture and others 3–15 years
The residual values, useful lives and method of depreciation and amortization of the assets arereviewed and adjusted, if appropriate, at the end of each reporting period.
Investment property is derecognized when either it has been disposed or when it is permanentlywithdrawn from use and no future economic benefit is expected from its disposal. Any gains orlosses on the retirement or disposal of an investment property are recognized in the consolidatedstatement of income in the period of retirement or disposal.
Transfers are made to investment property when, and only when, there is a change in use,evidenced by ending of owner-occupation or commencement of an operating lease to anotherparty. Transfers are made from investment property when, and only when, there is a change inuse, evidenced by commencement of owner-occupation or commencement of development with aview to sell.
For a transfer from investment property to owner-occupied property or inventories, the cost ofproperty for subsequent accounting is its carrying value at the date of change in use. If theproperty occupied by the Group as an owner-occupied property becomes an investment property,the Group accounts for such property in accordance with the policy stated under property andequipment up to the date of change in use.
Construction in ProgressConstruction in progress represents structures under construction and is stated at cost. Thisincludes cost of construction, property and equipment, and other direct costs. Cost also includesinterest on borrowed funds incurred during the construction period. Construction in progress isnot depreciated until such time that the relevant assets are completed and are ready for use.
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Tenants’ DepositsTenants’ deposits are measured at amortized cost. Tenants’ deposits refers to security depositsreceived from various tenants upon inception of the respective lease contracts on the Group’sinvestment properties. At the termination of the lease contracts, the deposits received by theGroup are returned to tenants, reduced by unpaid rental fees, penalties and/or deductions fromrepairs of damaged leased properties, if any. The related lease contracts usually have a term ofmore than twelve months.
Property Acquisitions, Business Combinations and Acquisitions of Non-controlling Interests
Property Acquisitions and Business Combinations. When property is acquired, through corporateacquisitions or otherwise, management considers the substance of the assets and activities of theacquired entity in determining whether the acquisition represents an acquisition of a business.
When such an acquisition is not judged to be an acquisition of a business, it is not treated as abusiness combination. Rather, the cost to acquire the entity is allocated between the identifiableassets and liabilities of the entity based on their relative fair values at the acquisition date.Accordingly, no goodwill or additional deferred tax arises. Otherwise, the acquisition isaccounted for as a business combination.
Business combinations are accounted for using the acquisition method except for businesscombinations under common control in which an accounting similar to pooling of interest methodis used. Business combinations under common control are those in which all of the combiningentities or businesses are controlled by the same party or parties both before and after the businesscombination, and that control is not transitory. Under the acquisition method, the cost of anacquisition is measured as the aggregate of the consideration transferred, measured at acquisitiondate fair value and the amount of any non-controlling interest in the acquiree. For each businesscombination, the acquirer measures the non-controlling interest in the acquiree either at fair valueor at the proportionate share of the acquiree’s identifiable net assets. Transaction costs incurredare expensed and included in “Selling, general and administrative expenses” account in theconsolidated statement of income.
For accounting similar to pooling of interest method, the assets, liabilities and equity of theacquired companies for the reporting period in which the common control business combinationsoccur, and for any comparative periods presented, are included in the consolidated financialstatements of the Group at their carrying amounts as if the combinations had occurred from thedate when the acquired companies first became under the control of the Group. The excess of thecost of business combinations over the net carrying amounts of the assets and liabilities of theacquired companies is recognized under “Equity adjustments from business combination undercommon control” account in the equity section of the consolidated balance sheet.
When the Group acquires a business, it assesses the financial assets and liabilities assumed forappropriate classification and designation in accordance with the contractual terms, economiccircumstances and pertinent conditions as at the acquisition date. This includes the separation ofembedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’spreviously held equity interest in the acquiree is remeasured at its acquisition date fair value andany resulting gain or loss is recognized in profit or loss. It is then considered in the determinationof goodwill.
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Any contingent consideration to be transferred by the acquirer will be recognized at fair value atthe acquisition date. Subsequent changes to the fair value of the contingent consideration which isdeemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit orloss or as a change to other comprehensive income. If the contingent consideration is classified asequity, it should not be remeasured and subsequent settlement is accounted for within equity.
Acquisitions of Non-controlling Interests. Changes in the Parent Company’s ownership interest ina subsidiary that do not result in a loss of control are accounted for as equity transactions(i.e., transactions with owners in their capacity as owners). In such circumstances, the carryingamounts of the controlling and non-controlling interests shall be adjusted to reflect the changes intheir relative interests in the subsidiary. Any difference between the amount by which thenon-controlling interests are adjusted and the fair value of the consideration paid shall berecognized directly in equity.
Goodwill
Initial Measurement of Goodwill or Gain on a Bargain Purchase. Goodwill is initially measuredby the Group at cost being the excess of the aggregate of the consideration transferred and theamount recognized for non-controlling interest over the net identifiable assets acquired andliabilities assumed. If this consideration is lower than the fair value of the net assets of thesubsidiary acquired, the difference is recognized in profit or loss as gain on a bargain purchase.Before recognizing a gain on a bargain purchase, the Group determines whether it has correctlyidentified all of the assets acquired and all of the liabilities assumed and recognize any additionalassets or liabilities that are identified.
Subsequent Measurement of Goodwill. Following initial recognition, goodwill is measured at costless any accumulated impairment losses.
Impairment Testing of Goodwill. For the purpose of impairment testing, goodwill acquired in abusiness combination is, from the acquisition-date, allocated to each of the Group’scash-generating units (CGU), or groups of CGUs, that are expected to benefit from the synergiesof the combination, irrespective of whether other assets or liabilities of the acquiree are assignedto those units or groups of units. Each unit or group of units to which the goodwill is allocated:
§ represents the lowest level within the Group at which the goodwill is monitored for internalmanagement purposes; and
§ is not larger than an operating segment as defined in PFRS 8, Operating Segments, beforeaggregation.
Frequency of Impairment Testing. Irrespective of whether there is any indication of impairment,the Company tests goodwill acquired in a business combination for impairment at least annually.
Allocation of Impairment Loss. An impairment loss is recognized for a CGU if the recoverableamount of the unit or group of units is less than the carrying amount of the unit or group of units.The impairment loss is allocated to reduce the carrying amount of the assets of the unit or group ofunits first to reduce the carrying amount of goodwill allocated to the CGU or group of units andthen to the other assets of the unit or group of units pro rata on the basis of the carrying amount ofeach asset in the unit or group of units.
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Measurement Period. If the initial accounting for a business combination is incomplete by the endof the reporting period in which the combination occurs, the Group reports in its consolidatedfinancial statements provisional amounts for the items for which the accounting is incomplete. Themeasurement period ends as soon as the Group receives the information it was seeking about factsand circumstances that existed as of the acquisition date or learns that more information is notobtainable. The measurement period shall not exceed one year from the acquisition date.
Intangible AssetsThe cost of trademarks and brand names acquired in a business combination is the fair value as atthe date of acquisition. The Group assessed the useful life of the trademarks and brand names tobe indefinite because based on an analysis of all of the relevant factors, there is no foreseeablelimit to the period over which the asset is expected to generate cash inflows for the Group.
Trademarks and brand names with indefinite useful lives are not amortized but are tested forimpairment annually either individually or at the cash generating unit level. The useful life of anintangible asset is reviewed annually to determine whether the indefinite life assessment continuesto be supportable. If not, the change in the useful life assessment from indefinite to finite is madeon a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the differencebetween the net disposal proceeds and the carrying amount of the asset at the date of disposal andare recognized in the consolidated statement of income when the asset is derecognized.
Impairment of Nonfinancial AssetsThe carrying values (property and equipment, investment properties and investments in shares ofstock of associates and joint ventures, intagibles and other noncurrent assets) are reviewed forimpairment when events or changes in circumstances indicate that the carrying value may not berecoverable. If any such indication exists, and if the carrying value exceeds the estimatedrecoverable amount, the assets or CGUs are written down to their recoverable amounts. Therecoverable amount of the asset is the greater of fair value less costs to sell or value in use. Thefair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s-lengthtransaction between knowledgeable, willing parties, less costs of disposal. In assessing value inuse, the estimated future cash flows are discounted to their present value using a pre-tax discountrate that reflects current market assessments of the time value of money and the risks specific tothe asset. For an asset that does not generate largely independent cash inflows, the recoverableamount is determined for the CGU to which the asset belongs. Impairment losses are recognizedin the consolidated statement of income in those expense categories consistent with the function ofthe impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previouslyrecognized impairment loss may no longer exist or may have decreased. If such indication exists,the recoverable amount is estimated. A previously recognized impairment loss is reversed only ifthere has been a change in the estimates used to determine the asset’s recoverable amount sincethe last impairment loss was recognized. If that is the case, the carrying amount of the asset isincreased to its recoverable amount. That increased amount cannot exceed the carrying amountthat would have been determined, net of depreciation and amortization, had no impairment lossbeen recognized for the asset in prior years. Such reversal is recognized in consolidated statementof income. After such a reversal, the depreciation or amortization charge is adjusted in futureperiods to allocate the asset’s revised carrying amount, less any residual value, on a systematicbasis over its remaining useful life.
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Capital StockCapital stock is measured at par value for all shares issued. Incremental costs incurred directlyattributable to the issuance of new shares are shown in equity as deduction from proceeds, net oftax. Proceeds and/or fair value of considerations received in excess of par value, if any, arerecognized as additional paid-in capital.
RevenueRevenue is recognized when it is probable that the economic benefits associated with thetransaction will flow to the Group and the amount of the revenue can be reliably measured.Revenue is measured at the fair value of the consideration received or receivable, excludingdiscounts, rebates and sales taxes or duties. The Group assesses its revenue arrangements againstspecific criteria in order to determine if it is acting as a principal or as an agent. The Group hasconcluded that it is acting as principal in majority of its revenue arrangements. The followingspecific recognition criteria must also be met before revenue is recognized:
Sale of Merchandise Inventories. Revenue is recognized when the significant risks and rewards ofownership of the goods have passed to the buyer, which is normally upon delivery. Sales returnsand sales discounts are deducted from sales to arrive at sales shown in the consolidated statementof income.
Sale of goods under consignment arrangements with suppliers is recognized as revenue uponbilling, delivery and transfer of goods to customers.
Sale of Real Estate. The Group assesses whether it is probable that the economic benefits willflow to the Group when the sales prices are collectible. Collectibility of the contract price isdemonstrated by the buyer’s commitment to pay, which is supported by the buyer’s initial andcontinuous investments that motivates the buyer to honor its obligation. Collectibility is alsoassessed by considering factors such as collections, credit standing of the buyer and location of theproperty.
Revenue from sales of completed real estate projects is accounted for using the full accrualmethod. In accordance with Philippine Interpretations Committee Q&A No. 2006-01, thepercentage-of-completion method is used to recognize income from sales of projects where theGroup has material obligations under the sales contract to complete the project after the property issold, the equitable interest has been transferred to the buyer, construction is beyond preliminarystage (i.e., engineering, design work, construction contracts execution, site clearance andpreparation, excavation and the building foundation are finished), and the costs incurred or to beincurred can be measured reliably. Under this method, revenue is recognized as the relatedobligations are fulfilled, measured principally on the basis of the estimated completion of aphysical proportion of the contract work.
Any excess of collections over the recognized receivables are included in the “Tenants’ depositsand others” account in the consolidated balance sheets. If any of the criteria under the full accrualor percentage-of-completion method is not met, the deposit method is applied until all theconditions for recording a sale are met. Pending recognition of sale, cash received from buyersare presented under the “Tenants’ deposits and others” account in the consolidated balance sheets.
Revenue from construction contracts included in the “Revenue from real estate and others”account in the consolidated statement of income is recognized using the percentage-of-completionmethod, measured principally on the basis of the estimated physical completion of the contractwork.
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Rent. Revenue is recognized on a straight-line basis over the lease term or based on the terms ofthe lease as applicable.
Sale of Cinema and Amusement Tickets. Revenue is recognized upon receipt of cash from thecustomer which coincides with the rendering of services.
Gain on Sale of Investments in Shares of Stock and Available-for-Sale Investments. Revenue isrecognized upon delivery of the securities to and confirmation of the sale by the broker.
Dividend. Revenue is recognized when the Group’s right as a shareholder to receive the paymentis established.
Management and Service Fees. Revenue is recognized when earned in accordance with the termsof the agreements.
Marketing Support. Revenue is recognized when the performance and provision of contractuallyagreed marketing tasks have been rendered and store facilities have been used. Marketing supportis shown under “Others” account in the consolidated statement of income.
Interest. Revenue is recognized as the interest accrues, taking into account the effective yield onthe asset.
Management FeesManagement fees are recognized as expense in accordance with the terms of the agreements.
Cost and Expenses
Cost of Real Estate Sales. Cost of real estate sales is recognized consistent with the revenuerecognition method applied. Cost of condominium units sold before the completion of thedevelopment is determined on the basis of the acquisition cost of the land plus its full developmentcosts, which include estimated costs for future development works.
The cost of inventory recognized in the consolidated statement of income upon sale is determinedwith reference to the specific costs incurred on the property, allocated to saleable area based onrelative size and takes into account the percentage of completion used for revenue recognitionpurposes.
Expected losses on contracts are recognized immediately when it is probable that the total contractcosts will exceed total contract revenue. Changes in the estimated cost to complete thecondominium project which affects cost of real estate sold and gross profit are recognized in theyear in which changes are determined.
Selling, General, Administrative and Other Expenses. Costs and expenses are recognized asincurred.
Pension BenefitsThe net defined benefit liability or asset is the aggregate of the present value of the defined benefitobligation at the end of the reporting period reduced by the fair value of plan assets (if any),adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceilingis the present value of any economic benefits available in the form of refunds from the plan orreductions in future contributions to the plan.
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The cost of providing benefits under the defined benefit plans is actuarially determined using theprojected unit credit method.
Defined benefit costs comprise the following:§ Service cost§ Net interest on the net defined benefit liability or asset§ Remeasurements of net defined benefit liability or asset
Service costs which include current service costs, past service costs and gains or losses onnon-routine settlements are recognized as expense in profit or loss. Past service costs arerecognized in profit or loss on the earlier of the date of the plan amendment or curtailment, and thedate the Group recognizes restructuring-related costs. These amounts are calculated periodicallyby independent qualified actuaries.
Net interest on the net defined benefit liability or asset is the change during the period in the netdefined benefit liability or asset that arises from the passage of time which is determined byapplying the discount rate based on government bonds to the net defined benefit liability or asset.Net interest on the net defined benefit liability or asset is recognized as expense or income inprofit or loss.
Remeasurements comprising actuarial gains and losses, return on plan assets and any change inthe effect of the asset ceiling (excluding net interest on defined benefit liability) are recognizedimmediately in other comprehensive income in the period in which they arise. Remeasurementsare not reclassified to profit or loss in subsequent periods.
Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurancepolicies. Plan assets are not available to the creditors of the Group, nor can they be paid directly tothe Group. Fair value of plan assets is based on market price information. When no market priceis available, the fair value of plan assets is estimated by discounting expected future cash flowsusing a discount rate that reflects both the risk associated with the plan assets and the maturity orexpected disposal date of those assets (or, if they have no maturity, the expected period until thesettlement of the related obligations). If the fair value of the plan assets is higher than the presentvalue of the defined benefit obligation, the measurement of the resulting defined benefit asset islimited to the present value of economic benefits available in the form of refunds from the plan orreductions in future contributions to the plan.
The Group’s right to be reimbursed of some or all of the expenditure required to settle a definedbenefit obligation is recognized as a separate asset at fair value when and only whenreimbursement is virtually certain.
Foreign Currency-denominated TransactionsThe consolidated financial statements are presented in Philippine peso, which is the ParentCompany’s functional and presentation currency. Transactions in foreign currencies are initiallyrecorded in the functional currency rate at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies are restated at the functional currency rate ofexchange as at reporting date. Nonmonetary items denominated in foreign currency are translatedusing the exchange rates as at the date of initial recognition. All differences are taken to theconsolidated statement of income.
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Foreign Currency TranslationThe assets and liabilities of foreign operations are translated into Philippine peso at the rate ofexchange ruling as at reporting date and their respective statements of income are translated at theweighted average rates for the year. The exchange differences arising on the translation areincluded in the consolidated statement of comprehensive income and are presented within the“Cumulative translation adjustment of a subsidiary” account in the consolidated statement ofchanges in equity. On disposal of a foreign entity, the deferred cumulative amount of exchangedifferences recognized in equity relating to that particular foreign operation is recognized in theprofit or loss.
LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance ofthe arrangement and requires an assessment of whether the fulfillment of the arrangement isdependent on the use of a specific asset or assets and the arrangement conveys a right to use theasset.
Group as Lessee. Finance leases, which transfer to the Group substantially all the risks andbenefits incidental to ownership of the leased item, are capitalized at the inception of the lease atthe fair value of the leased property or, if lower, at the present value of the minimum leasepayments. Lease payments are apportioned between the finance charges and reduction of the leaseliability so as to achieve a constant rate of interest on the remaining balance of the liability.Finance charges are reflected in the consolidated statement of income.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the assetand the lease term, if there is no reasonable certainty that the Group will obtain ownership by theend of the lease term.
Leases which do not transfer to the Group substantially all the risks and benefits of ownership ofthe asset are classified as operating leases. Operating lease payments are recognized as expense inthe consolidated statement of income on a straight-line basis over the lease term. Associatedcosts, such as maintenance and insurance, are expensed as incurred.
Group as Lessor. Leases where the Group does not transfer substantially all the risks and benefitsof ownership of the asset are classified as operating leases. Lease income from operating leasesare recognized as income on a straight-line basis over the lease term. Initial direct costs incurredin negotiating an operating lease are added to the carrying amount of the leased asset andrecognized over the lease term on the same basis as rental income. Contingent rents arerecognized as revenue in the period in which they are earned.
ProvisionsProvisions are recognized when the Group has a present obligation (legal or constructive) as aresult of a past event, it is probable that an outflow of resources embodying economic benefits willbe required to settle the obligation, and a reliable estimate can be made of the amount of theobligation. If the effect of the time value of money is material, provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflects current marketassessments 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 recognizedas interest expense. Where the Group expects a provision to be reimbursed, the reimbursement isrecognized as a separate asset but only when the receipt of the reimbursement is virtually certain.
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Borrowing CostsBorrowing costs are capitalized as part of the cost of the asset if they are directly attributable tothe acquisition or construction of a qualifying asset. Capitalization of borrowing costs commenceswhen the activities to prepare the asset are in progress and expenditures and borrowing costs arebeing incurred. Borrowing costs are capitalized until the assets are substantially ready for theirintended use. Borrowing costs are capitalized when it is probable that they will result in futureeconomic benefits to the Group. All other borrowing costs are expensed as incurred. Forborrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, aweighted average cost of borrowings is used.Taxes
Current Tax. Current tax assets and liabilities for the current and prior periods are measured at theamount expected to be recovered from or paid to the taxation authorities. The tax rates and taxlaws used to compute the amount are those that are enacted or substantively enacted as at the endof the reporting period.
Deferred Tax. Deferred tax is provided, using the balance sheet liability method, on temporarydifferences at the end of the reporting period between the tax bases of assets and liabilities andtheir carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized forall taxable temporary differences, except:
§ where the deferred tax liability arises from the initial recognition of goodwill or of an asset orliability in a transaction that is not a business combination and, at the time of the transaction,affects neither the accounting profit nor taxable profit or loss; and
§ with respect to taxable temporary differences associated with investments in subsidiaries,associates and interests in joint ventures, where the timing of the reversal of the temporarydifferences can be controlled and it is probable that the temporary differences will not reversein the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences and carryforwardbenefits of excess MCIT and NOLCO, to the extent that it is probable that taxable profit will beavailable against which the deductible temporary differences and the carryforward benefits ofexcess MCIT and NOLCO can be utilized, except:
§ where the deferred tax asset relating to the deductible temporary difference arises from theinitial recognition of an asset or liability in a transaction that is not a business combinationand, at the time of the transaction, affects neither the accounting profit nor taxable profit orloss; and
§ with respect to deductible temporary differences associated with investments in subsidiaries,associates and interests in joint ventures, deferred tax assets are recognized only to the extentthat it is probable that the temporary differences will reverse in the foreseeable future andtaxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period andreduced to the extent that it is no longer probable that sufficient taxable profit will be available toallow all or part of the deferred income tax assets to be utilized. Unrecognized deferred tax assetsare reassessed at the end of each reporting period and are recognized to the extent that it hasbecome probable that future taxable profit will allow the deferred tax assets to be recovered.
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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to theperiod the asset is realized or the liability is settled, based on tax rates and tax laws that have beenenacted or substantively enacted as at reporting date.
Income tax relating to items recognized directly in the consolidated statement of comprehensiveincome is recognized in the consolidated statement of comprehensive income and not in theconsolidated statement of income.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists tooffset current tax assets against current tax liabilities and the deferred taxes relate to the sametaxable entity and the same taxation authority.
Value-added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT,except:
§ where the tax incurred on a purchase of assets or services is not recoverable from the taxationauthority, in which case the tax is recognized as part of the cost of acquisition of the asset oras part of the expense item as applicable; and
§ for receivables and payables that are stated with the amount of tax included.
The net amount of VAT recoverable from, or payable to, the taxation authority is included as partof “Other current assets” or “Accounts payable and other current liabilities” accounts in theconsolidated balance sheets.
Business SegmentsThe Group is organized and managed separately according to the nature of business. The threemajor operating businesses of the Group are property, retail and financial services and others.These operating businesses are the basis upon which the Group reports its segment informationpresented in Note 6 to the consolidated financial statements.
Basic/Diluted Earnings Per Common Share (EPS)Basic EPS is computed by dividing the net income for the period attributable to owners of theParent by the weighted-average number of issued and outstanding common shares during theperiod, with retroactive adjustment for any stock dividends declared.
For the purpose of computing diluted EPS, the net income for the period attributable to owners ofthe Parent and the weighted-average number of issued and outstanding common shares areadjusted for the effects of all dilutive potential ordinary shares.
ContingenciesContingent liabilities are not recognized in the consolidated financial statements. They aredisclosed unless the possibility of an outflow of resources embodying economic benefits isremote. Contingent assets are not recognized in the consolidated financial statements but aredisclosed when an inflow of economic benefits is probable.
Events after the Reporting PeriodPost year-end events that provide additional information about the Group’s position at the end ofthe reporting period (adjusting events) are reflected in the consolidated financial statements. Postyear-end events that are not adjusting events are disclosed in the notes to the consolidatedfinancial statements when material.
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Cha nges in Accounting Policies and DisclosuresThe accounting policies adopted are consistent with those of the previous financial year, except forthe adoption of the following amended PFRS, which were adopted starting January 1, 2013. Theadoption of the following amended standards and interpretations did not have any impact on theGroup’s consolidated financial statements, except when otherwise indicated:
§ PFRS 7, Financial Instruments: Disclosures – Offsetting Financial Statements and FinancialLiabilities (Amendments)
§ PFRS 10, Consolidated Financial Statements
§ PFRS 11, Joint Arrangements
§ PFRS 12, Disclosure of Interests in Other Entities
§ PFRS 13, Fair Value Measurement
§ PAS 1, Presentation of Financial Statements - Presentation of Items of Other ComprehensiveIncome or OCI (Amendments)
§ PAS 19, Employee Benefits (Revised)
§ PAS 27, Separate Financial Statements (as revised in 2011)
§ PAS 28, Investments in Associates and Joint Ventures (as revised in 2011)
§ Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine
§ Philippine Interpretations Committee Q&A No. 2013-03, Accounting for Employee Benefitsunder a Defined Contribution Plan Subject to Requirements of Republic Act 7641, ThePhilippine Retirement Law
§ 2012 improvements to PFRSs, effective 2013.
Adoption of Revised PAS 19For defined benefit plans, the Revised PAS 19 requires all remeasurements actuarial gains andlosses to be recognized in other comprehensive income and unvested past service costs previouslyrecognized over the average vesting period to be recognized immediately in profit or loss whenincurred.
Prior to adoption of the Revised PAS 19, the Group recognized actuarial gains and losses asincome or expense when the net cumulative unrecognized gains and losses for each individualplan at the end of the previous period exceeded 10% of the higher of the defined benefit obligationand the fair value of the plan assets and recognized unvested past service costs as an expense on astraight-line basis over the average vesting period until the benefits become vested.
Upon adoption of the Revised PAS 19, the Group changed its accounting policy to recognize allremeasurements in other comprehensive income, which will not be reclassified to profit or loss insubsequent periods, and all past service costs in profit or loss in the period they occur. Movingforward, the Group will retain the remeasurements in other comprehensive income and will nottransfer this to other items of equity.
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The revised PAS 19 replaced the interest cost and expected return on plan assets with the conceptof net interest on defined benefit liability or asset which is calculated by multiplying the netbalance sheet defined benefit liability or asset by the discount rate used to measure the employeebenefit obligation, each as at the beginning of the annual period.
The revised PAS 19 also amended the definition of short-term employee benefits and requiresemployee benefits to be classified as short-term based on expected timing of settlement rather thanthe employee’s entitlement to the benefits. In addition, the Revised PAS 19 modifies the timing ofrecognition for termination benefits. The modification requires the termination benefits to berecognized at the earlier of when the offer cannot be withdrawn or when the related restructuringcosts are recognized.
The changes to the definition of short-term employee benefits and the timing of recognition fortermination benefits do not have any impact to the Group’s financial position and financialperformance.
The Group reviewed its existing employee benefits and determined that the amended standard hasan impact on its accounting for pension benefits. The effect of the adoption of theRevised PAS 19 as at January 1, 2013 amounted to P=283.7 million. This was recorded in thecurrent year profit or loss as reduction pension benefit expense, instead of a retrospectiveadjustment as required by the Revised PAS 19, as the impact is not material (see Note 26). Onthis basis, the Group’s consolidated statement of financial position at the beginning of the earliestcomparative period was also not presented.
The adoption increased earnings per share by P=0.36 in 2013 (see Note 31). It did not have impacton the consolidated statement of cash flows for the year ended December 31, 2013.
Future Changes in Accounting PoliciesThe following are the new standards, interpretations, amendments and improvements to PFRS andPhilippine Interpretations that were issued but are not yet effective as at December 31, 2013. TheGroup intends to adopt the applicable standards, interpretations, amendments and improvementswhen these become effective.
New Standards and Interpretations§ PAS 36, Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets
(Amendments). These amendments remove the unintended consequences of PFRS 13 on thedisclosures required under PAS 36. In addition, these amendments require disclosure of therecoverable amounts for the assets or cash-generating units (CGUs) for which impairment losshas been recognized or reversed during the period. These amendments are effectiveretrospectively for annual periods beginning on or after January 1, 2014 with earlierapplication permitted, provided PFRS 13 is also applied. The amendments affect disclosuresonly and have no impact on the Group’s financial position or performance.
§ Investment Entities (Amendments to PFRS 10, PFRS 12 and PAS 27). These amendments areeffective for annual periods beginning on or after January 1, 2014. They provide an exceptionto the consolidation requirement for entities that meet the definition of an investment entityunder PFRS 10. The exception to consolidation requires investment entities to account forsubsidiaries at fair value through profit or loss. It is not expected that this amendment wouldbe relevant to the Group since none of the entities in the Group would qualify to be aninvestment entity under PFRS 10.
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§ Philippine Interpretation IFRIC 21, Levies (IFRIC 21). IFRIC 21 clarifies that an entityrecognizes a liability for a levy when the activity that triggers payment, as identified by therelevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold,the interpretation clarifies that no liability should be anticipated before the specified minimumthreshold is reached. IFRIC 21 is effective for annual periods beginning on or after January 1,2014. The Group does not expect that IFRIC 21 will have material financial impact in futurefinancial statements.
§ PAS 39, Financial Instruments: Recognition and Measurement - Novation of Derivatives andContinuation of Hedge Accounting (Amendments). These amendments provide relief fromdiscontinuing hedge accounting when novation of a derivative designated as a hedginginstrument meets certain criteria. These amendments are effective for annual periodsbeginning on or after January 1, 2014. The Group has not novated its derivatives during thecurrent period. However, these amendments would be considered for future novations.
§ PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and FinancialLiabilities (Amendments). The amendments clarify the meaning of “currently has a legallyenforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria tosettlement systems (such as central clearing house systems) which apply gross settlementmechanisms that are not simultaneous. The amendments affect presentation only and have noimpact on the Group’s financial position or performance. The amendments to PAS 32 are tobe retrospectively applied for annual periods beginning on or after January 1, 2014.
§ PAS 19, Employee Benefits – Defined Benefit Plans: Employee Contributions (Amendments),apply to contributions from employees or third parties to defined benefit plans. Contributionsthat are set out in the formal terms of the plan shall be accounted for as reductions to currentservice costs if they are linked to service or as part of the remeasurements of the net definedbenefit asset or liability if they are not linked to service. Contributions that are discretionaryshall be accounted for as reductions of current service cost upon payment of thesecontributions to the plans. The amendments to PAS 19 are to be retrospectively applied forannual periods beginning on or after July 1, 2014. The amendments have no impact in theGroup’s financial position and performance.
§ Annual Improvements to PFRSs (2010-2012 cycle)The Annual Improvements to PFRSs (2010-2012 cycle) contain non-urgent but necessaryamendments to the following standards:
· PFRS 2, Share-based Payment – Definition of Vesting Condition. The amendmentrevised the definitions of vesting condition and market condition and added thedefinitions of performance condition and service condition to clarify various issues.This amendment shall be prospectively applied to share-based payment transactions forwhich the grant date is on or after July 1, 2014. This amendment does not apply to theGroup as it has no share-based payments.
· PFRS 3, Business Combinations – Accounting for Contingent Consideration in aBusiness Combination. The amendment clarifies that a contingent consideration thatmeets the definition of a financial instrument should be classified as a financial liabilityor as equity in accordance with PAS 32. Contingent consideration that is not classifiedas equity is subsequently measured at fair value through profit or loss whether or not itfalls within the scope of PFRS 9 (or PAS 39, if PFRS 9 is not yet adopted). Theamendment shall be prospectively applied to business combinations for which the
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acquisition date is on or after July 1, 2014. The Group shall consider this amendment infuture business combinations.
· PFRS 8, Operating Segments – Aggregation of Operating Segments and Reconciliationof the Total of the Reportable Segments’ Assets to the Entity’s Assets. The amendmentsrequire entities to disclose the judgment made by management in aggregating two ormore operating segments. This disclosure should include a brief description of theoperating segments that have been aggregated in this way and the economic indicatorsthat have been assessed in determining that the aggregated operating segments sharesimilar economic characteristics. The amendments also clarify that an entity shallprovide reconciliations of the total of the reportable segments’ assets to the entity’sassets if such amounts are regularly provided to the chief operating decision maker.These amendments are effective for annual periods beginning on or after July 1, 2014and are applied retrospectively. The amendments affect disclosures only and have noimpact on the Group’s financial position or performance.
· PFRS 13, Fair Value Measurement – Short-term Receivables and Payables. Theamendment clarifies that short-term receivables and payables with no stated interestrates can be held at invoice amounts when the effect of discounting is immaterial.
· PAS 16, Property, Plant and Equipment – Revaluation Method – ProportionateRestatement of Accumulated Depreciation. The amendment clarifies that, uponrevaluation of an item of property, plant and equipment, the carrying amount of the assetshall be adjusted to the revalued amount, and the asset shall be treated in one of thefollowing ways:a. The gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. The accumulated depreciation atthe date of revaluation is adjusted to equal the difference between the gross carryingamount and the carrying amount of the asset after taking into account anyaccumulated impairment losses.
b. The accumulated depreciation is eliminated against the gross carrying amount of theasset.
The amendment is effective for annual periods beginning on or after July 1, 2014. Theamendment shall apply to all revaluations recognized in annual periods beginning on orafter the date of initial application of this amendment and in the immediately precedingannual period. The amendment has no impact on the Group’s financial position orperformance as it does not have property, plant and equipment carried at revaluedamounts.
· PAS 24, Related Party Disclosures – Key Management Personnel. The amendmentsclarify that an entity is a related party of the reporting entity if the said entity, or anymember of a group for which it is a part of, provides key management personnelservices to the reporting entity or to the parent company of the reporting entity. Theamendments also clarify that a reporting entity that obtains management personnelservices from another entity (also referred to as management entity) is not required todisclose the compensation paid or payable by the management entity to its employees ordirectors. The reporting entity is required to disclose the amounts incurred for the keymanagement personnel services provided by a separate management entity. Theamendments are effective for annual periods beginning on or after July 1, 2014 and areapplied retrospectively. The amendments affect disclosures only and have no impact onthe Group’s financial position or performance.
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· PAS 38, Intangible Assets – Revaluation Method – Proportionate Restatement ofAccumulated Amortization. The amendments clarify that, upon revaluation of anintangible asset, the carrying amount of the asset shall be adjusted to the revaluedamount, and the asset shall be treated in one of the following ways:a. The gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. The accumulated amortization atthe date of revaluation is adjusted to equal the difference between the gross carryingamount and the carrying amount of the asset after taking into account anyaccumulated impairment losses.
b. The accumulated amortization is eliminated against the gross carrying amount of theasset.
The amendments also clarify that the amount of the adjustment of the accumulatedamortization should form part of the increase or decrease in the carrying amountaccounted for in accordance with the standard.
The amendments are effective for annual periods beginning on or after July 1, 2014.The amendments shall apply to all revaluations recognized in annual periods beginningon or after the date of initial application of this amendment and in the immediatelypreceding annual period. The amendments have no impact on the Group’s financialposition or performance as it does not have intangible assets carried at revaluedamounts.
§ Annual Improvements to PFRSs (2011-2013 cycle)The Annual Improvements to PFRSs (2011-2013 cycle) contain non-urgent but necessaryamendments to the following standards:
· PFRS 1, First-time Adoption of Philippine Financial Reporting Standards – Meaning of‘Effective PFRSs’. The amendment clarifies that an entity may choose to apply either acurrent standard or a new standard that is not yet mandatory, but that permits earlyapplication, provided either standard is applied consistently throughout the periodspresented in the entity’s first PFRS financial statements. This amendment is notapplicable to the Group as it is not a first-time adopter of PFRS.
· PFRS 3, Business Combinations – Scope Exceptions for Joint Arrangements. Theamendment clarifies that PFRS 3 does not apply to the accounting for the formation of ajoint arrangement in the financial statements of the joint arrangement itself. Theamendment is effective for annual periods beginning on or after July 1 2014 and isapplied prospectively.
· PFRS 13, Fair Value Measurement – Portfolio Exception. The amendment clarifies thatthe portfolio exception in PFRS 13 can be applied to financial assets, financial liabilitiesand other contracts. The amendment is effective for annual periods beginning on orafter July 1 2014 and is applied prospectively. The amendment has no significantimpact on the Group’s financial position or performance.
· PAS 40, Investment Property. The amendment clarifies the interrelationship betweenPFRS 3 and PAS 40 when classifying property as investment property or owner-occupied property. The amendment stated that judgment is needed when determiningwhether the acquisition of investment property is the acquisition of an asset or a groupof assets or a business combination within the scope of PFRS 3. This judgment is basedon the guidance of PFRS 3. This amendment is effective for annual periods beginning
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on or after July 1, 2014 and is applied prospectively. The Group shall consider thisamendment in future acquisitions of investment properties.
§ PFRS 9, Financial Instruments. PFRS 9, as issued, reflects the first and third phases of theproject to replace PAS 39 and applies to the classification and measurement of financial assetsand liabilities and hedge accounting, respectively. Work on the second phase, which relate toimpairment of financial instruments, and the limited amendments to the classification andmeasurement model is still ongoing, with a view to replace PAS 39 in its entirety. PFRS 9requires all financial assets to be measured at fair value at initial recognition. A debt financialasset may, if the fair value option (FVO) is not invoked, be subsequently measured atamortized cost if it is held within a business model that has the objective to hold the assets tocollect the contractual cash flows and its contractual terms give rise, on specified dates, tocash flows that are solely payments of principal and interest on the principal outstanding. Allother debt instruments are subsequently measured at fair value through profit or loss. Allequity financial assets are measured at fair value either through other comprehensive income(OCI) or profit or loss. Equity financial assets held for trading must be measured at fair valuethrough profit or loss. For liabilities designated as at FVPL using the fair value option, theamount of change in the fair value of a liability that is attributable to changes in credit riskmust be presented in OCI. The remainder of the change in fair value is presented in profit orloss, unless presentation of the fair value change relating to the entity’s own credit risk in OCIwould create or enlarge an accounting mismatch in profit or loss. All other PAS 39classification and measurement requirements for financial liabilities have been carried forwardto PFRS 9, including the embedded derivative bifurcation rules and the criteria for using theFVO. The adoption of the first phase of PFRS 9 will have an effect on the classification andmeasurement of the Group’s financial assets, but will potentially have no impact on theclassification and measurement of financial liabilities.
On hedge accounting, PFRS 9 replaces the rules-based hedge accounting model ofPAS 39 with a more principles-based approach. Changes include replacing the rules-basedhedge effectiveness test with an objectives-based test that focuses on the economicrelationship between the hedged item and the hedging instrument, and the effect of credit riskon that economic relationship; allowing risk components to be designated as the hedged item,not only for financial items, but also for non-financial items, provided that the risk componentis separately identifiable and reliably measurable; and allowing the time value of an option,the forward element of a forward contract and any foreign currency basis spread to beexcluded from the designation of a financial instrument as the hedging instrument andaccounted for as costs of hedging. PFRS 9 also requires more extensive disclosures for hedgeaccounting.
PFRS 9 currently has no mandatory effective date. PFRS 9 may be applied before thecompletion of the limited amendments to the classification and measurement model andimpairment methodology. The Group will not adopt the standard before the completion of thelimited amendments and the second phase of the project.
§ Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, coversaccounting for revenue and associated expenses by entities that undertake the construction ofreal estate directly or through subcontractors. The interpretation requires that revenue onconstruction of real estate be recognized only upon completion, except when such contractqualifies as construction contract to be accounted for under PAS 11, Construction Contracts,or involves rendering of services in which case revenue is recognized based on stage ofcompletion. Contracts involving provision of services with the construction materials andwhere the risks and reward of ownership are transferred to the buyer on a continuous basis
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will also be accounted for based on stage of completion. The SEC and the FinancialReporting Standards Council have deferred the effectivity of this interpretation until the finalRevenue standard is issued by the International Accounting Standards Board and anevaluation of the requirements of the final Revenue standard against the practices of thePhilippine real estate industry is completed. The adoption of this interpretation will result to achange in the revenue and cost recognition from percentage of completion method tocompleted contract method. The Group has made an assessment and is continuouslymonitoring the impact of this new interpretation to its consolidated financial statements.
4. Significant Accounting Judgments, Estimates and Assumptions
The preparation of the consolidated financial statements requires management to make judgments,estimates and assumptions that affect the reported amounts of revenue, expenses, assets andliabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertaintyabout these estimates and assumptions could result in outcomes that could require a materialadjustment to the carrying amount of the affected asset or liability in the future.JudgmentsIn the process of applying the Group’s accounting policies, management has made the followingjudgments, apart from those involving estimations, which have the most significant effect on theamounts recognized in the consolidated financial statements:
Functional Currency. The Parent Company has determined that its functional currency is thePhilippine peso. It is the currency of primary economic environment in which the ParentCompany operates.
Revenue Recognition on Real Estate. The Group’s process of selecting an appropriate revenuerecognition method for a particular real estate sales transaction requires certain judgments basedon the buyer’s commitment on the sale which may be ascertained through the significance of thebuyer’s initial investment and completion of development. The buyer’s commitment is evaluatedbased on collections, credit standing of the buyer and location of the property. The completion ofdevelopment is determined based on engineer’s judgments and estimates on the physical portionof contract work done and the completion of development beyond the preliminary stage.
Revenue from real estate sales amounted to P=21,242.1 million, P=22,499.7 million andP=17,215.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Property Acquisitions and Business Combinations. The Group acquires subsidiaries which ownreal estate. At the time of acquisition, the Group considers whether the acquisition represents anacquisition of a business or a group of assets and liabilities. The Group accounts for anacquisition as a business combination if it acquires an integrated set of business processes inaddition to the real estate property. The consideration is made to the extent that the significantbusiness processes are acquired and the additional services to be provided by the subsidiary.
When the acquisition of subsidiary does not constitute a business, it is accounted for as anacquisition of a group of assets and liabilities. The purchase price of the acquisition is allocated tothe assets and liabilities acquired based upon their relative fair values at the date of acquisition, nogoodwill or deferred tax is recognized.
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Classification of Property. The Group determines whether a property is classified as investmentproperty, land and development or property and equipment as follows:
§ Investment property comprises building spaces and improvements which are not occupied foruse by, or in the operations of, the Group, nor for sale in the ordinary course of business, butare held primarily to earn rental income and capital appreciation.
§ Land and development comprises property that is held for sale in the ordinary course ofbusiness in which the Group develops and intends to sell on or before completion ofconstruction.
§ Property and equipment is held for use in the supply of goods or services or for administrativepurposes.
The Group considers each property separately in making its judgment.
The aggregate carrying values of land and development, investment properties and property andequipment amounted to P=236,599.5 million and P=197,355.1 million as at December 31, 2013 and2012, respectively (see Notes 11, 14, 15 and 16).
Consignment Arrangements on Retail Segment. The retail segment of the Group has entered intovarious consignment arrangements with suppliers. Under these arrangement, the Group bears thesignificant risks and rewards associated with the sale of goods. The Group concluded that it isacting as principal in the sales transaction with customers. Accordingly, sales revenue isrecognized at gross amount upon actual sales to customers. The related inventory stocks suppliedunder these arrangement are only payable to suppliers when actually sold.
Operating Lease Commitments - Group as Lessor. The Group has entered into commercialproperty leases in its investment property portfolio. The Group has determined, based on anevaluation of the terms and conditions of the arrangements, that it retains all the significant risksand rewards of ownership of the properties and thus accounts for the contracts as operating leases.
Rent income amounted to P=27,929.4 million, P=24,695.6 million and P=20,832.7 million for theyears ended December 31, 2013, 2012 and 2011, respectively.
Operating Lease Commitments - Group as Lessee. The Group has entered into various leaseagreements as a lessee. Management has determined that all the significant risks and benefits ofownership of these properties, which the Group leases under operating lease arrangements, remainwith the lessor. Accordingly, the leases were accounted for as operating leases.
Rent expense amounted to P=7,295.1 million, P=4,876.3 million and P=3,463.7 million for the yearsended December 31, 2013, 2012 and 2011, respectively (see Note 24).
Assessing Significant Influence over Associates. Significant influence is presumed when there is aholding of 20% or more of the voting power of the investee (held directly or indirectly, throughsubsidiaries). Management assessed that the Group has significant influence over all its associatesby virtue of the Group’s holding more than 20% voting power in the investee, representation onthe board of directors, and participation in policy-making processes of the associates.
The carrying value of the investments in associates as at December 31, 2013 and 2012 amountedto P=133,814.2 million and P=128,453.7 million, respectively (see Note 13).
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Assessing Joint Control of an Arrangement and the Type of Arrangement. Joint control is thecontractually agreed sharing of control of an arrangement, which exists only when decisions aboutthe relevant activities require the unanimous consent of the parties sharing control. Managementassessed that the Group has joint control of Waltermart Mall by virtue of a contractual agreementwith other shareholders. Waltermart Mall is a joint venture arrangement as it is a separate legalentity and its stockholders have rights to its net assets.
The carrying value of the investment in Waltermart Mall amounted to P=5,180.2 million as atDecember 31, 2013 (see Note 13).
Impairment of AFS Investments - Significant or Prolonged Decline in Fair Value. The Groupdetermines that an AFS investment is impaired when there has been a significant or prolongeddecline in the fair value below its cost. The Group determines that a decline in fair value ofgreater than 20% of cost is considered to be a significant decline and a decline for a period oflonger than 12 months is considered to be a prolonged decline. The determination of what issignificant or prolonged requires judgment. In making this judgment, the Group evaluates, amongother factors, the normal volatility in price. In addition, impairment may be appropriate whenthere is evidence of deterioration in the financial health of the investee, industry and sectorperformance.
There was no impairment loss recognized on AFS investments for the years endedDecember 31, 2013, 2012 and 2011. The carrying values of AFS investments amounted toP=17,158.3 million and P=19,307.8 million as at December 31, 2013 and 2012, respectively (seeNotes 9 and 12).
Assessing of Control of Investees. The Group controls an investee when it is exposed, or hasrights, to variable returns from its involvement with the investee and when it has the ability toaffect those returns through its power over the investee.
Net Group. On December 2, 2013, SMIC entered into Shareholders Agreement and SharePurchase Agreement for the acquisition of ownership interest in the Net Group. The acquisitionincluded a purchase of five (5) land-holding companies where SMIC obtained 90% economicinterest and 40% voting interest. Management assessed that SMIC has control of theseland-holding companies as the contracting party intend to align the voting interest in the land-holding companies to reflect the economic interest in these subsidiaries. SMIC has secured itsinterest in the land by virtue of its long-term leases on both the buildings and land (see Note 5).
BDO. The Group has 48% ownership interest in BDO which is accounted for as an associate.Management assessed that the Group does not have control of BDO as the Group’s voting rightsare not sufficient to give it power to direct the relevant activities of BDO (see Note 13).
Estimates and AssumptionsThe key assumptions concerning the future and other key sources of estimation uncertainty at theend of the reporting period that have a significant risk of causing material adjustments to thecarrying amounts of assets and liabilities within the next financial year are discussed below:
Revenue and Cost Recognition. The Group’s revenue recognition policies require management tomake use of estimates and assumptions that may affect the reported amounts of revenues andcosts. The Group’s revenue from real estate and construction contracts recognized based on thepercentage of completion are measured principally on the basis of the estimated completion of aphysical proportion of the contract work.
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Revenue from sale of real estate amounted to P=21,242.1 million, P=22,499.7 million andP=17,215.1 million for the years ended December 31, 2013, 2012, and 2011, respectively, whilecost of real estate sold amounted to P=12,243.5 million, P=14,124.8 million and P=10,289.0 millionfor the years ended December 31, 2013, 2012 and 2011, respectively.
Impairment of Receivables. The Group maintains an allowance for impairment loss at a levelconsidered adequate to provide for potential uncollectible receivables. The level of allowance isevaluated by the Group on the basis of factors that affect the collectibility of the accounts. Thesefactors include, but are not limited to, the length of the Group’s relationship with the customersand counterparties, average age of accounts and collection experience. The Group performs aregular review of the age and status of these accounts, designed to identify accounts with objectiveevidence of impairment and to provide the appropriate allowance for doubtful accounts. Thereview is accomplished using a combination of specific and collective assessment. The amountand timing of recorded expenses for any period would differ if the Group made differentjudgments or utilized different methodologies. An increase in allowance for impairment losswould increase the recorded selling, general and administrative expenses and decrease current andnoncurrent assets.
Allowance for impairment loss amounted to P=340.6 million and P=161.0 million as atDecember 31, 2013 and 2012, respectively (see Notes 10 and 11) . Receivables, including non-trade receivables, advances and deposits, accrued interest receivable and receivable from banksand credit cards included under “Other current assets” account and advances for projectdevelopment, noncurrent portion of receivables from real estate buyers and long-term notesincluded under “Other noncurrent assets” account, amounted to P=54,749.1 million andP=45,312.6 million as at December 31, 2013 and 2012, respectively (see Notes 10, 11 and 17).
Impairment of AFS Investments - Calculation of Impairment Losses. The computation for theimpairment of AFS debt instruments requires an estimation of the present value of the expectedfuture cash flows and the selection of an appropriate discount rate. In the case of AFS equityinstruments, the Group expands its analysis to consider changes in the investee’s industry andsector performance, legal and regulatory framework, changes in technology and other factors thataffect the recoverability of the Group’s investments.
Allowance for impairment loss amounted to P=31.2 million and P=45.1 million as at December 31,2013 and 2012. The carrying values of AFS investments amounted to P=17,158.3 million andP=19,307.8 million as at December 31, 2013 and 2012, respectively (see Notes 9 and 12).
Net Realizable Value of Merchandise Inventories, Condominium Units for Sale, and Land andDevelopment. The Group writes down merchandise inventories, condominium units for sale, andland and development to net realizable value, through the use of an allowance account, wheneverthe net realizable value of the assets become lower than cost due to damage, physicaldeterioration, obsolescence, changes in price levels or other causes.
Estimates of net realizable value are based on the most reliable evidence available at the time theestimates are made of the amount the assets are expected to be realized. These estimates take intoconsideration fluctuations of price or cost directly relating to events occurring after reportingperiod to the extent that such events confirm conditions existing at the end of the reporting period.
The allowance account is reviewed on a regular basis to reflect the accurate valuation in thefinancial records.
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In 2013 and 2012, the Group assessed that the net realizable values of merchandise inventories,condominium units for sale and land and development are higher than cost, hence, the Group didnot recognize any losses on write down of the assets. The carrying values of merchandiseinventories amounted to P=13,232.3 million and P=13,402.8 million as at December 31, 2013 and2012, respectively (see Note 23). The carrying values of condominium units for sale includedunder “Other current assets” account amounted to P=6,213.5 million and P=2,670.9 million as atDecember 31, 2013 and 2012, respectively (see Note 11). The carrying values of land anddevelopment amounted to P=38,209.7 million and P=30,197.9 million as at December 31, 2013 and2012, respectively (see Notes 11 and 16).
Estimated Useful Lives of Property and Equipment and Investment Properties. The useful life ofeach of the Group’s property and equipment and investment properties is estimated based on theperiod over which the asset is expected to be available for use. Such estimation is based on acollective assessment of industry practice, internal technical evaluation and experience withsimilar assets. The estimated useful life of each asset is reviewed periodically and updated ifexpectations differ from previous estimates due to physical wear and tear, technical or commercialobsolescence and legal or other limitations on the use of the asset. It is possible, however, thatfuture financial performance could be materially affected by changes in the amounts and timing ofrecorded expenses brought about by changes in the factors mentioned above. A reduction in theestimated useful life of any property and equipment and investment properties would increase therecorded selling, general and administrative expenses and decrease noncurrent assets.
The total carrying values of property and equipment and investment properties amounted toP=210,932.6 million and P=167,157.2 million as at December 31, 2013 and 2012, respectively(see Notes 14 and 15).
Impairment of Investments in Shares of Stock of Associates. Impairment review of investments inshares of stock of associates is performed when events or changes in circumstances indicate thatthe carrying value may not be recoverable. This requires management to make an estimate of theexpected future cash flows from the investments and to choose a suitable discount rate in order tocalculate the present value of those cash flows.
The Group reversed impairment loss amounting to P=775.0 million and P=3,542.7 million in 2013and 2012, respectively, and no allowance was recognized for impairment loss in 2013 and 2012.Allowance for impairment loss amounted to nil and P=775.0 million as at December 31, 2013 and2012, respectively. The carrying values of investments in shares of stock of associates amountedto P=138,994.4 million and P=128,453.7 million as at December 31, 2013 and 2012, respectively(see Note 13).
Impairment of Goodwill and Trademarks and Brand Names with Indefinite Useful Lives.Impairment exists when the carrying value of an asset or cash generating unit exceeds itsrecoverable amount, which is the higher of its fair value less costs of disposal and its value in use.Fair value less costs of disposal calculation is based on available data from binding salestransactions, conducted at arm’s length, for similar assets or observable market prices lessincremental costs for disposing of the asset. The value in use calculations is based on a discountedcash flow model. The cash flows are derived from the budget for the next three years and do notinclude restructuring activities that the Group is not yet committed to or significant futureinvestments that will enhance the assets. The recoverable amount is most sensitive to the pre-taxdiscount rates used for the discounted cash flow model as well as the expected future cash inflowsand the growth rate used for extrapolation purposes. The key assumptions used to determine therecoverable amount for the different cash generating units are further discussed in Note 17.
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The total carrying values of goodwill and trademarks and brand names with indefinite usefullives arising from business combinations amounted P=20,255.1 million and P=15,354.2 million as atDecember 31, 2013 and 2012, respectively (see Note 17).
Impairment of Other Nonfinancial Assets. The Group assesses at each reporting date whetherthere is an indication that an item of property and equipment and investment properties may beimpaired. Determining the value of the assets, which requires the determination of future cashflows expected to be generated from the continued use and ultimate disposition of such assets,requires the Group to make estimates and assumptions that can materially affect the consolidatedfinancial statements. Future events could cause the Group to conclude that these assets areimpaired. Any resulting impairment loss could have a material impact on the financial positionand performance of the Group.
The preparation of the estimated future cash flows involves judgments and estimations. While theGroup believes that its assumptions are appropriate and reasonable, significant changes in theseassumptions may materially affect the Group’s assessment of recoverable values and may lead tofuture additional impairment charges.
Allowance for impairment loss on investment properties amounted to P=923.2 million as atDecember 31, 2013 and 2012 (see Note 15). The total carrying values of property and equipmentand investment properties amounted to P=210,932.6 million and P=167,157.2 million as atDecember 31, 2013 and 2012, respectively (see Notes 14 and 15).
Purchase Price Allocation in Business Combinations. The acquisition method requires extensiveuse of accounting estimates and judgments to allocate the purchase price to the fair market valuesof the acquiree’s identifiable assets and liabilities at acquisition date. It also requires the acquirerto recognize goodwill. The Group’s acquisitions have resulted in goodwill and separaterecognition of trademarks and brand names with indefinite lives.
In 2013, the Group acquired 90% ownership interest in Net Group and 51% ownership interest inWaltermart Supermarket, Inc. (WSI). The acquisition was accounted on provisional basis pendingdetermination of the fair value of Net Group’s and WSI’s net assets as at December 31, 2013 (seeNote 5).
In 2011, the Group acquired 17.9% equity interest in Atlas Consolidated Mining and DevelopmentCorporation (Atlas). The acquisition was accounted on provisional basis pending the fair value ofAtlas’ net assets as at December 31, 2011. In 2012, the fair values of the net assets acquired werefinalized where the resulting goodwill from the acquisition formed part of the cost of investmentin shares of stock of Atlas (see Note 13).
In 2012, SMIC increased its ownership in Atlas from 17.9% to 28.4%. The goodwill resultingfrom the acquisition formed part of the cost of investment in shares of stock of Atlas(see Note 13).
The total carrying values of goodwill and trademarks and brand names with indefinite useful livesarising from business combinations amounted P=20,255.1 million and P=15,354.2 million as atDecember 31, 2013 and 2012, respectively (see Note 17).
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Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at theend of each reporting period and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred tax assets to be utilized. TheGroup’s assessment on the recognition of deferred tax assets on deductible temporary differencesand carryforward benefits of excess minimum corporate income tax (MCIT) and net operating losscarryover (NOLCO) is based on the projected taxable income in future periods. Based on theprojection, not all deductible temporary differences and carryforward benefits of excess MCIT andNOLCO will be realized. Consequently, only a portion of the Group’s deferred tax assets wasrecognized.
Deferred tax assets recognized in the consolidated balance sheets as at December 31, 2013 and2012 amounted to P=2,172.8 million and P=642.1 million, respectively, while the unrecognizeddeferred tax assets amounted to P=304.6 million and P=1,902.3 million as at December 31, 2013 and2012, respectively (see Note 27).
Present Value of Defined Benefit Obligation. The present value of the pension obligationsdepends on a number of factors that are determined on an actuarial basis using a number ofassumptions. The assumptions used in determining the net cost for pensions include, amongothers, discount rate, and rate of salary increase. Actual results that differ from the Group’sassumptions are accumulated and amortized over future periods and therefore, generally affect therecognized expense and recorded obligation in such future periods.
The Group determines the appropriate discount rate at the end of each reporting period. It is theinterest rate that should be used to determine the present value of estimated future cash outflowsexpected to be required to settle the pension obligations. In determining the appropriate discountrate the Group considers the interest rates on government bonds that are denominated in thecurrency in which the benefits will be paid, and that have terms to maturity approximating theterms of the related pension liability.
Other key assumptions for pension obligations are based on current market conditions.
While it is believed that the Group’s assumptions are reasonable and appropriate, significantdifferences in actual experience or significant changes in assumptions may materially affect theGroup’s pension and other pension obligations.
The Group’s defined benefit asset amounted to P=616.0 million and P=452.9 million as atDecember 31, 2013 and 2012, respectively (see Notes 17 and 26). While the Group’s definedbenefit liability amounted to P=154.3 million and P=28.3 million as at December 31, 2013 and 2012,respectively (see Note 26).
Fair Value of Financial Assets and Liabilities. The Group carries certain financial assets andliabilities at fair value, which requires extensive use of accounting judgments and estimates. Thesignificant components of fair value measurement were determined using verifiable objectiveevidence (i.e., foreign exchange rates, interest rates and volatility rates). The amount of changesin fair value would differ if the Group utilized different valuation methodologies and assumptions.Any changes in the fair value of these financial assets and liabilities would directly affect profit orloss and other comprehensive income.
The fair value of financial assets and liabilities are discussed in Note 30.
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Contingencies. The Group is currently involved in legal and administrative proceedings. TheGroup’s estimate of the probable costs for the resolution of these proceedings has been developedin consultation with outside legal counsel handling defense in these matters and is based upon ananalysis of potential results. The Group currently does not believe that these proceedings willhave a material adverse effect on its financial position and performance. It is possible, however,that future financial performance could be materially affected by changes in the estimates or in theeffectiveness of strategies relating to these proceedings. No accruals were made in relation tothese proceedings.
5. Corporate Restructuring and Significant Acquisitions
Corporate RestructuringIn 2013, SM Prime initiated a corporate restructuring exercise to consolidate all of the SMGroup’s real estate subsidiaries and real estate assets under one single listed entity which is SMPrime (collectively, the “SM Property Group”). The overall objective is to bring to the equitiesmarket the most comprehensive and integrated Philippine property company that will engage theinvestor community in the long-term growth potential not just of the Philippine property sector,but also of the consumer and tourism sectors. This will leverage on SM’s strong brand franchise,group synergies, dominant position in mall and residential development, extensive marketing andsupplier network, huge landbank and other resources to strongly enhance the overall value of thecompany and all its future projects, which also include township and mixed-use development,commercial and resorts development, and hotels and convention centers.
Following are the significant corporate restructuring transactions of the SM Property Group:
a. SM Land’s Tender Offers for SMDC and HPI
Both SMDC and HPI are companies primarily engaged in real estate development listed in thePSE and registered with the Philippine SEC. On June 4, 2013, SM Land launched a tenderoffer to the existing shareholders of SMDC and HPI in exchange for SM Prime shares held bySM Land. The terms of the tender offer were executed at an exchange ratio of 0.472 SMPrime share for 1 SMDC share and 0.135 SM Prime share for 1 HPI share. The exchangeratios were arrived at based on SM Prime’s one month volume-weighted average price(VWAP) of P=18.66 per share and a six percent premium to SMDC’s one month VWAP ofP=8.303 per share. For HPI, the exchange ratios were arrived at based on SM Prime’s onemonth VWAP of P=18.66 per share and a fifteen percent premium to HPI’s one month VWAPof P=2.195 per share. The tender offers were completed on August 12, 2013. Total number ofSM Prime common shares held by SM Land exchanged to complete the tender offer toshareholders of SMDC and HPI is 1,778,427,940. After the completion of the Tender Offer,SMDC and HPI became 98.9% and 99.9% subsidiaries of SM Land.
Subsequently, on November 5, 2013, SMDC and HPI were delisted from the PSE.
b. Merger of SM Prime and SM Land
Following the completion of the tender offer, on October 10, 2013, the SEC approved themerger of SM Prime and SM Land via a share-for-share swap where the stockholders ofSM Land received new SM Prime shares in exchange for their shareholdings in SM Land.SM Prime is the surviving entity while SM Land is the absorbed entity. As a result of themerger, SMDC and HPI became subsidiaries of SM Prime effective October 10, 2013. Inaddition to the shareholdings in SMDC and HPI, SM Prime now holds SM Land’s real estate
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assets which includes among others, Mall of Asia Complex (MOAC), office buildings such asTwo E-Com in MOAC, Cyber 1 and Cyber 2 in Makati, and certain real properties leased toSM SaveMore and SM Department Store. The merger ratio of 738 SM Prime shares for 1 SMLand share were arrived based on the net appraised values of SM Prime and SM Land as atFebruary 28, 2013 as conducted by CB Richard Ellis. The total number of new SM Primecommon shares issued to SM Land shareholders is 14,390,923,857.
c. Acquisition of unlisted real estate companies and real estate assets from SMIC and the SyFamily
On October 10, 2013, the SEC approved SM Prime’s acquisition of SMIC’s unlisted realestate companies including SM Hotels and Conventions Corp. (SMHCC), SM Arena ComplexCorporation (SMACC), Costa del Hamilo, Inc. (Costa), Prime Metro Estate, Inc. (PMI) andTagaytay Resort and Development Corporation (TRDC) (collectively, the “Unlisted RealEstate Companies”). The SEC likewise approved SM Prime’s acquisition of real propertyassets of SMIC which includes among others, SMX Convention Center in MOAC and realproperties located in Tagaytay, by issuing new SM Prime shares to SMIC. The unlisted realestate companies and real estate assets of SMIC were acquired based on the appraised valuesas at February 28, 2013 as conducted by CB Richard Ellis. The total acquisition price of theunlisted real estate companies and real property assets amounted to P=25.8 billion equivalent to1,382,841,458 SM Prime common shares issued based on SM Prime 30-day VWAP ofP=18.66.
The Group viewed the series of the corporate restructuring transactions described above as a“single” or “linked” arrangements effected by the Sy Family (the Controlling Shareholder) to re-organize its real estate businesses and assets. The companies and real estate assets (accounted foras business units) involved in the restructuring are all under the common control by the Sy Family.
The impact to SMIC of the SM Property Group corporate restructuring are as follows:
SMDC, SM Land, SM Prime and Unlisted Real Estate Companies. The corporate restructuringresulted in changes in SMIC’s ownership interest in these subsidiaries only without loss of control.The related transaction costs of P=1,862.1 million was recorded under the “Equity adjustment fromcommon control transactions” account.
HPI. The increase in ownership interest of HPI from 27% to 51% resulted in acquisition ofcontrol. HPI is ultimately controlled by the Sy Family, hence, the transaction was accounted foras a step acquisition of an associate under common control. HPI was consolidated beginning2013. The related transaction costs of P=38.1 million was recognized as an expense under“Selling, general and administrative expenses” account of the 2013 consolidated statement ofincome.
The difference of P=1,610.7 million between the carrying value of the net assets disposed tonon-controlling interests and the carrying value of the net assets acquired from non-controllinginterests was recorded as part of the “Equity adjustment from common control transactions”account in the equity section of the December 2013 consolidated balance sheet.
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Acquisitions
Net Group. On December 2, 2013, SMIC entered into a Shareholders Agreement and SharePurchase Agreement for the acquisition of ownership interests in the following companies(collectively, the “Net Group”):
Company Voting interest Economic interest6-24 Property Holdings, Inc. 90% 90%14-678 Property Holdings, Inc. 90% 90%19-1 Property Holdings, Inc. 90% 90%18-2 Property Holdings, Inc. 90% 90%6-3 Property Holdings, Inc. 90% 90%Crescent Park 6-24 Property Holdings, Inc. 40% 90%Crescent Park 14-678 Property Holdings, Inc. 40% 90%Crescent Park 19-1 Property Holdings, Inc. 40% 90%Crescent Park 18-2 Property Holdings, Inc. 40% 90%Crescent Park 6-3 Property Holdings, Inc. 40% 90%
As a result of the acquisition, the Net Group became a partially-owned subsidiary of the Group.The primary reason for acquiring the Net Group was to expand the Group’s commercialdevelopment’s operation across major commercial business districts.
The acquisition was accounted for based on provisional fair values of the identifiable assets andliabilities as at the date of the acquisition as follows:
Provisionalfair values
(In Thousands)
Cash and cash equivalents P=926,304Receivables 894,298Other current assets 360,997Property and equipment (see Note 14) 3,125Investment properties (see Note 15) 18,800,000Other noncurrent assets 684,141
Total identifiable assets 21,668,865Less:Trade payables and other current liabilities 307,758Bank loan 5,630,288Deferred tax liabilities 2,431,755Other noncurrent liabilities 1,281,597
Total identifiable liabilities 9,651,398Total identifiable net assets at fair value P=12,017,467
The amount of purchase consideration is subject to finalization after due diligence.
The Net Group’s receivables comprise mainly of lease receivables from tenants amounting toP=894.3 million which was the carrying value as at acquisition date. None of the receivables havebeen impaired and it is expected that the full contractual amounts can be collected.
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The Group’s consolidated revenue and net income would have increased by 1,647.2 million andP=646.8 million, respectively, for the year ended December 31, 2013 had the acquisition of NetGroup took place on January 1, 2013. Total revenue and net income of Net Group included in theconsolidated financial statements for 2013 are immaterial.
WSI. In January and May 2013, SM Retail acquired a total of 193,800,000 shares of WSIequivalent to 51% ownership interest for P=3,200.0 million. WSI is mainly engaged in the businessof trading goods and merchandise. As a result of the acquisition, WSI became a partially-ownedsubsidiary of the Group. The primary reason for acquiring WSI was to expand the Group’s marketshare through the pre-existing stores of WSI.
The acquisition was accounted for based on provisional fair values of the identifiable assets andliabilities as at the date of the acquisition as follows:
Provisionalfair values
(In Thousands)
Cash and cash equivalents P=552,991Receivables 187,710Inventories 700,154Other current assets 154,512Property and equipment (see Note 14) 425,511Investment properties (see Note 15) 589,126Other noncurrent assets 26,535
Total identifiable assets 2,636,539Less:Trade payables and other current liabilities 1,349,769Other liabilities 3,606
Total identifiable liabilities 1,353,375Total identifiable net assets at fair value 1,283,164Non-controlling interest measured at proportionate
share of the provisional fair value (628,750)Goodwill arising from acquisition 2,545,625Purchase consideration transferred P=3,200,039
The goodwill of P=2,545.6 million represents the value of expected synergies arising from thebusiness combination.
WSI’s receivables comprise mainly of trade receivables amounting to P=187.7 million which wasthe carrying value as at acquisition date. None of the receivables have been impaired and it isexpected that the full contractual amounts can be collected.
The Group’s consolidated revenue and net income would have increased by P=3,595.5 million andP=102.8 million, respectively, for the year ended December 31, 2013 had the acquisition of WSItook place on January 1, 2013. Total revenue and net income of WSI included in the consolidatedfinancial statements for 2013 are immaterial.
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The net cash outflow on the acquisition is as follows
(In Thousands)Purchase consideration, net of cash acquired
(presented as investing activities) P=2,647,048Transaction costs (presented as operating activities) 369,931
P=3,016,979
CHAS Realty and Development Corporation and subsidiaries (CHAS). In January 2013, SMPrime entered into a Binding Share Purchase Agreement for the acquisition of 100% interest inCHAS. CHAS is engaged in the business of shopping mall operations which owns CabanatuanMegacenter in Nueva Ecija. The primary reason for acquiring CHAS is to expand the Group’small operations.
In December 2013, SM Prime completed its acquisition of 100% interest in CHAS.The acquisition was accounted based on provisional fair values of the identifiable assets andliabilities as at the date of the acquisition as follows:
Provisionalfair values
(In Thousands)
Investment properties P=1,384,990Cash and other assets 192,261 Total identifiable assets 1,577,251Less:Accounts payable and other current assets 72,259Deferred tax liabilities 199,098
Total identifiable liabilities 271,357Total identifiable net assets at fair value 1,305,894Goowill arising from acquisition 378,721Purchase consideration transferred P=1,684,615
The goodwill of P=378.7 million represents the value of expected synergies arising from thebusiness combination.
The fair value of acquired receivables amounting to P=73 million approximates their carryingvalue. No impairment loss was provided on these receivables.
SM Prime’s consolidated revenue and net income would have increased by 80 million anddecreased by 105 million, respectively, for the year ended December 31, 2013 had theacquisition of CHAS took place on January 1, 2013. Total revenue and net income of CHASincluded in the consolidated financial statements for 2013 are immaterial.
The net cash outflow from the acquisition of CHAS amounted to 1,572.2 million.
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6. Segment Information
For management purposes, the Group is organized into business units based on their products andservices. As a result of the corporate restructuring in 2013 (see Note 5), the Group changed thepresentation of its segment information and has identified three reportable operating segments asfollows: property, retail, and financial services and others. Segment information in thecomparative years were restated for this change.
The property segment is involved in mall, residential and commercial development and hotels andconvention centers operations. The mall segment develops, conducts, operates and maintains thebusiness of modern commercial shopping centers and all businesses related thereto such as theconduct, operation and maintenance of shopping center spaces for rent, amusement centers, orcinema theaters within the compound of the shopping centers. Residential and commercialsegments are involved in the development and transformation of major residential, commercial,entertainment and tourism districts through sustained capital investments in buildings andinfrastructure. The hotels and convention centers segment engages in and carries on the businessof hotels and convention centers and operates and maintains any and all services and facilitiesincident thereto.
The retail segment is engaged in the retail/wholesale trading of merchandise, such as dry goods,wearing apparels, food and other merchandise.
The financial services and others segment primarily includes the Parent Company which engagesin asset management and capital investments, and associates which are involved in financialservices.
Management monitors the operating results of its business units separately for the purpose ofmaking decisions about resource allocation and performance assessment. Segment performance isevaluated based on operating profit or loss and is measured consistently with the operating profitor loss in the consolidated financial statements.
The amount of segment assets and liabilities and segment profit or loss are based on measurementprinciples that are similar to those used in measuring the assets and liabilities and profit or loss inthe consolidated financial statements, which is in accordance with PFRS.
Inter-segment transactions are eliminated in the consolidated financial statements.
Business Segment Data
2013
Property RetailFinancial Services
and Others Eliminations Consolidated(In thousands)
Revenue: External customers P=56,109,064 P=183,606,666 P=13,577,074 P=– P=253,292,804 Inter-segment 6,004,771 117,556 16,101,800 (22,224,127) –
P=62,113,835 P=183,724,222 P=29,678,872 P=(22,211,392) P=253,292,804
Segment results: Income before income tax P=23,672,023 P=8,551,740 P=12,331,124 (P=895,312) P=43,659,575 Provision for income tax (3,991,614) (2,446,033) 289,085 728,065 (5,420,497) Net income P=19,680,409 P=6,105,707 P=12,620,209 (167,247) P=38,239,078
Net income attributable to: Owners of the Parent P=19,229,301 P=5,748,922 P=12,620,210 (P=10,152,751) P=27,445,682 Non-controlling interests 451,107 356,786 – 9,985,503 10,793,396
Segment assets (excludingdeferred tax) P=352,503,891 P=67,860,354 P=243,699,419 (P=33,242,294) P=630,821,370
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2013
Property RetailFinancial Services
and Others Eliminations Consolidated(In thousands)
Segment liabilities (excludingdeferred tax) P=173,423,059 P=43,474,968 P=135,992,362 (P=27,107,595) P=325,782,794
Net cash flows provided by (used in): Operating activities P=8,268,259 (P=3,524,717) P=289,615 P=23,797,065 P=28,830,222 Investing activities (11,246,629) 869,427 (5,745,157) (14,927,430) (31,049,789) Financing activities 2,376,377 (1,007,189) (7,555,018) (1,834,439) (8,020,269)
Other information: Investments in shares of stock
of associates and joint ventures P=11,965,534 P=129,666 P=126,899,166 P=– P=138,994,366 Equity in net earnings
of associates 1,860,138 39,627 11,702,504 – 13,602,269 Capital expenditures 46,534,815 4,770,987 21,677,367 – 72,983,169 Depreciation and amortization 5,470,283 3,440,348 602,953 – 9,513,584 Reversal of impairment losses – – 1,018,156 – 1,018,156
2012
Property RetailFinancial Services
and Others Eliminations Consolidated(In Thousands)
Revenue: External customers P=52,609,032 P=161,149,617 P=10,118,625 P=– P=223,877,274 Inter-segment 11,498,582 89,139 11,891,579 (23,479,300) –
P=64,107,614 P=161,238,756 P=22,010,204 (P=23,479,300) P=223,877,274
Segment results: Income before income tax P=25,528,157 P=9,258,062 P=10,061,252 (P=3,901,867) P=40,945,604 Provision for income tax (3,687,017) (2,708,977) (149,092) – (6,545,086) Net income P=21,841,140 P=6,549,085 P=9,912,160 (P=3,901,867) P=34,400,518
Net income attributable to: Owners of the Parent P=19,828,629 P=6,328,141 P=9,912,160 (P=11,394,549) P=24,674,381 Non-controlling interests 2,012,511 220,944 – 7,492,682 9,726,137
Segment assets (excludingdeferred tax) P=300,016,069 P=67,976,666 P=244,318,016 (P=51,148,888) P=561,161,863
Segment liabilities (excludingdeferred tax) P=133,548,224 P=34,237,153 P=155,030,432 (P=27,199,737) P=295,616,072
Net cash flows provided by (used in): Operating activities P=5,409,476 P=12,049,628 (P=7,102,048) P=20,609,741 P=30,966,797 Investing activities (18,932,325) (205,184) (25,153,687) (33,268,588) (77,559,784) Financing activities 16,768,724 (8,195,619) 30,175,999 12,573,192 51,322,296
Other information: Investments in shares of stock
of associates and joint ventures P=11,233,223 P=90,039 P=117,130,482 P=– P=128,453,744 Equity in net earnings (losses)
of associates 759,201 (9,961) 8,292,794 – 9,042,034 Capital expenditures 40,384,237 5,642,614 2,220,767 – 48,247,618 Depreciation and amortization 4,552,018 2,858,638 647,215 – 8,057,871 Provision for (reversal of)
impairment losses 108,142 – (2,743,711) – (2,635,569)
2011
Property RetailFinancial Services
and Others Eliminations Consolidated(In Thousands)
Revenue: External customers P=42,501,490 P=150,472,734 P=6,941,424 P=– P=199,915,648 Inter-segment 8,159,079 2,883,744 12,815,388 (23,858,211) –
P=50,660,569 P=153,356,478 P=19,756,812 (P=23,858,211) P=199,915,648
Segment results: Income before income tax P=22,195,386 P=8,242,661 P=9,286,422 (P=4,031,827) P=35,692,642 Provision for income tax (3,056,020) (2,360,704) (82,574) 4,480 (5,494,818) Net income P=19,139,366 P=5,881,957 P=9,203,848 (P=4,027,347) P=30,197,824
Net income attributable to: Owners of the Parent P=18,807,048 P=5,809,110 P=9,203,848 (P=12,595,414) P=21,224,592 Non-controlling interests 332,318 72,847 – 8,568,067 8,973,232
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2011
Property RetailFinancial Services
and Others Eliminations Consolidated
Net cash flows provided by (used in): Operating activities P=9,923,580 P=7,656,609 P=4,643,410 (P=3,422,186) P=18,801,413 Investing activities (20,372,344) 1,158,138 (271,559) (6,408,165) (25,893,930) Financing activities 1,840,433 (8,154,976) (7,183,829) 9,470,498 (4,027,874)
Other information: Equity in net earnings (losses)
of associates and joint ventures 522,904 – 5,892,520 – 6,415,424 Capital expenditures 32,623,063 4,219,155 3,132,553 – 39,974,771 Depreciation and amortization 4,301,033 2,409,174 482,893 – 7,193,100 Provision for (reversal of)
impairment losses 479,775 – 73,611 – 553,386
7. Cash and Cash Equivalents
This account consists of:
2013 2012(In Thousands)
Cash on hand and in banks (see Note 22) P=10,202,986 P=6,098,368Temporary investments (see Notes 18 and 22) 40,006,671 54,616,352
P=50,209,657 P=60,714,720
Cash in banks earn interest at the respective bank deposit rates. Temporary investments are madefor varying periods of up to three months depending on the immediate cash requirements of theGroup, and earn interest at the respective temporary investment rates.
Interest income earned on cash and cash equivalents is disclosed in Note 25.
8. Time Deposits and Short-Term Investments
This account consists of:
2013 2012(In Thousands)
Time deposits:Pledged (see Notes 20 and 22) P=21,087,625 P=19,498,750Not pledged (see Note 22) 34,018,075 38,203,435
55,105,700 57,702,185Short-term investments (see Note 22) 887,900 821,000
55,993,600 58,523,185Less current portion 28,912,650 29,090,335Noncurrent portion P=27,080,950 P=29,432,850
A portion of the time deposits amounting to US$475.0 million, with peso equivalents ofP=21,087.6 million and P=19,498.8 million as at December 31, 2013 and 2012, respectively and bearinterest ranging from 4.1% to 5.4%, are used as collateral for loans obtained by the Group(see Note 20).
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Short-term investments amounting to US$20.0 million, with peso equivalents of P=887.9 millionand P=821.0 million as at December 31, 2013 and 2012, respectively, bear a fixed interest rate of3.24%.
Interest income earned on time deposits and short-term investments is disclosed in Note 25.
9. Investments Held for Trading and Sale
This account consists of:
2013 2012(In Thousands)
Investments held for trading -Bonds (see Note 22) P=459,754 P=459,343
AFS investments (see Note 12):Bonds and corporate notes (see Note 22) – 1,733,752Shares of stock 659,226 661,446
659,226 2,395,198P=1,118,980 P=2,854,541
The Group recognized a loss of P=18.2 million for the year ended December 31, 2013 and a gain ofP=16.3 million and P=13.4 million from fair value adjustments of investments held for trading forthe years ended December 31, 2012 and 2011, respectively. The amounts are included under“Gain on sale of available-for-sale investments and fair value changes on investments held fortrading - net” account in the consolidated statements of income.
Interest income earned on investments held for trading and sale is disclosed in Note 25.
10. Receivables
This account consists of:
2013 2012(In Thousands)
Trade:Real estate buyers P=29,150,833 P=23,373,079Third-party tenants 3,329,038 3,123,358Related-party tenants (see Note 22) 2,594,444 1,512,842
Due from related parties (see Note 22) 1,334,076 2,465,971Management fees (see Note 22) 433,921 154,172Dividends 766,816 292,917Total 37,609,128 30,922,339Less allowance for impairment loss 334,891 155,274
37,274,237 30,767,065Less noncurrent portion of receivables from
real estate buyers (see Note 17) 10,636,503 14,401,513Current portion P=26,637,734 P=16,365,552
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The terms and conditions of the above receivables are as follows:
§ Trade receivables from tenants and management fee receivables are noninterest-bearing andare normally collectible on a 30 to 90 days’ term.
§ Receivables from real estate buyers mainly consist of receivables subject to financing frombanks and other financial institutions with interest at market rates ranging from 13% to 18%per annum and normally collectible on a 3 to 5 years term.
§ The terms and conditions of related party receivables are further discussed in Note 22.
§ Dividends receivables are noninterest-bearing and are normally collectible within the nextfinancial year.
The movements in allowance for impairment loss are as follows:
2013 2012(In Thousands)
Balance at beginning of year P=155,274 P=47,132Provision for the year (see Note 24) 179,640 108,142Reversal of provision (23) –Balance at end of year P=334,891 P=155,274
The allowance for impairment loss pertains to receivables from real estate buyers and tenantswhich were identified through specific assessment.
The aging analysis of receivables as at December 31, 2013 and 2012 are as follows:
December 31, 2013Neither Past Due
nor ImpairedPast Due but not Impaired Individually
31–90 Days 91–120 Days Over 120 Days Impaired Total(In Thousands)
Trade: Real estate buyers: Current P=17,142,278 P=231,862 P=145,587 P=671,699 P=322,904 P=18,514,330 Noncurrent 10,636,503 – – – – 10,636,503 Related-party tenants 2,594,444 – – – – 2,594,444 Third-party tenants 3,208,416 69,975 38,660 – 11,987 3,329,038Due from related parties 1,334,076 – – – – 1,334,076Management fees- Related parties 433,921 – – – – 433,921Dividends 766,816 – – – – 766,816Net receivables before allowance
for doubtful accounts P=36,116,453 P=301,837 P=184,247 P=671,700 P=334,891 P=37,609,128
December 31, 2012Neither Past Due
nor ImpairedPast Due but not Impaired Individually
31–90 Days 91–120 Days Over 120 Days Impaired Total(In Thousands)
Trade: Real estate buyers: Current P=8,569,352 P=83,106 P=28,886 P=147,315 P=142,907 P=8,971,566 Noncurrent 14,401,513 – – – 14,401,513 Related-party tenants 1,512,842 – – – – 1,512,842 Third-party tenants 3,110,175 390 426 – 12,367 3,123,358Due from related parties 2,465,971 – – – – 2,465,971Management fees- Related parties 154,172 – – – – 154,172Dividends 292,917 – – – – 292,917Net receivables before allowance
for doubtful accounts P=30,506,942 P=83,496 P=29,312 P=147,315 P=155,274 P=30,922,339
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Receivables, other than those identified as impaired, are assessed by the Group’s management asgood and collectible.
11. Other Current Assets
This account consists of:
2013 2012(In Thousands)
Land and development (see Note 16) P=12,542,783 P=–Prepaid taxes and other prepayments 5,652,642 5,295,701Condominium units for sale (see Note 16) 6,213,523 2,670,943Non-trade receivables, net of allowance for
impairment loss of P=5,705 5,086,936 4,247,081Advances and deposits 5,091,059 3,374,278Input tax 2,987,264 1,704,159Receivable from banks and credit cards 2,423,215 2,352,836Accrued interest receivable 959,763 1,174,785Advances for project development (see Note 22) 88,615 1,121,565Others 1,781,824 1,516,860
P=42,827,624 P=23,458,208
§ Non-trade receivables include interest-bearing advances to third parties which are normallycollectible within the next financial year.
§ Receivable from banks and credit cards are noninterest-bearing and are normally collectibleon a 30 to 90 days term.
§ Accrued interest receivable relates mostly to time deposits which will be collected atrespective maturity dates.
§ Advances for project development mostly pertain to advances made to related parties for theacquisition of land for future development.
12. Available-for-Sale Investments
This account consists of investments in:
2013 2012(In Thousands)
Shares of stock:Listed (see Note 20) P=11,539,018 P=11,516,716Unlisted 99,468 102,120
Bonds and corporate notes (see Note 20) 5,539,822 7,728,240Club shares 11,260 5,900
17,189,568 19,352,976Less allowance for impairment loss 31,250 45,132
17,158,318 19,307,844Less current portion (see Note 9) 659,226 2,395,198Long-term portion P=16,499,092 P=16,912,646
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§ Listed shares of stock of the Group pertain to investments in publicly-listed companies. Theseare measured at the quoted market price of the shares. A portion of these investmentsamounting to P=3,594.0 million and P=3,587.0 million as at December 31, 2013 and 2012,respectively, are pledged as collateral for a portion of the Group’s long-term loans(see Note 20).
§ Unlisted shares of stock of the Group pertain to stocks of private corporations. These areclassified as AFS investments and are carried at cost since fair value cannot be reliablyestimated due to lack of reliable estimates of future cash flows and discount rates necessary tocalculate the fair value. There is currently no market for these investments and the Groupintends to hold them for the long-term.
§ Investments in bonds and corporate notes as at December 31, 2013 and 2012 include thirdparty convertible bonds and corporate notes with fixed interest rates ranging from 2.5% to8.25%. These investments will mature on various dates from February 9, 2013 toApril 15, 2018.
The account also includes SM Prime’s investment in corporate notes issued by BDO Unibank,Inc. (BDO) in 2013 and 2012 with fixed interest rate of 6.80% which were early redeemed inMay 2013 at par (see Note 20). Investments in corporate notes are intended to meet short-term cash requirements.
Investment in convertible bonds as at December 31, 2012 have embedded derivatives whichare further discussed in Note 30.
The movements in net unrealized gain on AFS investments and share in unrealized gain ofassociates attributable to the owners of the Parent which are recognized in othercomprehensive income for the years ended December 31, 2013 and 2012 are as follows:
2013 2012(In Thousands)
Balance at beginning of year P=11,718,559 P=7,008,067Share in net unrealized gain (loss) on AFS
investments of associates (see Note 13) (2,687,077) 1,486,257Gain (loss) due to changes in fair value
of AFS investments (1,546,395) 3,224,165Transferred to consolidated statement of income (146,587) 70Balance at end of year P=7,338,500 P=11,718,559
Gain (loss) on disposal of AFS investments recognized under “Gain on sale of available-for-sale investments and fair value changes on investments held for trading - net” account in theconsolidated statement of income amounted to P=159.4 million for the year endedDecember 31, 2013, (P=0.1) million for the year ended December 31, 2012, P=30.8 million forthe year ended December 31, 2011. The amounts are exclusive of the share of non-controllinginterests.
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13. Investments in Shares of Stock of Associates and Joint Ventures
The details of and movements in this account are as follows:
2013 2012(In Thousands)
Cost:Balance at beginning of year P=92,840,123 P=66,416,206Additions 5,492,653 28,361,006Acquisition of controlling interest of HPI and SHDC (see Note 5) (1,710,703) –Disposals - net of realized deferred gain (21,556) (1,937,089)Balance at end of year 96,600,517 92,840,123
Accumulated equity in net earnings:Balance at beginning of year 36,388,668 26,319,348Equity in net earnings 13,602,269 9,042,034Dividends received (4,499,652) (418,470)Accumulated equity in net earnings of investments – HPI and SHDC (338,474) –Accumulated equity in net earnings of investments sold (2,208) (68,587)Balance at end of year 45,150,603 34,874,325
Share in net unrealized gain (loss) on AFSinvestments of associates (2,756,754) 1,514,343
Allowance for impairment loss:Balance at beginning of year 775,047 4,317,705Recovery (775,047) (3,542,658)
Balance at end of year – (775,047)P=138,994,366 P=128,453,744
In 2012 and 2011, the Group reversed the allowance for impairment loss in investment in BDOamounting to P=3,542.7 million and P=445.0 million, respectively, and is included under “Provisionfor (reversal of) impairment loss and others” under “Selling, general and administrative expenses”account in the consolidated statement of income (see Note 24). The Group made a reassessmentof its investments in shares of stock of BDO and concluded that the impairment is no longernecessary in reference to the quoted stock price of BDO in the market.
The major associates and joint venture of the Group, all of which were incorporated in thePhilippines, are as follows:
Percentage of OwnershipDecember 31, 2013 December 31, 2012
Company Gross Effective Gross Effective Principal ActivitiesAssociatesBDO 48 47 48 47 Financial servicesChina Banking Corporation (China Bank) 23 20 23 21 Financial servicesBelle Corp. (Belle) 32 28 32 18 Real estate development and tourismAtlas 29 29 29 29 MiningSodexo Motivation Solutions Philippines, Inc. 40 40 40 40 RetailFast Retailing Philippines, Inc. 25 25 25 25 RetailHPI – – 35 27 Real estate development and tourismSummerhills Home Development
Corporation (SHDC) – – 49 21 Real estate development and tourismJoint VenturesWaltermart Mall 51 26 – – Shopping mall development
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BDOIn March 2012, BDO declared a stock dividend equivalent to 3% of the outstanding capital stockof BDO which increased the number of common and preferred shares held by the Group by40.5 million and 3.6 million, respectively. The declaration of the stock dividend by BDOincreased the ownership interest of the Group by 1% as a result of the preferred shares held bySMIC.
In June 2012, BDO had a stock rights offering which entitled each eligible stockholder tosubscribe to one common share for every three common shares held as at record date at an offerprice of P=48.6 per rights share. As at June 30, 2012, the Group exercised its rights share and paidP=22,528.7 million equivalent to 463.5 million BDO shares. Upon completion of the regulatoryrequirements by BDO, the shares were issued to SMIC on July 4, 2012.
At various dates in 2012, SMIC sold a total number of 1.2 million BDO shares, equivalent to0.04% of the total outstanding voting shares of BDO at a total cost of P=39.0 million.
China BankIn May 2013, China Bank declared a stock dividend to stockholders of record as of July 19, 2013.The BSP and SEC approved the dividend declaration on June 21, 2013.
On August 24, 2012, SEC approved the Amended Articles of Incorporation of China Bank toeffect a ten-for-one stock split of the common shares. This resulted in an increase in the numberof shares from 200 million to 2,000 million, and a reduction in par value of shares from P=100.00 toP=10.00 per share. The stock split by China Bank did not result to a change in the ownershipinterest of the Group.
BelleIn April 2011, the Group, increased its ownership interest in Belle, an associate, by 20.78% and12.58% gross and effective ownership, respectively, via share swap wherein the entire outstandingshares of Premium Leisure Amusement, Inc. (a subsidiary) was exchanged for certain number ofcommon shares of Belle valued at P=1.95 per share (shares swap). The valuation of the PLAIshares was made by an independent appraiser and approved by the SEC on October 6, 2010. Thisis the same valuation used in recording the share swap transaction in its 2011 financial statementsupon receipt of the approval from the Bureau of Internal Revenue on March 31, 2011 and issuanceof stock certificates by Belle on April 14, 2011. The transaction resulted in a net gain on shareswap amounting to P=2,604.2 million, net of the eliminated portion of the gain pertaining to theretained interest of the Group in Belle and is recognized under “Gain on disposal of investmentsand properties - net” account in the consolidated statement of income. The Group will realize thedeferred income as the investment in the associate is disposed.
In 2013, SMIC acquired 100% ownership in Sto. Roberto (see Note 5). The acquisition of Sto.Roberto increased the Group’s effective interest in Belleshares Holdings, Inc. to 99% whichresulted to an increase in the Group’s effective ownership in Belle.
On various dates in 2013 and 2012, the Group sold 20.2 million and 1,509.0 million Belle shares,respectively, on which the Group realized P=10.8 million and P=811.2 million of the deferred gain in2013 and 2012, respectively, and was recognized under “Gain on disposal of investments andproperties - net” account in the consolidated statement of income. The remaining balance of thedeferred gain as at December 31, 2013 and 2012 amounted to P=1,065.7 million andP=1,076.4 million, respectively.
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Atlas
Finalization of 2011 Provisional AccountingIn July 2011, SMIC acquired 316.2 million common shares of Atlas for US$142.2 million(P=5,996.6 million) representing 17.9% equity interest. In 2011, the Group accounted for thepurchase price allocation on provisional basis, pending the information on the fair value of Atlas’net assets. The fair values of the net assets acquired were finalized in June 2012 and goodwillfrom the acquisition formed part of the cost of investment in shares of stock of Atlas.
SMIC has three representations in the BOD of Atlas as at December 31, 2011 and is participatingin operational decisions. Based on these facts and circumstances, management determined that theGroup has significant influence over Atlas and therefore accounted for it as an investment in anassociate.
Convertible Loan of AtlasOn February 29, 2012, SMIC purchased from BDO the P=5,492.7 million convertible loan coveredby Secured Notes Facility Agreement (the Agreement) between Atlas and BDO dated July 25,2011. On May 21, 2012, SMIC gave an irrevocable notice to fully exercise the conversion optionunder the Agreement as the assignee of BDO. On July 13, 2012, upon completion of thenecessary regulatory approval, the shares were issued to SMIC resulting in an increase inownership in Atlas from 17.9% to 28.4%.
Fast Retailing Philippines, Inc.In January 2012, Marketwatch Investments Co., Inc., a subsidiary of SM Retail, investedP=100.0 million to acquire 25% ownership of the total outstanding shares of Fast RetailingPhilippines, Inc. accounted as an investment in an associate. The entity is organized with FastRetailing (Singapore) Co. Ltd. to engage in the retail/wholesale trading of merchandise, such asdry goods, wearing apparels and other merchandise, cosmetics, skin care and hair care productsand other related products under the brand name “Uniqlo”.
HPIIn 2011, the Group disposed 134.8 million shares of HPI for a total cost of P=288.2 million. Thedisposal resulted in a gain of P=1.0 million, which is included under “Gain on disposal ofinvestments and properties - net” account in the consolidated statement of income.
In 2011, the Group recognized allowance for impairment loss in investment in HPI amounting toP=395.0 million and is included under “Provision for (reversal of) impairment loss and others”under “Selling, general and administrative expenses” account in the consolidated statement ofincome (see Note 24). The allowance recognized by the Group was based on fair value less costto sell of the investment in reference to the quoted stock price in the market.
In 2013, through the corporate restructuring, HPI became a subsidiary of SMIC, indirectly thoughSM Prime. The acquisition of the controlling interest of HPI was considered as a businesscombination under common control. Thus, this was accounted for as a step-up acquisition usingthe pooling of interest method (Note 5).
In 2013, the Group reversed the allowance for impairment loss in investment in HPI amounting toP=775.0 million and is included under “Provision for (reversal of) impairment loss and others”under “Selling, general and administrative expenses” account in the consolidated statements ofincome (see Note 24). The Group made a reassessment of its investments in shares of stock ofHPI and concluded that the impairment is no longer necessary in reference to the quoted stockprice of HPI in the market.
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SHDCIn February 2013, SHDC became a subsidiary of SM Land through the latter’s acquisition of the51.0% ownership in SHDC for a total consideration of P=20.4 million. This was accounted for as astep-up acquisition using the pooling of interest method (Note 5).
In 2011, SMDC obtained 49% and 21% gross and effective ownership, respectively, in SHDC fora total consideration of P=20.1 million. Consequently, SHDC became an associate of the Group.
Waltermart MallOn January 7, 2013, SM Prime entered into Shareholders Agreement and Share PurchaseAgreement for the acquisition of 51% ownership interest in the following companies (collectively,Waltermart Mall):
§ Winsome Development Corporation§ Willin Sales, Inc.§ Willimson, Inc.§ Waltermart Ventures, Inc.§ Waltermart Development, Inc.
On July 12, 2013, the Deeds of Absolute Sale were executed between SM Prime and shareholdersof Waltermart Mall. Waltermart Mall is involved in shopping mall operations and currently ownsnineteen (19) malls across Metro Manila and Luzon. The investments in Waltermart Mall wereaccounted as investment in joint venture using equity method of accounting because thecontractual arrangement between the parties establishes joint control.
The condensed financial information of the Group’s material associate, BDO, and thereconciliation of its net assets to the carrying amounts in the consolidated financial statementsfollows:
2013 2012(In Millions)
Total assets P=1,672,778 P=1,244,408Total liabilities (1,508,424) (1,087,156)Equity 164,354 157,252Proportion of the Group’s ownership 48% 48%
78,890 75,481Goodwill and others 24,120 23,258Carrying amount of the investment 103,010 98,739
2013 2012 2011(In Millions)
Interest income 56,606 54,014 50,467Interest expense 13,440 17,816 16,688Other expenses – net (20,520) (21,766) (23,191)Net income 22,646 14,432 10,588Share in net income 10,676 6,897 4,986Total other comprehensive income (4,766) 3,303 (168)Total comprehensive income 17,880 17,735 10,676Share in comprehensive income 8,381 8,360 5,033
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The following is the aggregate information of associates that are not individually material:
2013 2012 2011(In Millions)
Share in net income P=2,926 P=2,145 P=1,429Share in other comprehensive
income (loss) (327) 111 131Share in total comprehensive income 2,599 2,256 1,560
As at December 31, the fair values of investments in associates which are listed in the PSE are asfollows:
2013 2012(In Thousands)
BDO P=158,844,179 P=134,986,770China Bank 19,003,197 15,987,281Belle 16,434,274 16,268,509Atlas 8,764,505 11,272,094
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14. Property and Equipment
The movements in this account are as follows:
Land
Buildings,Condominium
Units andImprovements
Store Equipmentand
Improvements
DataProcessingEquipment
Furniture,Fixtures
and OfficeEquipment
Machineryand
EquipmentLeasehold
ImprovementsTransportation
EquipmentConstruction
in Progress Total(In Thousands)
CostBalance as at December 31, 2011 P=2,974,095 P=4,655,572 P=6,721,043 P=4,132,561 P=3,457,225 P=2,801,446 P=3,756,493 P=580,594 P=965,169 P=30,044,198Additions 183,851 1,594,292 1,119,843 428,180 767,679 690,525 1,180,589 38,469 611,142 6,614,570Reclassifications (744,956) 764,325 (115,484) 141,191 (184,867) (23,739) 87,977 6,043 (329,884) (399,394)Disposals/retirements – (2,644,901) (148,498) (163,128) (57,536) (99,186) (35,118) (31,879) (11,474) (3,191,720)Balance as at December 31, 2012 2,412,990 4,369,288 7,576,904 4,538,804 3,982,501 3,369,046 4,989,941 593,227 1,234,953 33,067,654Additions – 566,841 1,194,897 325,373 520,580 604,179 1,071,236 66,081 782,608 5,131,795Effect of business combination (see Note 5) – 8,066 865,036 74,265 1,410 1,418 – 2,596 263,643 1,216,434Reclassifications (2,382,990) 67,187 1,410,778 265,870 139,905 (285,449) 1,678,823 30,713 (776,681) 148,156Disposals/retirements (30,000) (605,516) (8,598) (580,863) (29,769) (37,616) (36,577) (5,923) (177,169) (1,512,031)Balance as at December 31, 2013 P=– P=4,405,866 P=11,039,017 P=4,623,449 P=4,614,627 P=3,651,578 P=7,703,423 P=686,694 P=1,327,355 P=38,052,008
Accumulated Depreciation and AmortizationBalance as at December 31, 2011 P=– P=2,508,269 P=4,575,151 P=2,739,647 P=1,595,566 P=1,634,964 P=1,616,711 P=281,536 P=– P=14,951,844Depreciation and amortization – 381,307 825,626 493,886 500,992 387,047 706,389 52,514 – 3,347,761Reclassifications – (127,122) (236,144) (3,049) (42,307) (53,726) 32,125 (99) – (430,322)Disposals/retirements – (1,535,720) (154,118) (120,030) (50,391) (90,035) (18,228) (19,624) – (1,988,146)Balance as at December 31, 2012 – 1,226,734 5,010,515 3,110,454 2,003,860 1,878,250 2,336,997 314,327 – 15,881,137Depreciation and amortization – 338,054 616,380 532,018 603,746 962,994 666,619 54,461 – 3,774,272Effect of business combination (see Note 5) – – 725,138 60,658 75 76 – 1,851 – 787,798Reclassifications – 323,592 966,206 48,100 48,567 (513,915) (309,346) 19,067 – 582,271Disposals/retirements – (558,336) (130,529) (552,812) (16,421) (19,823) (15,873) (3,056) – (1,296,850)Balance as at December 31, 2013 P=– P=1,330,044 P=7,187,710 P=3,198,418 P=2,639,827 P=2,307,582 P=2,678,397 P=386,650 P=– P=19,728,628
Net Book ValueAs at December 31, 2013 P=– P=3,075,822 P=3,851,307 P=1,425,031 P=1,974,800 P=1,343,996 P=5,025,026 P=300,044 P=1,327,355 P=18,323,380As at December 31, 2012 P=2,412,990 P=3,142,554 P=2,566,389 P=1,428,350 P=1,978,641 P=1,490,796 P=2,652,944 P=278,900 P=1,234,953 P=17,186,517
As at December 31, 2013 and 2012, the Group has no idle property and equipment and the gross carrying amount of fully depreciated property andequipment still in use amounted to P=8,455.8 million and P=4,644.3 million, respectively.
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15. Investment Properties
The movements in this account are as follows:
Land andImprovements and
Land Use Rights
Buildingsand
Improvements
BuildingEquipment,
Furnitureand Others
Construction inProgress Total
(In Thousands)
CostBalance as at December 31, 2011 P=30,570,126 P=94,671,246 P=17,521,166 P=20,668,255 P=163,430,793Additions 4,766,518 10,150,742 2,907,309 10,107,534 27,932,103Reclassifications (186,572) 7,850,434 1,260,406 (13,493,898) (4,569,630)Translation adjustment (159,893) (611,091) (71,572) (220,612) (1,063,168)Balance as at December 31, 2012 34,990,179 112,061,331 21,617,309 17,061,279 185,730,098Additions 4,800,290 5,307,963 1,619,709 14,157,130 25,885,092Effect of business combination (see Note 5) – 20,774,116 – – 20,774,116Reclassifications 746,887 6,770,851 6,196,877 (4,637,452) 9,077,163Translation adjustment 347,920 1,706,129 206,315 587,066 2,847,430Disposals (747,287) (11,389,188) (876,904) (837,905) (13,851,284)Balance as at December 31, 2013 P=40,137,989 P=135,231,202 P=28,763,306 P=26,330,118 P=230,462,615
Accumulated Depreciation, Amortizationand Impairment Loss
Balance as at December 31, 2011 P=1,177,437 P=21,530,088 P=9,323,793 P=123,564 P=32,154,882Depreciation and amortization 72,584 3,229,407 1,408,119 – 4,710,110Reclassifications (323,275) (664,505) (179) – (987,959)Translation adjustment (10,232) (76,254) (31,139) – (117,625)Balance as at December 31, 2012 916,514 24,018,736 10,700,594 123,564 35,759,408Depreciation and amortization 155,598 3,788,648 1,795,066 – 5,739,312Reclassifications (493,837) 8,730,336 1,059,532 – 9,296,031Translation adjustment 47,656 783,816 76,446 – 907,918Disposals (41) (12,698,071) (1,151,131) – (13,849,243)Balance as at December 31, 2013 P=625,890 P=24,623,465 P=12,480,507 P=123,564 P=37,853,426
Net Book ValueAs at December 31, 2013 P=39,512,099 P=110,607,737 P=16,282,799 P=26,206,554 P=192,609,189As at December 31, 2012 P=34,073,665 P=88,042,595 P=10,916,715 P=16,937,715 P=149,970,690
As at December 31, 2013 and 2012, the allowance for impairment loss on land and improvementsand land use rights, and construction amounted to P=923.2 million. There were no reversals ofallowance for impairment loss in 2013 and 2012, respectively.
Included under “Land” account are the 212,119 square meters of real estate properties with acarrying value of P=494.0 million and P=447.0 million as at December 31, 2013 and 2012,respectively, and a fair value of P=13,531.0 million as at August 2007. The land was planned forresidential development in accordance with the cooperative contracts entered into by Mega MakeEnterprises Limited and Affluent Capital Enterprises Limited (Oriental Land) with Grand Chinaand Oriental Land Development Limited on March 15, 2007. The value of these real estateproperties was not part of the consideration paid by SM Prime of P=10,827.0 million to GrandChina and Oriental Land. Accordingly, the assets were recorded at carrying values under“Investment properties” account and a corresponding liability equivalent to the same amount isshown as part of “Tenants’ deposits and others” account in the consolidated balance sheets.
Portions of investment properties located in China with carrying value of P=5,001.0 million andP=4,852.0 million as at December 31, 2013 and 2012, respectively, and estimated fair value ofP=20,109.0 million and P=10,874.0 million as at December 31, 2013 and 2012, respectively, weremortgaged as collaterals to secure the domestic borrowings in China (see Note 20).
Rent income from investment properties, which is primarily attributable to SM Prime, amountedto P=27,929.4 million, P=24,695.6 million and P=20,832.7 million for the years ended December 31,2013, 2012 and 2011, respectively. Consolidated direct operating expenses from investment
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properties which generate income amounted to P=17,068.0 million, P=13,995.2 million andP=12,277.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Construction in progress includes shopping mall complex under construction amounting toP=21,247.0 million and P=15,245.0 million, and landbanking and commercial building constructionsamounting to P=2,112.0 million and P=1,430.0 million as at December 31, 2013 and 2012,respectively.
In 2013, shopping mall complex under construction mainly pertains to costs incurred for thedevelopment of SM Seaside City Cebu, SM City Cauayan, SM Tianjin and SM Zibo and theongoing expansions and renovations of SM Megamall, SM City Bacolod and SM City Lipa. In2012, shopping mall complex under construction mainly pertains to costs incurred for thedevelopment of SM Aura Premier, SM City BF-Paranaque, SM Seaside City Cebu, SM Tianjinand SM Zibo and the ongoing expansions and renovations of SM Megamall, SM City Bacolod,SM City Clark, SM City Dasmariñas, and SM City Sta. Rosa.
Shopping mall complex under construction includes cost of land amounting to P=2,149.0 millionand P=1,615 million as at December 31, 2013 and 2012, respectively.
Construction contracts with various contractors related to the construction of the above-mentionedprojects amounted to P=82,058.0 million and P=53,965.0 million as at December 31, 2013 and 2012,respectively, inclusive of overhead, cost of labor and materials and all other costs necessary for theproper execution of the works. The outstanding contracts are valued at P=28,857.0 million andP=14,393.0 million as at December 31, 2013 and 2012, respectively.
Interest capitalized to the construction of investment properties amounted to P=77.1 million andP=130.0 million in 2013 and 2012, respectively. Capitalization rates used ranged from 5.83% to7.20% and 5.75% to 6.13% for the years ended December 31, 2013 and 2012, respectively.
The fair value of the investment properties amounted to P=458,612.0 million as at February 28,2013 based on a report by an independent and accredited appraiser. The fair value represents theprice that would be received to sell the investment properties in an orderly transaction betweenmarket participants at the measurement date.
In conducting the appraisal, the independent appraiser used the income approach. Below are thekey inputs used in the valuation:
Discount rate 10.00%Capitalization rate 7.40%Average growth rate 5.00%
The fair value disclosures of the investment properties are categorized under Level 3 as these werebased on unobserved inputs.
While fair value of the investment properties was not determined as at December 31, 2013, theGroup’s management believes that there were no conditions present in 2013 that wouldsignificantly reduce or increase the fair value of the investment properties from that determined onFebruary 28, 2013.
The Group has no restriction on the realizability of its investment properties and no obligation toeither purchase, construct or develop or for repairs, maintenance and enhancements.
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16. Land and Development and Condominium Units for Sale
This account consists of the following:
2013 2012(In Thousands)
Condominium units for sale (see Note 11) P=6,213,523 P=2,670,943Land and development:Current portion (see Note 11) 12,542,783 –Noncurrent portion 25,666,930 30,197,862
P=44,423,236 P=32,868,805
Condominium units for saleCondominium units for sale pertain to completed projects of SMDC, Costa and ICDC. These areincluded under “Other current assets” account in the consolidated balance sheets (see Note 11).
The movements in “Condominium units for sale” account are as follows:
2013 2012(In Thousands)
Balance at beginning of year P=2,670,943 P=1,115,878Transfer from land and development 7,332,175 2,624,448Additions 393,905 89,698Recognized as costs of real estate sold (4,183,500) (1,159,081)Balance at end of year P=6,213,523 P=2,670,943
The condominium units for sale are stated at cost as at December 31, 2013 and 2012. There is noallowance for inventory write-down as at December 31, 2013 and 2012.
Land and developmentLand and development, include land and cost of ongoing condominium projects.
The movements in “Land and development” account are as follows:
2013 2012(In Thousands)
Balance at the beginning of year P=30,197,862 P=23,012,453Land acquired during the year 5,483,396 4,909,701Development cost incurred 15,280,134 15,384,282Borrowing cost capitalized 1,654,579 1,003,610Recognized as costs of real estate sold (7,727,066) (11,204,375)Transfer to condominium units for sale (7,332,175) (2,624,448)Transfer from (to) property and equipment
(see Note 14) 652,983 (208,897)Transfer to investment property (see Note 15) – (74,464)Balance at end of year 38,209,713 P=30,197,862Less current portion (see Note 11) 12,542,783 –Noncurrent portion P=25,666,930 P=30,197,862
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The average rates used to determine the amount of borrowing costs eligible for capitalizationranged from 3.6% to 5.1% in 2013 and 3.3% to 8.3% in 2012.
SMDCLand and development costs attributable to SMDC pertain to the ongoing residentialcondominium projects. Estimated cost to complete the projects amounted to P=22,887.0 millionand P=29,012.9 million as at December 31, 2013 and 2012, respectively.
SMDC acquired LLCI, GLC and MSDPC for P=600.0 million, P=1,500.0 million andP=498.0 million, respectively, in 2012. The purchases of these subsidiaries were accounted for asasset acquisition. At acquisition date, these subsidiaries own parcels of land which are to bedeveloped into commercial/residential condominium projects.
CostaCosta’s land and development projects located at Hamilo Coast in Nasugbu, Batangas consist ofcondominium buildings and macro-infrastructure. Estimated cost to complete the on-goingprojects amounted to P=400.1 million and P=364.2 million as at December 31, 2013 and 2012,respectively.
In 2012, Costa completed the construction of Miranda and Carola condominium buildings. Thecompleted condominium buildings were accordingly classified as part of “Condominium units forsale” in 2012. As at December 31, 2013 and 2012, the development of macro-infrastructure is stillongoing.
HPIEstimated cost to complete HPI’s ongoing projects amounted to P=1,364.6 million at December 31,2013. As at December 31, 2013, the land and development account includes land held for futuredevelopment amounting to P=1,519.1 million which was the payment received by HPI from BelleCorporation (Belle) for its subscription to HPI’s capital stock before the tender offer by SM Landand parcels of land subsequently acquired by HPI from Belle after its subscription.
Land and development are stated at cost as at December 31, 2013 and 2012. There is noallowance for inventory write-down as at December 31, 2013 and 2012.
17. Intangibles and Other Noncurrent Assets
Intangible AssetsThis account consists of:
2013 2012(In Thousands)
Goodwill P=14,221,912 P=9,321,057Less accumulated impairment loss 91,619 91,619Net book value 14,130,293 9,229,438
Trademarks and brand names 6,124,762 6,124,762P=20,255,055 P=15,354,200
Goodwill is allocated to SM Prime, Supervalue, Inc. (SVI), Super Shopping Market, Inc. (SSMI),Prime Metroestate, Inc. and others as separate cash generating units.
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Trademarks and brand names pertain to that of the supermarket and hypermarket business of theGroup which were acquired in a business combination in 2006. The trademarks and brand nameswere assessed to have an indefinite life and was valued using the Relief-from-Royalty Method.The royalty rate was 3.5%, which was the prevailing royalty rate in 2006 in the retail assortedcategory where the two entities fall.
The recoverable amount of goodwill, trademarks and brand names have been determined based onvalue-in-use caluculations using the cash flow projections from the financial budgets approved bysenior management covering a three-year period and fair value less costs of disposal calculationsof the underlying net assets of the CGUs.
Value-in-use. The calculation of value-in-use is most sensitive to pre-tax discount rates. Thepre-tax discount rates applied to cash flow projections ranged from 21.45% to 21.58% and 6.61%to 9.14% as at December 31, 2013 and 2012, respectively. The discount rates were determinedbased on the yield of ten-year government bonds at the beginning of the forecasted year. Discountrates reflect the current market assessment of the risks to each cash generating unit and wereestimated based on the average percentage of weighted average cost of capital for the industry.The rate was further adjusted to reflect the market assessment of any risk specific to the CGU forwhich future estimates of cash flows have not been adjusted. The increase in discount rates in2013 was due to change in the comparable companies used in the value-in-use computation.
Management assessed that no reasonably possible change in pre-tax discount rates and future cashinflows would cause the carrying value of goodwill, trademarks and brand names in 2013 and2012 to materially exceed its recoverable amount.
Fair value less cost of disposal. The fair values of the assets and liabilities of the CGUs weredetermined by independent appraisers and in reference to the available market price for quotedinstruments. Management assessed that no reasonably possible change in the fair values wouldcause the carrying value of goodwill in 2013 and 2012 to materially exceed its recoverableamount.
Other Noncurrent AssetsThis account consists of:
2013 2012(In Thousands)
Receivables from real estate buyers (see Note 10) P=10,636,503 P=14,401,513Deposits and advance rentals 6,362,347 8,149,028Advances for project development (see Note 22) 3,607,169 1,962,578Derivative assets (see Notes 29 and 30) 2,643,487 109,979Deferred input VAT 1,554,256 962,629Defined benefit asset (see Note 26) 615,982 452,910Escrow fund (see Note 22) 556,206 98,996Long-term notes (see Note 22) 218,124 306,724Others 2,259,381 1,322,879
P=28,453,455 P=27,767,236
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§ Deposits and advance rentals substantially pertain to the lease agreements entered into by SMPrime for certain parcels of land where some of its malls are constructed. The leaseagreements provide that the security deposits will be applied to future rentals. Consequently,the said deposits and advance rentals are not remeasured at amortized cost.
§ Long-term notes pertain to unquoted and unsecured subordinated debt instruments whichcarry fixed interest rates per annum ranging from 7.0% to 8.5% as at December 31, 2013 and2012. The P=200.0 million will mature on November 21, 2017, P=88.6 million will mature onMay 29, 2018 and the remaining P=218.1 million will mature on March 20, 2019. In May 2013and November 2012, the Group received a full payment from BDO for the early redemption ofthe long-term note amounting to P=88.6 million and P=200.0 million, respectively.
§ Escrow fund amounting to P=426.2 million and P=99.0 million as at December 31, 2013 and2012, respectively, pertains mainly to the amounts deposited in the account of an escrow agentas required by the Housing and Land Use Regulatory Board (HLURB) in connection withSMDC’s temporary license to sell prior to HLURB’s issuance of a license to sell andcertificate of registration. In 2013, the Parent Company deposited cash in escrow amountingto P=130.0 million in the account of an escrow agent as required by the SEC in connection withthe corporate restructuring.
18. Bank Loans
This account consists of:
2013 2012(In Thousands)
Parent Company:U.S. dollar-denominated loans P=2,219,750 P=2,052,500Peso-denominated loans 6,550,000 11,783,400
Subsidiaries -Peso-denominated loans 18,818,509 17,958,075
P=27,588,259 P=31,793,975
The U.S. dollar-denominated loans amounting to US$50.0 million with peso equivalent ofP=2,219.8 million and P=2,052.5 million as at December 31, 2013 and 2012, respectively, bearinterest at three-month London Inter-Bank Offered Rate (LIBOR) plus margin (see Note 29).
The peso-denominated loans bear annual interest rates ranging from 1.06% to 6.75% and 3.25% to5.00% in 2013 and 2012, respectively.
These loans have maturities of less than one year (see Note 29).
Interest expense on bank loans amounted to P=3,960.4 million, P=3,253.7 million andP=2,288.8 million in 2013, 2012 and 2011, respectively (see Note 25).
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19. Accounts Payable and Other Current Liabilities
This account consists of:
2013 2012(In Thousands)
Trade P=39,580,013 P=34,304,241Nontrade 8,013,509 2,276,078Payable arising from acquisition of land 4,838,686 6,100,508Accrued expenses 3,967,472 1,881,254Payable to government agencies 3,671,601 2,334,796Due to related parties (see Note 22) 2,091,305 3,265,015Accrued interest 1,784,520 2,537,777Derivative liabilities (see Note 29 and 30) 845,429 2,493,651Gift checks redeemable and others 3,295,792 2,672,556
P=68,088,327 P=57,865,876
The terms and conditions of the above liabilities follow:
§ Trade payables primarily consist of liabilities to suppliers and contractors, which arenoninterest-bearing and are normally settled on a 30 to 60 days term.
§ Nontrade payables, accrued interest and others are expected to be settled within the nextfinancial year.
§ Payable arising from acquisition of land is expected to be settled within the following year.
§ The terms and conditions relating to due to related parties are discussed in Note 21.
§ Gift checks are redeemable at face value.
§ Payable to government agencies mainly consists of output tax which are normally settledwithin the next financial year.
§ Accrued expenses pertain to accrued and unpaid selling, general and administrative expenseswhich are normally settled within the next financial year.
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20. Long-term Debt
This account consists of:
2013 2012Gross Amount Debt Issue Cost Net Amount Gross Amount Debt Issue Cost Net Amount
(In Thousands)
Parent CompanyU.S. dollar-denominated: Fixed rate bonds P=56,053,998 (P=365,270) P=55,688,728 P=61,813,938 (P=449,782) P=61,364,156 Convertible bonds 3,732,919 (60,787) 3,672,132 9,407,559 (183,247) 9,224,312 Five-year term loans 13,318,500 (16,893) 13,301,607 – – –Peso-denominated: Seven-year and ten-year fixed rate corporate notes – – – 4,995,000 (37,757) 4,957,243 Five-year fixed rate
corporate notes – – – 6,699,043 (36,984) 6,662,059 Five-year and seven-year
retail bonds 9,400,000 (13,794) 9,386,206 9,400,000 (32,107) 9,367,893 Seven-year and ten-year
retail bonds 13,082,270 (89,961) 12,992,309 14,282,270 (118,549) 14,163,721 Bank loans collateralized
with time deposits 3,000,000 (3,457) 2,996,543 3,000,000 (6,635) 2,993,365 Other bank loans 9,350,000 (294,476) 9,055,523 8,050,000 (10,945) 8,039,055SubsidiariesU.S. dollar-denominated: Five-year term loans 11,986,650 (141,857) 11,844,793 11,083,500 (186,538) 10,896,962 Two-year, three-year and
five-year bilateralloans 1,109,875 (5,994) 1,103,881 1,026,250 (5,008) 1,021,242
Five-year syndicated loan 22,197,500 (473,025) 21,724,475 Other U.S. dollar loans 4,439,500 (55,869) 4,383,631 2,463,000 (24,888) 2,438,112China yuan-renminbi
denominated: Three-year loan 961,827 – 961,827 1,111,112 – 1,111,112 Five-year loan 2,235,771 – 2,235,771 2,272,374 – 2,272,374Peso-denominated: Three-year and five-year
fixed rate notes 17,075,000 (80,100) 16,994,900 18,313,000 (84,747) 18,228,253 Five-year and ten-year
fixed and floating ratenotes 7,375,500 (47,692) 7,327,808 7,500,000 (57,081) 7,442,919
Five-year, seven-year andten-year fixed andfloating rate notes 4,316,400 (25,877) 4,290,523 5,000,000 (33,540) 4,966,460
Five-year, seven-year andten-year corporatenotes 6,596,000 (25,068) 6,570,932 6,860,000 (36,161) 6,823,839
Five-year and ten-yearcorporate notes 1,100,000 (6,906) 1,093,094 1,100,000 (7,849) 1,092,151
Five-year floating ratenotes 4,900,000 (20,390) 4,879,610 4,950,000 (29,172) 4,920,828
Five-year, seven-year andten-year fixed ratenotes 8,200,000 (51,445) 8,148,556 800,000 (4,658) 795,342
Five-year bilateral loans 500,000 (1,547) 498,453 500,000 (2,009) 497,991 Other bank loans 11,026,060 (21,325) 11,004,735 9,133,550 (20,510) 9,113,040
211,957,770 (1,801,733) 210,156,037 189,760,596 (1,368,167) 188,392,429Less current portion 34,858,218 (291,599) 34,566,619 13,889,278 (29,720) 13,859,558
Noncurrent portion P=177,099,552 (P=1,510,134) P=175,589,418 P=175,871,318 (P=1,338,447) P=174,532,871
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Parent Company
Fixed Rate Bonds
US$500.0 million Senior BondsOn October 17, 2012, SMIC issued US$500.0 million senior bonds, with peso equivalent ofP=22,197.5 million and P=20,525.0 million as at December 31, 2013 and 2012, which bear a fixedinterest rate of 4.25% per annum, payable semi-annually in arrears. The bonds will mature onOctober 17, 2019.
US$400.0 million Exchanged BondsOn October 13, 2010, SMIC issued US$400.0 million bonds with peso equivalents ofP=17,023.9 million and P=15,641.8 million as at December 31, 2013 and 2012, respectively, whichbear a fixed interest rate of 5.5% per annum, payable semi-annually in arrears and will mature onOctober 13, 2017. This issuance is comprised of US$186.3 million (P=7,356.2 million) additionalbonds, and US$82.9 million (P=3,199.4 million) and US$130.8 million (P=5,086.2 million)exchanged bonds from the existing US$350.0 million 6.75% bonds due 2013 andUS$500.0 million 6.0% bonds due 2014, respectively. The exchange was not accounted for as anextinguishment but merely a modification of terms because the terms of the exchanged bonds arenot substantially different from the existing bonds (i.e., the difference between the present value ofthe cash flows of the exchanged bonds and the present value of the remaining cash flows of theexisting bonds discounted using the original effective interest rate did not exceed 10%).
US$500.0 million BondsOn September 22, 2009, SMIC issued US$500.0 million bonds, with peso equivalent ofP=16,832.6 million and P=15,564.4 million as at December 31, 2013 and 2012, which bear a fixedinterest rate of 6.0% per annum, payable semi-annually in arrears. The bonds will mature onSeptember 22, 2014.
US$350.0 million BondsOn July 17, 2008, SMIC issued US$350.0 million bonds, with peso equivalent of nil andP=10,082.8 million as at December 31, 2013 and 2012, respectively, which bear a fixed interest rateof 6.75% per annum, payable semi-annually in arrears. The bonds matured on July 20, 2013.
Convertible Bonds
US$250.0 million Convertible BondsOn February 15, 2012, SMIC issued at face value 1.625% coupon US$250.0 million(P=9,407.6 million) convertible bonds, with a yield to maturity of 2.875% due on February 15,2017 at 106.67%. The bonds bear coupon interest of 1.625% and has a yield-to-maturity of2.875% at inception. Interest on the bonds is payable semi-annually in arrears. The bonds containmultiple embedded derivatives (i.e., conversion option, call option and put option) which wasbifurcatedby SMIC at inception. See Note 29 for further discussion.
Unless previously redeemed, converted or purchased and cancelled, the holder has the right toconvert its outstanding bonds for SMIC’s common shares at any time, on or after June 15, 2012until the close of business on February 5, 2017, at an initial conversion price of P=781.45 per sharetranslated into U.S. dollars at a fixed conversion rate of P=42.711 to US$1.00. Effective July 8,2013, the new conversion price is P=624.625 after giving effect to the 25% stock dividendsdeclared on April 25, 2013. If a bondholder exercises its conversion option, the Company canchoose either to settle the bonds in cash or issue common shares. At various dates in 2013, the
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bondholders of US$150.8 million (P=5,778.9 million) opted to convert their holdings into8,390,334 of SMIC’s shares. No conversion options were exercised as at December 31, 2012.
The put option entitles the bondholders to require the Parent Company to redeem all or some of itsbonds on February 15, 2015 (put date) at 103.89%.
Lastly, the call option gives right to the Parent Company to redeem the Bonds, in whole but not inpart at their early redemption amount on the date fixed for redemption, provided, however, that nosuch redemption may be made unless the closing price of the shares of the Parent Company(translated into US Dollars at the prevailing rate) for each of the 30 consecutive trading days, thelast of which occurs no more than five days prior to redemption notice, was at least 130% of theapplicable early redemption amount divided by the conversion ratio.
US$300.0 million Convertible BondsOn March 19, 2007, SMIC issued at face value zero coupon US$300.0 million convertible bondswith a yield to maturity of 3.5% due on March 20, 2012 at 118%. The bonds contain multipleembedded derivatives (i.e., conversion option, call option and put option) which were bifurcatedby SMIC at inception. See Note 29 for further discussion.
Unless previously redeemed, converted or purchased and cancelled, the holder has the right toconvert its outstanding bonds (conversion option) for SMIC’s common shares at any time, on orafter June 30, 2007 until the close of business on March 13, 2012. Starting April 25, 2007, theconversion price is equal to P=453.39 a share, after giving effect to the 4.27% stock dividend. Atvarious dates in 2012, the bondholders of US$16.0 million (P=813.6 million) andUS$1.7 million (P=82.2 million) bonds, respectively, opted to convert their holdings into 1,710,587and 181,364 of SMIC’s shares (see Note 20). The fair value of the related derivative liabilityderecognized upon conversion amounted to US$4.2 million (P=181.50 million) in 2012(see Notes 30 and 31).
The remaining value of convertible bond amounting to US$4.7 million (P=201.4 million) maturedon March 20, 2012, resulted to a gain of P=28.8 million, shown under “Gain (loss) on fair valuechanges on derivatives - net” account in the consolidated statements of income. The fair value ofthe related derivative liability derecognized upon maturity amounted to US$3.9 million(P=28.8 million) (see Note 29).
The put option entitles the bondholders to require the Parent Company to redeem all or some of itsbonds on March 19, 2010 (put date) at 110.97%. A total of US$246.3 million (P=11,253.5 million)bonds were redeemed as a result of the exercise of the holders of the put option, which resulted ina gain of P=844.6 million shown under “Gain (loss) on fair value changes on derivatives - net” ”account in the 2010 consolidated statements of income. The fair value of the related derivativeliability derecognized upon early redemption amounted to US$35.2 million (P=1,609.7 million)(see Note 30).
Lastly, the call option gives right to the Parent Company to redeem the remaining Bonds, in wholebut not in part at their early redemption amount on the date fixed for redemption, provided,however, that no such redemption may be made unless the closing price of the shares of the ParentCompany (translated into US Dollars at the prevailing rate) for each of the 30 consecutive tradingdays, the last of which occurs no more than five days prior to redemption notice, was at least130% of the applicable early redemption amount divided by the conversion ratio.
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Five-year U.S. Dollar LoansIn 2013, the Company obtained a five-year loan amounting to US$300.0 million with Phillippinepeso equivalent of P=13,318.5 million as at December 31, 2013 which bears floating interest rate ofsix-month LIBOR plus margin. Portion of the loan amounting to US$180.0 million is hedgedagainst interest rate and foreign exchange risks using cross currency swap contract (see Notes 30and 31).
Seven-year and Ten-year Fixed Rate Corporate NotesOn September 26, 2011, SMIC issued fixed rate corporate notes comprised of seven-year orSeries A Notes and ten-year or Series B Notes due on September 26, 2018 and September 26,2021, respectively. The total issuance amounted to P=916.0 million and P=4,084.0 million for theSeries A and Series B Notes, respectively.
The Series A Notes have a term of seven years from the issue date, with a fixed interest rateequivalent to 5.75% per annum payable semi-annually in arrears starting March 26, 2012. TheSeries B Notes have a term of ten years from the issue date, with a fixed interest rate equivalent to6.625% per annum payable semi-annually in arrears starting March 26, 2012.
The Series A and B Notes have principal repayment of 0.1% of the principal amount in annualinstallments that will commence on the twelfth (12th) month from the issue date, with the lastinstallment payment to be made on maturity date.
The Series A and B Notes were pre-terminated on April 16, 2013. Outstanding balance as atDecember 31, 2012 for the Series A and B Notes amounted to P=915.1 million andP=4,079.9 million, respectively.
Five-year Fixed Rate Corporate NotesOn February 7, 2011, SMIC issued corporate notes amounting to P=6,700.0 million, which bear afixed interest rate of 6.17% per annum, payable semi-annually in arrears. The corporate notes willmature on February 8, 2016. The notes have principal repayment of P=1.0 million that willcommence on the 12th month from the issue date, with the last installment payment to be made onmaturity date. Outstanding balance as at December 31, 2012 amounting to P=6,699.0 million waspre-terminated on March 27, 2013.
Seven-year and Ten-year Retail BondsOn July 16, 2012, SMIC issued fixed rate bonds, which comprised of seven-year or Series CBonds and ten-year or Series D Bonds due on July 16, 2019 and July 16, 2022, respectively. Thetotal issuance amounted to P=5,623.5 million and P=8,658.8 million for the Series C and Series DBonds, respectively.
The Series C Bonds have a term of seven years from the issue date, with a fixed interest rateequivalent to 6.00% per annum payable semi-annually in arrears starting January 16, 2013. TheSeries D Bonds have a term of ten years from the issue date, with a fixed interest rate equivalent to6.94% per annum payable semi-annually in arrears starting January 16, 2013.
At various dates in 2013, the SMIC redeemed P=1,317.7 million for Series C andP=600.0 million for Series D Bonds.
Outstanding balance as at December 31, 2013 for Series C and Series D bonds amounted toP=5,023.5 million and P=8,058.8 million, respectively.
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Five-year and Seven-year Retail BondsOn June 25, 2009, SMIC issued fixed rate bonds, which comprised of five-year or Series A Bondsand seven-year or Series B Bonds due on June 26, 2014 and June 25, 2016, respectively. The totalissuance amounted to P=8,400.0 million and P=1,000.0 million for the Series A and Series B Bonds,respectively.
The Series A Bonds have a term of five years and one day from the issue date, with a fixed interestrate equivalent to 8.25% per annum payable semi-annually in arrears starting December 26, 2009.The Series B Bonds have a term of seven years from the issue date, with a fixed interest rateequivalent to 9.10% per annum payable semi-annually in arrears starting December 25, 2009.
Outstanding balance as at December 31, 2013 and 2012 amounted to P=9,400.0 million.
Bank Loans Collateralized with Time DepositsOn January 8, 2010, SMIC obtained two five-year term loans amounting to P=1,500.0 million each.The loans are based on a three-month Philippine Dealing System Treasury-Fixing (PDST-F) rateplus an agreed margin. Interest on these loans is payable quarterly in arrears.
On October 16, 2007, SMIC obtained a five-year term loan amounting to P=6,000.0 million, whichbears interest based on a three-month PDST-F rate plus an agreed margin, payable quarterly inarrears. On October 12, 2011, SMIC paid P=50.0 million of this loan. The remaining valueamounting to P=5,950.0 million matured on October 16, 2012.
These loans are collateralized by a portion of SMIC’s time deposits amounting toUS$475.0 million with peso equivalents of P=21,087.6 million and P=19,498.8 million as atDecember 31, 2013 and 2012, respectively (see Note 8).
Other Peso Bank LoansThis account includes the following:
2013 2012(In Thousands)
Ten-year term loans P=100,000 P=2,050,000Seven-year term loans 9,250,000 3,000,000Five-year term loans – 3,000,000
P=9,350,000 P=8,050,000
§ In August 2013, SMIC obtained a seven-year term loan amounting to P=2,000.0 million whichbears a fixed interest rate of 4.47% per annum.
§ In June 2013, the Company obtained a seven-year term loan amounting to P=3,000.0 millionwhich bears a fixed interest rate of 4.39% per annum.
§ In April 2013, SMIC obtained two seven-year term loans and a ten-year term loan amountingto P=2,250.0 million and P=100.0 million, which bear fixed interest rates of 4.39% and 4.64%per annum, respectively.
§ In January 2008, SMIC obtained two ten-year term loans amounting to P=1,050.0 million andP=500.0 million, which bear fixed interest rates of 6.85% and 6.71% per annum, respectively.On various dates in 2013, SMIC prepaid the P=1,050.0 million and P=500.0 million fixed rate
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loans. Outstanding balances of these loans amounted to nil and P=1,550.0 million as atDecember 31, 2013 and 2012, respectively.
§ In April 2008, SMIC obtained seven-year and ten-year term loans amounting toP=500.0 million each, which bear fixed interest rates of 8.56% and 8.79% per annum,respectively. The seven-year term loan has annual principal repayment of P=0.5 million thatwill commence on the 12th month from the issue date, with the last installment payment to bemade on maturity date. On April 25, 2012, SMIC paid the total outstanding balance of theseven-year term loan amounting to P=498.5 million. Outstanding balance of ten-year termloans amounted to P=500.0 million as at December 31, 2013, was prepaid by SMIC onApril 25, 2013.
§ In March 2008, SMIC obtained a seven-year term loan amounting to P=1,000.0 million, whichbears a fixed interest rate of 7.28% per annum. Outstanding balance as at December 31, 2012amouting to P=1,000.0 million was prepaid by SMIC on March 6, 2013.
§ The seven-year term loans also include P=2,000.0 million and P=1,000.0 million fixed rate loanswith interest rates of 6.90% and 6.91%, respectively. It likewise includes P=2,000.0 millionfloating rate loan with interest based on three-month PDST-F plus an agreed margin. Theloans will mature in October and November 2014. On January 31, 2011 and November 23,2012, SMIC prepaid the P=2,000.0 million and P=1,000.0 million fixed rate loans, respectively.Outstanding balance as at December 31, 2013 and 2012 amounted to P=2,000.0 million..
§ In February 2009, SMIC obtained a five-year term loan amounting to P=3,000.0 million whichbears a floating interest rate based on a six-month PDST-F plus margin. Outstanding balanceas at December 31, 2012 amounted to P=3,000.0 million.
Subsidiaries
U.S. Dollar-denominated Five-Year Term LoansThis represents a US$270.0 million unsecured loan obtained on various dates in 2012 and 2011from a US$270.0 million facility. The loans bear interest rates based on LIBOR plus spread, witha bullet maturity on March 21, 2016 (see Notes 29 and 30).
U.S. Dollar-denominated Five-Year Term Syndicated LoansThis consists of the following:
§ US$300.0 million unsecured loan obtained on various dates in 2013. The loan bears aninterest rate based on LIBOR plus spread, with a bullet maturity on March 25, 2018. Portionof the loan amounting to US$150 million is hedged against interest rate and foreign exchangerisks using cross currency swap contracts (see Notes 29 and 30).
§ US$200.0 million unsecured loan obtained on January 29, 2013. The loan bears an interestrate based on LIBOR plus spread, with a bullet maturity on January 29, 2018. This loan ishedged against interest rate and foreign exchange risks using cross currency swap contracts(see Notes 30 and 31).
U.S. Dollar-denominated Two-Year, Three-Year and Five-Year Bilateral LoansThis consists of the following:
§ US$40.0 million and US$10.0 million, out of US$50 million five-year bilateral unsecuredloan, were obtained in 2013 and 2012, respectively. The loan bears interest rate based onLIBOR plus spread, with a bullet maturity on August 30, 2017 (see Note 30).
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§ US$30.0 million and US$20.0 million five-year bilateral unsecured loan drawn onNovember 30, 2010 and April 15, 2011, respectively. The loans bear interest rate based onLIBOR plus spread, with a bullet maturity on November 30, 2015 (see Notes 30 and 31).
Other U.S. Dollar LoansThis consists of the following:
§ US$75.0 million unsecured loans were obtained in November 2008. The loans bear interestrates based on LIBOR plus spread, with bullet maturities ranging from two to five years. TheCompany prepaid the US$20.0 million and the US$30.0 million unsecured loans on June 1,2009 and November 30, 2010, with original maturity dates of November 19, 2010 andNovember 28, 2011, respectively (see Notes 30 and 31). The remaining balance ofUS$25.0 million matured on November 20, 2013.
§ US$25.0 million five-year bilateral unsecured loan drawn on November 20, 2013. The loansbear interest rate based on LIBOR plus spread, with a bullet maturity on November 20, 2018(see Notes 29 and 30).
China Yuan Renminbi-denominated Five-Year LoanThis consists of the following:
§ A five-year loan obtained on August 26, 2009 amounting to ¥350.0 million to finance theconstruction of shopping malls. The loan is payable in semi-annual installments until 2014.The loan has a floating rate with an annual re-pricing at prevailing rate dictated by CentralBank of China less 10%. The loan carries an interest rate of 5.76% in 2013 and 2012 (seeNote 29).
§ A five-year loan obtained on August 27, 2010 amounting to ¥150.0 million to finance theconstruction of shopping malls. Partial drawdown totaling ¥61.0 million was made as atDecember 31, 2013. The loan is payable in 2015. The loan has a floating rate with an annualre-pricing at prevailing rate dictated by Central Bank of China less 10%. The loan carries aninterest rate of 5.76% in 2013 and 2012 (see Note 29).
China Yuan Renminbi-denominated Three-Year LoanThis represents a three-year loan obtained on March 28, 2011 amounting to ¥187.0 million out of¥250.0 million loan facility to finance the construction of shopping malls. The Company prepaidportion of this loan amounting to ¥37.0 million in 2013 and ¥18.0 million each in 2012. The loanhas a floating rate with an annual re-pricing at prevailing rate dictated by Central Bank of Chinaless 5% and will mature on March 27, 2014. The loan bears interest rate of 6.20% in 2013 and2012 (see Note 29).
The China yuan renminbi-denominated loans are secured by investment properties in China(see Note 16).
Philippine Peso-denominated Three-Year and Five-Year Fixed Rate NotesThis consists of the following:
§ On December 27, 2012, SMDC obtained long-term loan amounting to P=2,000.0 million froma local bank with an interest rate of 4.72%, payable quarterly and will mature onDecember 23, 2015.
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§ Peso-denominated fixed rate corporate notes amounting to P=6,313.0 million, issued by SMDCon April 27, 2012. Of the total principal, P=6.0 million shall be paid annually starting on April27, 2013 up to April 27, 2017 and the remaining shall be paid on July 27, 2017. The noteshave fixed interest rate of 6.0% payable semi-annually. The notes were pre-terminated in June2013 (see Note 30).
§ Series “A” and Series “B” peso-denominated fixed rate corporate notes amounting toP=2,000.0 million and P=8,000.0 million, respectively, issued by SMDC on June 1, 2010. TheSeries “A” and Series “B” notes have fixed interest rates of 6.8% and 7.7%, which are payablesemi-annually, and with maturity dates of June 1, 2013 and June 2, 2015, respectively. Thenotes were pre-terminated in June 2013 (see Note 30).
Philippine Peso-denominated Five-Year and Ten-Year Floating and Fixed Rate NotesThis represents five-year and ten-year floating and fixed rate notes obtained on June 19, 2012amounting to P=3,450.0 million and P=1,000.0 million for the floating and P=680.0 million andP=2,370.0 million for the fixed, respectively. The loans bear an interest rate based on PDST-F plusmargin for the floating and 6.22% and 6.81% for the five-year and ten-year fixed, respectively.The loans have bullet maturities in 2017 and 2022, respectively. The Company prepaid a portionof fixed rate notes amounting to P=50.0 million on March 19, 2013. The related unamortized debtissuance costs charged to expense amounted to P=0.4 million in 2013 (see Note 30).
Philippine Peso-denominated Five-Year, Seven-Year and Ten-Year Fixed and Floating Rate NotesThis represents a five-year floating, five-year, seven-year and ten-year fixed rate notes obtained onJanuary 12, 2012 amounting to P=200.0 million, P=1,012.0 million, P=133.0 million, andP=3,655.0 million, respectively. The loans bear an interest rate based on PDST-F plus margin forthe five-year floating and 5.86%, 5.97% and 6.10% for the five-year, seven-year and ten-yearfixed, respectively. The loans have bullet maturities in 2017, 2019 and 2022, respectively. TheCompany prepaid a portion of fixed rate notes amounting to P=634.0 million on April 12, 2013.The related unamortized debt issuance costs charged to expense amounted to P=5.0 million in 2013(see Note 30).
Philippine Peso-denominated Five-Year, Seven-Year and Ten-Year Corporate NotesThis represents a five-year floating and five-year, seven-year and ten-year fixed rate notesamounting to P=3,000.0 million, P=1,134.0 million, P=52.0 million and P=814.0 million, respectively,out of P=7,000.0 million facility obtained on December 20, 2010. The remaining P=2,000.0 millionfloating rate note was obtained on June 13, 2011. The loans bear an interest rate based on PDST-Fplus margin for the five-year floating and 5.79%, 5.89% and 6.65% for the five-year, seven-yearand ten-year fixed, respectively. The loans have bullet maturities in 2015, 2017 and 2020,respectively. The Company prepaid a portion of fixed rate notes amounting to P=196.0 million onMarch 20, 2013. The related unamortized debt issuance costs charged to expense amounted toP=2.0 million in 2013 (see Note 30).
Philippine Peso-denominated Five-Year and Ten-Year Corporate NotesThis represents a five-year floating and fixed rate and ten-year fixed rate notes obtained onApril 14, 2009 amounting to P=200.0 million, P=3,700.0 million and P=1,100.0 million, respectively.The loans bear an interest rate based on PDST-F plus margin for the five-year floating and 8.4%and 10.11% for the five-year and ten-year fixed, respectively. The loans have bullet maturities in2014 and 2019, respectively. The Company prepaid the P=200.0 million and P=3,700.0 millionloans on April 15, 2012, with original maturity date of April 15, 2014. The related unamortizeddebt issuance costs charged to expense amounted to P=17.0 million in 2012 (see Note 30).
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Philippine Peso-denominated Five-Year Floating Rate NotesThis represents five-year floating rate notes obtained on March 18, 2011 and June 17, 2011amounting to P=4,000.0 million and P=1,000.0 million, respectively. The loans bear an interest ratebased on PDST-F plus margin and will mature on March 19, 2016 and June 18, 2016, respectively(see Note 30).
Philippine Peso-denominated Five-Year, Seven-Year and Ten-Year Fixed Rate NotesThis consists of the following:
§ On June 17, 2008, SM Prime obtained five-year, seven-year and ten-year fixed rate notesamounting to P=1,000.0 million, P=1,200.0 million and P=800.0 million, respectively. The loansbear fixed interest rates of 9.31%, 9.60% and 9.85%, respectively, and will mature onJune 17, 2013, 2015 and 2018, respectively. The loans amounting to P=1,000.0 million,P=1,200.0 million and P=800.0 million were prepaid on June 17, 2011, 2012 and 2013,respectively. The related unamortized debt issuance costs charged to expense amounted toP=4.0 million in 2011, P=5.0 million in 2012 and P=4.0 million in 2013 (see Notes 29 and 30).
§ Series “A” and Series “B” peso-denominated fixed rate corporate notes amounting toP=3,740.0 million and P=2,460.0 million, respectively, issued by SMDC on June 3, 2013. TheSeries “A” and Series “B” notes have fixed interest rates of 5.6% and 5.9%, which are payablesemi-annually, and with maturity dates of June 2020 and June 2023, respectively (see Note30).
§ On June 28, 2013, SMDC issued peso-denominated fixed rate corporate notes amounting toP=2,000.0 million to a local bank. Of the total principal, P=2.0 million shall be paid annuallystarting June 30, 2014 up to June 30, 2019 and the remaining will be paid on June 28, 2020.The loan bears fixed interest rate at 5.7%, payable semi-annually (see Note 30).
Philippine Peso-denominated Five-Year Bilateral LoansThis consists of the following:
§ Five-year term loan obtained on September 28, 2007 and November 6, 2007 amounting toP=250.0 million to finance the construction of a project called “SM by the Bay.” The loan ispayable in equal quarterly installments of P=16.0 million starting December 2008 up toSeptember 2012 and carries an interest rate based on PDST-F plus an agreed margin(see Note 30).
§ Five-year term loan obtained on October 24, 2011 amounting to P=500.0 million and willmature on October 24, 2016. The loan carries an interest rate based on PDST-F plus anagreed margin (see Note 31).
Other Bank Loans - SubsidiariesThis account includes the following:
2013 2012(In Thousands)
Three-year term loan P=315,000 P=Five-year term loans 7,511,060 7,933,550Ten-year term loan 3,200,000 1,200,000
P=11,026,060 P=9,133,550
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§ On October 14, 2013, SHDC obtained a three-year bullet fixed rate loan amounting toP=315.0 million which bears a fixed interest rate of 4.50% and will mature on October 4, 2016(see Note 29).
§ The following five-year term loans were obtained by various subsidiaries:
Year Obtained Maturity Subsidiary 2013 2012 Interest Rate (see Note 30)(In Millions)
2010 2015 SM Prime P=2,000.0 P=2,000.0 PDST-F plus an agreed marginSM Prime 793.4 980.0 Agreed fixed rate less PDST-FSM Land 220.5 222.8 Fixed rate of 6.75%Costa 117.6 118.8 Fixed rate of 7.0%SM Land � 75.0 PDST-F plus an agreed margin
2009 2014 SM Prime 3,000.0 3,000.0 PDST-F plus an agreed marginSM Land 1,379.5 1,387.0 Fixed rate of 5.69-6.75%SM Land � 150.0 PDST-F plus an agreed margin
P=7,511.0 P=7,933.6
§ On June 3, 2013 and June 25, 2013, SMDC obtained two ten-year loans amounting toP=1,000.0 million each which bears fixed interest rate of 5.88% and will mature onJune 3, 2020 and June 25, 2023.
§ On August 16, 2006, SM Prime obtained a ten-year bullet fixed rate loan amounting toP=1,200.0 million which bears a fixed interest rate of 9.75% and will mature onAugust 16, 2016 (see Note 29).
The repricing frequencies of floating rate loans range from three to six months.
A portion of these loans is collateralized by temporary investment and shares of stocks. Thecarrying values of the collaterals approximate the amounts of the loans (see Note 11).
Debt Issue CostThe movements in unamortized debt issue cost in 2013 and 2012 are as follows:
2013 2012(In Thousands)
Balance at beginning of year P=1,368,167 P=1,048,431Additions 966,967 652,989Amortization (see Note 24) (452,594) (296,977)Prepayments (80,807) (36,276)Balance at end of year P=1,801,733 P=1,368,167
Repayment ScheduleThe repayments of long-term debt are scheduled as follows:
Gross Loan Debt Issue Cost Net(In Thousands)
2014 P=34,858,218 (P=291,599) P=34,566,6192015 16,485,220 (243,769) 16,241,4512016 25,002,750 (188,923) 24,813,8272017 28,371,637 (310,047) 28,061,590
(Forward)
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Gross Loan Debt Issue Cost Net(In Thousands)
2018 P=46,201,775 (P=359,109) P=45,842,6662019 28,499,160 (248,313) 28,250,8472020 13,779,060 (65,790) 13,713,2702021 66,800 (6,218) 60,5822022 14,137,610 (60,972) 14,076,6382023 4,555,540 (26,993) 4,528,547
P=211,957,770 (P=1,801,733) P=210,156,037
The loan agreements provide certain restrictions and requirements principally with respect tomaintenance of required financial ratios and material change in ownership or control. As atDecember 31, 2013 and 2012, the Group is in compliance with the terms of its loan covenants.
21. Equity
Capital Stock
a. Common stockNumber. of shares
2013 2012
Authorized - P=10 par value per share 1,190,000,000 690,000,000
Issued:Balance at beginning of the year 622,974,620 612,164,033Issuances 173,297,648 10,810,587Balance at end of year 796,272,268 622,974,620
Subscribed:Balance at beginning of the year 622,974,620 612,164,033Issuances 173,297,648 10,810,587Balance at end of year 796,272,268 622,974,620
Issued and subscribed 796,272,268 622,974,620
On June 14, 2013, the SEC approved the increase in authorized capital stock of SMIC from P=6,900.0 million to P=11,900.0 million.
On August 7, 2013, the SMIC entered into a Placement Agreement with certain shareholdersand UBS AG, Hong Kong Branch (the “Placement Agent”), where the selling shareholdersshall sell 7.3 million common shares (the “Sale Shares”) at P=900.00 per share to the PlacementAgent, or to investors that the Placement Agent may procure outside the Philippines.
On August 24, 2012, SMIC entered into a Placement Agreement with certain shareholders andMacquarie Capital PTE. Limited (the “Placement Agent”), where the selling shareholdersshall sell 9.1 million SMIC common shares (the “Sale Shares”) at P=700.00 per share to thePlacement Agent, or to investors that the Placement Agent may procure outside thePhilippines.
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In 2013 and 2012, the SMIC simultaneously entered into a Subscription Agreement with theselling shareholders, where the Company agreed to issue new common shares (out of itsauthorized but unissued capital stock) in an amount equal to the aggregate number of the SaleShares sold by the Selling Shareholders and the Selling Shareholders agreed to subscribe tothe said shares.
The placement and subscription agreements increased “Capital Stock” and “Additional paid-incapital” in the amount of P=72.5 million and P=6,370.6 million in 2013 and P=91.0 million andP=6,238.7 million in 2012, respectively.
In 2013 and 2012, 8,390,334 common shares and 1,710,587 common shares, respectively,were issued as a result of conversion of SMIC’s convertible bonds (see Note 20). The excessof the conversion price over par value totaling P=8,449.7 million and P=977.8 million in 2013and 2012, respectively, are presented under “Additional paid-in capital” account in theconsolidated balance sheets.
As at December 31, 2013 and 2012, the Parent Company is compliant with the minimumpublic float as required by the PSE.
The following summarizes the information on the Parent Company’s registration of securitiesunder the Securities Regulation Code:
Date of SEC ApprovalAuthorized
SharesNo. of
Shares IssuedIssue/Offer
PriceMarch 2005 105,000,000 P=250November 6, 2007 56,000,000 218June 14, 2007 100,000,000 10April 25, 2007 25,023,038 10October 4, 2010 340,858 453November 3, 2010 309,387 453November 25, 2010 309,386 453August 17, 2011 10,668 453September 26, 2011 170,696 453January 2, 2012 21,337 453January 10, 2012 16,002 453January 11, 2012 298,718 453January 26, 2012 90,682 453February 3, 2012 679,584 453February 8, 2012 279,515 453March 8, 2012 250,070 453March 12, 2012 10,668 453March 13, 2012 64,011 453September 24, 2012 9,100,000 700January 23, 2013 10,931 781January 24, 2013 32,793 781February 20, 2013 688,668 781February 25, 2013 87,450 781February 28, 2013 109,312 781March 4, 2013 76,518 781March 6, 2013 54,656 781March 8, 2013 109,312 781March 12, 2013 349,797 781
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Date of SEC ApprovalAuthorized
SharesNo. of
Shares IssuedIssue/Offer
PriceMarch 14, 2013 459,113 781March 15, 2013 109,312 781March 18, 2013 163,968 781March 19, 2013 218,625 781March 20, 2013 153,037 781March 22, 2013 120,243 781March 25, 2013 207,693 781April 2, 2013 546,563 781April 3, 2013 174,900 781April 5, 2013 163,969 781April 10, 2013 109,312 781April 11, 2013 109,312 781April 12, 2013 109,312 781April 15, 2013 54,656 781April 16, 2013 109,312 781April 17, 2013 109,312 781April 18, 2013 229,556 781April 19, 2013 32,793 781April 22,2013 109,312 781April 23, 2013 185,830 781April 24, 2013 87,449 781April 26, 2013 54,656 781May 6, 2013 120,243 781May 7, 2013 382,594 781May 8, 2013 65,587 781May 9, 2013 21,862 781May 10, 2013 207,693 781May 13, 2013 54,656 781May 16, 2013 109,312 781May 17, 2013 546,562 781May 20, 2013 54,656 781May 24, 2013 163,968 781May 28, 2013 185,831 781May 29, 2013 207,693 781June 4, 2013 163,968 781June 5, 2013 54,656 781June 6, 2013 32,793 781June 7, 2013 21,862 781June 14, 2013 500,000,000 10June 24, 2013 10,931 781July 5, 2013 109,312 781July 18, 2013 82,053 625July 19, 2013 164,108 625July 26, 2013 82,054 625July 29, 2013 41,027 625July 30, 2013 136,757 625August 1, 2013 157,629,986 10August 1, 2013 7,250,000 900October 17, 2013 27,328 10October 17, 2013 68,378 625
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Date of SEC ApprovalAuthorized
SharesNo. of
Shares IssuedIssue/Offer
PriceOctober 25, 2013 136,755 625November 1, 2013 27,351 625
The Company declared stock dividends in 2013 and 2007. The total number of shareholdersof the Parent Company was 1,249 and 1,263 as at December 31, 2013 and 2012, respectively.
b. Redeemable preferred sharesNumber of shares
2013 2012
Authorized - P=10 par value per share 10,000,000 10,000,000
There are no issued and subscribed preferred shares as at December 31, 2013 and 2012.
Cost of Parent Common Shares Held by SubsidiariesCertain subsidiaries hold common shares of the Parent Company. This is presented as “Cost ofParent common shares held by subsidiaries” and is treated as a reduction in equity as shown in theconsolidated balance sheets and consolidated statements of changes in equity.
The cost of common shares held by subsidiaries as at December 31, 2013 amounting toP=25.4 million pertains to 879 shares with an average cost of P=257.7 per share. The cost ofcommon shares held by subsidiaries as at December 31, 2012 amounting to P=125.9 millionpertains to 390,491 shares with an average cost of P=322.4 per share.
In 2013, SM Land disposed 389,612 Parent Company common shares for P=371.0 million. Thedisposal resulted in a total gain of P=267.7 million where the portion of the gain pertaining to theinterest of the Parent Company and Non-controlling interest is recognized under“Additional paid-in capital” and “Non-controlling interests” account, respectively, in theconsolidated balance sheets.
In 2012, SM Land and MRDC disposed a total of 430,000 Parent Company common shares forP=323.9 million. The disposal resulted in a total gain of P=184.5 million where the portion of thegain pertaining to the interest of the Parent Company and Non-controlling interest is recognizedunder “Additional paid-in capital” and “Non-controlling interests” account, respectively, in theconsolidated balance sheets.
Equity Adjustments from Common Control TransactionsEquity adjustments from business combination under common control mainly pertains to theacquisitions of the various SM China Companies by SM Prime in 2007 and various servicecompanies by SM Retail in 2009. These acquisitions were considered as business reorganizationsof companies under common control. Thus, the acquisitions were accounted for similar to poolingof interest method.
In 2013, the Group entered into a corporate restructuring to consolidate all of the SM Group’s realestate subsidiaries and real estate assets under one single listed entity. At the consolidated level,all transactions with the subsidiaries were considered as equity transactions. The adjustmentresulting from these transactions was also recorded in this account (see Note 5).
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Retained Earnings
a. AppropriatedOn December 14, 2012, the BOD approved the appropriation of P=35,000.0 million retainedearnings.
On April 25, 2013, the BOD approved to reverse P=8,000.0 million of the appropriation.As at December 31, 2013, the appropriated retained earnings is intended for the followingprojects:
Projects Timeline 2013(In Thousands)
Hotel projects 2013–2015 P=8,000,000Commercial buildings 2012–2016 10,000,000Acquisition of investments 2012–2018 9,000,000
P=27,000,000
b. UnappropriatedOn April 25, 2013, the BOD approved the declaration of cash dividends of 118.0% of the parvalue or P=11.80 per share for a total amount of P=7,402.0 million in favor of stockholders onrecord as at May 24, 2013. This was paid on June 20, 2013. On the same date, the BODapproved the declaration of 25% stock dividends in favor of stockholders on record to be fixedby the SEC.
On June 24, 2013 and July 12, 2013, the SEC approved the issuance of 157,000,000 and629,986 shares as stock dividends to stockholders on record as of July 8, 2013. The stockdividends were issued on August 1, 2013.
On April 26, 2012, the BOD approved the declaration of cash dividends of 104.0% of the parvalue or P=10.40 per share for a total amount of P=6,383.6 million in favor of stockholders onrecord as at May 22, 2012. This was paid on June 21, 2012.
On April 27, 2011, the BOD approved the declaration of cash dividends of 90.4% of the parvalue or P=9.04 per share for a total amount of P=5,532.3 million in favor of stockholders onrecord as at May 27, 2011. This was paid on June 22, 2011.
The balance of retained earnings includes the accumulated equity in net earnings ofsubsidiaries, associates and joint ventures amounting to P=108,146.6 million andP=93,346.9 million as at December 31, 2013 and 2012, respectively. Such amounts are notavailable for distribution until such time that the Parent Company receives the dividends fromthe respective subsidiaries, associates and joint ventures.
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22. Related Party Transactions
Parties are considered to be related if one party has the ability, directly and indirectly, to controlthe other party or exercise significant influence over the other party in making financial andoperating decisions. Parties are also considered to be related if they are subject to commoncontrol.
The following are the significant transactions with related parties:
a. RentThe Group have existing lease agreements for office and commercial spaces with relatedcompanies (retail entities under common stockholder, banking group and other related partiesunder common stockholder).
b. Management and Service FeesThe Group pays management fees to Shopping Center Management Corporation, LeisureCenter, Inc., West Avenue Theaters Corporation and Family Entertainment Center, Inc. (relatedparties under common stockholder) for the management of the office and mall premises. TheGroup also provides manpower and other services to related parties under commonstockholder.
SMIC and SM Retail also receive management and service fees from retail entities undercommon stockholder for management, consultancy, manpower and other services.
c. Dividend IncomeThe Group has investment in certain related parties under common stockholder classified asAFS equity instruments. The Group earn income from these investments upon the declarationof dividends by the investees.
d. Cash Placements and LoansThe Group has certain bank accounts and cash placements that are maintained with BDOand China Bank (Bank Associates). Such accounts earn interest based on prevailing marketinterest rates (see Notes 7, 8 and 17).
The Group also availed of bank loans and long-term debt from BDO and China Bank and paysinterest based on prevailing market interest rates (see Notes 18 and 20).
e. OthersThe Group, in the normal course of business, has outstanding receivables from and payables torelated companies as at reporting period which are unsecured and normally settled in cash.
Following is the summary of related party transactions and outstanding balances for the years as atand for the years ended December 31, 2013, 2012 and 2011.
Category YearAmount/Volume
OutstandingBalance Terms Condition
(In Thousands)
Bank AssociatesCash placement and investment in debt
securities2013 (P=14,392,658) P=99,621,590 Interest bearing 0.5% to
6.55%Unsecured;
no impairment2012 54,171,200 P=114,014,2482011 (41,171,620) 59,843,048
Interest income 2013 589,122 798,688 Interest bearing 4.9% to6.47%
Unsecured;no impairment2012 3,950,656 1,011,987
2011 3,125,270 841,418
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Category YearAmount/Volume
OutstandingBalance Terms Condition
(In Thousands)
Loans 2013 (9,841,644) 22,180,000 Interest-bearing3.25% to 8.79%
Unsecured2012 (5,175,006) 32,021,6442011 10,084,368 37,196,650
Interest expense 2013 634,507 41,054 Interest-bearing3.25% to 8.79%
Unsecured2012 859,134 286,7192011 738,231 190,583
Rent income 2013 64,951 3,060 Noninterest bearing Unsecured;no impairment2012 52,860 2,547
2011 40,408 351
Retail Entities under Common StockholdersRent income 2013 4,469,727 2,557,790 Noninterest bearing Unsecured;
no impairment2012 4,002,084 1,516,0662011 2,945,053 1,267,728
Management fee income 2013 309,310 54,533 Noninterest bearing Unsecured;no impairment2012 713,226 154,172
2011 564,160 95,892
Management fee expense 2013 976,415 109,177 Noninterest bearing Unsecured2012 872,853 2,0202011 779,814 104,963
Dividend income 2013 716,384 719,861 Noninterest bearing Unsecured;no impairment2012 552,768 292,917
2011 222,089 42,015
Service income 2013 19,329 4,998 Noninterest bearing Unsecured;no impairment2012 1,097 49,098
2011 127,589 –
Due from related parties 2013 (1,131,895) 1,281,276 Noninterest bearing Unsecured2012 1,040,720 2,413,1712011 (384,608) 1,372,451
Due to related parties 2013 (1,173,710) 2,091,305 Noninterest bearing Unsecured;2012 530,600 3,265,0152011 766,475 2,734,415
Other Related PartiesReceivable under common Stockholders 2013 – 52,800 Interest-bearing fixed at
4.5% in 2012 and7.0% in 2011 &2010
Unsecured;no impairment2012 (7,312,107) 52,800
2011 (281,621) 7,312,107
Receivable for project development 2013 147,529 3,231,672 Noninterest-bearing Unsecured;no impairment2012 1,962,578 3,084,143
2011 (88) 1,121,565
Terms and Conditions of Transactions with Related PartiesFor the years ended December 31, 2013, 2012 and 2011, the Group did not make any provision fordoubtful accounts relating to amounts owed by related parties. An assessment is undertaken ateach financial year-end by examining the financial position of the related party and the market inwhich the related party operates. There have been no guarantees provided or received for anyrelated party receivables or payables. Related parties under common stockholders refer to anentity, that is neither a parent, subsidiary, nor an associate, with stockholders common to the SMGroup or under common control.
Compensation of Key Management Personnel of the GroupThe aggregate compensation and benefits related to key management personnel of the Group forthe years ended December 31, 2013, 2012 and 2011 consist of short-term employee benefitsamounting to P=777.3million, P=708.7 million and P=644.3 million, respectively, andpost-employment benefits (pension benefits) amounting to P=87.7 million, P=144.4 million andP=99.5 million, respectively.
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23. Cost of Merchandise Sales
This account consists of:
2013 2012 2011(In Thousands)
Merchandise inventories at beginning of year P=13,402,762 P=13,436,456 P=10,485,903Purchases 138,549,914 117,862,994 115,143,309Total goods available for sale 151,952,676 131,299,450 125,629,212Less merchandise inventories at end of year 13,232,308 13,402,762 13,436,456
P=138,720,368 P=117,896,688 P=112,192,756
24. Selling, General and Administrative Expenses
This account consists of:
2013 2012 2011(In Thousands)
Personnel cost (see Note 22) P=12,253,177 P=10,942,505 P=9,842,436Depreciation and amortization
(see Notes 14 and 15) 9,513,584 8,057,871 7,193,100Utilities 7,792,591 6,295,496 5,346,665Rent (see Note 28) 7,295,122 4,876,327 3,463,656Marketing and selling 3,318,896 3,528,501 2,373,630Outside services 3,163,822 2,802,479 2,351,613Taxes and licenses 2,436,069 3,964,767 3,212,041Repairs and maintenance 1,172,705 1,062,124 958,955Supplies 1,066,982 838,943 739,183Management fees (see Note 22) 1,062,906 910,614 944,098Provision for (reversal of) impairment loss
and others (see Notes 10 and 13) (1,018,156) (2,635,569) 553,386Insurance 552,183 470,633 357,743Transportation and travel 502,028 436,156 341,716Professional fees 387,950 460,268 199,378Entertainment, representation and amusement 241,857 196,185 239,943Data processing 206,183 98,472 8,825Communications 163,989 122,666 104,357Donations 115,605 297,629 201,533Pension expense (benefit) (see Note 26) (92,085) 235,499 234,746Others 908,389 2,017,256 1,745,746
P=51,043,797 P=44,978,822 P=40,412,750
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25. Interest Income and Interest Expense
The details of the sources of interest income and interest expense follow:
2013 2012 2011(In Thousands)
Interest income on:Time deposits and short-term
investments (see Note 8) P=2,245,719 P=2,080,949 P=1,921,384AFS investments and others
(see Notes 9 and 12) 523,303 853,249 1,227,952Cash in banks and temporary
investments (see Note 7) 912,152 1,439,218 1,083,460Investments held for trading
(see Note 9) 28,310 43,330 41,844P=3,709,484 P=4,416,746 P=4,274,640
Interest expense on:Long-term debt (see Note 20) P=6,806,602 P=7,325,871 P=6,249,515Bank loans (see Note 18) 3,960,390 3,253,656 2,288,844Others (see Note 30) 176,409 232,209 297,654
P=10,943,401 P=10,811,736 P=8,836,013
26. Pension Benefits
The Group has funded defined benefit pension plans covering all regular and permanentemployees. The benefits are based on employees’ projected salaries and number of years ofservice. The Group obtained an updated actuarial valuation report for December 31, 2013financial reporting.
a. Net Defined Benefit Liability
The following tables summarize the components of pension benefit expense recognized by thesubsidiaries whose pension plan resulted in a defined benefit liability as at December 31,2013, 2012 and 2011.
Pension Benefit Expense (Included under “Selling, Generaland Administrative Expenses”, see Note 24)
2013 2012 2011(In Thousands)
Current service cost P=110,200 P=30,196 P=33,872Net interest cost 235 14,789 27,398Expected return on plan assets – (12,685) (24,820)Recognized actuarial gain – (1,280) (4,509)Others (75,238) 1,497 1,497Net pension benefit expense P=35,197 P=32,517 P=33,438
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Remeasurement loss (Included under “Other Comprehensive Income”)The remeasurement loss for the year ended December 31, 2013, recognized as part of othercomprehensive income, comprised of the following:
Actuarial losses (gains):Defined benefit obligation P=113,034Plan assets (8,036)Other adjustments 181,189
P=286,187
Actuarial gains and losses in 2012 and 2011 were recognized when the net cumulativeunrecognized gains and losses exceeded 10% of the higher of the defined benefit obligationsand the fair value of the plan asset at the end of the previous period (see Note 3).
Defined Benefit Liability (Included under “Tenants’ deposits and others” see Note )
2013 2012(In Thousands)
Present value of obligation P=1,395,264 P=276,936Fair value of plan assets 1,240,943 302,376Funded status 154,321 (25,440)Unrecognized actuarial gain – 60,513Others – (6,763)Defined benefit liability P=154,321 P=28,310
Changes in the Present Value of the Defined Benefit Obligation
2013 2012 2011(In Thousands)
Defined benefit obligationat beginning of year P=276,936 P=442,619 P=695,108
Reclassifications from (to) definedbenefit assets 898,493 (232,674) (352,155)
Current service cost 110,200 30,196 33,872Interest cost 72,057 14,789 27,398Actuarial loss on defined benefit
obligations – 30,464 47,023Remeasurement losses (gains):
Changes in financial assumptions (54,605) – –Changes in demographic
assumptions 9,926 – –Experience adjustment 157,713 – –
Benefits paid (84,477) (6,307) (13,696)Transfer from (to) related parties 9,021 (2,151) 2,778Other adjustments – – 2,291Defined benefit obligation
at end of year P=1,395,264 P=276,936 P=442,619
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Changes in the Fair Value of Plan Assets
2013 2012 2011(In Thousands)
Fair value of plan assetsat beginning of year P=302,376 P=494,554 P=732,189
Reclassifications from (to) definedbenefit assets 878,655 (253,032) (343,747)
Actual contributions 55,510 28,169 102,835Actuarial gain on plan assets – 28,458 10,104Expected return on plan assets – 12,685 24,820Interest income 71,822 – –Remeasurement gain - return on plan
assets 8,036 – –Benefits paid (84,477) (6,307) (13,696)Transfer from (to) related parties 9,021 (2,151) 2,778Other adjustments – – (20,729)Fair value of plan assets at end of
year P=1,240,943 P=302,376 P=494,554
Unrecognized Actuarial Gain
2013 2012 2011(In Thousands)
Net cumulative unrecognizedactuarial gain at beginningof year P=60,513 P=131,766 P=219,047
Actuarial gain (loss) on: –Plan assets – 28,458 10,104Defined benefit obligation – (30,464) (47,023)
Reclassifications to defined benefitassets – (67,967) (24,722)
Recognized actuarial gain – (1,280) (4,509)Other adjustments (60,513) – (21,131)Net cumulative unrecognized
actuarial gain at end of year P=– P=60,513 P=131,766
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b. Net Defined Benefit Asset
The following tables summarize the components of pension benefit expense recognized by thesubsidiaries whose pension plan resulted in a defined benefit asset as at December 31, 2013,2012 and 2011.
Pension Benefit Expense (Income) (Included under “Selling, Generaland Administrative Expenses”, see Note 24)
2013 2012 2011(In Thousands)
Current service cost P=240,698 P=232,910 P=206,172Net interest cost (income) (39,644) 177,343 150,945Expected return on plan assets – (186,269) (162,260)Recognized actuarial loss (gain) – (13,888) 10,583Effect of asset limit 445 (2,860) 1,435Others (328,781) (4,254) (5,567)Net pension benefit expense (income) (P=127,282) P=202,982 P=201,308
Remeasurement gain (Included under “Other Comprehensive Income”)The remeasurement gain for the year ended December 31, 2013, recognized as part of othercomprehensive income, is comprised of the following:
Actuarial losses (gains):Defined benefit obligation P=6,276Plan assets (55,722)Changes in the effect of the asset ceiling (35,730)Other adjustments 293
(P=84,883)
Actuarial gains and losses in 2012 and 2011 were recognized when the net cumulativeunrecognized gains and losses exceeded 10% of the higher of the defined benefit obligationsand the fair value of the plan asset at the end of the previous period (see Note 3).
Defined Benefit Asset (Recorded as part of “Other Noncurrent Assets”, see Note 17)
2013 2012(In Thousands)
Present value of obligation P=2,640,893 P=3,234,528Fair value of plan assets 3,343,406 3,967,810Funded status (702,513) (733,282)Amount not recognized due to asset limit 86,531 (7,404)Unrecognized actuarial gain – 292,384Others – (4,608)Defined benefit asset (P=615,982) (P=452,910)
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Changes in the Present Value of the Defined Benefit Obligation
2013 2012 2011(In Thousands)
Defined benefit obligation atbeginning of year P=3,234,528 P=2,269,976 P=1,618,563
Reclassifications from (to) definedbenefit liability (898,493) 232,674 352,155
Current service cost 240,698 232,910 206,172Interest cost 145,294 177,343 150,945Actuarial loss on defined benefit
obligations – 366,834 140,848Remeasurement losses (gains):
Changes in financial assumptions (154,212) – –Changes in demographic
assumptions 54,555 – –Experience adjustments 105,933 – –
Benefits paid (166,950) (68,621) (181,173)Transfer to related parties (4,855) (57,896) (12,590)Other adjustments 84,395 81,308 (4,944)Defined benefit obligation at
end of year P=2,640,893 P=3,234,528 P=2,269,976
Changes in the Fair Value of Plan Assets
2013 2012 2011(In Thousands)
Fair value of plan assets at beginningof year P=3,967,810 P=2,994,978 P=2,437,705
Reclassifications from (to) definedbenefit liability (878,655) 253,031 343,747
Actual contributions 71,661 313,700 337,732Actuarial gain on plan assets – 333,746 56,398Expected return on plan assets – 186,269 162,260Interest income 189,689 – –Remeasurement gain - Return on plan
assets 55,722 – –Benefits paid (166,950) (68,621) (181,173)Transfer to related parties (4,855) (57,896) (12,590)Other adjustments 108,984 12,603 (149,101)Fair value of plan assets at end of
year P=3,343,406 P=3,967,810 P=2,994,978
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Unrecognized Actuarial Gain
2013 2012 2011(In Thousands)
Net cumulative unrecognizedactuarial gain at beginning of year P=292,384 P=321,952 P=510,542
Actuarial gain (loss) on: –Defined benefit obligation – (366,834) (140,848)Plan assets – 333,746 56,398
Reclassifications from defined benefitliability – 67,968 24,722
Recognized actuarial (gain) loss – (13,888) 10,583Other adjustments (292,384) (50,560) (139,445)Net cumulative unrecognized
actuarial gain at end of year P=– P=292,384 P=321,952
The expected overall rate of return on assets is determined based on historical returns, applicableto the period over which obligation is to be settled. These are reflected in the principalassumptions below.
2013 2012Discount rate 4%–6% 4%–7%Expected rate of return on assets N/A 5%-8%Future salary increases 10% 10%–11%
The assets of the Retirement Plan are held by a trustee bank. The investing decisions of the Planare made by the Board of Trustees of the Retirement Plan. The following table presents thecarrying amounts and estimated fair values of the assets of the Retirement Plan:
2013 2012CarryingAmount Fair Value
CarryingAmount Fair Value
Cash and cash equivalents P=117,834 P=117,834 P=171,751 P=171,751Investment in debt and other
securities 714,898 714,898 450,728 450,728Investment in common trust funds 1,723,165 1,723,165 1,736,086 1,736,086Investment in equity securities 123,443 123,443 183,913 183,913Investment in government securities 1,865,037 1,865,037 1,692,804 1,692,804Others 39,972 39,972 34,904 34,904
P=4,584,349 P=4,584,349 P=4,270,186 P=4,270,186
The Retirement Plans’ assets and investments consist of the following:
§ Cash and cash equivalents includes regular savings and time deposits.
§ Investments in debt and other securities, consisting of both short-term and long-term corporateloans, notes and bonds, which bear interest ranging from 5.45% to 8.46% and have maturitiesfrom April 2014 to September 2022;
§ Investment in common trust funds consists of unit investment trust fund.
§ Investment in equity securities consists of listed and unlisted equity securities.
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§ Investments in government securities, consisting of retail treasury bonds that bear interestranging from 5.00% to11.14% and have maturities from July 2013 to October 2037; and
§ Other financial assets held by the Retirement Plan are primarily accrued interest income oncash deposits and debt securities held by the Plan.
The following table summarizes the outstanding balances and transactions of the Retirement Planwith the reporting entity and BDO Unibank, Inc., a related party as at and for the year endedDecember 31, 2013 and December 31, 2012:
2013 2012(In Thousands)
Balances:Cash and cash equivalents P=110,392 P=171,151Investment in common trust funds 1,723,165 1,736,086
Transactions:Interest income from cash and cash equivalents 3,456 2,826Gains from Investment in common trust funds 54,711 456,634
The Group expects to contribute about P=341.9 million to its defined benefit pension plan in 2014.
The sensitivity analysis below has been determined based on reasonably possible changes of eachsignificant assumption on the defined benefit obligation as at December 31, 2013 assuming allother assumptions were held constant:
Increase(Decrease) in
Basis Points
Increase (Decrease) inDefined Benefit
Obligation(In Thousands)
Discount rates 50 (4,325)(50) 4,927100 (275,558)
(100) 306,110Future salary increases 50 584,572
(50) (489,141)No attrition of rates – 3,070,593
The Group has no specific matching strategies between the retirement plan assets and the definedbenefit obligation.
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27. Income tax
The details of the Group’s deferred tax assets and liabilities are as follows:
2013 2012(In Thousands)
Deferred tax assets - net:Unrealized gain on intercompany sale of investment property P=1,201,479 P=–Deferred rent expense 504,342 –Unamortized past service cost and defined benefit liability 201,080 100,129NOLCO 122,118 17,131Unrealized mark-to-market loss on investments 106,574 40,517Accrued leases 44,071 43,070Unrealized foreign exchange loss and others (6,865) 362,005MCIT – 79,253
P=2,172,799 P=642,105
Deferred tax liabilities - net:Appraisal increment on investment property P=2,276,990 P=–Trademarks and brand names 1,879,000 1,837,429Capitalized interest 1,614,650 1,276,303Accrued/deferred rent income 313,461 169,831Unrealized gross profit on sale of real estate 310,878 301,382Unamortized past service cost and defined benefit asset 189,650 54,905Unrealized foreign exchange gain – 791,671Unrealized marked-to-market gain on investments – 45,723Others 385,898 65,674
P=6,970,527 P=4,542,918
The following are the movements in NOLCO and MCIT:
2013 2012(In Thousands)
NOLCO:Balance at beginning of year P=57,103 P=32,210Additions 349,957 24,893Balance at end of year 407,060 P=57,103
MCIT:Balance at beginning of year 79,253 P=61,248Additions (79,253) 18,005Balance at end of year – P=79,253
The Group’s consolidated deferred tax assets as at December 31, 2013 and 2012 have beenreduced to the extent that part or all of the deferred tax assets may no longer be utilized in thefuture.
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The components of deductible temporary differences of certain balance sheet items and thecarryforward benefits of unused MCIT and NOLCO, which pertain to the Parent Company, forwhich no deferred tax assets have been recognized in the consolidated balance sheets, are asfollows:
2013 2012(In Thousands)
Allowance for impairment losses P=488,683 P=1,889,215Net unrealized foreign exchange loss 381,078 2,011,810Defined benefit liability 65,597 –Past service cost 54,917 36,672Non-refundable advance rentals 24,920 66,456NOLCO – 1,630,269Accretion on convertible bonds – 297,707MCIT – 122,669
P=1,015,195 P=6,054,798
NOLCO and MCIT amounting to P=1,752.9 million as at December 31, 2012 was applied in 2013.
The reconciliation between the statutory tax rates and the Group’s effective tax rates on incomebefore income tax is as follows:
2013 2012 2011Statutory income tax rate 30% 30% 30%Add (deduct) income tax effects
of reconciling items:Equity in net earnings of associates (9) (7) (5)Dividend income exempt from tax (1) (1) (1)Interest income subjected to final tax (2) (3) (3)Gain on sale of shares of stock – – (3)Others (2) (3) (2)
Change in unrecognized deferred tax assets (4) – (1)Effective income tax rates 12% 16% 15%
28. Lease Agreements
Parent Company
The Parent Company’s lease agreements with its tenants are generally granted for a term of one totwenty-five years. Tenants likewise pay a fixed monthly rent which is calculated by reference to afixed sum per square meter of area leased except for a few tenants, which pay either a fixedmonthly rent or a percentage of gross sales, whichever is higher.
Upon inception of the lease agreement, tenants are required to pay certain amounts of deposits.Tenants’ deposits amounted to P=10,527.6 million and P=11,691.8 million as at December 31, 2013and 2012, respectively.
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The minimum lease receivables under the noncancellable operating leases of the Parent Companyas at December 31 are as follows:
2013 2012(In Thousands)
Within one year P=791,487 P=738,122After one year but not more than five years 2,902,785 2,230,084After five years 1,792,043 5,512,218Balance at end of year P=5,486,316 P=8,480,424
SM Prime
As LessorThe lease agreements of SM Prime and its subsidiaries with their tenants are generally granted fora term of one year, with the exception of some of the larger tenants operating nationally, which aregranted initial lease terms of five years, renewable on an annual basis thereafter. Upon inceptionof the lease agreement, tenants are required to pay certain amounts of deposits. Tenants likewisepay either a fixed monthly rent, which is calculated by reference to a fixed sum per square meterof area leased, or pay rent on a percentage rental basis, which comprises of a basic monthlyamount and a percentage of gross sales or a minimum set amount, whichever is higher.
Also, SM Prime and its subsidiaries’ lease agreements with its commercial property tenants aregenerally granted for a term of one year, with the exception of some tenants, which are grantedinitial lease terms of 2 to 20 years, renewable on an annual basis thereafter. Upon inception of thelease agreement, tenants are required to pay certain amounts of deposits. Tenants pay either afixed monthly rent or a percentage of sales, depending on the terms of the lease agreements,whichever is higher.
SM Prime’s future minimum rent receivables for the noncancellable portions of the operatingcommercial property leases follow:
2013 2012(In Millions)
Within one year P=1,277 P=1,244After one year but not more than five years 4,427 5,071After more than five years 1,367 1,626
P=7,071 P=7,941
As LesseeSM Prime and its subsidiaries also lease certain parcels of land where some of their malls aresituated or constructed. The terms of the lease are for periods ranging from 15 to 50 years,renewable for the same period under the same terms and conditions. Rental payments aregenerally computed based on a certain percentage of the gross rental income or a certain fixedamount, whichever is higher.
Also, SM Prime and its subsidiaries have various operating lease commitments with third partyand related parties. The noncancellable periods of the lease range from 2 to 30 years, mostlycontaining renewal options. Several lease contracts provide for the payment of additional rentalbased on certain percentage of sales of the tenants.
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The minimum lease payables under the noncancellable operating leases of SM Prime as atDecember 31 are as follows:
2013 2012(In Millions)
Within one year P=735 P=428After one year but not more than five years 3,261 1,810After five years 27,330 21,042Balance at end of year P=31,326 P=23,280
29. Financial Risk Management Objectives and Policies
The Group’s principal financial instruments, other than derivatives, comprise of bank loans,long-term debt, AFS investments, investments held for trading, time deposits and short-terminvestments and cash and cash equivalents. The main purpose of these financial instruments is tofinance the Group’s operations. The Group has other financial assets and liabilities such asreceivables and accounts payable and other current liabilities, which arise directly from itsoperations.
The Group also enters into derivative transactions, principally, cross currency swaps, interest rateswaps, foreign currency call options, non-deliverable forwards and foreign currency range options.The purpose is to manage the interest rate and foreign currency risks arising from the Group’soperations and its sources of finance.
The main risks arising from the Group’s financial instruments are interest rate risk, foreigncurrency risk, liquidity risk, credit risk and equity price risk. The BOD reviews and agreespolicies for managing each of these risks and they are summarized in the following tables. TheGroup’s accounting policies in relation to derivatives are set out in Note 3.
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Interest Rate RiskThe following tables set out the carrying amount, by maturity, of the Group’s long-term financial liabilities that are exposed to interest raterisk as at December 31, 2013 and 2012:
2013
Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years TotalDebt Issue
Cost/Discount Carrying Amount(In Thousands)
Fixed RateForeign Currency Loans: US$400 million fixed rate bonds $– $– $383,463 $– $– P=17,023,867 (P=112,588) P=16,911,280 Interest rate – – 5.50% – – US$500 million fixed rate bonds 379,156 – – – – 16,832,631 (42,037) 16,790,593 Interest rate 6.00% – – – – US$250 million convertible bonds – – – 84,084 – 3,732,919 (60,787) 3,672,132 Interest rate – – – 1.63% – US$500 million Senior bonds – – – – 500,000 22,197,500 (210,645) 21,986,855 Interest rate – – – – 4.25%Peso Loans: Three-year, five-year, seven-year and
ten-year fixed rate notes P=– P=– P=2,000,000 P=18,757,800 P=11,605,600 32,363,400 (175,781) 32,187,619 Interest rate – – 4.72% 4.00%-6.81% 5.90%-10.11% Five-year and seven-year retail bonds 8,400,000 – 1,000,000 – – 9,400,000 (13,795) 9,386,205 Interest rate 8.25% – 9.10% – – Seven-year and ten-year retail bonds – – – – 13,082,270 13,082,270 (89,961) 12,992,309 Interest rate – – – – 6.00%-6.94% Ten-year corporate notes – – – – 1,100,000 1,100,000 (6,906) 1,093,094 Interest rate – – – – 10.11% Other bank loans 1,379,500 1,538,100 315,000 – 7,350,000 10,582,600 (26,880) 10,555,720 Interest rate 5.00%-5.68% 5.00%-9.75% 4.50% – 4.03%-5.88%Variable RateForeign Currency Loans: US$ five-year term loans – – $570,000 – – 25,305,150 (426,877) 24,878,273 Interest rate – – LIBOR+margin% – – China Yuan renminbi loans ¥386,761 ¥62,782 – – – 3,197,597 – 3,197,597
(Forward)
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2013
Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years TotalDebt Issue
Cost/Discount Carrying Amount(In Thousands)
Interest rate 5.76%-6.20% 5.76%-6.20% – – – US$ bilateral loans – – – $25,000 – P=1,109,875 (P=5,994) P=1,103,881 Interest rate – – – LIBOR+margin% – US$ five-year syndicated loans – – – 500,000 – 22,197,500 (473,025) 21,724,475 Interest rate – – – LIBOR+margin% – Other bank loans – – 50,000 50,000 – 4,439,5000 (55,869) 4,383,631 Interest rate – – LIBOR+margin% LIBOR+margin% –Peso Loans: – – – – – Peso loans collateralized with time deposits P=– P=– P=3,000,000 P=– P=– 3,000,000 (3,457) 2,996,543 Interest rate – – PDST-F+margin% – – Five-year, seven-year and ten-year corporate notes – – 1,746,000 – 4,850,000 6,596,000 (25,068) 6,570,932 Interest rate – – PDST-F+margin% – PDST-F+margin% Five-year and ten-year corporate notes – – – 3,415,500 990,000 4,405,500 (28,297) 4,377,203 Interest rate – – – PDST-F+margin% PDST-F+margin% Five-year floating rate loan – – 4,900,000 – – 4,900,000 (20,390) 4,879,610 Interest rate – – PDST-F+margin% – – Five-year bilateral loans – – 500,000 – – 500,000 (1,545 498,455 Interest rate – – PDST-F+margin% – – Other bank loans 5,000,000 2,793,460 – 198,000 2,000,000 9,991,460 (21,830) 9,772,865 Interest rate PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin%
P=211,957,770 (P=1,801,732) P=210,156,037
2012
Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years TotalDebt Issue Cost/
Discount Carrying Amount(In Thousands)
Fixed RateForeign Currency Loans: US$400 million fixed rate bonds $– $– $– $381,042 $– P=15,641,760 (P=127,984) P=15,513,776 Interest rate – – – 5.50% – US$500 million fixed rate bonds – 379,156 – – – 15,564,354 (89,610) 15,474,744 Interest rate – 6.00% – – – US$350 million fixed rate bonds 245,623 – – – – 10,082,824 (17,119) 10,065,705 Interest rate 6.75% – – – – US$250 million convertible bonds – – 229,173 – – 9,407,559 (183,247) 9,224,312 Interest rate – – 1.63% – – US$500 million Senior bonds – – – – 500,000 20,525,000 (215,069) 20,309,931 Interest rate – – – – 4.25%
(Forward)
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2012
Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years TotalDebt Issue Cost/
Discount Carrying Amount(In Thousands)
Peso Loans: Three-year, five-year, seven-year and
ten-year fixed rate notes P=2,078,500 P=78,500 P=10,078,500 P=8,077,400 P=6,650,100 26,963,000 (144,816) 26,818,184 Interest rate 5.86%-6.81% 5.86%-6.81% 5.86%-7.73% 5.86%-6.81% 5.86%-9.85% Five-year and seven-year retail bonds – 8,400,000 – 1,000,000 – 9,400,000 (32,108) 9,367,892 Interest rate – 8.25% – 9.10% – Seven-year and Ten-year retail bonds – – – – 14,282,270 14,282,270 (118,549) 14,163,721 Interest rate – – – – 6.00%-6.94% Five-year fixed rate notes 1,000 1,000 1,000 6,696,043 – 6,699,043 (36,984) 6,662,059 Interest rate 6.17% 6.17% 6.17%– 6.17% – Five-year and ten-year corporate notes – – – – 1,100,000 1,100,000 (7,849) 1,092,151 Interest rate – – – 10.11% Seven-year and ten-year corporate notes 5,000 5,000 5,000 10,000 4,970,000 4,995,000 (37,757) 4,957,243 Interest rate 5.75%-6.63% 5.75%-6.63% 5.75%-6.63% 5.75%-6.63% 5.75%-6.63% Five-year, seven-year and ten-year corporate notes 20,000 20,000 1,097,300 66,145 756,555 1,960,000 (10,332) 1,949,668 Interest rate 5.79%-6.65% 5.79%-6.65% 5.79%-6.65% 5.89%-6.65% 6.65% Other bank loans 8,750 1,380,500 1,339,300 1,200,000 2,050,000 5,978,550 (13,070) 5,965,480 Interest rate 6.75% 5.69%-6.75% 3.6%-7.28% 9.75% 6.71%-8.79%Variable RateForeign Currency Loans: US$ five-year term loans $– $– $– $280,000 $– 11,494,000 (195,854) 11,298,146 Interest rate – – – LIBOR+margin % – China Yuan renminbi loans 77,476 375,168 60,900 – – 3,383,486 – 3,383,486 Interest rate 5.76%-6.20% 5.76%-6.20% 5.76% – US$ bilateral loans $25,000 $– $– $– $– P=1,026,250 (P=5,008) P=1,021,242 Interest rate LIBOR+margin % – $– – – Other bank loans $– $– $50,000 $– $– 2,052,500 (15,572) 2,036,928 Interest rate – – LIBOR+margin % – –Peso Loans: Peso loans collateralized with time deposits – – 3,000,000 – – 3,000,000 (6,635) 2,993,365 Interest rate – – PDST-F+margin% – – Five-year, seven-year and ten-year corporate notes 30,000 30,000 2,880,000 – – 2,940,000 (25,829) 2,914,171 Interest rate PDST-F+margin% – PDST-F+margin% – – Five-year floating rate loan 96,500 96,500 96,500 8,360,500 950,000 9,600,000 (64,382) 9,535,618 Interest rate PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin% Five-year bilateral loans – – – 500,000 – 500,000 (2,009) 497,991 Interest rate – – – PDST-F+margin% – Other bank loans 30,000 5,180,000 4,955,000 3,000,000 – 13,165,000 (18,384) 13,146,616 Interest rate PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin% –
P=189,760,596 (P=1,368,167) P=188,392,429
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Fixed rate financial instruments are subject to fair value interest rate risk while floating ratefinancial instruments are subject to cash flow interest rate risk.
Repricing of floating rate financial instruments is mostly done at intervals of three months or sixmonths.
The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. TheGroup’s guideline is to keep between 50% to 60% of its borrowings at fixed interest rates. Tomanage this mix in a cost-efficient manner, the Group enters into interest rate swaps andcross-currency swaps, in which the Group agrees to exchange, at specified intervals, the differencebetween fixed and variable rate interest amounts calculated by reference to an agreed notionalamount. The interest rate swaps economically hedge the underlying debt obligations. The cross-currency swaps were designated by the Group under cash flow hedge accounting (see Note 30).As at December 31, 2013 and 2012, after taking into account the effect of the swaps,approximately 63% of the Group’s borrowings are kept at a fixed rate of interest, consideringmarket conditions.
Interest Rate Risk Sensitivity Analysis. The following table demonstrates the sensitivity to areasonably possible change in interest rates, with all other variables held constant of the Group’sincome before income tax and equity after income tax, through the impact of floating ratefinancial liabilities and debt securities classified as at FVPL and AFS investments, respectively.
Increase(Decrease)
in Basis Points
Effecton Income
Before Tax
Effect onEquity AfterIncome Tax
(In Millions)
2013 100 (P=836.4) (P=129.8)50 (418.2) (65.3)
(100) 836.4 135.9(50) 418.2 67.5
2012 100 (437.2) (133.5)50 (218.6) (58.9)
(100) 437.2 174.8(50) 218.6 95.2
Fixed rate debts, although subject to fair value interest rate risk, are not included in the sensitivityanalysis as these are carried at amortized costs. The assumed movement in basis points forinterest rate sensitivity analysis is based on currently observable market environment, showing asignificantly higher volatility as in prior years.
Foreign Currency RiskThe Group’s exposure to foreign currency risk arises as the Parent Company and SM Prime havesignificant investments and debt issuances which are denominated in U.S. dollars. To manage itsforeign exchange risk, stabilize cash flows and improve investment and cash flow planning, theGroup enters into foreign currency swap contracts, foreign cross-currency swaps, foreign currencycall options, non-deliverable forwards and foreign currency range options (see Note 30) with theaim of reducing and/or managing the adverse impact of changes in foreign exchange rates onfinancial performance and cash flows.
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The following tables show the Group’s foreign currency-denominated financial assets andliabilities and their peso equivalents as at December 31, 2013 and 2012:
2013US$ PhP=
(In Thousands)
Current assets:Cash and cash equivalents $5,999 P=266,316Time deposits and short-term investments 705,501 31,320,708AFS investments 5,250 233,074Receivables 448,365 19,905,182
Noncurrent assets:AFS investments 124,785 5,539,822Time deposits 585,000 25,971,075Derivative assets 39,059 1,734,034
Total foreign currency-denominated financial assets 1,913,959 84,970,211Current liabilities:
Bank loans 50,000 2,219,750Accounts payable and other current liabilities 34,985 1,553,191
Noncurrent liabilities:Long-term debt - net of current portion 2,183,908 96,954,602Derivative liabilities 3,603 159,974
Total foreign currency-denominated financial liabilities 2,272,496 100,887,517Net foreign currency-denominated financial liabilities $358,537 P=15,917,306
2012US$ PhP=
(In Thousands)
Current assets:Cash and cash equivalents $20,355 P=835,593Time deposits and short-term investments 111,941 4,595,167AFS investments 17,875 733,752Receivables 334,142 13,716,529
Noncurrent assets:AFS investments 146,028 5,994,458Time deposits 1,095,480 44,969,454Derivative assets 2,679 109,973Other noncurrent assets 24,151 991,431
Total foreign currency-denominated financial assets 1,752,651 71,946,357Current liabilities:
Bank loans 50,000 2,052,500Accounts payable and other current liabilities 92,297 3,788,792Current portion of long-term debt 245,623 10,082,824
Noncurrent liabilities:Long-term debt - net of current portion 1,762,239 72,339,915Derivative liabilities 5,952 244,330
Total foreign currency-denominated financial liabilities 2,156,111 88,508,361Net foreign currency-denominated financial liabilities $403,460 P=16,562,004
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As at December 31, 2013 and 2012, approximately 41.7% and 38.4% respectively, of the Group’stotal consolidated bank loans and long-term debt were denominated in US Dollars. Thus,appreciation of the Philippine peso against the US Dollar will decrease both the principal amountof the foreign currency-denominated debt and interest expense on the Group’s debt in Philippinepeso terms.
The Group has recognized in its consolidated statements of income, net foreign exchange gain ofP=59.4 million, P=565.1 million and P=242.9 million on its net foreign-currency denominated assetsand liabilities for the years ended December 31, 2013, 2012 and 2011, respectively. This resultedfrom the movements of the closing rates of U.S. dollar against the Philippine peso as shown in thefollowing table:
U.S. Dollarto Peso
December 31, 2011 43.84December 31, 2012 41.05December 31, 2013 44.40
Foreign Currency Risk Sensitivity Analysis. The following table demonstrates the sensitivity to areasonably possible change in U.S. dollar to Philippine peso exchange rate, with all other variablesheld constant, of the Group’s income before income tax (due to changes in the fair value ofmonetary assets and liabilities, including the impact of derivative instruments).
Appreciation (Depreciation) of P= Effect on Income Before Tax(In Millions)
2013 1.50 P=537.81.00 358.5(1.50) (537.8)(1.00) (358.5)
2012 1.50 605.21.00 403.5(1.50) (605.2)(1.00) (403.5)
Liquidity RiskLiquidity risk arises from the possibility that the Group may encounter difficulties in raising fundsto meet commitments from financial instruments.
The Group seeks to manage its liquidity profile to be able to finance capital expenditures andservice maturing debts. To cover its financing requirements, the Group intends to use internallygenerated funds and proceeds from debt and equity issues and sales of certain assets.
As part of its liquidity risk management program, the Group regularly evaluates its projected andactual cash flow information and continuously assesses conditions in the financial markets foropportunities to pursue fund-raising initiatives. These initiatives may include bank loans, exportcredit agency-guaranteed facilities and debt capital and equity market issues.
The Group’s financial assets, which have maturities of less than 12 months and used to meet itsshort-term liquidity needs, include cash and cash equivalents, current portion of time deposits andshort-term investments, investments held for trading and current portion of AFS investments -bonds and corporate notes amounting to P=50,209.7 million, P=28,912.7 million, P=459.8 millionand nil, respectively, as at December 31, 2013 and P=60,714.2 million, P=29,090.3 million,
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P=459.3 million and P=1,734.0 million, respectively, as at December 31, 2012 (see Notes 7, 8 and 9).The Group also has readily available credit facility with banks and related parties to meet its long-term financial liabilities.
The tables below summarize the maturity profile of the Group’s financial liabilities as atDecember 31, 2013 and 2012 based on the contractual undiscounted payments:
2013
On Demand Less than 1 Year 2 to 5 YearsMore than
5 Years Total(In Thousands)
Bank loans P=– P=27,588,259 P=– P=– P=27,588,259Accounts payable and other
current liabilities* – 64,416,727 – – 64,416,727Long-term debt (including
current portion) – 38,296,386 138,091,911 66,216,033 242,604,330Derivative liabilities:** Interest rate swaps – – 159,974 – 159,974 Multiple derivatives
on convertible bonds – 845,429 – – 845,429Dividends payable – 210,189 – – 210,189Tenants’ deposits – – 10,527,581 – 10,527,581
P=– P=131,356,990 P=148,779,466 P=66,216,033 P=346,352,489
2012
On Demand Less than 1 Year 2 to 5 YearsMore than
5 Years Total(In Thousands)
Bank loans P=– P=33,146,253 P=– P=– P=33,146,253Accounts payable and other
current liabilities* – 55,531,106 – – 55,531,106Long-term debt (including
current portion) – 16,077,517 144,860,929 69,106,024 230,044,470Derivative liabilities:** Non-deliverable forward – 18,501 – – 18,501 Interest rate swaps – – 244,330 – 244,330 Foreign currency swap – 2,020 – – 2,020 Multiple derivatives
on convertible bonds – 2,473,130 – – 2,473,130Dividends payable – 97,282 – – 97,282Tenants’ deposits – 146,360 11,123,172 77,786 11,347,318
P=– P=107,492,169 P=156,228,431 P=69,183,810 P=332,904,410* Excluding payable to government agencies of P=3,671.6 million and P=2,334.8 million at December 31, 2013 and 2012, respectively,
the amounts of which are not considered as financial liabilities.**Based on estimated future cash flows.
Credit RiskThe Group trades only with recognized, creditworthy related and third parties. It is the Group’spolicy that all customers who wish to trade on credit terms are subject to credit verificationprocedures. In addition, receivable balances are monitored on a regular basis which aims toreduce the Group’s exposure to bad debts at a minimum level. Given the Group’s diverse base ofcustomers, it is not exposed to large concentrations of credit risk.
With respect to credit risk arising from the other financial assets of the Group, which comprise ofcash and cash equivalents, time deposits and short-term investments, investments held for trading,AFS investments and certain derivative instruments, the Group’s exposure to credit risk arisesfrom default of the counterparty, with a maximum exposure equal to the carrying amount of theseinstruments, without considering the effects of collateral.
Since the Group trades only with recognized related and third parties, there is no requirement forcollateral.
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Receivable from sale of real estate has minimal credit risk and is effectively collateralized byrespective unit sold since title to the real estate properties are not transferred to the buyers untilfull payment is made.
As at December 31, 2013 and 2012, the financial assets, except for certain receivables and AFSinvestments, are generally viewed by management as good and collectible considering the credithistory of the counterparties. Past due or impaired financial assets are very minimal in relation tothe Group’s total financial assets.
Credit Quality of Financial AssetsThe credit quality of financial assets is managed by the Group using high quality and standardquality as internal credit ratings.
High Quality. This pertains to a counterparty who is not expected by the Group to default insettling its obligations, thus credit risk exposure is minimal. This normally includes large primefinancial institutions, companies and government agencies.
Standard Quality. Other financial assets not belonging to high quality financial assets areincluded in this category.
As at December 31, 2013 and 2012, the credit analyses of the Group’s financial assets that areneither past due nor impaired are as follows:
2013High Quality Standard Quality Total
(In Thousands)Cash and cash equivalents
(excluding cash on hand) P=48,999,592 P=– P=48,999,592Time deposits and short-term investments
(including noncurrent portion) 55,993,600 – 55,993,600Investments held for trading - Bonds 459,754 – 459,754AFS investments 17,154,400 3,918 17,158,318Receivables - net (including noncurrent
portion of receivables from realestate buyers) 30,313,593 5,802,860 36,116,453
Advances and other receivables - net(includes non-trade receivables,advances and deposits, receivablefrom banks and credit card, accruedinterest receivable, and advances forproject development under “Othercurrent assets” account in theconsolidated balance sheet) 13,649,588 – 13,649,588
Long-term notes (included under “Othernoncurrent assets” account in theconsolidated balance sheet) 218,124 – 218,124
Derivative assets (included under “Othernoncurrent assets” account in theconsolidated balance sheet) 2,643,487 – 2,643,487
P=169,432,138 P=5,806,778 P=175,238,916
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2012High Quality Standard Quality Total
(In Thousands)Cash and cash equivalents
(excluding cash on hand) P=59,646,460 P=– P=59,646,460Time deposits and short-term investments
(including noncurrent portion) 58,523,185 – 58,523,185Investments held for trading - Bonds 459,343 – 459,343AFS investments 19,303,356 4,488 19,307,844Receivables - net (including noncurrent
portion of receivables from realestate buyers) 25,883,925 4,623,017 30,506,942
Advances and other receivables - net(includes non-trade receivables,advances and deposits, receivablefrom banks and credit card, accruedinterest receivable, and advances forproject development under “Othercurrent assets” account in theconsolidated balance sheet) 14,238,828 – 14,238,828
Treasury bonds (included under “Othercurrent and noncurrent assets”account in the consolidated balancesheet) 200,000 – 200,000
Long-term notes (included under “Othernoncurrent assets” account in theconsolidated balance sheet) 306,724 – 306,724
Derivative assets 128,480 – 128,480P=178,690,301 P=4,627,505 P=183,317,806
Equity Price RiskThe Group’s exposure to equity price pertains to its investments in quoted equity shares which areclassified as AFS investments in the consolidated balance sheets. Equity price risk arises from thechanges in the levels of equity indices and the value of individual stocks traded in the stockexchange.
As a policy, management monitors the equity securities in its investment portfolio based onmarket expectations. Material equity investments within the portfolio are managed on anindividual basis and all buy and sell decisions are approved by management.
The effect on equity after income tax (as a result of change in fair value of AFS investments as atDecember 31, 2013 and 2012) due to a possible change in equity indices, based on historical trendof PSE index, with all other variables held constant is as follows:
Change inEquity Price
Effect onEquity AfterIncome Tax
(In Millions)
2013 +6.69% P=1,815.7-6.69% (1,815.7)
2012 +14.37% 1,950.5-14.37% (1,950.5)
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Capital ManagementCapital includes equity attributable to the owners of the Parent.
The primary objective of the Group’s capital management is to ensure that it maintains a strongcredit rating and healthy capital ratios in order to support its business and maximize shareholdervalue.
The Group manages its capital structure and makes adjustments to it, in the light of changes ineconomic conditions. To maintain or adjust the capital structure, the Group may adjust thedividend payment to shareholders, pay-off existing debts, return capital to shareholders or issuenew shares.
The Group monitors its capital gearing by measuring the ratio of net interest-bearing debt dividedby total capital plus net interest-bearing debt and interest-bearing debt divided by total capital plusinterest-bearing debt. Net interest-bearing debt includes all short-term and long-term debt,reduced by related pledged time deposits, net of cash and cash equivalents, time deposits andshort-term investments, investments in bonds held for trading, AFS investments (redeemablepreferred shares and bonds and corporate notes) and long-term notes included under “Othernoncurrent assets” account, while interest-bearing debt includes all short-term and long-term debt,reduced by related pledged time deposits. The Group’s guideline is to keep the gearing ratio at notlower than 50:50.
As at December 31, 2013 and 2012, the Group’s ratio of net interest-bearing debt to total capitalplus net interest-bearing debt and ratio of interest-bearing debt to total capital plus interest-bearingdebt were as follows:
Net Interest-bearing Debt to Total Capital plus Net Interest-bearing Debt
2013 2012(In Thousands)
Bank loans P=27,588,259 P=31,793,975Long-term debt 210,156,037 188,392,429Less:
Cash and cash equivalents (excluding cash on hand) (48,999,592) (59,646,460)Time deposits and short-term investments (55,993,600) (58,523,185)AFS investments (bonds and corporate notes) (5,539,822) (7,728,240)Long-term notes included under “Other noncurrent assets” account (218,124) (306,724)
Total net interest-bearing debt (a) 126,993,158 93,981,795Total equity attributable to owners of the Parent 219,433,817 188,074,132Total net interest-bearing debt and equity
attributable to owners of the Parent (b) 346,426,975 P=282,055,927Gearing ratio (a/b) 37% 33%
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Interest-bearing Debt to Total Capital plus Interest-bearing Debt
2013 2012(In Thousands)
Bank loans P=27,588,259 P=31,793,975Long-term debt 210,156,037 188,392,429Total interest-bearing debt (a) 237,744,296 220,186,404Total equity attributable to owners of the Parent 219,433,817 188,074,132Total interest-bearing debt and equity attributable to
owners of the Parent (b) P=457,178,113 P=408,260,536Gearing ratio (a/b) 52% 54%
30. Financial Instruments
Fair ValuesThe following table sets forth the carrying values and estimated fair values of financial assets andliabilities, by category and by class, recognized as at December 31, 2013 and 2012:
2013
Carrying Value Total
Quotedprices in
activemarkets(Level 1)
Significantobservable
inputs(Level 2)
Significantunobservable
inputs(Level 3)
(In Thousands)
Assets Measured at Fair ValueFinancial assets at FVPL: Investments held for trading - Bonds P=459,754 P=459,754 P=459,754 P=– P=– Derivative assets 2,643,487 2,643,487 – 2,643,487 –
3,103,241 3,103,241 459,754 2,643,487 –AFS investments: Shares of stock 11,607,236 11,607,236 11,539,018 – – Bonds and corporate notes 5,539,822 5,539,822 5,539,822 – – Club shares 11,260 11,260 11,260 – –
17,158,318 17,158,318 17,058,850 – –20,261,559 20,261,559 17,518,604 2,643,487 –
Assets for which Fair Values are DisclosedLoans and receivables: Cash and cash equivalents 50,209,657 50,209,657 – – – Time deposits and short-term investments
(including noncurrent portion) 55,993,600 58,549,481 – – 58,549,481 Receivables - net (including noncurrent portion
of receivables from real estate buyers) 37,274,237 37,274,237 – – 37,274,237 Advances and other receivables - net (included
under “Other current assets” account in theconsolidated balance sheets) 13,649,588 13,649,588 – – 13,649,588
Long-term notes (included under “Othernoncurrent assets” account in theconsolidated balance sheets) 218,124 264,656 – – 264,656
157,345,206 159,947,619 – – 109,737,962P=177,606,765 P=180,209,178 P=– P=– P=109,837,430
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2013
Carrying Value Total
Quotedprices in
activemarkets(Level 1)
Significantobservable
inputs(Level 2)
Significantunobservable
inputs(Level 3)
(In Thousands)
Liabilities Measured at Fair ValueFinancial Liabilities at FVPL: Derivative liabilities P=1,005,403 P=1,005,403 P=– P=159,974 P=845,429Liabilities for which Fair Values are DisclosedOther Financial Liabilities: Bank loans 27,588,259 27,588,259 27,588,259 – – Accounts payable and other current liabilities* 64,416,727 64,416,727 – – 64,416,727 Long-term debt (including current portion and
net of unamortized debt issue cost) 210,156,037 224,775,629 – – 224,775,629 Dividends payable 210,189 210,189 – – 210,189 Tenants’ deposits and others 17,967,224 13,047,622 – 13,047,622
320,338,436 330,038,426 27,588,259 – 302,450,167P=321,343,839 P=331,043,829 P=27,588,259 P=159,974 P=303,295,596
* Excluding payable to government agencies of P=3,671.6 million at December 31, 2013, the amounts of which are not consideredas financial liabilities.
2012
Carrying Value Total
Quotedprices in
activemarkets(Level 1)
Significantobservable
inputs(Level 2)
Significantunobservable
inputs(Level 3)
(In Thousands)
Assets Measured at Fair ValueFinancial assets at FVPL: Investments held for trading - Bonds P=459,343 P=459,754 P=459,754 P=– P=– Derivative assets 128,480 128,840 – 128,840 –
587,823 3,103,241 459,754 128,840 –AFS investments: Shares of stock 11,618,836 11,618,836 11,516,716 – – Bonds and corporate notes 7,728,240 7,728,240 7,728,840 – – Club shares 5,900 5,900 5,9000 – –
19,352,976 19,352,976 19,304,556 – –20,261,559 20,261,559 19,764,310 128,840 –
Assets for which Fair Values are DisclosedLoans and receivables: Cash and cash equivalents 60,714,720 60,714,720 – – 60,714,720 Time deposits and short-term investments
(including noncurrent portion) 58,523,185 62,048,610 – – 62,048,610 Receivables - net (including noncurrent portion
of receivables from real estate buyers) 30,767,065 29,466,700 – – 29,466,700 Advances and other receivables - net (included
under “Other current assets” account in theconsolidated balance sheets) 11,316,886 11,316,886 – – 11,316,886
Long-term notes (included under “Othernoncurrent assets” account in theconsolidated balance sheets) 306,724 331,519 – – 331,519
161,628,580 163,878,435 – – 163,878,435P=181,769,379 P=184,044,929 P=19,764,310 P=128,140 P=163,980,555
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2012
Carrying Value Total
Quotedprices in
activemarkets(Level 1)
Significantobservable
inputs(Level 2)
Significantunobservable
inputs(Level 3)
(In Thousands)
Liabilities Measured at Fair ValueFinancial Liabilities at FVPL: Derivative liabilities P=2,737,981 P=2,737,981 P=– P=264,851 P=2,473,130Liabilities for which Fair Values are DisclosedOther Financial Liabilities: Bank loans 31,793,975 31,793,975 31,793,975 – – Accounts payable and other current liabilities* 55,531,106 55,531,106 – – 64,416,727 Long-term debt (including current portion and
net of unamortized debt issue cost) 188,392,429 230,044,469 – – 230,044,469 Dividends payable 97,282 210,189 – – 210,189 Tenants’ deposits and others 14,500,317 14,976,358 – – 14,976,358
290,315,109 332,443,190 31,793,975 – 302,450,167P=293,053,090 P=335,181,171 P=31,793,975 P=264,851 P=304,923,297
*Excluding payable to government agencies of P=2,334.8 million at December 31, 2012, the amounts of which are not considered asfinancial liabilities.
During the years ended December 31, 2013 and 2012, there were no transfers between Level 1 andLevel 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.
The following methods and assumptions were used to estimate the fair value of each class offinancial instrument for which it is practicable to estimate such value:
Investments Held for Trading. The fair values are based on the quoted market prices of theinstruments.
Cash and Cash Equivalents. The carrying amounts reported in the consolidated balance sheetsapproximate its fair value, due to its short-term nature.
Time Deposits and Short-term Investments. The estimated fair value is based on the discountedvalue of future cash flows using the prevailing interest rates. The discount rates used range from0.18% to 2.09% and 0.50% to 6.55% as at December 31, 2013 and 2012, respectively.
Receivables and Advances and Other Receivables included under “Other current assets” account.The carrying values of short-term receivables approximate their fair values due to their short-termmaturities. The estimated fair value of the noncurrent portion of receivables from real estatebuyers is based on the discounted value of future cash flows using the prevailing interest rates.The discount rates used ranged from 5.0% to 7.5% and 5.5% to 8.0% as at December 31, 2013and 2012, respectively.
Long-term Notes included under “Other noncurrent assets” account. The estimated fair values oflong-term notes are based on the discounted value of future cash flows using the prevailinginterest rates. Discount rates used for long-term notes range is .01% to 3.21% and 0.45% to4.13% as at December 31, 2013 and 2012.
AFS Investments. The fair value of investments that are actively traded in organized financialmarkets is determined by reference to quoted market bid prices at the close of business. Forunlisted equity securities, these are carried at cost less allowance for impairment loss since thereare no quoted prices and due to the unpredictable nature of future cash flows and lack of suitablemethods for arriving at reliable fair value.
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Bank Loans. The carrying value approximates fair value because of recent and regular repricing(i.e., quarterly) based on market conditions.
Accounts Payable and Other Current Liabilities and Dividends Payable. The carrying valuesreported in the consolidated balance sheets approximate the fair value due to the short-termmaturities of these liabilities.
Long-term Debt. Fair value is based on the following:
Debt Type Fair Value AssumptionsFixed Rate Loans Estimated fair value is based on the discounted value
of future cash flows using the applicable rates forsimilar types of loans. Discount rates used range from0.02% to 4.76% and 1.52% to 9.10% as atDecember 31, 2013 and 2012, respectively.
Variable Rate Loans For variable rate loans that re-price every three months,the carrying value approximates the fair value becauseof recent and regular repricing based on current marketrates. For variable rate loans that re-price every sixmonths, the fair value is determined by discounting theprincipal amount plus the next interest paymentamount using the prevailing market rate for the periodup to the next repricing date. Discount rates used was0.5% to 3.8% and 1.73% to 5.91% as atDecember 31, 2013 and 2012, respectively.
Tenants’ Deposits. The estimated fair value is based on the discounted value of future cash flowsusing the applicable rates. The discount rates used range from 0.27% to 4.51% and 0.50% to5.91% as at December 31, 2013 and 2012, respectively.
Derivative Assets and Liabilities. The fair values of the interest rate swaps, cross currency swaps,and non-deliverable forwards are based on quotes obtained from counterparties classified underLevel 2 of the fair value hierarchy. The fair value of the embedded options relating to the ParentCompany’s convertible bonds were classified under Level 3 because the credit spread used asinput to the fair value calculation of the options which were assessed by the Group as having asignificant impact to its fair values. The fair values of the embedded option were computed usingthe indirect method of valuing multiple embedded derivatives. This valuation method comparesthe fair value of the option-free bond against the fair value of the bond as quoted in the market.The difference of the fair values is assigned as the value of the embedded derivatives.
Significant unobservable inputs to valuation RangeUSD Risk-free rate 0.015% - 1.806%Credit spread 4.350%
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To assess the impact of the credit spreads used, the Group performed a sensitivity analysis usingan increase (decrease) assumption in the credit spreads, the result of which is shown below:
Increase (Decrease) in Credit Spread Net Effect on Fair Values of Option(In Thousands)
2013 100 bps (P=124,528)(100) bps 129,032
2012 100 bps (370,183)(100) bps 387,334
Show below is the rollforward analysis of the fair value changes of this financial instrument forthe year ended December 31, 2013:
Balance at beginning of year (P=2,473,130)Fair value changes (1,335,209)Conversions 2,962,910Balance at December 31, 2013 (P=845,429)
The fair value changes during the year were recognized under “Gain or loss on fair value changeson derivatives - net” account and “Foreign exchange gain – net” account in the consolidatedstatement of comprehensive income.
Derivative Financial InstrumentsTo address the Group’s exposure to market risk for changes in interest rates arising primarily fromits long-term floating rate debt obligations and to manage its foreign exchange risks, the Groupentered into various derivative transactions such as cross-currency swaps, interest rate swaps,foreign currency call options, non-deliverable forwards and foreign currency range options. TheGroup also has embedded derivatives bifurcated from the Parent Company’s convertible bonds.
Derivative Assets
2013 2012(In Thousands)
Parent (see Note 17):Cross-currency swaps P=864,677 P=Non-deliverable forwards 18,501
SM Prime (see Note 17):Cross-currency swaps 1,668,400Interest rate swaps 110,410 109,979
P=2,643,487 P=128,480
Derivative Liabilities
2013 2012(In Thousands)
Parent (see Note 19):Options arising from convertible bonds P=845,429 P=2,473,130Non-deliverable forwards P=18,501Foreign currency swap 2,020
SM Prime (see Note 29)-Interest rate swaps 159,974 244,330
P=1,005,403 P=2,737,981
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Derivative Instruments Accounted for as Cash Flow Hedges
Cross Currency Swaps. In 2013, the Parent Company and SM Prime entered into cross-currencyswap transactions to hedge both the foreign currency and interest rate exposures on its U.S. dollar-denominated five-year term loans (the hedged loans) obtained on January 29, 2013, April 16, andJune 2013. (see Note 29).
Details of the hedged loans are as follows:
Outstanding Principal Balance Interest Rate Maturity Date(in Thousands)
(In US$) (In PhP=)Parent:
Unsecured loans US$180,000 P=7,425,450 6-month US LIBOR + 1.70% May 15, 2018
SM Prime:Unsecured loan US$200,000 P=8,640,000 6-month US LIBOR + 1.70% January 29, 2018Unsecured loan US$150,000 P=6,480,000 6-month US LIBOR + 1.70% March 23,2018
The table below provides the details of the Group’s outstanding cross-currency swaps as atDecember 31, 2013:
Notional Amounts Receive PayUS$:P=
Rate MaturityFair Value
Gain(in Thousands) (in Thousands)
(In US$) (In PhP=)Parent:
Floating-to-Fixed 50,000 2,059,250 6M US LIBOR + 1.70% 4.05% P=41.19 May 15, 2018 P=240,779Floating-to-Fixed 60,000 2,478,000 6M US LIBOR + 1.70% 4.03% 41.30 May 15, 2018 283,828Floating-to-Fixed 70,000 2,888,200 6M US LIBOR + 1.70% 3.98% 41.26 May 15, 2018 340,070
SM Prime:Floating-to-Fixed 150,000 6,100,500 6M US LIBOR + 1.70% 3.70% 40.67 January 29, 2018 741,311Floating-to-Fixed 50,000 2,033,500 6M US LIBOR + 1.70% 3.70% 40.67 January 29, 2018 256,939Floating-to-Fixed 50,000 2,055,000 6M US LIBOR + 1.70% 3.90% 41.10 March 23, 2018 219,342Floating-to-Fixed 50,000 2,055,000 6M US LIBOR + 1.70% 3.90% 41.10 March 23, 2018 219,029Floating-to-Fixed 50,000 2,055,000 6M US LIBOR + 1.70% 3.90% 41.10 March 23, 2018 231,779
Under the floating-to-fixed cross-currency swaps, the Parent Company and SM Prime effectivelyconverted the hedged US dollar-denominated loans into Philippine peso-denominated loans where,at inception, it agreed to swap US dollar principal equal to the face amount of the loans for theiragreed Philippine peso equivalents with the counterparty banks and to exchange, at maturity date,the principal amount originally swapped. The agreements also require the Parent Company andSM Prime to pay fixed interest at the Philippine peso notional amount and receives floatinginterest on the US$ notional amount, on a semi-annual basis, simultaneous with the interestpayments on the hedged loans.
Hedge Effectiveness ResultsAs the terms of the swaps have been negotiated to match the terms of the hedged loans, the hedgeswere assessed to be highly effective. The fair value of the outstanding cross-currency swaps of thethe Group designates as cash flow hedges as at December 31, 2013 amounting to P=2,533.2 milliongain were taken to equity under “Cumulative translation adjustment”. No ineffectiveness wasrecognized in the consolidated statement of income for the twelve-month period ended December31, 2013. Foreign currency translation loss arising from the hedged loans of the Group amountingto P=1,804.7 million was recognized in the consolidated statement of income for the twelve-monthperiod ended December 31, 2013. A foreign exchange gain equivalent to the same amount wasrecycled from equity to the consolidated statement of income during the same period.
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Other Derivative Instruments Not Designated as HedgesThe table below shows information on the Group’s interest rate swaps presented by maturityprofile:
2013<1 Year >1-<2 Years >2-<5 Years
(Amounts in Thousands)
Floating-FixedOutstanding notional amount $145,000 $145,000 $145,000Receive-floating rate 6 months 6 months 6 months
LIBOR+margin% LIBOR+margin% LIBOR+margin%Pay-fixed rate 2.91%–3.28% 2.91%–3.28% 2.91%–3.28%
Outstanding notional amount $30,000 $30,000 $30,000Receive-floating rate 6 months 6 months 6 months
LIBOR+margin% LIBOR+margin% LIBOR+margin%Pay-fixed rate 3.53% 3.53% 3.53%
Outstanding notional amount $20,000 $20,000 $20,000Receive-floating rate 6 months 6 months 6 months
LIBOR+margin% LIBOR+margin% LIBOR+margin%Pay-fixed rate 3.18% 3.18% 3.18%
Fixed-FloatingOutstanding notional amount P=793,460 P=793,460 P=793,460Receive-fixed rate 5.44% 5.44% 5.44%Pay-floating rate 3MPDST-F 3MPDST-F 3MPDST-F
Outstanding notional amount P=795,280 P=795,280 P=795,280Receive-fixed rate 7.36% 7.36% 7.36%Pay-floating rate 3MPDST-F+margin% 3MPDST-F+margin% 3MPDST-F+margin%
2012<1 Year >1-<2 Years >2-<5 Years
(Amounts in Thousands)
Floating-FixedOutstanding notional amount $145,000 $145,000 $145,000Receive-floating rate 6 months
LIBOR+margin%6 months
LIBOR+margin%6 months
LIBOR+margin%Pay-fixed rate 2.91%–3.28% 2.91%–3.28% 2.91%–3.28%Outstanding notional amount $30,000 $30,000 $30,000Receive-floating rate 6 months
LIBOR+margin%6 months
LIBOR+margin%6 months
LIBOR+margin%Pay-fixed rate 3.53% 3.53% 3.53%
Outstanding notional amount $20,000 $20,000 $–Receive-floating rate 6 months
LIBOR+margin%6 months
LIBOR+margin%Pay-fixed rate 3.18% 3.18%
Outstanding notional amount $25,000 $– $–Receive-floating rate 6 months
LIBOR+margin%Pay-fixed rate 4.10%
Fixed-FloatingOutstanding notional amount P=970,000 P=960,000 P=950,000Receive-fixed rate 5.44% 5.44% 5.44%Pay-floating rate 3MPDST-F 3MPDST-F 3MPDST-F
Outstanding notional amount P=970,000 P=960,000 P=950,000Receive-fixed rate 7.36% 7.36% 7.36%Pay-floating rate 3MPDST-F+margin% 3MPDST-F+margin% 3MPDST-F+margin%
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Derivative Liabilities
Options Arising from Investment in Convertible Bonds. The Parent Company invested in US$denominated convertible bonds of a public company which it classified as AFS investments. Thebonds contain multiple embedded derivatives such as long equity call, short call and long putoptions. Such multiple embedded derivatives were bifurcated by the Parent Company from thehost bonds on the respective purchase dates of the bonds and were accounted for as singlecompound derivative. The net positive fair value of the options at inception amounted toP=3.7 million. The long equity call option pertains to the right of the Parent Company to convertthe bonds into common shares of the issuer at the conversion price of P=63.7 (P=26.9 at present) pershare at the fixed exchange rate of P=40.6 per US$1.0 until January 31, 2013, subject to a cashsettlement option on the part of the issuer. The short call option pertains to the right of the issuerto early redeem the bonds on or after February 11, 2010 subject to the conditions stated in thebond agreement. On the other hand, the long put option, which expired on February 11, 2011,pertains to the right of the Parent Company to require the issuer to redeem the bonds at 115.6%.
As at December 31, 2013 and 2012, all outstanding embedded derivatives of the convertible bondshave nil values.
Options Arising from Convertible Bonds. The Parent Company’s and SM Prime’s convertiblebonds contain multiple embedded derivatives such as short equity call option, long call option andshort put option, which were bifurcated and accounted for as single compound derivative.
US$250.0 million Convertible BondsAs at December 31, 2013 and 2012, the negative fair value of the multiple embedded derivatives,which is shown as a current liability in the parent company balance sheets, amounted toP=845.4 million and P=2,473.1 million, respectively. At inception date, the negative fair value of theoptions amounted to P=1,193.9 million. In 2013 and 2012, the Parent Company recognized a netfair value change from these options amounting to P=1,105.7 million loss and P=1,279.2 million losswhich is recognized under “Gain (loss) on fair value changes on derivatives - net” account andP=229.6 million loss which is recognized under “Foreign exchange gain - net” account in theconsolidated statements of income. Also, as a result of the exercise of the conversion option atvarious dates in 2013 (see Note 18), P=2,962.9 million of the option value was transferred fromderivative liabilities to “Additional paid-in capital” (APIC) account in the parent company balancesheets.
US$300.0 million Convertible BondsNet fair value changes of the multiple embedded derivatives recognized in the 2012 parentcompany statement of comprehensive income include P=131.5 million mark-to-market loss andP=28.7 million gain arising from the expiry of options which are reflected under “Gain (loss) on fairvalue changes of derivatives - net” account in the parent company statements of comprehensiveincome. Also, as a result of the exercise of the conversion option at various dates in 2012 (seeNote 18), P=219.3 million of the option value was transferred from derivative liabilities to“Additional paid-in capital” (APIC) account in the parent company balance sheets.
Interest Rate Swaps. In 2011, the SM Prime entered into floating to fixed US$ interest rate swapagreements with aggregate notional amount of US$145 million. Under the agreements, SM Primeeffectively converts the floating rate U.S. dollar-denominated term loan into fixed rate loan withsemi-annual payment intervals up to March 21, 2015 (see Note 20). As at December 31, 2013 and2012, the floating to fixed interest rate swaps have aggregate negative fair value of P=114 millionand P=158 million, respectively.
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SM Prime also entered into US$ interest rate swap agreement with notional amount of US$20million in 2011. Under the agreement, SM Prime effectively converts the floating rate U.S. dollar-denominated five-year bilateral unsecured loan into fixed rate loan with semi-annual paymentintervals up to November 30, 2014 (see Note 20). As at December 31, 2013 and 2012, the floatingto fixed interest rate swap has negative fair value of P=10 million and P=17 million, respectively.
In 2010, the SM Prime entered into the following interest rate swap agreements:
§ A US$ interest rate swap agreement with nominal amount of US$30 million. Under theagreement, SM Prime effectively converts the floating rate U.S. dollar-denominated five-yearbilateral unsecured loan into fixed rate loan with semi-annual payment intervals up toNovember 30, 2015 (see Note 20). As at December 31, 2013 and 2012, the floating to fixedinterest rate swap has negative fair value of P=36 million and P=48 million, respectively.
§ Two Philippine peso interest rate swap agreements with notional amount of P=1,000 million each,with amortization of P=10 million every anniversary. The consolidated net cash flows of the twoswaps effectively converts the Philippine peso-denominated five-year inverse floating rate notesinto floating rate notes with quarterly payment intervals up to June 2015 (see Note 20). In June2013, SM Prime preterminated P=351 million out of the P=1.9 billion outstanding notional amountof interest rate swaps as a result of the prepayment of the portion of the underlying loans. Fairvalue changes from the preterminated swaps recognized under “Gain (loss) on fair value changeson derivatives - net” account in the consolidated statement of income amounted to P=10.1 milliongain in 2013.
§ A US$ interest rate swap agreement with notional amount of US$20 million. Under theagreement, SM Prime effectively converts the floating rate U.S. dollar-denominated three-yearbilateral unsecured loan into fixed rate loan with semi-annual payment intervals up to January 14,2013 (see Note 20). As at December 31, 2011, the floating to fixed interest rate swap has anegative fair value of P=3 million. In January 2012, the interest rate swap agreement waspreterminated as a result of the prepayment of the underlying loan. Fair value changes from thepreterminated swap recognized in the consolidated statements of income amounted to P=1 millionloss in 2012.
In 2009, SM Prime entered into US$ interest rate swap agreements with aggregate notionalamount of US$25 million. Under these agreements, SM Prime effectively converts the floatingrate US dollar-denominated five-year bilateral loan into fixed rate loan with semi-annual paymentintervals up to November 2013 (see Note 20). Fair value changes from the matured swapsrecognized in the consolidated statements of income amounted to P=10 million gain in 2013. As atDecember 31, 2012, the floating to fixed interest rate swaps have negative fair value of P=22million.
Foreign Currency Swap. In 2012, the Parent Company entered into sell P= and buy US$ foreigncurrency swap contracts. It also entered into sell US$ and buy P= with the same aggregate notionalamount. Net fair value changes recognized by the Parent Company in the consolidated statementof income amount to P=2.0 million loss and P=9.0 million gain from the outstanding and settledforeign currency swaps, respectively, as at December 31, 2012. In 2013, net fair value changesfrom the settled foreign currency swap contracts included under “Gain (loss) on fair value changeson derivatives – net” account and “Foreign exchange – net” in the consolidated statements ofincome amounted to P=14.0 million gain and P=16.6 million gain, respectively.
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Non-deliverable Forwards. In 2013, 2012 and 2011, the Parent Company and SM Prime enteredinto sell P= and buy US$ forward contracts. It also entered into sell US$ and buy P= with the sameaggregate notional amount. The Group recognized derivative assets amounting to P=18.5 millionfrom the outstanding forward contracts as at December 31, 2012, respectively. Net fair valuechanges from the settled forward contracts of the Group amounted to P=53.0 million and P=87.7million gain, in 2013 and 2012, respectively.
Fair Value Changes on DerivativesThe net movements in fair value changes of all derivative instruments as at December 31 are asfollows:
2013 2012(In Thousands)
Balance at beginning of year (P=2,609,501) (P=202,741)Net change in fair value 1,251,514 (2,304,958)Fair value of derivatives on settled contracts 2,996,071 (101,802)Balance at end of year P=1,638,084 (P=2,609,501)
In 2013, the net changes in fair value amounting to P=1,251.5 million gain include net mark-to-market gain on derivative instruments accounted for as cash flow hedges amounting to P=2,533.2million, which is included under “Cumulative translation adjustment” account in the consolidatedbalance sheets and net mark-to-market loss on derivative instruments not designated as hedges,which is included under “Gain (loss) on fair value changes on derivatives – net” accountamounting to P=997.5 million and net mark-to-market loss included under “Foreign exchange –net” amounting to P=284.2 million.
In 2012, the net changes in fair value amounting to negative P=2,305.0 million comprise of interestpaid amounting to P=26.8 million, which is included under “Interest expense” account in theconsolidated statements of income, net marked-to-market loss on derivatives amounting toP=1,403.4 million, which is included under “Gain (loss) on fair value changes on derivatives - net”account in the consolidated statements of income, P=1,193.7 million pertaining to the valuation ofthe option on convertible bond, P=219.3 million transferred to “Additional paid-in capital” accountin the consolidated balance sheets and P=99.6 million gain recognized under “Foreign exchangegain – net”.
The reconciliation of the amounts of derivative assets and liabilities recognized in the consolidatedbalance sheets is as follows:
2013 2012(In Thousands)
Derivative assets (see Notes 11 and 17) P=2,643,487 P=128,480Derivative liabilities (see Note 19) (1,005,403) (2,737,981)Balance at end of year P=1,638,084 (P=2,609,501)
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31. EPS Computation
2013 2012 2011(In Thousands, Except for Per Share Data)
Net Income Attributable to CommonOwners of the Parent
Net income attributable to common owners of theParent for basic earnings (a) P=27,445,683 P=24,674,381 P=21,224,592
Effect on net income of convertible bonds,net of tax – – 43,813
Net income attributable to common equityholders of the Parent adjusted for the effectof dilution (b) P=27,445,683 P=24,674,381 P=21,268,405
Weighted Average Number of Common SharesOutstanding
Weighted average number of common sharesoutstanding for the period, after retroactiveeffect of stock dividends declared in 2013 (c) 787,457 776,823 769,767
Dilutive effect of convertible bonds – – 2,132Weighted average number of common shares
outstanding for the period adjusted for the effectof dilution (d) 787,457 776,823 771,899
Basic EPS (a/c) P=34.85 P=31.76 P=27.57
Diluted EPS (b/d) P=34.85 P=31.76 P=27.55
The effect of the convertible bonds on net income and on the number of shares in 2012 and 2013were not considered due to its antidilutive effect, which if included, will arrive at an EPS ofP=36.34 and P=33.27 in 2013 and 2012, respectively.
32. Non-cash Transactions
The Group’s principal non-cash transaction under financing activites pertains to the conversion ofthe Parent Company’s convertible bonds into common shares. Details of the conversion option ofthe convertible bonds and the conversions are further discussed in Note 20.
The Group’s principal non-cash transaction under investing activities pertains to the acquisition ofcontrolling interest in HPI in exchange for SM Prime common shares. Details of the corporaterestructuring is further discussed in Note 5.
33. Reclassification
The comparative information in 2012 and 2011 consolidated statements of income has beenreclassified to conform to the presentation of the financial statements for the period endedDecember 31, 2013.
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34. Events After the Reporting Period
On February 17, 2014, SMIC signed an Investment and Shareholders Agreement for theacquisition of 34% ownership interest in CityMall Commercial Center, Inc. The remaining 66%of the outstanding capital is held by DoubleDragon Properties Corp.
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INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors SM Investments Corporation 10th Floor, One E-Com Center Harbor Drive, Mall of Asia Complex CBP-1A, Pasay City 1300 We have audited the accompanying consolidated financial statements of SM Investments Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
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, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015
A member firm of Ernst & Young Global Limited
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We believe that the audit evidence we have obtained are sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of SM Investments Corporation and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Ramon D. Dizon Partner CPA Certificate No. 46047 SEC Accreditation No. 0077-AR-3 (Group A), February 21, 2013, valid until February 20, 2016 Tax Identification No. 102-085-577 BIR Accreditation No. 08-001998-17-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3669677, January 2, 2013, Makati City March 6, 2013
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SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) December 31 2012 2011 ASSETS Current Assets Cash and cash equivalents (Notes 6, 17, 21, 28 and 29) P=60,714,720 P=56,050,322 Time deposits and short-term investments (Notes 7, 19, 21, 28 and 29) 29,090,335 879,410 Investments held for trading and sale (Notes 8, 11, 21, 28 and 29) 2,854,541 1,939,709 Receivables (Notes 9, 16, 21, 28 and 29) 16,365,552 11,764,852 Merchandise inventories - at cost (Note 22) 13,402,762 13,436,456 Other current assets (Notes 10, 15, 16, 21, 28 and 29) 23,458,208 17,189,740 Total Current Assets 145,886,118 101,260,489 Noncurrent Assets Available-for-sale investments (Notes 11, 21, 28 and 29) 16,912,646 12,453,181 Investments in shares of stock of associates (Note 12) 128,453,744 88,417,849 Time deposits (Notes 7, 19, 21, 28 and 29) 29,432,850 37,416,562 Property and equipment (Note 13) 17,186,517 15,092,354 Investment properties (Notes 14 and 19) 149,970,690 131,275,911 Land and development (Note 15) 30,197,862 23,012,453 Intangibles (Note 16) 15,354,200 15,354,200 Deferred tax assets - net (Note 26) 642,105 694,644 Other noncurrent assets (Notes 9, 16, 21, 25, 28 and 29) 27,767,236 24,084,415 Total Noncurrent Assets 415,917,850 347,801,569 P=561,803,968 P=449,062,058 LIABILITIES AND EQUITY Current Liabilities Bank loans (Notes 17, 21, 28 and 29) P=31,793,975 P=25,747,920 Accounts payable and other current liabilities (Notes 18, 21, 28 and 29) 57,865,876 44,749,807 Income tax payable 1,474,045 1,331,046 Current portion of long-term debt (Notes 14, 19, 21, 28 and 29) 13,859,558 7,920,961 Dividends payable (Notes 28 and 29) 97,282 25,696 Total Current Liabilities 105,090,736 79,775,430 Noncurrent Liabilities Long-term debt - net of current portion (Notes 14, 19, 21, 28 and 29) 174,532,871 128,464,019 Derivative liabilities (Notes 28 and 29) 244,330 237,980 Deferred tax liabilities - net (Note 26) 4,542,918 4,507,979 Tenants’ deposits and others (Notes 14, 25, 27, 28 and 29) 15,748,135 13,789,789 Total Noncurrent Liabilities 195,068,254 146,999,767 Total Liabilities 300,158,990 226,775,197 Equity Attributable to Owners of the Parent Capital stock (Note 20) 6,229,746 6,121,640 Additional paid-in capital (Note 20) 42,858,920 35,536,615 Equity adjustments from business combination under common
control (Note 20) (2,332,796) (2,332,796) Cost of Parent common shares held by subsidiaries (Note 20) (125,906) (263,195) Cumulative translation adjustment of a subsidiary 266,915 428,058 Net unrealized gain on available-for-sale investments (Notes 11 and 12) 11,718,559 7,008,067 Retained earnings (Note 20): Appropriated 35,000,000 5,000,000 Unappropriated 94,458,694 106,167,942 Total Equity Attributable to Owners of the Parent 188,074,132 157,666,331 Non-controlling Interests 73,570,846 64,620,530 Total Equity 261,644,978 222,286,861 P=561,803,968 P=449,062,058 See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except Per Share Data) Years Ended December 31 2012 2011 2010
REVENUE Sales: Merchandise P=158,888,415 P=148,182,071 P=135,570,401 Real estate and others 23,438,959 17,874,409 10,896,597 Rent (Notes 14, 21 and 27) 24,155,567 20,472,785 17,904,661 Equity in net earnings of associates (Note 12) 9,042,034 6,415,424 5,440,826 Cinema ticket sales, amusement and others 4,824,228 4,138,053 3,722,983 Management and service fees (Note 21) 1,112,302 880,679 807,507 Gain on sale of available-for-sale investments and fair
value changes on investments held for trading - net (Notes 8, 11 and 29) 2,055 44,368 683,714
Dividend income (Note 21) 628,385 368,919 303,518 Others 1,785,329 1,538,940 1,599,684 223,877,274 199,915,648 176,929,891 COST AND EXPENSES Cost of sales: Merchandise (Note 22) 117,896,688 112,192,756 103,500,345 Real estate and others 14,124,779 10,289,007 5,995,214 Selling, general and administrative expenses (Note 23) 44,978,822 40,412,750 35,496,334 177,000,289 162,894,513 144,991,893
OTHER INCOME (CHARGES) Interest expense (Notes 15, 17, 19, 21, 24, 28 and 29) (10,811,736) (8,836,013) (7,652,557) Interest income (Notes 6, 7, 8, 11, 21 and 24) 4,416,746 4,274,640 3,716,452 Gain on disposal of investments and properties - net
(Notes 12, 13, 14 and 19) 1,301,888 2,623,864 1,626,816 Gain (loss) on fair value changes on derivatives - net (Notes 19 and 29) (1,403,411) 366,154 243,085 Foreign exchange gain - net (Note 28) 565,132 242,862 407,208 (5,931,381) (1,328,493) (1,658,996)
INCOME BEFORE INCOME TAX 40,945,604 35,692,642 30,279,002
PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 26) Current 6,453,836 5,534,187 5,109,646 Deferred 91,250 (39,369) 291,407 6,545,086 5,494,818 5,401,053
NET INCOME P=34,400,518 P=30,197,824 P=24,877,949
Attributable to Owners of the Parent (Note 30) P=24,674,381 P=21,224,592 P=18,440,169 Non-controlling interests 9,726,137 8,973,232 6,437,780 P=34,400,518 P=30,197,824 P=24,877,949
Earnings Per Common Share (Note 30) Basic P=39.85 P=34.68 P=30.17 Diluted 39.08 34.63 30.17 See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) Years Ended December 31 2012 2011 2010
NET INCOME P=34,400,518 P=30,197,824 P=24,877,949
OTHER COMPREHENSIVE INCOME (LOSS) Share in unrealized gain on available-for-sale
investments of associates - net (Notes 11 and 12) 1,514,343 440,127 2,065,101 Net unrealized gain (loss) on available-for-sale
investments (Note 11) 4,753,031 (434,299) 1,941,882 Income tax relating to components of other
comprehensive income 3,772 207,106 (375,510) Cumulative translation adjustment of a subsidiary (205,702) 177,178 (75,740) 6,065,444 390,112 3,555,733
TOTAL COMPREHENSIVE INCOME P=40,465,962 P=30,587,936 P=28,433,682
Attributable to Owners of the Parent P=29,223,730 P=21,573,362 P=21,366,625 Non-controlling interests 11,242,232 9,014,574 7,067,057 P=40,465,962 P=30,587,936 P=28,433,682 See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Amounts in Thousands, Except Per Share Data) Equity Attributable to Owners of the Parent
Non-controlling Interests
Total Equity
Capital Stock
(Note 20)
Additional Paid-in Capital
(Note 20)
Equity Adjustments
from Business Combination Under
Common Control (Note 20)
Cost of Parent Common
Shares Held by Subsidiaries
(Note 20)
Cumulative Translation Adjustment
of a Subsidiary
Net Unrealized Gain on
Available-for-Sale Investments
(Notes 11 and 12)
Appropriated Retained Earnings (Note 20)
Unappropriated Retained Earnings (Note 20) Total
Balance at December 31, 2011 P=6,121,640 P=35,536,615 (P=2,332,796) (P=263,195) P=428,058 P=7,008,067 P=5,000,000 P=106,167,942 P=157,666,331 P=64,620,530 P=222,286,861 Net income for the year – – – – – – – 24,674,381 24,674,381 9,726,137 34,400,518 Other comprehensive income – – – – (161,143) 4,710,492 – – 4,549,349 1,516,095 6,065,444 Total comprehensive income for the year – – – – (161,143) 4,710,492 – 24,674,381 29,223,730 11,242,232 40,465,962 Issuance of Parent common shares 108,106 7,216,451 – – – – – – 7,324,557 – 7,324,557 Disposal of Parent common shares held by subsidiaries – 105,854 – 137,289 – – – – 243,143 52,402 295,545 Cash dividends - P=10.40 a share (Note 20) – – – – – – – (6,383,629) (6,383,629) – (6,383,629) Appropriation during the year – – – – – – 30,000,000 (30,000,000) – – – Decrease in previous year’s non-controlling interests – – – – – – – – – (235,336) (235,336) Cash dividends received by non-controlling interests – – – – – – – – – (2,108,982) (2,108,982) Balance at December 31, 2012 P=6,229,746 P=42,858,920 (P=2,332,796) (P=125,906) P=266,915 P=11,718,559 P=35,000,000 P=94,458,694 P=188,074,132 P=73,570,846 P=261,644,978
Balance at December 31, 2010 P=6,119,826 P=35,456,200 (P=2,332,796) (P=263,195) P=289,260 P=6,798,095 P=5,000,000 P=90,475,674 P=141,543,064 P=56,274,415 P=197,817,479 Net income for the year – – – – – – – 21,224,592 21,224,592 8,973,232 30,197,824 Other comprehensive income – – – – 138,798 209,972 – – 348,770 41,342 390,112 Total comprehensive income for the year – – – – 138,798 209,972 – 21,224,592 21,573,362 9,014,574 30,587,936 Issuance of Parent common shares 1,814 80,415 – – – – – – 82,229 – 82,229 Cash dividends - P=9.04 a share (Note 20) – – – – – – – (5,532,324) (5,532,324) – (5,532,324) Increase in previous year’s non-controlling interests – – – – – – – – – 1,562,422 1,562,422 Cash dividends received by non-controlling interests – – – – – – – – – (2,230,881) (2,230,881) Balance at December 31, 2011 P=6,121,640 P=35,536,615 (P=2,332,796) (P=263,195) P=428,058 P=7,008,067 P=5,000,000 P=106,167,942 P=157,666,331 P=64,620,530 P=222,286,861
Balance at December 31, 2009 P=6,110,230 P=35,030,710 (P=2,332,796) (P=24,078) P=344,302 P=3,816,597 P=5,000,000 P=76,850,367 P=124,795,332 P=40,929,934 P=165,725,266 Net income for the year – – – – – – – 18,440,169 18,440,169 6,437,780 24,877,949 Other comprehensive income – – – – (55,042) 2,981,498 – – 2,926,456 629,277 3,555,733 Total comprehensive income for the year – – – – (55,042) 2,981,498 – 18,440,169 21,366,625 7,067,057 28,433,682 Issuance of Parent common shares 9,596 425,490 – – – – – – 435,086 – 435,086 Acquisition of Parent common shares held
by subsidiaries – – – (249,812) – – – – (249,812) – (249,812) Disposal of Parent common shares held
by a subsidiary – – – 10,695 – – – – 10,695 – 10,695 Cash dividends - P=7.88 a share (Note 20) – – – – – – – (4,814,862) (4,814,862) – (4,814,862) Increase in previous year’s non-controlling interests – – – – – – – – – 9,688,915 9,688,915 Cash dividends received by non-controlling interests – – – – – – – – – (1,411,491) (1,411,491) Balance at December 31, 2010 P=6,119,826 P=35,456,200 (P=2,332,796) (P=263,195) P=289,260 P=6,798,095 P=5,000,000 P=90,475,674 P=141,543,064 P=56,274,415 P=197,817,479 See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years Ended December 31 2012 2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=40,945,604 P=35,692,642 P=30,279,002 Adjustments for: Interest expense (Note 24) 10,811,736 8,836,013 7,652,557 Depreciation and amortization
(Notes 13, 14 and 23) 8,057,871 7,193,100 6,321,252 Equity in net earnings of associates (Note 12) (9,042,034) (6,415,424) (5,440,826) Interest income (Note 24) (4,416,746) (4,274,640) (3,716,452) Gain on disposal of investments and properties -
net (Notes 12, 13, 14 and 19) (1,301,888) (2,623,864) (1,626,816) Loss (gain) on fair value changes on derivatives -
net (Note 29) 1,403,411 (366,154) (243,085) Gain on available-for-sale investments and fair
value changes on investments held for trading - net (Notes 8, 11 and 29) (2,055) (44,368) (683,714)
Dividend income (628,385) (368,919) (303,518) Unrealized foreign exchange loss (gain) (93,811) 190,586 (435,321) Provision for (reversal of) impairment loss
(Notes 9, 10, 11, 12, 14 and 23) (2,743,711) 72,567 557,536 Income before working capital changes 42,989,992 37,891,539 32,360,615 Decrease (increase) in: Land and development (13,700,945) (14,042,798) (13,991,134) Merchandise inventories 33,694 (2,950,553) (2,725,140) Receivables (1,809,471) (1,861,758) (4,529,308) Other current assets (6,043,200) (405,838) (1,374,622) Increase (decrease) in: Accounts payable and other current liabilities 13,469,449 4,362,657 4,442,599 Tenants’ deposits and others 2,390,156 1,300,123 2,411,126 Defined benefit liability (Note 25) (48,178) (101,787) (170,977) Net cash generated from operations 37,281,497 24,191,585 16,423,159 Income tax paid (6,314,700) (5,390,172) (4,991,668) Net cash provided by operating activities 30,966,797 18,801,413 11,431,491
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: Investments in shares of stock of associates 1,870,174 289,416 1,506,807 Property and equipment 161,834 265,060 210,586 Investment properties 236,210 141,361 194,208 Available-for-sale investments and held for trading 2,233,812 84,604 2,878,859 Investments held for trading – – 3,713,156 Additions to: Investment properties (Note 14) (27,932,103) (21,140,911) (15,426,869) Investments in shares of stock of associates (28,261,006) (7,109,378) (1,598,303) Property and equipment (Note 13) (6,614,570) (4,791,062) (4,403,485) Available-for-sale investments (3,237,646) (1,619,334) (3,384,105) Time deposits (23,005,702) – – Investments held for trading – – (2,491,297) Decrease (increase) in: Other noncurrent assets 1,984,796 1,923,878 (1,639,195) Time deposits and short-term investments – – 2,583,891 Interest received 4,208,464 4,152,181 4,113,667 Dividends received (Note 12) 795,953 1,910,255 1,669,398 Net cash used in investing activities (77,559,784) (25,893,930) (12,072,682)
(Forward)
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Years Ended December 31 2012 2011 2010
CASH FLOWS FROM FINANCING ACTIVITIES Availments of: Long-term debt P=71,638,384 P=27,594,082 P=33,964,598 Bank loans 62,039,335 23,428,370 22,828,100 Payments of: Long-term debt (14,495,495) (21,874,200) (20,988,993) Bank loans (55,910,180) (18,228,800) (6,608,400) Interest (9,918,610) (8,747,952) (8,301,873) Dividends (8,421,026) (7,761,796) (6,224,317) Proceeds from issuance of new common shares 6,329,678 – – Disposal of Parent common shares held by subsidiaries 295,546 – 10,695 Increase (decrease) in non-controlling interests (235,336) 1,562,422 9,688,915 Acquisition of Parent common shares held
by subsidiaries – – (249,812) Net cash provided by (used in) financing activities 51,322,296 (4,027,874) 24,118,913
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,729,309 (11,120,391) 23,477,722
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (64,911) 209,703 (63,713)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 56,050,322 66,961,010 43,547,001
CASH AND CASH EQUIVALENTS AT END OF YEAR P=60,714,720 P=56,050,322 P=66,961,010
See accompanying Notes to Consolidated Financial Statements.
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SM INVESTMENTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information
SM Investments Corporation (SMIC or Parent Company) was incorporated in the Philippines on January 15, 1960. On June 3, 2009, the Philippine Securities and Exchange Commission (SEC) approved the amendment of SMIC’s articles of incorporation for the extension of the Company’s corporate life for another 50 years from January 15, 2010. Its registered office address is 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City 1300.
The Parent Company and its subsidiaries (collectively referred to as the Group), and its associates are involved primarily in shopping mall development, retail, real estate development and tourism, hotels and conventions and financial services and others.
The Parent Company’s shares of stock are publicly traded in the Philippine Stock Exchange (PSE).
The accompanying consolidated financial statements were authorized for issue by the Board of Directors (BOD) as approved and recommended for approval by the Audit Committee on March 6, 2013.
2. Basis of Preparation, Statement of Compliance and Changes in Accounting Policies
Basis of Preparation The consolidated financial statements of the Group have been prepared on the historical cost basis, except for derivative financial instruments, investments held for trading and available-for-sale (AFS) investments, which have all been measured at fair value. The consolidated financial statements are presented in Philippine peso, which is the Group’s functional and presentation currency under Philippine Financial Reporting Standards (PFRS). All values are rounded to the nearest thousand, except when otherwise indicated.
Statement of Compliance The consolidated financial statements have been prepared in compliance with PFRS. PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).
Cha nges in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following amended PFRS, which were adopted starting January 1, 2012. The adoption of the amended standards and interpretations did not have any impact on the Group’s consolidated financial statements.
Amendments to Standards and Interpretations
§ PFRS 7 (Amendment), Financial Instruments: Disclosures - Transfers of Financial Assets, became effective for annual periods beginning July 1, 2011
§ PAS 12 (Amendment), Income Taxes - Deferred Tax: Recovery of Underlying Assets, became effective for annual periods beginning January 1, 2012
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§ Philippine Interpretation Questions and Answers (Q&A) 2011-02, PFRS 3.2 Common Control Business Combinations, effective January 1, 2012
§ Philippine Interpretation Q&A 2011-03, Accounting for Intercompany Loans, effective January 1, 2012
Future Changes in Accounting Policies The following are the new standards, interpretations, amendments and improvements to PFRS and Philippine Interpretations that were issued but are not yet effective as at December 31, 2012. The Group intends to adopt the applicable standards, interpretations, amendments and improvements when these become effective.
New Standards and Interpretations
§ PFRS 7, Financial Instruments: Disclosures (Amendment) - Offsetting Financial Assets and Financial Liabilities, requires an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32, Financial Instruments: Presentation. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:
(a) The gross amounts of those recognized financial assets and recognized financial liabilities; (b) The amounts that are set off in accordance with the criteria in PAS 32 when determining
the net amounts presented in the balance sheet; (c) The net amounts presented in the balance sheet; (d) The amounts subject to an enforceable master netting arrangement or similar agreement
that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of
the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and
(e) The net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendments to PFRS 7 are to be retrospectively applied and are effective for annual periods beginning on or after January 1, 2013. The amendments affect disclosures only and have no impact on the Group’s financial position or performance.
§ PFRS 9, Financial Instruments, will become effective for annual periods beginning on or after January 1, 2015. PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through OCI or profit or loss. Equity financial assets held for trading must be measured at fair value
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through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The Group has made an evaluation of the impact of the adoption of this standard. The Group decided not to early adopt PFRS 9 for its 2012 reporting ahead of its effectivity date on January 1, 2015 and therefore the consolidated financial statements as of December 31, 2012 and 2011 do not reflect the impact of the said standard. Based on this evaluation, loans and receivables and other financial liabilities, both carried at amortized cost, and investments held for trading and available for sale investments, both carried at fair value, will not be significantly affected. Upon adoption, these financial instruments shall continue to be carried at amortized cost and fair value, thus, has no impact to the Group’s financial position and performance. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Group’s other financial assets, but will potentially have no impact on the classification and measurement of financial liabilities. The Group shall conduct another impact assessment early in 2013 using the consolidated financial statements as of and for the year ended December 31, 2012. Given the amendments on PFRS 9, the Group at present, does not plan to early adopt in its 2013 financial reporting. It plans to reassess its current position once the phases of PFRS 9 on impairment and hedge accounting become effective. The Group’s decision whether to early adopt PFRS 9 for its 2013 financial reporting will be disclosed in its consolidated financial statements as of and for the year ending December 31, 2013. Should the Group decide to early adopt the said standard for its 2013 financial reporting, its interim consolidated financial statements as of and for the period ending March 31, 2013 will reflect application of the requirement under the said standard and will contain the qualitative and quantitative discussions of the results of the Group’s impact evaluation.
§ PFRS 10, Consolidated Financial Statements, will become effective for annual periods beginning on or after January 1, 2013. PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC 12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. The Group performed a reassessment of control over its investments and assessed that this standard will not have a significant impact on its consolidated financial statements.
§ PFRS 11, Joint Arrangements, will become effective for annual periods beginning on or after January 1, 2013. PFRS 11 replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities - Non-Monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the
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equity method. The Group does not expect this amendment to have a significant impact on its consolidated financial statements.
§ PFRS 12, Disclosure of Interests in Other Entities, will become effective for annual periods beginning on or after January 1, 2013. PFRS 12 includes all of the disclosures related to consolidated financial statements that were previously in PAS 27, as well as all the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The adoption of PFRS 12 will affect disclosures only and have no impact on the Group’s financial position or performance.
§ Transition guidance on PFRS 10, PFRS 11 and PFRS 12 (Amendment) will become effective for annual periods beginning January 1, 2013. The amendments changed the transition guidance to provide further relief from full retrospective application. The International Accounting Standards Board (IASB) noted that the intention in IFRS 10 was to use the date of initial application as a reference point to determine which interests must be accounted for in terms of IFRS 10, i.e., the point at which the control assessment must be made. To this end, ‘the date of initial application’ is defined as ‘the beginning of the annual reporting period in which IFRS 10 is applied for the first time’. The Group does not expect this transition guidance to have a significant impact on its consolidated financial statements.
§ PFRS 13, Fair Value Measurement, will become effective for annual periods beginning on or after January 1, 2013. PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The Group does not anticipate that the adoption of this standard will have a significant impact on its financial position and performance.
§ Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. The adoption of this interpretation will result to a change in the revenue and cost recognition from percentage of completion method to completed contract method. The Group has made an assessment and is continuously monitoring the impact of this new interpretation to its consolidated financial statements.
§ Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, will become effective for annual periods beginning on or after January 1, 2013. This interpretation applies to waste removal costs (“stripping costs”) that are incurred in surface
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mining activity during the production phase of the mine (“production stripping costs”). If the benefit from the stripping activity will be realized in the current period, an entity is required to account for the stripping activity costs as part of the cost of inventory. When the benefit is the improved access to ore, the entity should recognize these costs as a non-current asset, only if certain criteria are met (“stripping activity asset”). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost or revalued amount less depreciation or amortization and less impairment losses, in the same way as the existing asset of which it is a part. The Group assessed that this new interpretation has no impact on its consolidated financial statements.
Amendments to Standards
§ PAS 1, Financial Statement Presentation (Amendment) - Presentation of Items of Other Comprehensive Income, will become effective for annual periods beginning on or after July 1, 2012. The amendments to PAS 1 change the grouping of items presented in other comprehensive income. Items that could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) will be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Group’s consolidated financial statements.
§ PAS 19, Employee Benefits (Revised), will become effective for annual periods beginning on or after January 1, 2013. Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. Once effective, the Group has to apply the amendments retroactively to the earliest period presented.
The Group reviewed its existing employee benefits and determined that the amended standard has significant impact on its accounting for retirement benefits. The Group obtained the services of an external actuary to compute the impact to the financial statements upon adoption of the standard. The effects are detailed below:
As at December
31, 2012
As at January 1,
2012
As at January 1,
2011 (In Thousands) Increase (decrease) in: Consolidated balance sheet Net defined benefit asset P=209,283 P=311,216 P=401,557 Deferred tax liability (30,580) (27,102) 120,467 Other comprehensive income (net of tax) (83,684) (86,060) – Retained earnings (7,658) 25,249 281,090
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2012 2011 (In Thousands) Consolidated statements of income Net pension expense (P=17,615) (P=32,601) Income tax expense 5,284 9,780 Net income for the year 12,331 22,821 Attributable to owners of the Parent Company (7,658) 25,249 Attributable to non-controlling interests 19,989 (2,428)
§ PAS 27, Separate Financial Statements (Amendment), as revised in 2011, will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 10 and PFRS 12, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The adoption of the amended PAS 27 will not have a significant impact on the separate financial statements of the entities in the Group.
§ PAS 28, Investments in Associates and Joint Venture (Amendment), as revised in 2011, will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 11 and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The Group does not expect this amendment to have a significant impact on its consolidated financial statements.
§ PAS 32, Financial Instruments: Presentation (Amendment) - Offsetting Financial Assets and Financial liabilities. The amendments to PAS 32 are to be applied retrospectively for annual periods beginning on or after January 1, 2014. The amendments clarify the meaning of “currently has a legally enforceable right to offset” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendment affects presentation only and have no impact on the Group’s financial position or performance.
Annual Improvements to PFRS (2009-2011 cycle) The Annual Improvements to PFRS (2009-2011 cycle) contain non-urgent but necessary amendments to PFRS. The amendments are effective for annual periods beginning on or after January 1, 2013 and are to be applied retrospectively. Earlier application is permitted.
§ PFRS 1, First-time Adoption of PFRS - Borrowing Costs. The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Group as it is not a first-time adopter of PFRS.
§ PAS 1, Presentation of Financial Statements - Clarification of the requirements for comparative information. The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes
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to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments affect disclosures only and have no impact on the Group’s financial position or performance.
§ PAS 16, Property, Plant and Equipment - Classification of servicing equipment. The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment will not have any significant impact on the Group’s financial position or performance.
§ PAS 32, Financial Instruments: Presentation - Tax effect of distribution to holders of equity instruments. The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that this amendment will not have any impact on its financial position or performance.
§ PAS 34, Interim Financial Reporting - Interim financial reporting and segment information for total assets and liabilities. The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity’s previous annual financial statements for that reportable segment. The amendment affects disclosures only and has no impact on the Group’s financial position or performance.
Basis of Consolidation
Basis of Consolidation from January 1, 2010. The consolidated financial statements comprise the financial statements of the Parent Company and all of its subsidiaries as at December 31, 2012.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company, using consistent accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated in full.
Non-controlling interests represent the portion of profit or loss, other comprehensive income and net assets not held by the Group and are presented separately in the consolidated statements of income, consolidated statements of comprehensive income and within equity section in the consolidated balance sheets, separately from equity attributable to owners of the Parent.
Losses from a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:
§ Derecognizes the assets (including goodwill) and liabilities of the subsidiary; § Derecognizes the carrying amount of any non-controlling interest;
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§ Derecognizes the cumulative translation differences recorded in equity; § Recognizes the fair value of the consideration received; § Recognizes the fair value of any investment retained; § Recognizes any surplus or deficit in profit or loss; § Reclassifies the Parent Company’s share of components previously recognized in other
comprehensive income to profit or loss or retained earnings, as appropriate.
Basis of Consolidation Prior to January 1, 2010. Certain of the above-mentioned policies were applied on a prospective basis. The following differences, however, are carried forward in certain instances from the previous basis of consolidation:
Transactions with non-controlling interest without loss of control, prior to January 1, 2010, were accounted for using the parent entity extension method, whereby, the difference between the consideration transferred (received) and the proportionate share of the net assets acquired (sold) were recognized as goodwill (negative goodwill).
Losses applicable to the non-controlling interest in a consolidated subsidiary may exceed the non-controlling interest in the subsidiary's equity. The excess, and any further losses applicable to the non-controlling interest, are allocated against the controlling interest to the extent that the non-controlling interest has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary subsequently reports profits, such profits are allocated to the controlling interest until the non-controlling interest's share in the losses previously absorbed by the controlling has been recovered. Losses prior to January 1, 2010 were not reallocated between non-controlling interest and owners of the Parent.
The income and expenses of a subsidiary are included in the consolidated financial statements until the date on which the Group ceases to control the subsidiary. The difference between the proceeds from the disposal of the subsidiary and its carrying amount as at the date of disposal, including the cumulative amount of any exchange differences that relate to the subsidiary recognized in equity, is recognized in the consolidated statements of income as gain or loss on the disposal of the subsidiary.
The consolidated financial statements include the accounts of the Parent Company and the following subsidiaries:
Percentage of Ownership 2012 2011 Company Direct Indirect Direct Indirect Shopping Mall Development SM Prime Holdings, Inc. (SM Prime) and Subsidiaries 22 41 22 41
Retail SM Retail, Inc. (SM Retail) and Subsidiaries 100 – 100 – Prime Central, Inc. (Prime Central) and Subsidiaries 100 – 100 – Rappel Holdings, Inc. (Rappel) and Subsidiaries 100 – 100 –
Real Estate Development and Tourism SM Land, Inc. (SM Land) and Subsidiaries: 67 – 67 – SM Development Corporation (SMDC) and Subsidiaries – 65 – 65 Magenta Legacy, Inc. (Magenta) – 99 – 99 Associated Development Corporation – 100 – 100 Mountain Bliss Resort and Development Corporation
(Mt. Bliss) and Subsidiaries 100 – 100 – Belleshares Holdings, Inc. (formerly SM Commercial
Properties, Inc.) and Subsidiaries 59 – 59 – Intercontinental Development Corporation (ICDC) 72 28 72 28 Bellevue Properties, Inc. 62 – 62 –
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Percentage of Ownership 2012 2011 Company Direct Indirect Direct Indirect Tagaytay Resort Development Corporation 33 25 33 25
Hotels and Conventions SM Hotels and Conventions Corp. (SM Hotels)
and Subsidiaries 100 – 100 –
Others Primebridge Holdings, Inc. (Primebridge) 80 20 80 20 Asia Pacific Computer Technology Center, Inc. 52 – 52 – Multi-Realty Development Corporation (MRDC) 91 – 91 – SM Arena Complex Corporation 100 – – – Henfels Investments Corp. 99 – – –
Hotel Specialist (Davao), Inc. In August 2012, SM Hotels incorporated Hotel Specialist (Davao), Inc., as a wholly owned subsidiary to engage in and carry on the business of hotel and resort.
Mindanao Shoppers Daily Destination Corp.(MSDD) In July 2012, SM Retail invested P=18.8 million or an equivalent of 75% interest in a newly incorporated company in the Philippines, MSDD. MSDD is engaged in the retail/wholesale trading of merchandise, such as dry goods, wearing apparels, food and other merchandise. Consequently, MSDD became a subsidiary of SM Retail.
SM Arena Complex Corporation (SM Arena) In March 2012, SMIC incorporated SM Arena, as a wholly owned subsidiary to engage in, conduct and carry on the business to manage the operations of Mall of Asia Arena, an entertainment and sporting events facility that also houses various stores.
My ShoppingLane Cebu Corporation (MSCC) In October 2011, SM Retail invested P=22.5 million or an equivalent of 75% interest in a newly incorporated company in the Philippines, MSCC. MSCC is engaged in the retail/wholesale trading of merchandise, such as dry goods, wearing apparels, food and other merchandise. Consequently, MSCC became a subsidiary of SM Retail.
Hyperhome Corp. and Hyperfashion Corp. (subsidiaries of SM Retail) In 2011, SM Retail incorporated Hyperhome Corp. and Hyperfashion Corp. as wholly owned subsidiaries to engage in, conduct and carry on the business of buying, selling, distributing, marketing at wholesale and retail, importing, exporting insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description such as but not limited to bags and luggages, clothing line and accessories and other general merchandise on a wholesale/retail basis.
SM Prime SM Prime declared a stock dividend in 2012 which resulted in an increase of 752.4 million and 1,423.4 million common shares held by SMIC and SM Land, respectively. The declaration of stock dividend by SM Prime did not result in a change in ownership interest of the Group.
On October 14, 2010, SM Prime has undergone an international placement and engaged into a Placement Agreement with SM Land (Selling Shareholder) and CLSA Limited and Macquarie Capital (Singapore) Pte. Limited (the “Joint Bookrunners”). As stated in the Placement Agreement, SM Land shall sell its 569.6 million SM Prime common shares (the “Sale Shares”) with a par value of P=1.00 per share at P=11.50 (Offer Price) per share to the Joint Bookrunners, or
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to investors that the Joint Bookrunners may procure outside the Philippines (the “International Placement”).
Contemporaneous with the signing of the Placement Agreement, SM Prime likewise entered into a Subscription Agreement with SM Land, where the latter will not directly receive any proceeds from the International Placement but has conditionally agreed to subscribe for new SM Prime common shares (out of its authorized but unissued capital stock) in an amount equal to the aggregate number of the Sale Shares sold by SM Land at a subscription price of P=11.50 per share, which is equal to the Offer Price of the Sale Shares.
SM Land was able to sell through the Joint Bookrunners the total Sale Shares of 569.6 million SM Prime common shares. Likewise, SM Land subscribed for and SM Prime issued to SM Land the same number of new SM Prime common shares.
The placement and subscription agreements resulted in a 3% decrease in total direct and indirect ownership of the Group over SM Prime.
SMDC SMDC declared a stock dividend in 2012 which resulted to an increase of 1.1 million and 549.4 million common shares held by SMIC and SM Land, respectively. The declaration of stock dividend by SMDC did not result to a change in the ownership interest of the Group.
In 2012, SMDC acquired Guadix Land Corporation (GLC), Lascona Land Company, Inc. (LLCI) and Metro South Davao Property Corporation (MSDPC) for P=498.4 million, P=1,500.0 million and P=600.0 million, respectively, and became its wholly owned subsidiaries (see Note 15).
In 2011, SMDC acquired Twenty Two Forty One Properties, Inc. (TTFOPI) for P=195.6 million and became its wholly owned subsidiary (see Note 15).
In 2010, SMDC acquired Vancouver Lands, Inc. (VLI) for P=566.6 million and became its wholly owned subsidiary (see Note 15).
In January and October 2010, SMDC had a stock rights offering to eligible existing common shareholders of SMDC at the proportion of one rights share for every three existing common shares held as at record date, at an offer price of P=3.50 and P=6.38 per rights share, respectively.
SMIC acquired a total of 4.04 million additional SMDC shares for a total cost of P=20.8 million. The availment of additional shares from the said offering did not result to a change in ownership interest of SMIC in SMDC.
SM Land acquired a total of 2,114.5 million additional SMDC shares for a total cost of P=10,840.0 million, a fraction of which totaling to 32.9 million SMDC shares or a total cost of P=115.2 million was purchased by SM Land from the unsubscribed portion of the aggregate stock rights offered by SMDC. The availment of additional shares resulted to a 0.6% increase in SM Land’s interest in SMDC.
MH Holdings, Inc. (MH Holdings, Inc.) In 2010, MH Holdings (a subsidiary of SM Retail) invested P=72.0 million or an equivalent of 60% interest in a newly incorporated company in the Philippines, Forever Agape & Glory, Inc. (Forever Agape). Consequently, Forever Agape became a subsidiary of MH Holdings.
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3. Significant Accounting Judgments, Estimates and Assumptions
The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these estimates and assumptions could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in the future.
Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements:
Functional Currency. The Parent Company has determined that its functional currency is the Philippine peso. It is the currency of primary economic environment in which the Parent Company operates.
Revenue Recognition on Real Estate. Selecting an appropriate revenue recognition method for a particular real estate sales transaction requires certain judgments based on the buyer’s commitment on the sale which may be ascertained through the significance of the buyer’s initial investment and completion of development. The buyer’s commitment is evaluated based on collections, credit standing of the buyer and location of the property. The completion of development is determined based on engineer’s judgments and estimates on the physical portion of contract work done and the completion of development beyond the preliminary stage.
Consignment Arrangements on Retail Segment. The retail segment of the Group has entered into various consignment arrangements with suppliers. Under these arrangement, the Group bears the significant risks and rewards associated with the sale of goods. The Group concluded that it is acting as principal in the sales transaction with customers. Accordingly, sales revenue is recognized at gross amount upon actual sales to customers. The related inventory stocks supplied under these arrangement are only payable to suppliers when actually sold.
Operating Lease Commitments - Group as Lessor. The Group has entered into commercial property leases in its investment property portfolio. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of the properties and thus accounts for the contracts as operating leases.
Rent income amounted to P=24,155.6 million, P=20,472.8 million and P=17,904.7 million for the years ended December 31, 2012, 2011 and 2010, respectively (see Note 14).
Operating Lease Commitments - Group as Lessee. The Group has entered into various lease agreements as a lessee. Management has determined that all the significant risks and benefits of ownership of these properties, which the Group leases under operating lease arrangements, remain with the lessor. Accordingly, the leases were accounted for as operating leases.
Rent expense amounted to P=4,876.3 million, P=3,463.7 million and P=3,016.0 million for the years ended December 31, 2012, 2011 and 2010, respectively (see Notes 23 and 27).
Classifying Held-to-Maturity (HTM) Investments. The classification to HTM investments requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity, it will
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be required to reclassify the entire portfolio as part of AFS investments. In such case, the investments would therefore be remeasured at fair value and not at amortized cost.
HTM investments as at December 31, 2012 and 2011 amounted to P=200.0 million with caption “Treasury bonds,” included under “Other current assets” and “Other noncurrent assets” accounts in the consolidated balance sheets (see Notes 10 and 16).
Classifying Investments in Shares of Stock of Associates. The classification to associate requires significant judgment. In making this judgment, the Group evaluates whether it has significant influence over the investees. Management has determined that it has significant influence over its equity investments classified as associates. As such, these investments are accounted for using equity method in the consolidated financial statements.
The carrying value of investments in shares of stock of associates as at December 31, 2012 and 2011 amounted to P=128,431.2 million and P=88,417.8 million, respectively (see Note 12).
Impairment of AFS Investments - Significant or Prolonged Decline in Fair Value. The Group determines that an AFS investment is impaired when there has been a significant or prolonged decline in the fair value below its cost. The Group determines that a decline in fair value of greater than 20% of cost is considered to be a significant decline and a decline for a period of more than twelve months is considered to be a prolonged decline. The determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates, among other factors, the normal volatility in price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance.
There was no impairment loss recognized on AFS investments for the years ended December 31, 2012, 2011 and 2010. The carrying values of AFS investments amounted to P=19,307.8 million and P=13,935.4 million as at December 31, 2012 and 2011, respectively (see Notes 8 and 11).
Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at reporting period that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below:
Impairment of Receivables. The Group maintains an allowance for impairment loss at a level considered adequate to provide for potential uncollectible receivables. The level of allowance is evaluated by the Group on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with the customers and counterparties, average age of accounts and collection experience. The Group performs a regular review of the age and status of these accounts, designed to identify accounts with objective evidence of impairment and to provide the appropriate allowance for doubtful accounts. The review is accomplished using a combination of specific and collective assessment. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. An increase in allowance for impairment loss would increase the recorded selling, general and administrative expenses and decrease current and noncurrent assets.
Allowance for impairment loss amounted to P=155.3 million and P=47.1 million as at December 31, 2012 and 2011, respectively (see Notes 9 and 10). Receivables, including advances and other receivables included under “Other current assets” account and receivable from a related party,
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noncurrent portion of receivables from real estate buyers and long-term notes included under “Other noncurrent assets” account, amounted to P=44,849.6 million and P=36,948.6 million as at December 31, 2012 and 2011, respectively (see Notes 9, 10 and 16).
Impairment of AFS Investments - Calculation of Impairment Losses. The computation for the impairment of AFS debt instruments requires an estimation of the present value of the expected future cash flows and the selection of an appropriate discount rate. In the case of AFS equity instruments, the Group expands its analysis to consider changes in the investee’s industry and sector performance, legal and regulatory framework, changes in technology and other factors that affect the recoverability of the Group’s investments.
Allowance for impairment loss amounted to P=45.1 million as at December 31, 2012 and 2011. The carrying values of AFS investments amounted to P=19,307.8 million and P=13,935.4 million as at December 31, 2012 and 2011, respectively (see Notes 8 and 11).
Net Realizable Value of Merchandise Inventories, Condominium Units for Sale, Club Shares for Sale and Land and Development. The Group writes down merchandise inventories, condominium units for sale, club shares for sale and land and development to net realizable value, through the use of an allowance account, whenever the net realizable value of the assets become lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes.
Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made of the amount the assets are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after reporting period to the extent that such events confirm conditions existing at reporting period.
The allowance account is reviewed on a regular basis to reflect the accurate valuation in the financial records.
In 2012 and 2011, the Group assessed that the net realizable values of merchandise inventories, condominium units for sale, club shares for sale and land and development are higher than cost, hence, the Group did not recognize any losses on write down of the assets. The carrying values of merchandise inventories amounted to P=13,402.8 million and P=13,436.5 million as at December 31, 2012 and 2011, respectively (see Note 22). The carrying values of condominium units for sale included under “Other current assets” account amounted to P=3,286.9 million and P=1,115.9 million as at December 31, 2012 and 2011, respectively (see Note 10). The carrying values of club shares for sale included under “Other current assets” account amounted to P=824.2 million and P=856.2 million as at December 31, 2012 and 2011, respectively (see Note 10). The carrying values of land and development amounted to P=30,197.9 million and P=23,012.5 million as at December 31, 2012 and 2011, respectively (see Note 15).
Estimated Useful Lives of Property and Equipment and Investment Properties. The useful life of each of the Group’s property and equipment and investment properties is estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limitations on the use of the asset. It is possible, however, that future financial performance could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any property and equipment and investment properties would increase the recorded selling, general and administrative expenses and decrease noncurrent assets.
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The total carrying values of property and equipment and investment properties amounted to P=167,157.2 million and P=146,368.3 million as at December 31, 2012 and 2011, respectively (see Notes 13 and 14).
Impairment of Investments in Shares of Stock of Associates. Impairment review of investments in shares of stock of associates is performed when events or changes in circumstances indicate that the carrying value may not be recoverable. This requires management to make an estimate of the expected future cash flows from the investments and to choose a suitable discount rate in order to calculate the present value of those cash flows.
The Group reversed impairment loss amounting to P=3,542.7 million and P=445.0 million in 2012 and 2011, respectively, and recognized allowance for impairment loss amounting to nil and P=395.0 million in 2012 and 2011, respectively. Allowance for impairment loss amounted to P=775.0 million and P=4,317.7 million as at December 31, 2012 and 2011, respectively. The carrying values of investments in shares of stock of associates amounted to P=128,431.2 million and P=88,417.8 million as at December 31, 2012 and 2011, respectively (see Note 12).
Impairment of Other Nonfinancial Assets. The Group assesses at each reporting date whether there is an indication that an item of property and equipment and investment properties may be impaired. Determining the value of the assets, which requires the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the Group to make estimates and assumptions that can materially affect the consolidated financial statements. Future events could cause the Group to conclude that these assets are impaired. Any resulting impairment loss could have a material impact on the financial position and performance of the Group.
The preparation of the estimated future cash flows involves judgment and estimations. While the Group believes that its assumptions are appropriate and reasonable, significant changes in these assumptions may materially affect the Group’s assessment of recoverable values and may lead to future additional impairment charges.
Allowance for impairment loss on investment properties amounted to P=923.3 million as at December 31, 2012 and 2011 (see Note 14). The total carrying values of property and equipment and investment properties amounted to P=167,157.2 million and P=146,368.3 million as at December 31, 2012 and 2011, respectively (see Notes 13 and 14).
Impairment of Goodwill, Trademarks and Brand Names with Indefinite Useful Lives. The Group’s impairment test for goodwill, trademarks and brand names is based on value in use calculations that use a discounted cash flow model. The cash flows are derived from the budget for the next three years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the assets. The recoverable amount is most sensitive to the pre-tax discount rates used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount for the different cash generating units are further discussed in Note 16.
The carrying values of goodwill, trademarks and brand names amounted to P=15,354.2 million as at December 31, 2012 and 2011, respectively (see Note 16).
Purchase Price Allocation in Business Combinations. The acquisition method requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities at acquisition date. It also requires the acquirer
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to recognize goodwill. The Group’s acquisitions have resulted in goodwill and separate recognition of trademarks and brand names with indefinite lives.
The total carrying values of goodwill and trademarks and brand names with indefinite useful lives arising from business combinations amounted to P=15,354.2 million as at December 31, 2012 and 2011 (see Note 16).
In 2012, SMIC increased its ownership in Atlas from 17.9% to 28.4%. The goodwill resulting from the acquisition formed part of the cost of investment in shares of stock of Atlas (see Note 12).
In 2011, the Group acquired 17.9% equity interest in Atlas Consolidated Mining and Development Corporation (Atlas). The acquisition was accounted on provisional basis pending the fair value of Atlas’ net assets as at December 31, 2011. In 2012, the fair values of the net assets acquired were finalized where the resulting goodwill from the acquisition formed part of the cost of investment in shares of stock of Atlas (see Note 12).
Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Group’s assessment on the recognition of deferred tax assets on deductible temporary differences and carryforward benefits of excess minimum corporate income tax (MCIT) and net operating loss carryover (NOLCO) is based on the projected taxable income in future periods. Based on the projection, not all deductible temporary differences and carryforward benefits of excess MCIT and NOLCO will be realized. Consequently, only a portion of the Group’s deferred tax assets was recognized.
Deferred tax assets recognized in the consolidated balance sheets as at December 31, 2012 and 2011 amounted to P=642.1 million and P=694.6 million, respectively, while the unrecognized deferred tax assets amounted to P=1,902.3 million and P=1,283.6 million as at December 31, 2012 and 2011, respectively (see Note 26).
Present Value of Defined Benefit Obligation. The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost for pensions include, among others, discount rate, expected rate of return on plan assets and rate of salary increase. Actual results that differ from the Group’s assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.
The assumption of the expected return on plan assets is determined on a uniform basis, taking into consideration the long-term historical returns, asset allocation and future estimates of long-term investment returns.
The Group determines the appropriate discount rate at the end of each reporting period. It is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Group considers the interest rates on government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.
Other key assumptions for pension obligations are based in part on current market conditions.
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While it is believed that the Group’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group’s pension and other pension obligations.
The Group has a net cumulative unrecognized actuarial gain amounting to P=352.9 million, P=453.7 million and P=729.6 million as at December 31, 2012, 2011 and 2010, respectively (see Note 25). The Group’s defined benefit asset amounted to P=452.9 million and P=394.7 million as at December 31, 2012 and 2011, respectively (see Notes 16 and 25). While the Group’s defined benefit liability amounted to P=28.3 million and P=76.5 million as at December 31, 2012 and 2011, respectively (see Note 25).
Fair Value of Financial Assets and Liabilities. The Group carries certain financial assets and liabilities at fair value, which requires extensive use of accounting judgments and estimates. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates and volatility rates). The amount of changes in fair value would differ if the Group utilized different valuation methodologies and assumptions. Any changes in the fair value of these financial assets and liabilities would directly affect profit or loss and other comprehensive income.
The fair value of financial assets and liabilities are discussed in Note 29.
Contingencies. The Group is currently involved in legal and administrative proceedings. The Group’s estimate of the probable costs for the resolution of these proceedings has been developed in consultation with outside legal counsel handling defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material adverse effect on its financial position and performance. It is possible, however, that future financial performance could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings. No accruals were made in relation to these proceedings (see Note 32).
4. Summary of Significant Accounting Policies
Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from acquisition date and are subject to an insignificant risk of change in value.
Time Deposits and Short-term Investments Time deposits and short-term investments are cash placements, shown under current assets, with original maturities of more than three months but less than one year. Time deposits which will mature twelve months after the reporting period are presented under noncurrent assets.
Financial Instruments - Initial Recognition and Subsequent Measurement
Date of Recognition. The Group recognizes a financial asset or a financial liability in the consolidated balance sheets when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the market place. Derivatives are recognized on a trade date basis.
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Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those classified as fair value through profit or loss (FVPL), includes transaction cost.
Subsequent to initial recognition, the Group classifies its financial instruments in the following categories: financial assets and financial liabilities at FVPL, loans and receivables, HTM investments, AFS investments and other financial liabilities. The classification depends on the purpose for which the instruments are acquired and whether they are quoted in an active market. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every reporting date.
Determination of Fair Value. The fair value of financial instruments traded in active markets at reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models.
“Day 1” Difference. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a “Day 1” difference) in the consolidated statements of income unless it qualifies for recognition as some other type of asset or liability. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the “Day 1” difference amount.
Financial Assets and Liabilities at FVPL. Financial assets and liabilities at FVPL include financial assets and liabilities held for trading and financial assets and liabilities designated upon initial recognition as at FVPL.
Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Gains or losses on investments held for trading are recognized in the consolidated statements of income under “Gain on sale of available-for-sale investments and fair value changes on investments held for trading - net” account. Interest income earned on investments held for trading are recognized in “Interest income” account in the consolidated statements of income.
Financial assets and liabilities may be designated by management at initial recognition as FVPL when any of the following criteria is met:
§ the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognizing gains or losses on a different basis; or
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§ the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or
§ the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.
The Group’s investments held for trading and derivative assets are classified as financial assets at FVPL, while the Group’s derivative liabilities arising from issuance of convertible bonds and derivative financial instruments with negative fair values are also included as financial liabilities at FVPL.
Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL.
After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statements of income when the loans and receivables are derecognized and impaired, as well as through the amortization process. Loans and receivables are included under current assets if realizability or collectibility is within twelve months from reporting period. Otherwise, these are classified as noncurrent assets.
The Group’s cash and cash equivalents, time deposits and short-term investments (including noncurrent portion) and receivables (including noncurrent portion of receivables from real estate buyers), advances and other receivables (included under “Other current assets” account), receivable from a related party and long-term notes (included under “Other noncurrrent assets” account) are classified under this category.
HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Group’s management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, these investments are measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statements of income when the HTM investments are derecognized or impaired, as well as through the amortization process. Assets under this category are classified as current assets if maturity is within twelve months from reporting period. Otherwise, these are classified as noncurrent assets.
The Group’s investment in quoted Philippine government treasury bonds are classified under this category.
AFS Investments. AFS investments are nonderivative financial assets that are designated under this category or are not classified in any of the other categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. Subsequent to initial recognition, AFS investments are carried at fair value in the
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consolidated balance sheets. Changes in the fair value of such assets are reported as net unrealized gain or loss on AFS investments in the consolidated statements of comprehensive income under “Net unrealized gain (loss) on available-for-sale investments” account until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in consolidated statements of comprehensive income is transferred to the consolidated statements of income. Interest earned on holding AFS investments are recognized in the consolidated statements of income using the effective interest method. Assets under this category are classified as current assets if expected to be disposed of within twelve months from reporting period and as noncurrent assets if expected date of disposal is more than twelve months from reporting period.
The Group’s investments in shares of stock, bonds and corporate notes, redeemable preferred shares and club shares are classified under this category. The current portion is included under “Investments held for trading and sale” account in the consolidated balance sheets.
Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings.
Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses on other financial liabilities are recognized in the consolidated statements of income when the liabilities are derecognized, as well as through the amortization process.
The Group’s bank loans, accounts payable and other current liabilities, dividends payable, long-term debt and tenants’ deposits and others are classified under this category.
Classification of Financial Instruments Between Liability and Equity A financial instrument is classified as liability if it provides for a contractual obligation to:
§ deliver cash or another financial asset to another entity; or
§ exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or
§ satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.
If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.
The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.
Redeemable Preferred Shares In determining whether a preferred share is a financial liability or an equity instrument, the Group assesses the particular rights attaching to the share to determine whether it exhibits the fundamental characteristic of a financial liability. A preferred share that provides for mandatory
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redemption by the Group for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to require the Group to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability.
The redeemable preferred shares of the Group exhibit the characteristics of a financial liability and are thus recognized as a liability under “Long-term debt” account in the consolidated balance sheets, net of transaction costs. The corresponding dividends on the shares are charged as interest expense in the consolidated statements of income.
Transaction costs are amortized over the maturity period of the preferred shares using the effective interest method.
Debt Issue Costs Debt issue costs are presented as reduction in long-term debt and are amortized over the terms of the related borrowings using the effective interest method.
Derivative Financial Instruments The Group uses derivative financial instruments such as long-term currency swaps, foreign currency call options, interest rate swaps, foreign currency range options and non-deliverable forwards to hedge the risks associated with foreign currency and interest rate fluctuations. Derivative financial instruments, including bifurcated embedded derivatives, are initially recognized at fair value on the date on which the derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
The Group’s derivative instruments provide economic hedges under the Group’s policies but are not designated as accounting hedges. Consequently, any gains or losses arising from changes in fair value are taken directly to profit or loss for the year.
Embedded Derivative. An embedded derivative is a component of a hybrid (combined) instrument that also includes a nonderivative host contract with the effect that some of the cash flows of the combined instrument vary, in a way similar to a stand-alone derivative. The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized as at FVPL.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract.
Options arising from the Parent Company’s investment in bonds and convertible bonds payable are the Group’s bifurcated embedded derivatives.
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Derecognition of Financial Assets and Liabilities
Financial Assets. A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:
§ the rights to receive cash flows from the asset have expired;
§ 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.
When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset, 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 original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.
Impairment of Financial Assets The Group assesses at each reporting period whether a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Objective evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial Assets Carried at Amortized Cost. The Group first assesses whether objective evidence of impairment exists 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 the collective impairment assessment.
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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 impaired asset shall be reduced through the use of an allowance account. The amount of the loss shall be recognized in the consolidated statements of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Group. If, in a subsequent period, the amount of the impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or decreased by adjusting the allowance account. If a future write-off is later recovered, the recovery is recognized in the consolidated statements of income under “Other revenue” account to the extent of the carrying amount that would have been determined had no impairment loss been recognized.
Financial Assets Carried at Cost. If there is objective evidence that an impairment loss has been incurred in 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, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.
AFS Investments. The Group assesses at each reporting period whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as AFS investments, an objective evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Significant decline in fair value is evaluated against the original cost of the investment, while prolonged decline is assessed against the periods in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of income, is removed from the consolidated statements of comprehensive income and recognized in the consolidated statements of income. Impairment losses on equity investments are not reversed through the consolidated statements of income; increases in fair value after impairment are recognized directly in the consolidated statements of comprehensive income.
In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount of the asset and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of “Interest income” account in the consolidated statements of income. If, in subsequent year, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statements of income, the impairment loss is reversed through the consolidated statements of income.
Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheets if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and
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settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross in the consolidated balance sheets.
Merchandise Inventories Merchandise inventories are valued at the lower of cost and net realizable value. Cost, which includes all costs directly attributable to acquisition, such as purchase price and transport costs, is primarily determined using the weighted average method. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale.
Land and Development, Condominium Units for Sale and Club Shares for Sale Land and development, condominium units for sale (included under “Other current assets” account in the consolidated balance sheets) and club shares for sale (included under “Other current assets” account in the consolidated balance sheets) are stated at the lower of cost and net realizable value. Net realizable value is the selling price in the ordinary course of business, less costs to complete and the estimated cost to make the sale. Cost includes those costs incurred for development and improvement of the properties.
Land and development includes properties held for future development and properties being constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation. Cost incurred for the development and improvement of the properties includes the following:
§ Land cost
§ Amounts paid to contractors for construction and development
§ Borrowing costs, planning and design costs, costs of site preparation, professional fees, property transfer taxes, construction overheads and other related costs.
Investments in Shares of Stock of Associates The Group’s investments in shares of stock of associates are accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, investment in an associate is carried in the consolidated balance sheets at cost plus post-acquisition changes in the Group’s share in net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized. After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the Group’s net investment in the associate. The consolidated statements of income reflect the share in the results of operations of the associate. Where there has been a change recognized directly in the equity of the associate, the Group recognizes its share in any changes and discloses this, when applicable, in the consolidated statements of comprehensive income. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.
An investment in an associate is accounted for using the equity method from the date when it becomes an associate. On acquisition of the investment, any difference between the cost of the investment and the investor’s share in the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities is accounted for as follows:
a. goodwill relating to an associate is included in the carrying amount of the investment. However, amortization of that goodwill is not permitted and is therefore not included in the determination of the Group’s share in the associate’s profits or losses.
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b. any excess of the Group’s share in the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities over the cost of the investment is included as income in the determination of the investor's share of the associate's profit or loss in the period in which the investment is acquired.
Also, appropriate adjustments to the investor’s share of the associate’s profit or loss after acquisition are made to account for the depreciation of the depreciable assets based on their fair values at the acquisition date and for impairment losses recognized by the associate, such as for goodwill or property, plant and equipment.
The Group discontinues the use of equity method from the date when it ceases to have significant influence over an associate and accounts for the investment in accordance with PAS 39, from that date, provided the associate does not become a subsidiary or a joint venture as defined in PAS 31. When the Group’s interest in an investment in associate is reduced to zero, additional losses are provided only to the extent that the Group has incurred obligations or made payments on behalf of the associate to satisfy obligations of the investee that the Group has guaranteed or otherwise committed. If the associate subsequently reports profits, the Group resumes recognizing its share of the profits if it equals the share of net losses not recognized.
The financial statements of the associates are prepared for the same reporting period as the Parent Company. The accounting policies of the associates conform to those used by the Group for like transactions and events in similar circumstances.
Property and Equipment Property and equipment, except land, is stated at cost less accumulated depreciation and amortization and any accumulated impairment in value. Such cost includes the cost of replacing part of the property and equipment at the time that cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing. Land is stated at cost less any impairment in value.
The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs necessary in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. When each major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. Expenditures incurred after the item has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period such costs are incurred. In situations where it can be clearly demonstrated that the expenditures have improved the condition of the asset beyond the originally assessed standard of performance, the expenditures are capitalized as additional cost of property and equipment.
Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:
Buildings, condominium units and improvements 5–25 years Store equipment and improvements 5–10 years Data processing equipment 5 years Furniture, fixtures and office equipment 3–10 years Machinery and equipment 5–10 years Leasehold improvements 5–10 years or term of the lease,
whichever is shorter Transportation equipment 5–10 years
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The residual values, useful lives and method of depreciation and amortization of the assets are reviewed and adjusted, if appropriate, at each reporting period.
The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.
Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization is credited or charged to current operations.
An item of property and equipment is derecognized when either it has been disposed or when it is permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gains or losses arising on the retirement and disposal of an item of property and equipment are recognized in the consolidated statements of income in the period of retirement or disposal.
Investment Properties Investment properties are measured initially at cost. The cost of a purchased investment property comprises of its purchase price and any directly attributable costs. Subsequently, investment properties, except land, are measured at cost, less accumulated depreciation and amortization and accumulated impairment in value. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Land is stated at cost less any impairment in value.
Property under construction or development for future use as an investment property is classified as investment property.
Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:
Land improvements 3–5 years Land use rights 40–60 years Buildings and improvements 10–35 years Building equipment, furniture and others 3–15 years
The residual values, useful lives and method of depreciation and amortization of the assets are reviewed and adjusted, if appropriate, at each reporting period.
Investment property is derecognized when either it has been disposed or when it is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statements of income in the period of retirement or disposal.
Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.
For a transfer from investment property to owner-occupied property or inventories, the cost of property for subsequent accounting is its carrying value at the date of change in use. If the property occupied by the Group as an owner-occupied property becomes an investment property,
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the Group accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use.
Construction in Progress Construction in progress represents structures under construction and is stated at cost. This includes cost of construction, property and equipment, and other direct costs. Cost also includes interest on borrowed funds incurred during the construction period. Construction in progress is not depreciated until such time that the relevant assets are completed and are ready for use.
Tenants’ Deposits Tenants’ deposits are measured at amortized cost. Tenants’ deposits refers to security deposits received from various tenants upon inception of the respective lease contracts on the Group’s investment properties. At the termination of the lease contracts, the deposits received by the Group are returned to tenants, reduced by unpaid rental fees, penalties and/or deductions from repairs of damaged leased properties, if any. The related lease contracts usually have a term of more than twelve months.
Business Combinations
Business Combinations from January 1, 2010. Business combinations are accounted for using the acquisition method except for commonly controlled transaction of which an accounting similar to pooling of interest method is used. Business combinations under commonly controlled transactions are those in which all of the combining entities or businesses are controlled by the same party or parties both before and after the business combination, and that control is not transitory. Under the acquisition method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Transaction costs incurred are expensed and included in “Selling, general and administrative expenses” account in the consolidated statements of income.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.
Acquisition of Non-controlling Interests. Changes in the Parent Company’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e., transactions with owners in their capacity as owners). In such circumstances, the carrying amounts of the controlling and non-controlling interests shall be adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the
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non-controlling interests are adjusted and the fair value of the consideration paid shall be recognized directly in equity.
Business Combinations prior to January 1, 2010. Business combinations were accounted for using the purchase method, except for commonly controlled transactions, of which, an accounting similar to pooling of interest method is used. For purchase method of accounting, the cost of acquisition is the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control over the net assets of the acquired entity. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest was measured at the proportionate share of the acquiree’s identifiable net assets. The identifiable assets, liabilities and contingent liabilities that satisfy certain recognition criteria have to be measured initially at their fair values at acquisition date, irrespective of the extent of any non-controlling interest. For accounting similar to pooling of interest method, the assets, liabilities and equity of the acquired companies for the reporting period in which the common control business combinations occur, and for any comparative periods presented, are included in the consolidated financial statements of the Group at their carrying amounts as if the combinations had occurred from the date when the acquired companies first became under the control of the Group. The excess of the cost of business combinations over the net carrying amounts of the assets and liabilities of the acquired companies is recognized under “Equity adjustments from business combination” account in the equity section of the consolidated balance sheet.
Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest do not affect previously recognized goodwill.
When the Group acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.
Contingent consideration was recognized if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill.
Goodwill Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in consolidated statements of income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which the goodwill is so allocated:
§ represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
§ not larger than an operating segment determined in accordance with PFRS 8, Operating Segments.
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Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed and the portion of the cash-generating unit retained.
Excess of the fair values of acquired identifiable assets and liabilities of subsidiaries and associates over the acquisition cost of that interest, is credited directly to income. Transfers of assets between commonly controlled entities are accounted for under historical cost accounting.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.
When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation adjustments and goodwill is recognized in the consolidated statements of income.
Intangible Assets The cost of trademarks and brand names acquired in a business combination is the fair value as at the date of acquisition. The Group assessed the useful life of the trademarks and brand names to be indefinite because based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate cash inflows for the Group.
Trademarks and brand names with indefinite useful lives are not amortized but are tested for impairment annually either individually or at the cash generating unit level. The useful life of an intangible asset is assessed as indefinite if it is expected to contribute net cash inflows indefinitely and is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized.
Impairment of Nonfinancial Assets The carrying values of property and equipment, investment properties and investments in shares of stock of associates are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and if the carrying
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value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell or value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s-length transaction between knowledgeable, willing parties, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in consolidated statements of income. After such a reversal, the depreciation or amortization charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
Capital Stock Capital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as deduction from proceeds, net of tax. Proceeds and/or fair value of considerations received in excess of par value, if any, are recognized as additional paid-in capital.
Revenue Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates and sales taxes or duties. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as a principal or as an agent. The Group has concluded that it is acting as principal in majority of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized:
Sale of Merchandise Inventories. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is normally upon delivery. Sales returns and sales discounts are deducted from sales to arrive at sales shown in the consolidated statement of income.
Sale of goods under consignment arrangements with suppliers is recognized as revenue upon billing, delivery and transfer of goods to customers.
Sale of Real Estate. The Group assesses whether it is probable that the economic benefits will flow to the Group when the sales prices are collectible. Collectibility of the contract price is demonstrated by the buyer’s commitment to pay, which is supported by the buyer’s initial and continuous investments that motivates the buyer to honor its obligation. Collectibility is also assessed by considering factors such as collections, credit standing of the buyer and location of the property.
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Revenue from sales of completed real estate projects is accounted for using the full accrual method. In accordance with Philippine Interpretations Committee Q&A No. 2006-01, the percentage-of-completion method is used to recognize income from sales of projects where the Group has material obligations under the sales contract to complete the project after the property is sold, the equitable interest has been transferred to the buyer, construction is beyond preliminary stage (i.e., engineering, design work, construction contracts execution, site clearance and preparation, excavation and the building foundation are finished), and the costs incurred or to be incurred can be measured reliably. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated completion of a physical proportion of the contract work.
Any excess of collections over the recognized receivables are included in the “Tenants’ deposits and others” account in the consolidated balance sheets. If any of the criteria under the full accrual or percentage-of-completion method is not met, the deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers are presented under the “Tenants’ deposits and others” account in the consolidated balance sheets.
Cost of real estate sales is recognized consistent with the revenue recognition method applied. Cost of condominium units sold before the completion of the development is determined on the basis of the acquisition cost of the land plus its full development costs, which include estimated costs for future development works.
The cost of inventory recognized in the consolidated statement of income upon sale is determined with reference to the specific costs incurred on the property, allocated to saleable area based on relative size and takes into account the percentage of completion used for revenue recognition purposes.
Revenue from construction contracts included in the “Revenue from real estate and others” account in the consolidated statements of income is recognized using the percentage-of-completion method, measured principally on the basis of the estimated physical completion of the contract work.
For income tax purposes, full recognition is applied when more than 25% of the selling price has been collected in the year of sale. Otherwise, the installment method is applied.
Sale of Club Shares for Sale. Revenue is recognized when the significant risks and rewards of ownership of the club shares for sale have passed to the buyer, which is normally upon delivery of such.
Rent. Revenue is recognized on a straight-line basis over the lease term or based on the terms of the lease as applicable.
Sale of Cinema and Amusement Tickets. Revenue is recognized upon receipt of cash from the customer which coincides with the rendering of services.
Gain on Sale of Investments in Shares of Stock and Available-for-Sale Investments. Revenue is recognized upon delivery of the securities to and confirmation of the sale by the broker.
Dividend. Revenue is recognized when the Group’s right as a shareholder to receive the payment is established.
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Management and Service Fees. Revenue is recognized when earned in accordance with the terms of the agreements.
Marketing Support. Revenue is recognized when the performance and provision of contractually agreed marketing tasks have been rendered and store facilities have been used. Marketing support is shown under “Others” account in the consolidated statements of income.
Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset.
Management Fees Management fees are recognized as expense in accordance with the terms of the agreements.
Cost and Expenses Cost of sales, selling, general and administrative expenses and interest expense are recognized as incurred.
Pension Benefits The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit actuarial valuation method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Pension cost includes current service cost, interest cost, expected return on plan assets, amortization of unrecognized past service costs, recognition of actuarial gains or losses and effect of any curtailments or settlements. Past service cost is amortized over a period until the benefits become vested. The portion of the actuarial gains and losses is recognized when it exceeds the “corridor” (10% of the greater of the present value of the defined benefit obligation or fair value of the plan assets) at the previous reporting date, divided by the expected average remaining working lives of active plan members.
The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets, out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.
If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost, and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or if there is an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or if there is a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.
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Foreign Currency-denominated Transactions The consolidated financial statements are presented in Philippine peso, which is the Group’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the functional currency rate of exchange as at reporting date. Nonmonetary items denominated in foreign currency are translated using the exchange rates as at the date of initial recognition. All differences are taken to the consolidated statements of income.
Foreign Currency Translation The assets and liabilities of foreign operations are translated into Philippine peso at the rate of exchange ruling as at reporting date and their respective statements of income are translated at the weighted average rates for the year. The exchange differences arising on the translation are included in the consolidated statements of comprehensive income and are presented within the “Cumulative translation adjustment of a subsidiary” account in the consolidated statements of changes in equity. On disposal of a foreign entity, the deferred cumulative amount of exchange differences recognized in equity relating to that particular foreign operation is recognized in the profit or loss.
Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
Group as Lessee. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated statements of income.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
Leases which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the consolidated statements of income on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.
Group as Lessor. Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Lease income from operating leases are recognized as income on a straight-line basis over the lease term. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.
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
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obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain.
Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset as part of the cost of that asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. Borrowing costs are capitalized when it is probable that they will result in future economic benefits to the Group. All other borrowing costs are expensed as incurred. For borrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowings is used.
Taxes
Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at reporting period.
Deferred Tax. Deferred tax is provided, using the balance sheet liability method, on temporary differences at reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:
§ where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
§ with respect to taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences and carryforward benefits of excess MCIT and NOLCO, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward benefits of excess MCIT and NOLCO can be utilized, except:
§ where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
§ with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
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The carrying amount of deferred tax assets is reviewed at each reporting period 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 tax assets are reassessed at each reporting period and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted as at reporting date.
Income tax relating to items recognized directly in the consolidated statements of comprehensive income is recognized in the consolidated statements of comprehensive income and not in the consolidated statements of income.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Value-added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT, except:
§ where the tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
§ receivables and payables that are stated with the amount of tax included.
The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of “Other current assets” or “Accounts payable and other current liabilities” accounts in the consolidated balance sheets.
Business Segments The Group is organized and managed separately according to the nature of business. The five major operating businesses of the Group are shopping mall development, retail, real estate development and tourism, hotels and conventions, and financial services and others. These operating businesses are the basis upon which the Group reports its segment information presented in Note 5 to the consolidated financial statements.
Basic/Diluted Earnings Per Common Share (EPS) Basic EPS is computed by dividing the net income for the period attributable to owners of the Parent by the weighted-average number of issued and outstanding common shares during the period, with retroactive adjustment for any stock dividends declared.
For the purpose of computing diluted EPS, the net income for the period attributable to owners of the Parent and the weighted-average number of issued and outstanding common shares are adjusted for the effects of all dilutive potential ordinary shares.
Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed when an inflow of economic benefits is probable.
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Events after the Reporting Period Post year-end events that provide additional information about the Group’s position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.
5. Segment Information
For management purposes, the Group is organized into business units based on their products and services, and has five reportable operating segments as follows: shopping mall development, retail, real estate development and tourism, hotels and conventions, and financial services and others.
The shopping mall development segment develops, conducts, operates and maintains the business of modern commercial shopping centers and all businesses related thereto such as the conduct, operation and maintenance of shopping center spaces for rent, amusement centers, or cinema theaters within the compound of the shopping centers.
The retail segment is engaged in the retail/wholesale trading of merchandise, such as dry goods, wearing apparels, food and other merchandise.
The real estate development and tourism segment is involved in the development and transformation of major residential, commercial, entertainment and tourism districts through sustained capital investments in buildings and infrastructure.
The hotels and conventions segment engages in and carries on the business of hotel and resort and operates and maintains any and all services and facilities incident thereto.
Financial services and others segment primarily includes the Parent Company which engages in asset management and capital investments, and associates which are involved in financial services.
Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with the operating profit or loss in the consolidated financial statements.
Segment assets and liabilities do not include deferred tax assets and deferred tax liabilities, respectively.
Segment revenue includes transfers between business segments. Such transfers are eliminated in the consolidation.
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Business Segment Data
2012
Shopping Mall
Development Retail
Real Estate Development and Tourism
Hotels and Conventions
Financial Services and
Others Eliminations Consolidated (In Thousands)
Revenue: External customers P=25,893,283 P=161,149,617 P=25,465,935 P=1,249,814 P=10,118,625 P=– P=223,877,274 Inter-segment 4,851,195 89,139 6,640,922 6,465 11,891,579 (23,479,300) – P=30,744,478 P=161,238,756 P=32,106,857 P=1,256,279 P=22,010,204 (P=23,479,300) P=223,877,274
Segment results: Income before income tax P=14,288,706 P=9,258,062 P=11,219,643 P=19,808 P=10,061,252 (P=3,901,867) P=40,945,604 Provision for income tax (3,366,560) (2,708,977) (304,969) (15,488) (149,092) – (6,545,086) Net income P=10,922,146 P=6,549,085 P=10,914,674 P=4,320 P=9,912,160 (P=3,901,867) P=34,400,518
Net income attributable to: Owners of the Parent P=10,529,955 P=6,328,141 P=9,295,976 P=2,698 P=9,912,160 (P=11,394,549) P=24,674,381 Non-controlling interests 392,191 220,944 1,618,698 1,622 – 7,492,682 9,726,137
Segment assets (excluding deferred tax) P=151,251,163 P=67,976,666 P=147,573,728 P=1,191,178 P=244,318,016 (P=51,148,888) P=561,161,863
Segment liabilities (excluding deferred tax) P=76,189,733 P=34,237,153 P=56,956,479 P=402,012 P=155,030,432 (P=27,199,737) P=295,616,072
Net cash flows provided by (used in): Operating activities P=17,295,646 P=12,049,628 (P=11,899,885) P=13,715 (P=7,102,048) P=20,609,741 P=30,966,797 Investing activities (21,898,570) (205,184) 3,377,578 (411,333) (25,153,687) (33,268,588) (77,559,784) Financing activities 6,039,565 (8,195,619) 10,324,159 405,000 30,175,999 12,573,192 51,322,296
Other information: Investments in shares of stock
of associates P=– P=90,039 P=11,233,223 P=– P=117,130,482 P=– P=128,453,744 Equity in net earnings (losses)
of associates – (9,961) 759,201 – 8,292,794 – 9,042,034 Capital expenditures 20,710,760 5,642,614 19,257,806 415,671 2,220,767 – 48,247,618 Depreciation and amortization 3,955,642 2,858,638 473,756 122,620 647,215 – 8,057,871 Provision for (reversal of)
impairment losses – – 108,142 – (2,743,711) – (2,635,569)
2011
Shopping Mall
Development Retail
Real Estate Development and Tourism
Hotels and Conventions
Financial Services and
Others Eliminations Consolidated (In Thousands)
Revenue: External customers P=22,267,973 P=150,472,734 P=19,269,290 P=964,227 P=6,941,424 P=– P=199,915,648 Inter-segment 4,658,879 2,883,744 3,499,070 1,130 12,815,388 (23,858,211) – P=26,926,852 P=153,356,478 P=22,768,360 P=965,357 P=19,756,812 (P=23,858,211) P=199,915,648
Segment results: Income (loss) before income tax P=12,220,391 P=8,242,661 P=10,133,163 (P=158,168) P=9,286,422 (P=4,031,827) P=35,692,642 Provision for income tax (2,838,169) (2,360,704) (202,350) (15,501) (82,574) 4,480 (5,494,818) Net income (loss) P=9,382,222 P=5,881,957 P=9,930,813 (P=173,669) P=9,203,848 (P=4,027,347) P=30,197,824
Net income (loss) attributable to: Owners of the Parent P=9,055,996 P=5,809,110 P=9,924,500 (P=173,448) P=9,203,848 (P=12,595,414) P=21,224,592 Non-controlling interests 326,226 72,847 6,313 (221) – 8,568,067 8,973,232
Segment assets (excluding deferred tax) P=131,376,199 P=71,926,765 P=111,560,497 P=1,135,344 P=196,580,640 (P=64,212,031) P=448,367,414
Segment liabilities (excluding deferred tax) P=62,951,059 P=36,123,463 P=38,861,479 P=348,154 P=118,724,932 (P=34,741,869) P=222,267,218
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2011 Net cash flows provided by (used in): Operating activities P=17,863,454 P=7,656,609 (P=6,664,084) (P=1,275,790) P=4,643,410 (P=3,422,186) P=18,801,413 Investing activities (14,946,526) 1,158,138 (5,165,755) (260,063) (271,559) (6,408,165) (25,893,930) Financing activities (4,359,445) (8,154,976) 6,085,058 114,820 (7,183,829) 9,470,498 (4,027,874)
Other information: Investments in shares of stock
of associates P=– P=– P=11,544,914 P=– P=76,872,935 P=– P=88,417,849 Equity in net earnings
of associates – – 522,904 – 5,892,520 – 6,415,424 Capital expenditures 16,641,751 4,219,155 15,912,625 68,687 3,132,553 – 39,974,771 Depreciation and amortization 3,829,971 2,409,174 348,848 122,214 482,893 – 7,193,100 Provision for impairment losses – – 479,657 118 73,611 – 553,386
2010
Shopping Mall
Development Retail
Real Estate Development and Tourism
Hotels and Conventions
Financial Services and
Others Eliminations Consolidated (In Thousands)
Revenue: External customers P=19,288,439 P=138,007,620 P=12,974,162 P=600,679 P=6,058,991 P=– P=176,929,891 Inter-segment 4,273,228 3,110,643 3,043,464 – 10,338,408 (20,765,743) – P=23,561,667 P=141,118,263 P=16,017,626 P=600,679 P=16,397,399 (P=20,765,743) P=176,929,891
Segment results: Income before income tax P=10,796,848 P=8,371,466 P=8,778,124 (P=111,965) P=10,253,381 (P=7,808,852) P=30,279,002 Provision for income tax (2,656,715) (2,429,969) (217,396) (3,663) (104,286) 10,976 (5,401,053) Net income (loss) P=8,140,133 P=5,941,497 P=8,560,728 (P=115,628) P=10,149,095 (P=7,797,876) P=24,877,949
Net income (loss) attributable to: Owners of the Parent P=7,856,348 P=5,783,035 P=8,552,486 (P=116,449) P=10,149,095 (P=13,784,346) P=18,440,169 Non-controlling interests 283,785 158,462 8,242 821 – 5,986,470 6,437,780
Segment assets (excluding deferred tax) P=119,193,199 P=65,302,951 P=94,117,055 P=2,485,527 P=190,577,330 (P=64,868,623) P=406,807,439
Segment liabilities (excluding deferred tax) P=56,069,831 P=30,496,617 P=35,150,201 P=1,525,299 P=116,317,898 (P=34,629,696) P=204,930,150
Net cash flows provided by (used in): Operating activities P=13,913,250 P=6,283,721 P=6,561,292 P=675,210 (P=12,548,272) (P=3,453,710) P=11,431,491 Investing activities (14,382,761) 1,328,401 (10,933,360) (889,640) 11,477,877 1,326,801 (12,072,682) Financing activities 6,402,803 (6,512,363) 16,421,135 1,908,623 3,823,818 2,074,897 24,118,913
Other information: Investments in shares of stock
of associates P=– P=– P=5,900,870 P=– P=64,959,311 P=– P=70,860,181 Equity in net earnings
of associates – – 530,499 – 4,910,327 – 5,440,826 Capital expenditures 11,373,974 4,010,949 15,602,168 25,432 2,808,965 33,821,488 Depreciation and amortization 3,616,926 1,724,578 374,859 57,850 547,039 – 6,321,252 Provision for impairment losses – – 36,108 – 521,428 – 557,536
6. Cash and Cash Equivalents
This account consists of:
2012 2011 (In Thousands)
Cash on hand and in banks (see Note 21) P=6,098,368 P=6,384,567 Temporary investments (see Notes 17 and 21) 54,616,352 49,665,755 P=60,714,720 P=56,050,322
Cash in banks earn interest at the respective bank deposit rates. Temporary 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 temporary investment rates (see Note 24).
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7. Time Deposits and Short-Term Investments
This account consists of:
2012 2011 (In Thousands)
Time deposits: Pledged (see Notes 19 and 21) P=19,498,750 P=20,824,000 Not pledged (see Note 21) 38,203,435 16,595,172 57,702,185 37,419,172 Short-term investments (see Note 21) 821,000 876,800 58,523,185 38,295,972 Less current portion 29,090,335 879,410 Noncurrent portion P=29,432,850 P=37,416,562
A portion of the time deposits amounting to US$475.0 million, with peso equivalents of P=19,498.8 million and P=20,824.0 million as at December 31, 2012 and 2011, respectively, were used as collateral for loans obtained by SMIC (see Note 19).
Short-term investments amounting to US$20.0 million, with peso equivalents of P=821.0 million and P=876.8 million as at December 31, 2012 and 2011, respectively, bear a fixed interest rate of 3.24%.
Interest income earned on time deposits and short-term investments is further discussed in Note 24.
8. Investments Held for Trading and Sale
This account consists of:
2012 2011 (In Thousands)
Investments held for trading - Bonds (see Notes 21 and 29) P=459,343 P=457,496 AFS investments (see Note 11): Bonds and corporate notes (see Notes 21 and 29) 1,733,752 1,000,000 Shares of stock 661,446 482,213 2,395,198 1,482,213 P=2,854,541 P=1,939,709
The Group recognized a gain of P=16.3 million, P=13.4 million and P=5.7 million from fair value adjustments of investments held for trading for the years ended December 31, 2012, 2011 and 2010 respectively. The amounts are included under “Gain on sale of available-for-sale investments and fair value changes on investments held for trading - net” account in the consolidated statements of income. Interest income earned on investments held for trading and sale is further discussed in Note 24.
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9. Receivables
This account consists of:
2012 2011 (In Thousands)
Trade: Real estate buyers P=23,373,079 P=13,833,732 Third-party tenants 3,123,358 2,623,529 Related-party tenants (see Note 21) 1,512,842 1,267,728 Due from related parties (see Note 21) 2,465,971 2,684,558 Management fees: Related parties (see Note 21) 154,172 95,892 Third parties – 3,942 Dividends 292,917 42,015 Total 30,922,339 20,551,396 Less allowance for impairment loss 155,274 47,132 30,767,065 20,504,264 Less noncurrent portion of receivables from
real estate buyers (see Note 16) 14,401,513 8,739,412 Current portion P=16,365,552 P=11,764,852
The terms and conditions of the above receivables are as follows:
§ Trade receivables from tenants and management fee receivables are noninterest-bearing and are normally collectible on a 30 to 90 days’ term. Receivables from real estate buyers mainly consist of receivables subject to financing from banks and other financial institutions with interest at market rates ranging from 13% to 18% per annum and normally collectible on a 3 to 5 years’ term.
§ The terms and conditions relating to related party receivables are further discussed in Note 21.
§ Dividends receivables are noninterest-bearing and are normally collectible within the next financial year.
The movements in allowance for impairment loss are as follows:
2012 2011 (In Thousands)
Balance at beginning of year P=47,132 P=12,476 Reversal of provision – (1,162) Provision for the year (see Note 23) 108,142 35,818 Balance at end of year P=155,274 P=47,132
Allowance for impairment loss amounting to P=155.3 million and P=47.1 million as at December 31, 2012 and 2011, respectively, pertains to receivables from real estate buyers and tenants which were identified through specific assessment.
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The aging analysis of receivables as at December 31, 2012 and 2011 are as follows: 2012
Neither Past Due nor Impaired
Past Due but not Impaired Individually 31–90 Days 91–120 Days Over 120 Days Impaired Total
(In Thousands)
Trade: Real estate buyers: Current P=8,569,352 P=83,106 P=28,886 P=147,315 P=142,907 P=8,971,566 Noncurrent 14,401,513 – – – 14,401,513 Related-party tenants 1,512,842 – – – – 1,512,842 Third-party tenants 3,110,175 390 426 – 12,367 3,123,358 Due from related parties 2,465,971 – – – – 2,465,971 Management fees- Related parties 154,172 – – – – 154,172 Dividends 292,917 – – – – 292,917 Net receivables before allowance
for doubtful accounts P=30,506,942 P=83,496 P=29,312 P=147,315 P=155,274 P=30,922,339
2011
Neither Past Due nor Impaired
Past Due but not Impaired Individually 31–90 Days 91–120 Days Over 120 Days Impaired Total
(In Thousands)
Trade: Real estate buyers: Current P=4,862,273 P=44,111 P=21,834 P=130,402 P=35,700 P=5,094,320 Noncurrent 8,739,412 – – – 8,739,412 Related-party tenants 1,267,719 – 9 – – 1,267,728 Third-party tenants 2,606,027 995 5,075 – 11,432 2,623,529 Due from related parties 2,684,558 – – – – 2,684,558 Management fees: Related parties 95,892 – – – – 95,892 Third parties 3,942 – – – – 3,942 Dividends 42,015 – – – – 42,015 Net receivables before allowance
for doubtful accounts P=20,301,838 P=45,106 P=26,918 P=130,402 P=47,132 P=20,551,396
Receivables, other than those identified as impaired, are assessed by the Group’s management as good and collectible.
10. Other Current Assets
This account consists of:
2012 2011 (In Thousands)
Non-trade receivables P=4,252,786 P=2,673,412 Prepaid taxes and other prepayments 5,295,701 3,785,637 Advances to contractors 3,374,278 3,098,881 Condominium units for sale (see Note 15) 2,670,943 1,115,878 Receivable from banks and credit cards 2,352,836 2,083,278 Input tax 1,704,159 1,019,280 Accrued interest receivable 1,174,785 966,503 Club shares for sale 824,213 856,208 Supplies and uniform inventory 474,146 474,803 Treasury bonds (see Note 16) 200,000 – Derivative assets (see Notes 28 and 29) 18,501 – Advances for project development (see Note 21) 1,121,565 1,121,565 23,463,913 17,195,445 Less allowance for impairment loss 5,705 5,705 P=23,458,208 P=17,189,740
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§ Non-trade receivables include interest-bearing advances to third parties, which are normally collectible within the next financial year.
§ Receivable from banks and credit cards are noninterest-bearing and are normally collectible on a 30 to 90 day’s term.
§ Accrued interest receivable relates mostly to time deposits which will be collected at respective maturity dates.
§ Advances for project development mostly pertain to advances made to related parties for the acquisition of land for future development.
§ Club shares for sale pertain to club shares of Pico de Loro Beach and Country Club (Pico de Loro) which Costa, a subsidiary of Mt. Bliss, received as consideration for the parcel of land and construction costs of the beach and country club. The club shares entitle its holders to proprietary club membership in Pico de Loro’s beach and country club facilities. Costa’s club shares for sale had a total of 6,919 and 7,055 as at December 31, 2012 and 2011, respectively.
On the other hand, at various dates in 2012, 2011 and 2010, Costa sold 135, 202 and 696 club shares for a total consideration of P=70.8 million, P=105.0 million and P=320.6 million, respectively. Revenue from the sale of club shares recognized under “Sales - real estate and others” account in the statements of consolidated income amounted to P=32.9 million, P=48.3 million and P=127.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.
§ Allowance for impairment loss amounting to P=5.7 million as at December 31, 2012 and 2011, pertains to nontrade receivables which were identified through specific assessment. There was no additional impairment loss identified based on the collective assessments made in 2012, 2011 and 2010.
11. Available-for-Sale Investments
This account consists of investments in:
2012 2011 (In Thousands)
Shares of stock: Listed P=11,516,716 P=7,031,822 Unlisted 102,120 102,265 Bonds and corporate notes (see Note 21) 7,728,240 6,841,109 Club shares 5,900 5,330 19,352,976 13,980,526 Less allowance for impairment loss 45,132 45,132 19,307,844 13,935,394 Less current portion (see Note 8) 2,395,198 1,482,213 Long-term portion P=16,912,646 P=12,453,181
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§ Listed shares of stock of the Group pertain to investments in publicly-listed companies. These are measured at the quoted market price of the shares. A portion of these investments amounting to P=3,587.0 million and P=2,159.8 million as at December 31, 2012 and 2011, respectively, were pledged as collateral for a portion of the Group’s long-term loans (see Note 19).
§ Unlisted shares of stock of the Group pertain to stocks of private corporations. These are classified as AFS investments and are carried at cost since fair value cannot be reliably estimated due to lack of reliable estimates of future cash flows and discount rates necessary to calculate the fair value. There is currently no market for these investments and the Group intends to hold them for the long-term.
§ Investments in bonds and corporate notes as at December 31, 2012 and 2011 include third party convertible bonds and corporate notes with fixed interest rates ranging from 2.5% to 8.25%. These investments will mature on various dates from February 11, 2013 to November 3, 2017.
The account includes investment in redeemable preferred shares issued in 2010 by a domestic corporation with an annual dividend rate of 8.25% and SM Prime’s investment in corporate notes issued by BDO Unibank, Inc. (BDO) in 2012 and 2011with fixed interest rate of 6.80% (see Note 21). The preferred shares have preference over the issuer’s common shares in the payment of dividends and in the distribution of assets in case of dissolution and liquidation. The outstanding investment in redeemable preferred shares as at December 31, 2010 was redeemed in 2011 at par value. Investments in corporate notes are intended to meet short-term cash requirements.
Investment in convertible bonds as at December 31, 2012 and 2011 have embedded derivatives which are further discussed in Note 29.
The movements in net unrealized gain on AFS investments and share in unrealized gain of associates attributable to the owners of the Parent which are recognized in other comprehensive income for the years ended December 31, 2012 and 2011 are as follows:
2012 2011 (In Thousands)
Balance at beginning of year P=7,008,067 P=6,798,095 Share in net unrealized gain on AFS
investments of associates (see Note 12) 1,486,257 440,127 Gain (loss) due to changes in fair value
of AFS investments 3,224,165 (199,308) Transferred to consolidated statements of income 70 (30,847) Balance at end of year P=11,718,559 P=7,008,067
Gain (loss) on disposal of AFS investments recognized under “Gain on sale of available-for-sale investments and fair value changes on investments held for trading - net” account in the consolidated statements of income amounted to (P=0.1) million for the year ended December 31, 2012, P=30.8 million for the year ended December 31, 2011 and P=481.3 million for the year ended December 31, 2010. The amounts are exclusive of the share of non-controlling interests.
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12. Investments in Shares of Stock of Associates
The details of and movements in this account are as follows:
2012 2011 (In Thousands)
Acquisition cost: Balance at beginning of year P=66,416,206 P=54,114,191 Additions 28,361,006 12,590,225 Disposals – net of realized deferred gain (1,937,089) (288,210) Balance at end of year 92,840,123 66,416,206 Accumulated equity in net earnings: Balance at beginning of year 26,319,348 21,113,648 Equity in net earnings 9,042,034 6,415,424 Dividends received (418,470) (1,583,351) Accumulated equity in net earnings
of investments sold (68,587) (66,500) Balance at end of year 34,874,325 25,879,221 Share in net unrealized gain on AFS
investments of associates (see Note 11) 1,514,343 440,127 Allowance for impairment loss: Balance at beginning of year 4,317,705 4,367,658 Recovery (see Note 23) (3,542,658) (445,000) Additions (see Note 23) – 395,047 Balance at end of year 775,047 4,317,705 P=128,453,744 P=88,417,849
The Group recognized its share in the net gain on AFS investments of the associates amounting to P=1,491.8 million, P=440.1 million and P=2,065.1 million, inclusive of the share of the non-controlling interests amounting to P=28.1 million, P=15.3 million and P=69.0 million, respectively, for the years ended December 31, 2012, 2011 and 2010, respectively, in the consolidated statements of comprehensive income.
In 2011 and 2010, the Group recognized allowance for impairment loss in investment in Highlands Prime, Inc. (HPI) amounting to P=395.0 million and P=380.0 million, respectively, and is included under “Provision for (reversal of) impairment loss and others” under “Selling, general and administrative expenses” account in the consolidated statements of income (see Note 23). The allowance recognized by the Group was based on fair value less cost to sell of the investment in reference to the quoted stock price in the market.
In 2012 and 2011, the Group reversed the allowance for impairment loss in investment in BDO amounting to P=3,542.7 million and P=445.0 million, respectively, and is included under “Provision for (reversal of) impairment loss and others” under “Selling, general and administrative expenses” account in the consolidated statements of income (see Note 23). The Group made a reassessment of its investments in shares of stock of BDO and concluded that the impairment is no longer necessary in reference to the quoted stock price of BDO in the market.
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The major associates of the Group are as follows:
Percentage of Ownership 2012 2011 Company Gross Effective Gross Effective Principal Activities BDO 48 47 47 46 Financial services China Banking Corporation
(China Bank) 23 21 23 21 Financial services Atlas 29 29 18 18 Mining Belle Corp. (Belle) 32 18 46 26 Real estate development and tourism HPI 35 27 35 27 Real estate development and tourism Summerhills Home Development
Corporation (SHDC) 49 21 49 21 Real estate development and tourism Sodexo Motivation Solutions
Philippines, Inc. 40 40 40 40 Retail Fast Retailing Philippines, Inc. 25 25 – – Retail
Atlas
Finalization of 2011 Provisional Accounting In July 2011, SMIC acquired 316.2 million common shares of Atlas for US$142.2 million (P=5,996.6 million) representing 17.9% equity interest. In 2011, the Group accounted for the purchase price allocation on provisional basis, pending the information on the fair value of Atlas’ net assets. The fair values of the net assets acquired were finalized in June 2012 and goodwill from the acquisition formed part of the cost of investment in shares of stock of Atlas.
SMIC has three representations in the BOD of Atlas as at December 31, 2011 and is participating in operational decisions. Based on these facts and circumstances, management determined that the Group has significant influence in Atlas and therefore has accounted it as an investment in associate.
Convertible Loan of Atlas On February 29, 2012, SMIC purchased from BDO the P=5,492.7 million convertible loan covered by Secured Notes Facility Agreement (the Agreement) between Atlas and BDO dated July 25, 2011. On May 21, 2012, SMIC gave an irrevocable notice to fully exercise the conversion option under the Agreement as the assignee of BDO. On July 13, 2012, upon completion of the necessary regulatory approval, the shares were issued to SMIC resulting to an increase in ownership in Atlas from 17.9% to 28.4%. The goodwill resulting from the acquisition formed part of the cost of investment in shares of stock of Atlas.
Belle In 2010, the Group obtained 17.53% additional ownership in Belle for a total consideration of P=1,598.3 million. The acquisition resulted in Belle becoming an associate of the Group at 24.77% and 13.24% gross and effective ownership, respectively, as at December 31, 2010.
In April 2011, the Group, increased its ownership interest in Belle, an associate, by 20.78% and 12.58% gross and effective ownership, respectively, via share swap wherein the entire outstanding shares of Premium Leisure Amusement, Inc. (a subsidiary) was exchanged for certain number of common shares of Belle valued at P=1.95 per share (shares swap). The valuation of the PLAI shares was made by an independent appraiser and approved by the SEC on October 6, 2010. This is the same valuation used in recording the share swap transaction in its 2011 financial statements upon receipt of the approval from the Bureau of Internal Revenue on March 31, 2011 and issuance of stock certificates by Belle on April 14, 2011. The transaction resulted to a net gain on share swap amounting to P=2,604.2 million, net of the eliminated portion of the gain pertaining to the retained interest of the Group in Belle and is recognized under “Gain on disposal of investments
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and properties - net” account in the consolidated statements of income. The Group will realize the deferred income as the investment in the associate is disposed.
At various dates in 2012, the Group sold 1,509.0 million Belle shares on which the Group realized P=811.2 million of the deferred gain and was recognized under “Gain on disposal of investments and properties - net” account in the consolidated statements of income. The remaining balance of the deferred gain as at December 31, 2012 amounted to P=1,076.4 million. The disposal of Belle shares resulted to a decrease in the Group’s direct and effective ownership to 32% and 18%, respectively.
BDO In 2010, SMIC and a related party under common stockholder entered into a deed of assignment whereby the related party cedes, transfers, conveys and assigns to the Company, all commercial rights of the related party's investment in BDO amounting to P=5,712.0 million.
At various dates in 2010, SMIC disposed a total of 5.3 million BDO common shares, which is equivalent to 0.2% of the total outstanding common stock of BDO at an average price of P=28.63 a share or for a total cost of P=151.8 million.
In April 2010, Primebridge and MRDC disposed a total of 21.5 million BDO common shares, which is equivalent to 0.8% of the total outstanding common stock of BDO at an average price of P=22.65 a share or for a total cost of P=486.2 million.
In March 2012, BDO declared a stock dividend equivalent to 3% of the outstanding capital stock of BDO which increased the number of common and preferred shares held by the Group by 40.5 million and 3.6 million, respectively. The declaration of the stock dividend by BDO increased the ownership interest of the Group by 1% as a result of the preferred shares held by SMIC.
In June 2012, BDO had a stock rights offering which entitled each eligible stockholder to subscribe to one common share for every three common shares held as at record date at an offer price of P=48.6 per rights share. As at June 30, 2012, the Group exercised its rights share and paid P=22,528.7 million equivalent to 463.5 million BDO shares. Upon completion of the regulatory requirements by BDO, the shares were issued to SMIC on July 4, 2012.
At various dates in 2012, SMIC sold a total number of 1.2 million BDO shares, equivalent to 0.04% of the total outstanding voting shares of BDO at a total cost of P=39.0 million.
HPI In 2011, the Group disposed 134.8 million shares of HPI for a total cost of P=288.2 miliion. The disposal resulted in a gain of P=1.0 million, which is included under “Gain on disposal of investments and properties - net” account in the consolidated statements of income.
China Bank At various dates in 2010, SMDC disposed a total of 0.09 million China Bank shares, which is equivalent to 0.08% of the total outstanding common stock of China Bank, at an average price of P=340.8 a share or for a total cost P=31.1 million.
On August 24, 2012, SEC approved the Amended Articles of Incorporation of China Bank to effect a ten-for-one stock split of the common shares. This resulted to an increase in the number of shares from 200 million to 2,000 million, and a reduction in par value of shares from P=100.00 to
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P=10.00 per share. The stock split by China Bank did not result to a change in the ownership interest of the Group.
SHDC In 2011, SMDC obtained 49% and 21% gross and effective ownership, respectively, in SHDC for a total consideration of P=20.1 million. Consequently, SHDC became an associate of the Group. Fast Retailing Philippines, Inc. In January 2012, Marketwatch Investments Co., Inc., a subsidiary of SM Retail, invested P=100.0 million to acquire 25% ownership of the total outstanding shares of Fast Retailing Philippines, Inc. accounted as an investment in an associate. The entity is organized with Fast Retailing (Singapore) Co. Ltd. to engage in the retail/wholesale trading of merchandise, such as dry goods, wearing apparels and other merchandise, cosmetics, skin care and hair care products and other related products under the brand name “Uniqlo”.
The condensed financial information of significant associates is shown below:
2012 2011 2010
(In Millions) BDO: Total resources P=1,244,408 P=1,097,349 Total liabilities 1,087,156 1,000,387 Interest income 54,014 50,467 P=49,930 Interest expense 17,816 16,688 15,772 Net income 14,432 10,588 8,881 China Bank: Total resources 322,021 262,213 Total liabilities 283,030 222,924 Interest income 13,164 12,677 13,213 Interest expense 5,104 4,125 4,580 Net income 5,034 5,009 5,004 HPI: Total assets 4,038 4,661 Total liabilities 1,284 1,937 Revenue from real estate sales 521 331 427 Cost of real estate sold 284 164 230 Net income (loss) 32 (35) 8 Belle: Total assets 25,461 22,644 Total liabilities 8,849 6,568 Revenue 421 697 1,263 Cost of real estate and club shares
sold 117 236 509 Net income 555 200 478 Atlas: Total assets 57,913 46,923 Total liabilities 22,354 19,933 Revenue 14,459 12,128 8,851 Cost of sales 8,679 7,759 6,815 Net income (loss) 3,434 17,223 (431)
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As at December 31, the fair values of investments in associates which are listed in the PSE are as follows:
2012 2011 (In Thousands)
BDO P=134,986,770 P=80,928,951 China Bank 15,987,281 10,594,301 Belle 16,268,509 24,670,664 Atlas 11,272,094 5,325,521 HPI 1,575,258 1,036,979
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13. Property and Equipment
The movements in this account are as follows:
Land
Buildings, Condominium
Units and Improvements
Store Equipment and Improvements
Data Processing Equipment
Furniture, Fixtures
and Office Equipment
Machinery and
Equipment Leasehold
Improvements Transportation
Equipment Construction
in Progress Total
(In Thousands)
Cost Balance as at December 31, 2010 P=2,945,232 P=4,534,292 P=6,638,725 P=3,253,276 P=3,050,238 P=2,424,501 P=2,629,192 P=626,380 P=699,668 P=26,801,504 Additions 26,970 118,732 784,783 635,960 620,339 507,700 1,188,675 258,957 648,946 4,791,062 Reclassifications 1,893 2,549 (615,945) 317,809 (186,048) (120,348) (61,331) (3,365) (383,445) (1,048,231) Disposals/retirements – (1) (86,520) (74,484) (27,304) (10,407) (43) (301,378) – (500,137) Balance as at December 31, 2011 2,974,095 4,655,572 6,721,043 4,132,561 3,457,225 2,801,446 3,756,493 580,594 965,169 30,044,198 Additions 183,851 1,594,292 1,119,843 428,180 767,679 690,525 1,180,589 38,469 611,142 6,614,570 Reclassifications (744,956) 764,325 (115,484) 141,191 (184,867) (23,739) 87,977 6,043 (329,884) (399,394) Disposals/retirements – (2,644,901) (148,498) (163,128) (57,536) (99,186) (35,118) (31,879) (11,474) (3,191,720) Balance as at December 31, 2012 P=2,412,990 P=4,369,288 P=7,576,904 P=4,538,804 P=3,982,501 P=3,369,046 P=4,989,941 P=593,227 P=1,234,953 P=33,067,654
Accumulated Depreciation and Amortization Balance as at December 31, 2010 P=– P=2,262,529 P=4,544,869 P=2,394,063 P=1,300,562 P=1,454,709 P=1,172,404 P=303,829 P=– P=13,432,965 Depreciation and amortization – 246,322 713,596 418,680 427,925 296,607 533,033 47,467 – 2,683,630 Reclassifications – (582) (598,186) (31,281) (106,226) (115,046) (88,726) (2,934) – (942,981) Disposals/retirements – – (85,128) (41,815) (26,695) (1,306) – (66,826) – (221,770) Balance as at December 31, 2011 – 2,508,269 4,575,151 2,739,647 1,595,566 1,634,964 1,616,711 281,536 – 14,951,844 Depreciation and amortization – 381,307 825,626 493,886 500,992 387,047 706,389 52,514 – 3,347,761 Reclassifications – (127,122) (236,144) (3,049) (42,307) (53,726) 32,125 (99) – (430,322) Disposals/retirements – (1,535,720) (154,118) (120,030) (50,391) (90,035) (18,228) (19,624) – (1,988,146) Balance as at December 31, 2012 P=– P=1,226,734 P=5,010,515 P=3,110,454 P=2,003,860 P=1,878,250 P=2,336,997 P=314,327 P=– P=15,881,137
Net Book Value As at December 31, 2012 P=2,412,990 P=3,142,554 P=2,566,389 P=1,428,350 P=1,978,641 P=1,490,796 P=2,652,944 P=278,900 P=1,234,953 P=17,186,517 As at December 31, 2011 P=2,974,095 P=2,147,303 P=2,145,892 P=1,392,914 P=1,861,659 P=1,166,482 P=2,139,782 P=299,058 P=965,169 P=15,092,354
As at December 31, 2012 and 2011, the Group has no idle property and equipment and the carrying amount of fully depreciated property and equipment still in use amounted to P=4,644.3 million and P=4,148.3 million, respectively.
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14. Investment Properties
The movements in this account are as follows:
Land and Improvements and
Land Use Rights Buildings and Improvements
Building Equipment,
Furniture and Others
Construction in Progress Total
(In Thousands)
Cost Balance as at December 31, 2010 P=27,302,498 P=84,785,047 P=15,973,989 P=12,828,906 P=140,890,440 Additions 2,606,363 2,762,132 932,825 14,839,591 21,140,911 Reclassifications 508,106 6,742,227 549,958 (7,138,201) 662,090 Translation adjustment 153,159 387,953 64,394 186,433 791,939 Disposals – (6,113) – (48,474) (54,587) Balance as at December 31, 2011 30,570,126 94,671,246 17,521,166 20,668,255 163,430,793 Additions 4,766,518 10,150,742 2,907,309 10,107,534 27,932,103 Reclassifications (186,572) 7,850,434 1,260,406 (13,493,898) (4,569,630) Translation adjustment (159,893) (611,091) (71,572) (220,612) (1,063,168) Balance as at December 31, 2012 P=34,990,179 P=112,061,331 P=21,617,309 P=17,061,279 P=185,730,098
Accumulated Depreciation, Amortization and Impairment Loss
Balance as at December 31, 2010 P=1,123,236 P=18,075,582 P=8,024,378 P=– P=27,223,196 Depreciation and amortization 46,470 3,186,275 1,276,725 – 4,509,470 Reclassifications – 217,003 – – 217,003 Impairment loss – – – 123,564 123,564 Translation adjustment 7,731 51,228 22,690 – 81,649 Balance as at December 31, 2011 1,177,437 21,530,088 9,323,793 123,564 32,154,882 Depreciation and amortization 72,584 3,229,407 1,408,119 – 4,710,110 Reclassifications (323,275) (664,505) (179) – (987,959) Translation adjustment (10,232) (76,254) (31,139) – (117,625) Balance as at December 31, 2012 P=916,514 P=24,018,736 P=10,700,594 P=123,564 P=35,759,408
Net Book Value As at December 31, 2012 P=34,073,665 P=88,042,595 P=10,916,715 P=16,937,715 P=149,970,690 As at December 31, 2011 P=29,392,689 P=73,141,158 P=8,197,373 P=20,544,691 P=131,275,911
The movements in allowance for impairment loss on land and improvements and land use rights, and construction in progress are as follows:
2012 2011 (In Thousands)
Beginning balance P=923,272 P=799,708 Provision for the year (see Note 23) – 123,564 Ending balance P=923,272 P=923,272
The fair values of investment properties as at December 31, 2011 were determined by independent appraisers based on various appraisal reports made in 2010, which amounted to P=291,671.9 million. The fair value, which is based on market data approach, represents the amount at which the assets can be exchanged between a knowledgeable, willing seller and a knowledgeable, willing buyer in an arm’s-length transaction at the date of valuation in accordance with International Valuation Standards.
Included under “Land” account are the 212,119 square meters and 223,474 square meters of real estate properties with a carrying value of P=447.0 million and P=474.0 million as at December 31, 2012 and 2011, respectively, and a fair value of P=13,531.0 million as at August 2007. The land was planned for residential development in accordance with the cooperative contracts entered into by Mega Make Enterprises Limited and Affluent Capital Enterprises Limited (Oriental Land) with Grand China and Oriental Land Development Limited on March 15, 2007. The value of these real estate properties was not part of the consideration paid
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by SM Prime of P=10,827.0 million to Grand China and Oriental Land. Accordingly, the assets were recorded at carrying values under “Investment properties” account and a corresponding liability equivalent to the same amount is shown as part of “Tenants’ deposits and others” account in the consolidated balance sheets.
Portions of investment properties located in China with carrying value of P=4,852 million and P=3,896 million as at December 31, 2012 and 2011, respectively, and estimated fair value of P=10,874 million and P=13,541 million as at December 31, 2012 and 2011, respectively, were mortgaged as collaterals to secure the domestic borrowings in China (see Note 19).
Rent income from investment properties, which is primarily attributable to SM Prime, amounted to P=24,155.6 million, P=20,472.8 million and P=17,904.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. Consolidated direct operating expenses from investment properties which generate income amounted to P=13,995.2 million, P=12,277.5 million and P=11,271.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Construction in progress account includes shopping mall complex under construction of SM Prime. In 2012, Shopping Mall Complex under construction mainly pertains to costs incurred for the development of SM Aura Premier, SM City BF-Paranaque, SM Seaside City Cebu, SM Tianjin and SM Zibo and the ongoing expansions and renovations of SM City Bacolod, SM City Clark, SM City Dasmarinas, SM City Sta. Rosa and SM Megamall. In 2011, shopping mall complex under construction mainly pertains to costs incurred for the development of SM San Fernando, SM Olongapo, SM Consolacion Cebu, SM General Santos, SM Lanang Davao, SM Taguig, SM Chongqing, SM Zibo and SM Tianjin.
Shopping mall complex under construction includes cost of land amounting to P=1,615.0 million and P=1,575.0 million as at December 31, 2012 and 2011, respectively.
Construction contracts with various contractors related to the construction of the above-mentioned projects amounted to P=53,964.0 million and P=39,240.0 million as at December 31, 2012 and 2011, respectively, inclusive of overhead, cost of labor and materials and all other costs necessary for the proper execution of the works. The outstanding contracts as at December 31, 2012 and 2011 are valued at P=14,393.0 million and P=10,268.0 million, respectively.
Interest capitalized to shopping mall complex under construction amounted to P=114.4 million and P=54.3 million in 2012 and 2011, respectively. Capitalization rates used were 6.13% and 5.71% in 2012 and 2011, respectively.
15. Land and Development and Condominium Units for Sale
This account consists of the following:
2012 2011 Condominium units for sale P=2,670,943 P=1,115,878 Land and development 30,197,862 23,012,453 P=32,868,805 P=24,128,331
Land and development, which amounted to P=30,197.9 million and P=23,012.5 million as at December 31, 2012 and 2011, respectively, include land and cost of ongoing condominium projects.
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Condominium units for sale amounting to P=2,670.9 million and P=1,115.9 million as at December 31, 2012 and 2011, respectively, pertain to completed projects of SMDC, Costa and ICDC. The amounts were included under “Other current assets” account in the consolidated balance sheets (see Note 10).
The movements in “Condominium units for sale” account are as follows:
2012 2011 At beginning of year P=1,115,878 P=1,531,486 Transfer from land and development 2,624,448 – Additions 89,698 165,613 Recognized as real estate sold (1,159,081) (581,221) At end of year P=2,670,943 P=1,115,878
The movements in “Land and development” account are as follows:
2012 2011 At the beginning of year P=23,012,453 P=19,703,595 Land acquired during the year 4,909,701 4,394,807 Development cost incurred 15,384,282 9,363,199 Borrowing cost capitalized 1,003,610 411,743 Recognized as real estate sold (11,204,375) (10,571,767) Transfer to condominium units for sale (2,624,448) – Transfer to property and equipment (see Note 13) (208,897) (289,124) Transfer to investment property (see Note 14) (74,464) – At end of year P=30,197,862 P=23,012,453
The condominium units for sale and land and development are stated at cost as at December 31, 2012 and 2011.
Borrowing costs capitalized by the Group to land and development account amounted to P=1,003.6 million and P=411.7 million in 2012 and 2011, respectively. The average rates used to determine the amount of borrowing costs eligible for capitalization range from 3.3% to 8.3% in 2012 and 3.7% to 7.5% in 2011. Interest expense charged to operations amounted to P=469.0 million, P=488.3 million and P=311.3 million in 2012, 2011 and 2010, respectively.
SMDC Land and development costs attributable to SMDC pertain to the ongoing residential condominium projects. Estimated cost to complete the projects amounted to P=29,012.9 million and P=30,587.9 million as at December 31, 2012 and 2011, respectively.
In 2012, SMDC acquired GLC, LLCI and MSDPC for P=1,500.0 million, P=600.0 million and P=498.4 million, respectively, and became its wholly owned subsidiaries. The purchase of GLC, LLCI and MSDPC was accounted for as an acquisition of asset. At acquisition date, these subsidiaries own parcels of land which are to be developed into commercial/residential condominium projects.
In 2011, SMDC acquired TTFOPI for P=195.6 million and became a wholly owned subsidiary. The purchase of TTFOPI was accounted for as an acquisition of asset. TTFOPI owns a parcel of land which is currently being developed into a commercial/residential condominium project.
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In 2010, SMDC acquired VLI for P=566.6 million and became its wholly owned subsidiary. The purchase of VLI was accounted for as an acquisition of asset. VLI owns a parcel of land which will be developed into a commercial/residential condominium project.
On June 30, 2004, SMDC entered into a Joint Venture Agreement with Government Service Insurance System (GSIS) for the development of a residential condominium project on a parcel of land owned by GSIS. As at December 31, 2012, the development of the said project has not yet started.
Costa Costa’s construction projects located at Hamilo Coast in Nasugbu, Batangas consist of condominium buildings and beach and country club. As at December 31, 2012, Costa completed the construction of four condominium projects and the beach and country club. Total estimated cost to complete the ongoing projects amounted to P=113.9 million and P=283.8 million as at December 31, 2012 and 2011, respectively.
In April 2010, the construction of Pico de Loro by Costa was completed but the ownership of the risk and rewards of the beach and country club was transferred to Pico de Loro in June 2010. The total actual cost of beach and country club, in exchange for a total of 4,000 club shares amounted to P=1,128.2 million as at December 31, 2010.
16. Intangibles and Other Noncurrent Assets
Intangibles This account consists of:
2012 2011 (In Thousands)
Goodwill P=9,321,057 P=9,321,057 Less accumulated impairment loss 91,619 91,619 Net book value 9,229,438 9,229,438 Trademarks and brand names 6,124,762 6,124,762 P=15,354,200 P=15,354,200
Goodwill is allocated to SM Prime, SM Land, Pilipinas Makro, Inc. (PMI), Supervalue, Inc. (SVI) and Super Shopping Market, Inc. (SSMI) as separate cash generating units. Trademarks and brand names pertain to that of the supermarket and hypermarket business of the Group which were acquired in a business combination in 2006. The trademarks and brand names were assessed to have an indefinite life and was valued using the Relief-from-Royalty Method. The royalty rate was 3.5%, which was the prevailing royalty rate in 2006 in the retail assorted category where the two entities fall.
The recoverable amount of goodwill, trademarks and brand names have been determined using the cash flow projections based on the financial budgets approved by senior management covering a three-year period. The calculation of value-in-use is most sensitive to pre-tax discount rates. The pre-tax discount rates applied to cash flow projections ranged from 6.61% to 9.14% and 8.18% to 10.82% as at December 31, 2012 and 2011, respectively. The discount rates were determined based on the yield of ten-year government bonds at the beginning of the forecasted year. Discount rates reflect the current market assessment of the risks to each cash generating unit and were estimated based on the average percentage of weighted average cost of capital for the industry.
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The rate was further adjusted to reflect the market assessment of any risk specific to the cash-generating unit for which future estimates of cash flows have not been adjusted. Management assessed that no reasonable possible change in pre-tax discount rates and future cash inflows would cause the carrying value of goodwill, trademarks and brand names in 2012 and 2011 to materially exceed its recoverable amount.
Other Noncurrent Assets This account consists of:
2012 2011 (In Thousands)
Receivables from real estate buyers (see Note 9) P=14,401,513 P=8,739,412 Deposits and advance rentals 8,149,028 5,030,882 Advances for project development (see Note 21) 1,962,578 – Deferred input VAT 962,629 380,994 Defined benefit asset (see Note 25) 452,910 394,713 Long-term notes (see Note 21) 306,724 506,724 Derivative assets (see Notes 28 and 29) 109,979 159,461 Receivable from a related party and escrow
fund (see Note 21) 98,996 8,195,691 Treasury bonds (see Note 10) – 200,000 Others 1,322,879 476,538 P=27,767,236 P=24,084,415
§ Deposits and advance rentals substantially pertain to the lease agreements entered into by SM Prime for certain parcels of land where some of its malls are constructed. The lease agreements provide that the security deposits will be applied to future rentals. Consequently, the said deposits and advance rentals are not remeasured at amortized cost.
§ Long-term notes pertain to unquoted and unsecured subordinated debt instruments which carry fixed interest rates per annum ranging from 7.0% to 8.50% as at December 31, 2012 and 2011. The P=200.0 million will mature on November 21, 2017, P=88.6 million will mature on May 29, 2018 and the remaining P=218.1 million will mature on March 20, 2019. In November 2012, the Group received a full payment from BDO for the early redemption of the long-term note amounting to P=200.0 million.
§ Treasury bonds pertain to quoted Philippine government treasury bonds classified as held-to-maturity investment which bear fixed interest rates ranging from 8.5% to 9.0% and payable quarterly. The P=200.0 million treasury bonds will mature on July 31, 2013.
§ In 2009, various cash advances were provided to a related party for payment of interest, purchase of shares and other operating requirements totaling to P=6,000.0 million, which bears a fixed interest of 7.0%, payable semi-annually and will mature in 2013 (see Note 21). At various dates in 2012, the cash advances were prepaid by the related party.
Escrow fund amounting to P=99.0 million and P=2,195.7 million as at December 31, 2012 and 2011, respectively, pertains mainly to the amounts deposited in the account of an escrow agent as required by the Housing and Land Use Regulatory Board (HLURB) in connection with SMDC’s temporary license to sell prior to HLURB’s issuance of a license to sell and certificate of registration.
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17. Bank Loans
This account consists of:
2012 2011 (In Thousands)
Parent Company: U.S. dollar-denominated loans P=2,052,500 P=3,857,920 Peso-denominated loans 11,783,400 15,500,000 Subsidiaries - Peso-denominated loans 17,958,075 6,390,000 P=31,793,975 P=25,747,920
The U.S. dollar-denominated loans amounting to US$50 million (P=2,052.5 million) and US$88.0 million (P=3,857.9 million) as at December 31, 2012 and 2011, respectively, bear interest at 3-month London Inter-Bank Offered Rate (LIBOR) plus margin (see Note 28). The peso-denominated loans bear annual interest rates ranging from 3.25% to 5.00% and 3.60% to 4.26% in 2012 and 2011, respectively. These loans have maturities of less than one year (see Note 21).
18. Accounts Payable and Other Current Liabilities
This account consists of:
2012 2011 (In Thousands)
Trade P=34,304,241 P=28,639,479 Payable arising from acquisition of land 6,100,508 3,116,058 Due to related parties (see Note 21) 3,265,015 2,734,415 Accrued interest (see Notes 17, 19 and 21) 2,537,777 1,702,660 Derivative liabilities (see Notes 28 and 29) 2,493,651 124,222 Payable to government agencies 2,334,796 1,426,230 Nontrade 2,276,078 2,078,768 Gift checks redeemable and others 2,672,556 2,088,702 Accrued expenses (see Note 21) 1,881,254 1,738,068 Subscriptions payable – 1,101,205 P=57,865,876 P=44,749,807
The terms and conditions of the above liabilities follow:
§ Trade payables primarily consist of liabilities to suppliers and contractors, which are noninterest-bearing and are normally settled on a 30 to 60 days’ term.
§ Payable arising from, nontrade payables, accrued interest and others are expected to be settled within the next financial year.
§ Payable arising from acquisition of land is expected to be settled within one to three years.
§ The terms and conditions relating to due to related parties are discussed in Note 21.
§ Gift checks are redeemable at face value.
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§ Payable to government agencies mainly consists of output tax which are normally settled within the next financial year.
§ Accrued expenses pertain to accrued and unpaid selling, general and administrative expenses which are normally settled within the next financial year.
§ In September 2011, the Group exercised its 1:6 stock rights entitlement with Belle for 734.1 million shares at P=3 per share. The availment did not affect the Group’s direct ownership with Belle which remained at 46.0%. The unpaid subscription amounted to P=1,101.2 million as at December 31, 2011. This was settled in April 2012.
19. Long-term Debt
This account consists of:
2012 2011 Gross Amount Debt Issue Cost Net Amount Gross Amount Debt Issue Cost Net Amount
(In Thousands)
Parent Company U.S. dollar-denominated: Fixed rate bonds P=61,813,938 (P=449,782) P=61,364,156 P=43,990,263 (P=357,171) P=43,633,092 Convertible bonds 9,407,559 (183,247) 9,224,312 979,645 (8,256) 971,389 Peso-denominated: Seven-year and ten-year fixed rate corporate notes 4,995,000 (37,757) 4,957,243 5,000,000 (42,578) 4,957,422 Five-year fixed rate corporate notes 6,699,043 (36,984) 6,662,059 6,700,000 (49,708) 6,650,292 Five-year and seven-year retail
bonds 9,400,000 (32,107) 9,367,893 9,400,000 (47,422) 9,352,578 Seven-year and ten-year retail
bonds 14,282,270 (118,549) 14,163,721 – – – Bank loans collateralized
with time deposits 3,000,000 (6,635) 2,993,365 8,950,000 (15,070) 8,934,930 Preferred shares – – – 200,000 (131) 199,869 Other bank loans 8,050,000 (10,945) 8,039,055 9,548,500 (17,921) 9,530,579 Subsidiaries U.S. dollar-denominated: Five-year term loans 11,083,500 (186,538) 10,896,962 6,356,800 (255,267) 6,101,533 Two-year, three-year and five-year bilateral loans 1,026,250 (5,008) 1,021,242 1,096,000 (11,071) 1,084,929 Other bank loans 2,463,000 (24,888) 2,438,112 3,068,800 (38,021) 3,030,779 China yuan-renminbi denominated: Three-year loan 1,111,112 – 1,111,112 1,299,441 – 1,299,441 Five-year loan 2,272,374 – 2,272,374 2,599,819 – 2,599,819 Eight-year loan – – – 277,388 – 277,388 Peso-denominated: Three-year and five-year fixed rate notes 18,313,000 (84,747) 18,228,253 10,000,000 (55,774) 9,944,226 Five-year and ten-year fixed and floating rate notes 7,500,000 (57,081) 7,442,919 – – – Five-year, seven-year and ten-year
fixed and floating rate notes 5,000,000 (33,540) 4,966,460 – – – Five-year, seven-year and ten-year
corporate notes 6,860,000 (36,161) 6,823,839 6,930,000 (45,829) 6,884,171 Five-year and ten-year
corporate notes 1,100,000 (7,849) 1,092,151 4,289,350 (24,457) 4,264,893 Five-year floating rate notes 4,950,000 (29,172) 4,920,828 5,000,000 (37,587) 4,962,413 Five-year, seven-year and
ten-year fixed rate notes 800,000 (4,658) 795,342 1,997,030 (11,355) 1,985,675 Five-year bilateral loans 500,000 (2,009) 497,991 546,875 (2,584) 544,291 Other bank loans 9,133,550 (20,510) 9,113,040 9,203,500 (28,229) 9,175,271 189,760,596 (1,368,167) 188,392,429 137,433,411 (1,048,431) 136,384,980 Less current portion 13,889,278 (29,720) 13,859,558 7,935,231 (14,270) 7,920,961 Noncurrent portion P=175,871,318 (P=1,338,447) P=174,532,871 P=129,498,180 (P=1,034,161) P=128,464,019
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Parent Company
Fixed Rate Bonds On October 17, 2012, SMIC issued US$500.0 million senior bonds, with peso equivalent of P=20,525.0 million as at December 31, 2012, which bear a fixed interest rate of 4.25% per annum, payable semi-annually in arrears. The bonds will mature on October 17, 2019. On October 13, 2010, SMIC issued US$400.0 million bonds (P=15,641.8 million) which bear a fixed interest rate of 5.5% per annum, payable semi-annually in arrears and will mature on October 13, 2017. This issuance is comprised of US$186.3 million (P=7,356.2 million) additional bonds, and US$82.9 million (P=3,199.4 million) and US$130.8 million (P=5,086.2 million) exchanged bonds from the existing US$350.0 million 6.75% bonds due 2013 and US$500.0 million 6.0% bonds due 2014, respectively. The exchange was not accounted for as an extinguishment but merely a modification of terms because the terms of the exchanged bonds are not substantially different from the existing bonds (i.e., the difference between the present value of the cash flows of the exchanged bonds and the present value of the remaining cash flows of the existing bonds discounted using the original effective interest rate did not exceed 10%).
On September 22, 2009, SMIC issued US$500.0 million bonds, with peso equivalent of P=15,564.4 million and P=16,622.2 million as at December 31, 2012 and 2011, which bear a fixed interest rate of 6.0% per annum, payable semi-annually in arrears. The bonds will mature on September 22, 2014.
On July 17, 2008, SMIC issued US$350.0 million bonds, with peso equivalents of P=10,082.8 million and P=10,768.1 million as at December 31, 2012 and 2011, respectively, which bear a fixed interest rate of 6.75% per annum, payable semi-annually in arrears. The bonds will mature on July 18, 2013 and may be redeemed at the option of the relevant holder beginning July 18, 2011 at the principal amount.
Convertible Bonds
US$250.0 million Convertible Bonds On February 15, 2012, SMIC issued at face value 1.625% coupon US$250.0 million (P=9,407.6 million) convertible bonds, with a yield to maturity of 2.875% due on February 15, 2017 at 106.67%. Interest on the bonds is payable semi-annually in arrears. The bonds contain multiple embedded derivatives (i.e., conversion option, call option and put option) which are further discussed in Note 29. The conversion option entitles the holder to convert its outstanding bonds for SMIC’s common shares at any time, on or after June 15, 2012 until the close of business on February 5, 2017, unless previously redeemed, converted or purchased and cancelled, at an initial conversion price of P=781.45 per share translated into U.S. dollars at a fixed conversion rate of P=42.711 to US$1.00. No conversion options were exercised as at December 31, 2012.
The put option entitles the bondholders to require the Parent Company to redeem all or some of its Bonds on February 15, 2015 (put date) at 103.89%. Lastly, the call option gives right to the Parent Company to redeem the Bonds, in whole but not in part at their early redemption amount on the date fixed for redemption, provided, however, that no such redemption may be made unless the closing price of the shares of the Parent Company (translated into US Dollars at the prevailing rate) for each of the 30 consecutive trading days, the
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last of which occurs no more than five days prior to redemption notice, was at least 130% of the applicable early redemption amount divided by the conversion ratio.
US$300.0 million Convertible Bonds On March 19, 2007, SMIC issued at face zero coupon US$300.0 million Convertible Bonds (financial liability component amounted to nil and P=979.6 million as at December 31, 2012 and 2011, respectively), with a yield to maturity of 3.5% due on March 20, 2012 at 118%. The bonds contain multiple embedded derivatives (i.e., conversion option, call option and put option) which are further discussed in Note 29.
The conversion option entitles the holder to convert its outstanding bonds for SMIC’s common shares at any time, on or after June 30, 2007 until the close of business on March 13, 2012, unless previously redeemed, converted or purchased and cancelled. Starting April 25, 2007, the conversion price is equal to P=453.39 a share, after giving effect to the 4.27% stock dividend. At various dates in 2012 and 2011, the bondholders of US$16.0 million (P=813.6 million) and US$1.7 million (P=82.2 million) bonds, respectively, opted to convert their holdings into 1,710,587 and 181,364 of SMIC’s shares (see Note 20). The fair value of the related derivative liability derecognized upon conversion amounted to US$4.2 million (P=181.50 million) and US$0.3 million (P=11.0 million) in 2012 and 2011, respectively (see Notes 18 and 29).
The remaining value of convertible bond amounting to US$4.7 million (P=201.4 million) matured on March 20, 2012, resulted to a gain of P=28.8 million, shown under “Gain (loss) on fair value changes on derivatives - net” account in the consolidated statements of income. The fair value of the related derivative liability derecognized upon maturity amounted to US$3.9 million (P=28.8 million) (see Note 29).
The put option entitles the bondholders to require the Parent Company to redeem all or some of its Bonds on March 19, 2010 (put date) at 110.97%. A total of US$246.3 million (P=11,253.5 million) bonds were redeemed, which resulted in a gain of P=844.6 million shown under “Gain (loss) on fair value changes on derivatives - net” ” account in the 2010 consolidated statements of income. The fair value of the related derivative liability derecognized upon early redemption amounted to US$35.2 million (P=1,609.7 million) (see Note 29).
Lastly, the call option gives right to the Parent Company to redeem the remaining Bonds, in whole but not in part at their early redemption amount on the date fixed for redemption, provided, however, that no such redemption may be made unless the closing price of the shares of the Parent Company (translated into US Dollars at the prevailing rate) for each of the 30 consecutive trading days, the last of which occurs no more than five days prior to redemption notice, was at least 130% of the applicable early redemption amount divided by the conversion ratio.
Seven-year and Ten-year Fixed Rate Corporate Notes On September 26, 2011, SMIC issued fixed rate corporate notes comprised of seven-year or Series A Notes and ten-year or Series B Notes due on September 26, 2018 and September 26, 2021, respectively. The total issuance amounted to P=916.0 million and P=4,084.0 million for the Series A and Series B Notes, respectively.
The Series A Notes have a term of seven years from the issue date, with a fixed interest rate equivalent to 5.75% per annum payable semi-annually in arrears starting March 26, 2012. The Series B Notes have a term of ten years from the issue date, with a fixed interest rate equivalent to 6.625% per annum payable semi-annually in arrears starting March 26, 2012.
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The Series A and B Notes have principal repayment of 0.1% of the principal amount in annual installments that will commence on the twelfth (12th) month from the issue date, with the last installment payment to be made on maturity date. Outstanding balance as at December 31, 2012 for the Series A and B Notes amounted to P=915.1 million and P=4,079.9 million, respectively.
Five-year Fixed Rate Corporate Notes On February 7, 2011, SMIC issued corporate notes amounting to P=6,700.0 million, which bear a fixed interest rate of 6.17% per annum, payable semi-annually in arrears. The corporate notes will mature on February 8, 2016. The notes have principal repayment of P=1.0 million that will commence on the twelfth (12th) month from the issue date, with the last installment payment to be made on maturity date. Outstanding balance as at December 31, 2012 and 2011 amounted to P=6,699.0 million and P=6,700.0 million, respectively.
Five-year and Seven-year Retail Bonds On June 25, 2009, SMIC issued fixed rate bonds, which comprised of five-year or Series A Bonds and seven-year or Series B Bonds due on June 26, 2014 and June 25, 2016, respectively. The total issuance amounted to P=8,400.0 million and P=1,000.0 million for the Series A and Series B Bonds, respectively.
The Series A Bonds have a term of five years and one day from the issue date, with a fixed interest rate equivalent to 8.25% per annum payable semi-annually in arrears starting December 26, 2009. The Series B Bonds have a term of seven years from the issue date, with a fixed interest rate equivalent to 9.10% per annum payable semi-annually in arrears starting December 25, 2009.
Seven-year and Ten-year Retail Bonds On July 16, 2012, SMIC issued fixed rate bonds, which comprised of seven-year or Series C Bonds and ten-year or Series D Bonds due on July 16, 2019 and July 16, 2022, respectively. The total issuance amounted to P=5,623.5 million and P=8,658.8 million for the Series C and Series D Bonds, respectively.
The Series C Bonds have a term of seven years from the issue date, with a fixed interest rate equivalent to 6.00% per annum payable semi-annually in arrears starting January 16, 2013. The Series D Bonds have a term of ten years from the issue date, with a fixed interest rate equivalent to 6.94% per annum payable semi-annually in arrears starting January 16, 2013.
Bank Loans Collateralized with Time Deposits On January 8, 2010, SMIC obtained two five-year term loans amounting to P=1,500.0 million each. The loans are based on a three-month Philippine Dealing System Treasury-Fixing (PDST-F) rate plus an agreed margin. Interest on these loans is payable quarterly in arrears.
On October 16, 2007, SMIC obtained a five-year term loan amounting to P=6,000.0 million, which bears interest based on a three-month PDST-F rate plus an agreed margin, payable quarterly in arrears. On October 12, 2011, SMIC paid P=50.0 million of this loan. The remaining value amounting to P=5,950.0 million matured on October 16, 2012.
These loans are collateralized by a portion of SMIC’s time deposits amounting to US$475.0 million with peso equivalents of P=19,498.8 million and P=20,824.0 million as at December 31, 2012 and 2011, respectively (see Note 7).
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Preferred Shares On August 6, 2007, SMIC issued Series 1 and Series 2 of non-convertible, non-participating, non-voting preferred shares amounting to P=3,300.0 million and P=200.0 million, respectively. Each share has a par value of P=10.0 a share and an offer price of P=10,000 a share.
The Series 1 preferred shares carry a fixed dividend rate of 7.51% per annum, payable semi-annually in arrears, while the Series 2 preferred shares carry a dividend rate based on 3-month PDST-F rate plus an agreed margin. The dividend rights are cumulative. The preferred shares rank ahead of the common shares in the event of liquidation.
The preferred shares are mandatorily redeemable on August 6, 2012 at redemption price, which consists of (1) 100% of the offer price; (2) all unpaid cash dividends accruing thereon, if any, and/or in the event no cash dividends are declared for the relevant period, an amount equivalent to the sum of the cash dividends on the preferred shares had dividends been declared and paid for the relevant period; and (3) any charges on unpaid amounts due then outstanding. SMIC has an option to early redeem the preferred shares subject to certain conditions. On February 7, 2011, SMIC prepaid the Series 1 preferred shares amounting to P=3,300.0 million. Series 2 preferred shares amounting to P=200.0 million was redeemed on August 6, 2012.
Other Peso Bank Loans This account includes the following:
2012 2011 (In Thousands)
Ten-year term loans P=2,050,000 P=2,050,000 Seven-year term loans 3,000,000 4,498,500 Five-year term loans 3,000,000 3,000,000 P=8,050,000 P=9,548,500
§ In January 2008, SMIC obtained two ten-year term loans amounting to P=1,050.0 million and P=500.0 million, which bear fixed interest rates of 6.85% and 6.71% per annum, respectively. Outstanding balances of these loans as at December 31, 2012 and 2011 amounted to P=1,550.0 million.
§ In April 2008, SMIC obtained seven-year and ten-year term loans amounting to P=500.0 million each, which bear fixed interest rates of 8.56% and 8.79% per annum, respectively. The seven-year term loan has annual principal repayment of P=0.5 million that will commence on the twelfth (12th) month from the issue date, with the last installment payment to be made on maturity date. On April 25, 2012, SMIC paid the total outstanding balance of the seven-year term loan amounting to P=498.5 million. Outstanding balance of the seven-year and ten-year term loans amounted to nil and P=500.0 million as at December 31, 2012, respectively, and P=498.5 million and P=500.0 million as at December 31, 2011, respectively.
§ In March 2008, SMIC obtained a seven-year term loan amounting to P=1,000.0 million, which bears a fixed interest rate of 7.28% per annum. Outstanding balance as at December 31, 2012 and 2011 amounted to P=1,000.0 million.
§ The seven-year term loans also include P=2,000.0 million and P=1,000.0 million fixed rate loans with interest rates of 6.90% and 6.91%, respectively. It likewise includes P=2,000.0 million floating rate loan with interest based on 3-month PDST-F plus an agreed margin. The loans
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will mature in October and November 2014. On January 31, 2011 and November 23, 2012, SMIC prepaid the P=2,000.0 million and P=1,000.0 million fixed rate loans respectively. Outstanding balance as at December 31, 2012 and 2011 amounted to P=2,000.0 million and P=3,000.0 million, respectively.
§ In February 2009, SMIC obtained a five-year term loan amounting to P=3,000.0 million which bears a floating interest rate based on a 6-month PDST-F plus margin. Outstanding balance as at December 31, 2012 and 2011 amounted to P=3,000.0 million.
§ The five-year term loans obtained in 2006 amounting to P=600.0 million and P=400.0 million bear fixed interest rates of 7.58% and 6.65% per annum and matured in October and November 2011, respectively.
Subsidiaries
US Dollar-denominated Five-year Term Loans This represents a US$270.0 million unsecured loans obtained on various dates in 2012 and 2011 by SM Prime. The loans bear interest rates based on London Inter-Bank Offered Rate (LIBOR) plus spread, with a bullet maturity on March 21, 2016.
US Dollar-denominated Two-year, Three-year and Five-year Bilateral Loans The US$75.0 million unsecured loans were obtained by SM Prime in November 2008. The loans bear interest rates based on LIBOR plus spread, with bullet maturities ranging from two to five years. SM Prime prepaid the US$30.0 million (P=1,386.0 million) and the US$20.0 million (P=950.4 million) unsecured loans on November 30, 2010 and June 1, 2009, with original maturity dates of November 28, 2011 and November 19, 2010, respectively. The related unamortized debt issuance costs charged to expense amounted P=4.0 million in 2010. The remaining balance of US$25.0 million will mature on November 20, 2013.
Other US Dollar-denominated Bank Loans This consists of the following:
§ US Dollar-denominated Five-year Bilateral Loans. This represents the US$10.0 million (P=410.5 million) out of US$50.0 million unsecured loan obtained by SM Prime on December 7, 2012. The loan bears interest rate based on LIBOR plus spread, with a bullet maturity on August 30, 2017. The balance of US$40.0 million will be fully drawn in 2013.
§ US Dollar-denominated Five-year Bilateral Loans. The US$20.0 million (P=821.0 million) and US$30.0 million (P=1,231.5 million) five-year bilateral unsecured loans were obtained by SM Prime on April 15, 2011 and November 30, 2010, respectively. The loans bear interest rate based on LIBOR plus spread, with bullet maturity on November 30, 2015.
§ US Dollar-denominated Three-year Bilateral Loans. The US$40.0 million (P=1,753.6 million) three-year bilateral unsecured loans were obtained by SM Prime on July 13, 2010 and October 15, 2009. The loans bear interest rate based on LIBOR plus spread, with bullet maturity on January 14, 2013 and October 15, 2012, respectively. The US$20 million (P=876.8 million) loan was prepaid on April 15, 2011 and the related unamortized debt issuance costs charged to expense amounted to P=2.0 million. The remaining US$20.0 million loan was prepaid on January 13, 2012.
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China Yuan Renminbi-denominated Three-year Loan This represents a three-year loan obtained by SM Prime on March 28, 2011 amounting to ¥250.0 million to finance the construction of shopping malls. Partial drawdown amounting to ¥187.4 million (P=1,299.4 million) was made as at December 31, 2011. The loan has a floating rate with an annual repricing at prevailing rate dictated by Central Bank of China less 5% and will mature on March 27, 2014. The loan bears an interest rate of 6.20% and 6.66% in 2012 and 2011, respectively.
China Yuan Renminbi-denominated Five-year Loan This consists of the following:
§ This represents a five-year loan obtained by SM Prime on August 26, 2009 amounting to ¥350.0 million to finance the construction of shopping malls. The loan is payable in semi-annual installments until 2014. The loan has a floating rate with an annual repricing at prevailing rate dictated by Central Bank of China less 10%. The loan carries an interest rate of 5.76% in 2012 and 6.21% in 2011 (see Note 29).
§ This represents a five-year loan obtained by SM Prime on August 27, 2010 amounting to ¥150.0 million to finance the construction of shopping malls. Partial drawdown amounting to ¥0.9 million (P=6.2 million) and ¥60.0 million (P=408.8 million) was made in 2012 and 2011, respectively. The loan is payable in annual installments until 2015. The loan has a floating rate with an annual repricing at prevailing rate dictated by Central Bank of China less 10%. The loan carries an interest rate of 5.76% in 2012 and 5.32% in 2011 (see Note 29).
China Yuan Renminbi-denominated Eight-year Loan This represents an eight-year loan obtained by SM Prime on December 28, 2005 amounting to ¥155.0 million to finance the construction of shopping malls. The loan is payable in annual installments with two years grace period until December 2012. The loan has a floating rate with an annual repricing at prevailing rate dictated by Central Bank of China less 10%. The loan bears interest rate of 6.35% in 2012 and 2011. The loan matured and was paid in December 2012 (see Note 29).
The China yuan renminbi-denominated loans are secured by investment properties in China (see Note 14).
Philippine Peso-denominated Three-year and Five-year Fixed Rate Notes This consists of the following:
§ On December 27, 2012, SMDC obtained long-term loan amounting to P=2,000.0 million from a local bank with an interest rate of 4.72%, payable quarterly and will mature on December 23, 2015.
§ On April 27, 2012, SMDC issued five-year fixed rate corporate notes amounting to P=6,313.0 million which will mature on various dates starting April 27, 2013 up to July 27, 2017. The notes have fixed interest rate of 6.01% payable semi-annually.
§ On June 1, 2010, SMDC issued a three-year and five-year fixed rate corporate notes amounting to P=2,000.0 million and P=8,000.0 million, respectively. The three-year and five-year fixed rate notes bear fixed interest rates of 6.8% and 7.7%, respectively, payable semi-annually and will mature on June 1, 2013 and June 2, 2015, respectively. SMDC has an option to prepay the notes subject to a fixed prepayment penalty. The prepaid amount shall include the outstanding principal obligation, any accrued interest on the notes and the prepayment penalty.
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Philippine Peso-denominated Five-year and Ten-year Fixed and Floating Rate Notes This represents a five-year and ten-year floating and fixed rate notes obtained by SM Prime on June 19, 2012 amounting to P=3,450.0 million and P=1,000.0 million for the floating and P=680.0 million and P=2,370.0 million for the fixed, respectively. The loans bear an interest rate based on PDST-F plus margin for the floating and 6.22% and 6.81% for the five-year and ten-year fixed, respectively. The loans have bullet maturities in 2017 and 2022, respectively (see Note 29). Philippine Peso-denominated Five-year, Seven-year and Ten-year Fixed and Floating Rate Notes This represents a five-year floating, five-year, seven-year and ten-year fixed rate notes obtained by SM Prime on January 12, 2012 amounting to P=200.0 million, P=1,012.0 million, P=133.0 million, and P=3,655.0 million, respectively. The loans bear an interest rate based on PDST-F plus margin for the five-year floating and 5.86%, 5.97% and 6.10% for the five-year, seven-year and ten-year fixed, respectively. The loans have bullet maturities in 2017, 2019 and 2022, respectively (see Note 29).
Philippine Peso-denominated Five-year, Seven-year and Ten-year Corporate Notes This represents a five-year floating and five-year, seven-year and ten-year fixed rate notes obtained by SM Prime amounting to P=3,000.0 million, P=1,134.0 million, P=52.5 million and P=813.5 million, respectively, out of P=7,000.0 million facility obtained on December 20, 2010. The remaining P=2,000.0 million floating rate note was obtained on June 13, 2011. The loans bear an interest rate based on PDST-F plus margin for the five-year floating and 5.79%, 5.89% and 6.65% for the five-year, seven-year and ten-year fixed, respectively. The loans have bullet maturities in 2015, 2017 and 2020, respectively (see Note 29).
Philippine Peso-denominated Five-year and Ten-year Corporate Notes This represents a five-year floating and fixed rate notes and ten-year fixed rate note obtained by SM Prime on April 14, 2009 amounting to P=200.0 million, P=3,700.0 million and P=1,100.0 million, respectively. The loans bear an interest rate based on PDST-F plus margin for the five-year floating and 8.4% and 10.1% for the five-year and ten-year fixed, respectively. The loans have bullet maturities in 2014 and 2019, respectively . SM Prime prepaid the P=200.0 million and P=3,700.0 million loans on April 15, 2012, with original maturity date of April 15, 2014. The related unamortized debt issuance costs charged to expense amounted to P=17.0 million (see Note 29). Philippine Peso-denominated Five-year Floating Rate Notes This represents a five-year floating rate notes obtained on March 18, 2011 and June 17, 2011 amounting to P=4,000.0 million and P=1,000.0 million, respectively. The loans bear an interest rate based on PDST-F plus margin and will mature on March 19, 2016 and June 18, 2016, respectively (see Note 29).
Philippine Peso-denominated Five-year, Seven-year and Ten-year Fixed Rate Notes This represents a five-year, seven-year and ten-year fixed rate notes obtained by SM Prime on June 17, 2008 amounting to P=1,000.0 million, P=1,200.0 million and P=800.0 million, respectively. The loans bear fixed interest rates of 9.31%, 9.60% and 9.85%, respectively, and will mature on June 17, 2013, 2015 and 2018, respectively. A portion of the loans amounting to P=1,000.0 million and P=1,200.0 million were prepaid on June 17, 2011 and 2012, respectively. The related unamortized debt issuance costs charged to expense amounted to P=4.0 million and P= 5.0 million in 2011 and 2012, respectively (see Notes 29).
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Philippine Peso-denominated Five-year Bilateral Loans This consists of the following:
§ Five-year term loan obtained by a subsidiary of SM Prime on October 24, 2011 amounting to P=500.0 million and will mature on October 24, 2016. The loan carries an interest rate based on PDST-F plus an agreed margin (see Note 29).
§ Five-year term loan obtained by a subsidiary of SM Prime on September 28, 2007 and November 6, 2007 amounting to P=250.0 million to finance the construction of a project called “SM by the Bay.” The loan is payable in equal quarterly installments of P=15.6 million starting December 2008 up to September 2012 and carries an interest rate based on PDST-F plus an agreed margin (see Note 29). The loan matured and was paid in September 2012.
Other Bank Loans - Subsidiaries This account includes the following:
2012 2011 (In Thousands)
Ten-year term loan P=1,200,000 P=1,200,000 Five-year term loans 7,933,550 8,003,500 P=9,133,550 P=9,203,500
§ On August 16, 2006, SM Prime obtained a ten-year bullet fixed rate loan amounting to P=1,200.0 million which bears a fixed interest rate of 9.75% and will mature on August 16, 2016 (see Note 29).
§ The following five-year term loans were obtained by various subsidiaries:
Year Obtained Maturity Subsidiary 2012 2011 Interest Rate (see Note 30)
(In Millions) 2010 2015 SM Prime P=2,000.0 P=2,000.0 PDST-F plus an agreed margin SM Prime 980.0 990.0 Agreed fixed rate less PDST-F SM Land 222.8 225.0 Fixed rate of 6.75% Costa 118.8 120.0 Fixed rate of 7.0% SM Land 75.0 75.0 PDST-F plus an agreed margin 2009 2014 SM Prime 3,000.0 3,000.0 PDST-F plus an agreed margin SM Land 1,387.0 1,393.5 Fixed rate of 5.69-6.75% SM Land 150.0 200.0 PDST-F plus an agreed margin P=7,933.6 P=8,003.5
The repricing frequencies of floating rate loans range from three to six months.
A portion of these loans is collateralized by temporary investment and shares of stocks. The carrying values of the collaterals approximate the amoutns of the loans (see Note 11)
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Debt Issue Cost The movements in unamortized debt issue cost in 2012 and 2011 are as follows:
2012 2011 (In Thousands)
Balance at beginning of year P=1,048,431 P=956,541 Additions 652,989 483,475 Amortization (see Note 24) (296,977) (264,457) Prepayments (36,276) (127,128) Balance at end of year P=1,368,167 P=1,048,431
Repayment Schedule The repayments of long-term debt are scheduled as follows:
Gross Loan Debt Issue Cost Net (In Thousands)
2013 P=13,889,278 (P=29,720) P=13,859,558 2014 33,227,646 (128,321) 33,099,325 2015 25,906,340 (92,701) 25,813,639 2016 28,418,203 (265,365) 28,152,838 2017 37,035,204 (408,208) 36,626,996 2018 3,844,303 (17,927) 3,826,376 2019 27,455,949 (273,848) 27,182,101 2020 814,619 (5,996) 808,623 2021 4,117,494 (31,380) 4,086,114 2022 15,051,560 (114,701) 14,936,859 P=189,760,596 (P=1,368,167) P=188,392,429
The loan agreements provide certain restrictions and requirements principally with respect to maintenance of required financial ratios and material change in ownership or control. As at December 31, 2012 and 2011, the Group is in compliance with the terms of its loan covenants.
20. Equity
Capital Stock As at December 31, 2012 and 2011, SMIC’s authorized capital stock is composed of 690,000,000 common shares and 10,000,000 redeemable preferred shares with a par value of P=10.0 a share. The issued and subscribed redeemable preferred shares are nil and 20,000 as at December 31, 2012 and 2011, respectively, and accounted for as a liability (see Note 19). SMIC’s issued and subscribed common shares are 622,974,620 and 612,164,033 as at December 31, 2012 and 2011, respectively.
As at December 31, 2012, the Company is compliant with the minimum public float as required by the PSE.
At various dates in 2012 and 2011, 1,710,587 common shares and 181,364 common shares, respectively, were issued as a result of conversion of SMIC’s convertible bonds (see Note 19). The excess of conversion price over par value totaling P=977.8 million and P=80.4 million, respectively, are presented under “Additional paid-in capital” account in the consolidated balance sheets.
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On August 24, 2012, SMIC entered into a Placement Agreement with certain shareholders and Macquarie Capital PTE. Limited (the “Placement Agent”), where the selling shareholders shall sell 9.1 million SMIC common shares (the “Sale Shares”) at P=700.00 per share to the Placement Agent, or to investors that the Placement Agent may procure outside the Philippines. Simultaneously, SMIC entered into a Subscription Agreement with the selling shareholders, where SMIC agreed to issue new SMIC common shares (out of its authorized but unissued capital stock) in an amount equal to the aggregate number of the Sale Shares sold by the Selling Shareholders and the Selling Shareholders agreed to subscribe to the said shares. The placement and subscription agreements increased “Capital Stock” and “Additional paid-in capital” in the amount of P=91.0 million and P=6,238.7 million, respectively.
The following summarizes the information on the Parent Company’s registration of securities under the Securities Regulation Code:
Date of SEC Approval Authorized
Shares No. of
Shares Issued Issue/Offer
Price March 2005 105,000,000 P=250 November 6, 2007 56,000,000 218 June 14, 2007 100,000,000 10 April 25, 2007 25,023,038 10 October 4, 2010 340,858 453 November 3, 2010 309,387 453 November 25, 2010 309,386 453 August 17, 2011 10,668 453 September 26, 2011 170,696 453 January 2, 2012 21,337 453 January 10, 2012 16,002 453 January 11, 2012 298,718 453 January 26, 2012 90,682 453 February 3, 2012 679,584 453 February 8, 2012 279,515 453 March 8, 2012 250,070 453 March 12, 2012 10,668 453 March 13, 2012 64,011 453 September 24, 2012 9,100,000 700
The Parent Company declared stock dividends in 2007. The total number of shareholders of the Parent Company is 1,263 and 1,304 as at December 31, 2012 and 2011, respectively.
Cost of Parent Common Shares Held by Subsidiaries Certain subsidiaries hold common shares of the Parent Company. This is presented as “Cost of Parent common shares held by subsidiaries” and is treated as a reduction in equity as shown in the consolidated balance sheets and consolidated statements of changes in equity.
The cost of common shares held by subsidiaries at December 31, 2012 amounting to P=125.9 million pertains to 390,491 shares with an average cost of P=322.4 per share. The cost of common shares held by subsidiaries as at December 31, 2011 amounting to P=263.2 million pertains to 820,491 shares with an average cost of P=320.8 per share.
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In various dates in 2012, SM Land and MRDC disposed a total of 430,000 Parent common shares at a total selling price of P=323.9 million. The disposal resulted in a total gain of P=184.5 million where the portion of the gain pertaining to the interest of the Parent Company and Non-controlling interest is recognized under “Additional paid-in capital” and “Non-controlling interests” account, respectively, in the consolidated balance sheets.
Additional Paid-in Capital The movements in “Additional paid-in capital” account in the consolidated balance sheets are as follows:
2012 2011 (In Thousands)
Balance at beginning of year P=35,536,615 P=35,456,200 Adjustments from additional issuance of shares 7,216,451 80,415 Gain on sale of Parent common shares held by
subsidiaries 105,854 – Balance at end of year P=42,858,920 P=35,536,615
Equity adjustments from business combination under common control Equity adjustments from business combination under common control mainly pertains to the acquisitions of the various SM China Companies by SM Prime in 2007 and various service companies by SM Retail in 2009. These acquisitions were considered as business reorganizations of companies under common control. Thus, the acquisitions were accounted for similar to pooling of interest method.
Retained Earnings On December 14, 2012, the BOD approved the appropriation of P=30,000.0 million retained earnings. As at December 31, 2012, the total appropriated retained earnings is P=35,000.0 million.
Projects Timeline 2012
(In Thousands)
Hotel projects 2013–2015 P=8,000,000 Commercial buildings 2012–2016 10,000,000 Acquisition of investments 2012–2013 17,000,000
P=35,000,000
On April 26, 2012, the BOD approved the declaration of cash dividends of 104.0% of the par value or P=10.40 per share for a total amount of P=6,383.6 million in favor of stockholders on record as at May 22, 2012. This was paid on June 21, 2012.
On April 27, 2011, the BOD approved the declaration of cash dividends of 90.4% of the par value or P=9.04 per share for a total amount of P=5,532.3 million in favor of stockholders on record as at May 27, 2011. This was paid on June 22, 2011.
On April 28, 2010, the BOD approved the declaration of cash dividends of 78.8% of the par value or P=7.88 per share for a total amount of P=4,814.9 million in favor of stockholders on record as at May 27, 2010. This was paid on June 21, 2010.
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The balance of retained earnings includes the accumulated equity in net earnings of subsidiaries and associates amounting to P=93,346.9 million and P=75,086.8 million as at December 31, 2012 and 2011, respectively. The amount is not available for dividends distribution until such time that the Parent Company receives the dividends from the respective subsidiaries and associates.
21. Related Party Transactions
Terms and Conditions of Transactions with Related Parties For the years ended December 31, 2012, 2011 and 2010, the Group did not make any provision for doubtful accounts relating to amounts owed by related parties. An assessment is undertaken at each financial year-end by examining the financial position of the related party and the market in which the related party operates. There have been no guarantees provided or received for any related party receivables or payables. Related parties under common stockholders refer to an entity, that is neither a parent, subsidiary, nor an associate, with stockholders common to the SM Group or under common control.
Parties are considered to be related if one party has the ability, directly and indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control.
Rent The Group have existing lease agreements for office and commercial spaces with related companies (retail entities under common stockholder, banking group and other related parties under common sotckholder).
Management and Service Fees The Group pays management fees to Shopping Center Management Corporation, Leisure Center, Inc., West Avenue Theaters Corporation and Family Entertainment Center, Inc. (related parties under common sotckholder) for the management of the office and mall premises. The Group also provides manpower and other services to related parties under common stockholder.
SMIC and SM Retail also receive management and service fees from retail entities under common stockholder for management, consultancy, manpower and other services.
Dividend Income The Group has investment in certain related parties under common stockholder classified as AFS equity instruments. The Group earn income from these investments upon the declaration of dividends by the investees.
Cash Placements and Loans The Group has certain bank accounts and cash placements that are maintained with BDO and China Bank (Bank Associates). Such accounts earn interest based on prevailing market interest rates (see Notes 6, 7 and 16).
The Group also availed of bank loans and long-term debt from BDO and China Bank and pays interest based on prevailing market interest rates (see Notes 17 and 19).
Others The Group, in the normal course of business, has outstanding receivables from and payables to related companies as at reporting period which are unsecured and normally settled in cash.
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The consolidated balance sheets and statements of income include the following amounts resulting from the above transactions with related parties as at December 31: Category Year Amount/Volume Outstanding balance Terms Condition
(In Thousands)
Bank Associates Cash placement and 2012 P=54,171,200 P=114,014,248 Interest bearing Unsecured; no investment in debt 2011 (41,171,620) 59,843,048 0.5% to 6.55% impairment securities 2010 16,896,687 101,014,668 Interest income 2012 3,950,656 1,011,987 Interest bearing Unsecured; no
2011 3,125,270 841,418 4.9% to 6.47% impairment 2010 3,013,880 754,064
Loans 2012 (5,175,006) 32,021,644 Interest-bearing Unsecured; no 2011 10,084,368 37,196,650 3.25% to 8.79% impairment 2010 18,100,663 27,112,282
Interest expense 2012 859,134 286,719 Interest-bearing Unsecured; no 2011 738,231 190,583 3.25% to 8.79% impairment 2010 1,161,073 115,581
Rent income 2012 52,860 2,547 Noninterest bearing Unsecured; no 2011 40,408 351 impairment 2010 27,744 2,263
Retail Entities under Common Stockholders Rent income 2012 4,002,084 1,516,066 Noninterest bearing Unsecured; no 2011 2,945,053 1,267,728 impairment 2010 2,985,019 878,452 Management fee income 2012 713,226 154,172 Noninterest bearing Unsecured; no
2011 564,160 95,892 impairment 2010 695,395 353,691
Management fee expense 2012 872,853 2,020 Noninterest bearing Unsecured; no 2011 779,814 104,963 impairment 2010 656,131 86,287
Dividend income 2012 552,768 292,917 Noninterest bearing Unsecured; no 2011 222,089 42,015 impairment 2010 188,472 – Service income 2012 1,097 49,098 Noninterest bearing Unsecured; no 2011 127,589 – impairment 2010 26,202 – Due from related parties 2012 1,040,720 2,413,171 Noninterest bearing Unsecured; no 2011 (384,608) 1,372,451 impairment 2010 (1,966,159) 1,757,059 Due to related parties 2012 530,600 3,265,015 Noninterest bearing Unsecured; no 2011 766,475 2,734,415 impairment 2010 510,696 1,967,940 Other Related Parties Receivable under 2012 (7,312,107) 52,800 Interest-bearing Unsecured; no common Stockholders 2011 (281,621) 7,312,107 Fixed at 4.5% in 2012 impairment 2010 1,593,728 7,593,728 and 7.0% in 2011 & 2010 Receivable for project 2012 1,962,578 3,084,143 Noninterest-bearing Unsecured; no development 2011 (88) 1,121,565 impairment 2010 172,358 1,121,653
Compensation of Key Management Personnel of the Group The aggregate compensation and benefits related to key management personnel of the Group for the years ended December 31, 2012, 2011 and 2010 consist of short-term employee benefits amounting to P=708.7 million, P=644.3 million and P=585.7 million, respectively, and post-employment benefits (pension benefits) amounting to P=144.42 million, P=99.5 million and P=86.6 million, respectively.
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22. Cost of Sales
This account consists of:
2012 2011 2010 (In Thousands)
Merchandise inventories at beginning of year P=13,436,456 P=10,485,903 P=7,760,762
Purchases 117,862,994 115,143,309 106,225,486 Total goods available for sale 131,299,450 125,629,212 113,986,248 Less merchandise inventories
at end of year 13,402,762 13,436,456 10,485,903 P=117,896,688 P=112,192,756 P=103,500,345
23. Selling, General and Administrative Expenses
This account consists of: 2012 2011 2010 (In Thousands)
Personnel cost (see Note 21) P=10,942,505 P=9,842,436 P=8,728,907 Depreciation and amortization
(see Notes 13 and 14) 8,057,871 7,193,100 6,321,252 Utilities 6,295,496 5,346,665 4,577,600 Rent (see Note 27) 4,876,327 3,463,656 3,016,022 Taxes and licenses 3,964,767 3,212,041 2,740,926 Outside services 2,802,479 2,351,613 1,974,286 Commission expense 2,084,339 570,807 404,679 Advertising and promotions 1,444,162 1,802,823 1,215,989 Repairs and maintenance 1,062,124 958,955 899,266 Management fees (see Note 21) 910,614 944,098 725,212 Supplies 838,943 739,183 698,628 Insurance 470,633 357,743 356,054 Professional fees 460,268 199,378 206,447 Transportation and travel 436,156 341,716 287,649 Donations 297,629 201,533 31,835 Pension expense (see Note 25) 235,499 234,746 281,567 Entertainment, representation
and amusement 196,185 239,943 287,665 Communications 122,666 104,357 92,602 Data processing 98,472 8,825 160,840 Provision for (reversal of)
impairment loss and others (see Notes 9, 10, 11, 12 and 14) (2,635,569) 553,386 557,536
Others 2,017,256 1,745,746 1,931,372 P=44,978,822 P=40,412,750 P=35,496,334
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24. Interest Income and Interest Expense
The details of the sources of interest income and interest expense follow:
2012 2011 2010 (In Thousands)
Interest income on: Time deposits and short-term
investments (see Note 7) P=2,080,949 P=1,921,384 P=2,071,015 AFS investments and others
(see Notes 8 and 11) 853,249 1,227,952 849,554 Cash in banks and temporary
investments (see Note 6) 1,439,218 1,083,460 763,649 Investments held for trading
(see Note 8) 43,330 41,844 32,234 P=4,416,746 P=4,274,640 P=3,716,452 Interest expense on: Long-term debt (see Note 19) P=7,325,871 P=6,249,515 P=7,177,322 Bank loans (see Note 17) 3,253,656 2,288,844 132,967 Others (see Note 29) 232,209 297,654 342,268 P=10,811,736 P=8,836,013 P=7,652,557
25. Pension Benefits
The Group has funded defined benefit pension plans covering all regular and permanent employees. The benefits are based on employees’ projected salaries and number of years of service. The latest appraisal valuation report is as at December 31, 2012.
The following tables summarize the components of net benefit expense recognized by Market Strategic Firm, Inc., Manduriao Star, Inc., Mindanao Shoppers Daily Destination Corp., Mindanao Shoppinglane Cebu Corp., CF_Mgt. Corp., LTBG_Mgmt. Corp., MCLG Mgmt. Corp., MF_Mgt Corp., Accessories Management Corp., and LF_Mgt. Corp. (subsidiaries of SM Retail); Manila Southcoast Development Corp. (subsidiary of Mt. Bliss); Forever Agape and Glory, Inc. and SM Hotels, as included in the consolidated statements of income and the funded status and amounts recognized in the consolidated balance sheets for the plan:
Net Benefit Expense (Included under “Selling, General and Administrative Expenses”, see Note 23)
2012 2011 2010 (In Thousands)
Current service cost P=30,196 P=33,872 P=60,962 Interest cost 14,789 27,398 61,573 Expected return on plan assets (12,685) (24,820) (27,501) Recognized actuarial gain (1,280) (4,509) (1,961) Others 1,497 1,497 14,305 Net benefit expense P=32,517 P=33,438 P=107,378
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Defined Benefit Liability (Included under “Tenants’ deposits and others”)
2012 2011 (In Thousands)
Present value of obligation P=276,936 P=442,619 Fair value of plan assets 302,376 494,554 Funded status (25,440) (51,935) Unrecognized actuarial gain 60,513 131,766 Others (6,763) (3,344) Defined benefit liability P=28,310 P=76,487
Changes in the Present Value of the Defined Benefit Obligation
2012 2011 2010 (In Thousands)
Defined benefit obligation at beginning of year P=442,619 P=695,108 P=922,784
Reclassifications to defined benefit assets (232,674) (352,155) (386,635)
Interest cost 14,789 27,398 61,573 Current service cost 30,196 33,872 60,962 Actuarial loss on defined benefit
obligations 30,464 47,023 23,505 Benefits paid (6,307) (13,696) (22,581) Transfer from related parties (2,151) 2,778 17,504 Other adjustments – 2,291 17,996 Defined benefit obligation
at end of year P=276,936 P=442,619 P=695,108
Changes in the Fair Value of Plan Assets
2012 2011 2010 (In Thousands)
Fair value of plan assets at beginning of year P=494,554 P=732,189 P=731,047
Reclassifications to defined benefit assets (253,032) (343,747) (317,680)
Actual contributions 28,169 102,835 149,592 Actuarial gain on plan assets 28,458 10,104 146,806 Expected return on plan assets 12,685 24,820 27,501 Benefits paid (6,307) (13,696) (22,581) Transfer from related parties (2,151) 2,778 17,504 Other adjustments – (20,729) – Fair value of plan assets at end
of year P=302,376 P=494,554 P=732,189
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Unrecognized Actuarial Gain
2012 2011 2010 (In Thousands)
Net cumulative unrecognized actuarial gain at beginning of year P=131,766 P=219,047 P=157,729
Actuarial gain (loss) on: Plan assets 28,458 10,104 146,806 Defined benefit obligation (30,464) (47,023) (23,505) Reclassifications to defined
benefit assets (67,967) (24,722) (60,022) Recognized actuarial gain (1,280) (4,509) (1,961) Other adjustments – (21,131) – Net cumulative unrecognized
actuarial gain at end of year P=60,513 P=131,766 P=219,047
The amounts for the current and previous four periods are as follows:
2012 2011 2010 2009 2008
(In Thousands)
Present value of defined benefit obligation P=276,936 P=442,619 P=695,108 P=922,784 P=643,307 Fair value of plan assets 302,376 494,554 732,189 731,047 571,629 Deficit (Surplus) (25,440) (51,935) (37,081) 191,737 71,678 Experience adjustment arising on plan asset 28,458 10,104 146,806 108,771 (89,871) Experience adjustment arising on plan liabilities 30,464 47,023 23,505 305,898 (765,951)
Certain subsidiaries have defined benefit assets as at December 31, 2012 and 2011. The following tables summarize the components of net benefit expense recognized by the Parent Company; SM Land; SM Prime; SMDC; SM Retail; Mainstream Business, Inc., Major Shopping Management Corporation, Metro Manila Star Asia Corporation, Meridien Business Leader, Inc., Madison Shopping Plaza, Inc., Multi Stores Corporation, Metro Manila Shopping Mecca Corp., Mercantile Stores Group, Inc., Mindanao Shopping Destination Corp., Manila Southern Associates, Inc., SM Mart, Inc., Sanford Marketing Corporation, SVI, SSMI, Accessories_Management Corp., LTBG_Management Corp., MF_Mgmt. Corp., Hyperhome Corp., Hyperfashion Corp. and MCLG_Mgmt. Corp., (subsidiaries of SM Retail); Costa; and Hotel Specialists (Tagaytay) Inc. and SMX Convention Specialist Corp. (subsidiaries of SM Hotels); and MRDC, as recognized in the consolidated statements of income, and the funded status and amounts as recognized in the consolidated balance sheets for the plan:
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Net Benefit Expense (Included under “Selling, General and Administrative Expenses”, see Note 23)
2012 2011 2010 (In Thousands)
Current service cost P=232,910 P=206,172 P=150,541 Interest cost 177,343 150,945 148,216 Expected return on plan assets (186,269) (162,260) (107,419) Recognized actuarial loss (gain) (13,888) 10,583 (27,508) Effect of asset limit (2,860) 1,435 4,409 Others (4,254) (5,567) 5,950 Net benefit expense P=202,982 P=201,308 P=174,189
Defined Benefit Asset (Recorded as part of “Other Noncurrent Assets”, see Note 16)
2012 2011 (In Thousands)
Present value of obligation P=3,234,528 P=2,269,976 Fair value of plan assets 3,967,810 2,994,978 Funded status (733,282) (725,002) Unrecognized actuarial gain 292,384 321,952 Amount not recognized due to asset limit (7,404) 12,797 Others (4,608) (4,460) Defined benefit asset (P=452,910) (P=394,713)
Changes in the Present Value of the Defined Benefit Obligation
2012 2011 2010 (In Thousands)
Defined benefit obligation at beginning of year P=2,269,976 P=1,618,563 P=926,755
Reclassifications from defined benefit liability 232,674 352,155 386,635
Current service cost 232,910 206,172 150,541 Interest cost 177,343 150,945 148,216 Actuarial loss on defined benefit
obligations 366,834 140,848 58,868 Benefits paid (68,621) (181,173) (46,489) Transfer to related parties (57,896) (12,590) (14,063) Other adjustments 81,308 (4,944) 8,100 Defined benefit obligation
at end of year P=3,234,528 P=2,269,976 P=1,618,563
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Changes in the Fair Value of Plan Assets
2012 2011 2010 (In Thousands)
Fair value of plan assets at beginning of year P=2,994,978 P=2,437,705 P=1,306,847
Actual contributions 313,700 337,732 392,338 Actuarial gain on plan assets 333,746 56,398 373,973 Reclassifications from defined
benefit liability 253,031 343,747 317,680 Expected return on plan assets 186,269 162,260 107,419 Benefits paid (68,621) (181,173) (46,489) Transfer to related parties (57,896) (12,590) (14,063) Other adjustments 12,603 (149,101) – Fair value of plan assets at end
of year P=3,967,810 P=2,994,978 P=2,437,705 Unrecognized Actuarial Gain
2012 2011 2010 (In Thousands) Net cumulative unrecognized
actuarial gain at beginning of year P=321,952 P=510,542 P=159,972
Actuarial gain (loss) on: Defined benefit obligation (366,834) (140,848) (58,868) Plan assets 333,746 56,398 373,973 Reclassifications from defined
benefit liability 67,968 24,722 60,022 Recognized actuarial (gain) loss (13,888) 10,583 (27,508) Other adjustments (50,560) (139,445) 2,951 Net cumulative unrecognized
actuarial gain at end of year P=292,384 P=321,952 P=510,542
The amounts for the current and previous four periods follow:
2012 2011 2010 2009 2008
(In Thousands)
Fair value of plan assets P=3,967,810 P=2,994,978 P=2,437,705 P=1,306,847 P=743,477 Present value of defined benefit obligation 3,234,528 2,269,976 1,618,563 926,755 492,166 Surplus 733,282 725,002 819,142 380,092 251,311 Experience adjustment on plan asset 333,746 56,398 373,973 62,727 (82,300) Experience adjustment on plan liabilities 366,834 140,848 58,868 143,281 (227,645)
The expected overall rate of return on assets is determined based on historical returns, applicable to the period over which obligation is to be settled. These are reflected in the principal assumptions below.
2012 2011 Discount rate 4%–7% 5%–7% Expected rate of return on assets 5%–8% 5%–7% Future salary increases 10%–11% 10%
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The assets of the Plan are being held by a trustee bank. The investing decisions of the Plan are made by Board of Trustees of the Retirement Plan. The following table presents the carrying amounts and estimated fair values of the assets of the Plan: 2012 2011
Carrying Amount Fair Value
Carrying Amount Fair Value
Cash and cash equivalents P=171,751 P=171,751 P=182,785 P=182,785 Investment in debt and other Securities 450,728 450,728 240,635 240,635 Investment in common trust
funds 1,736,086 1,736,086 1,244,928 1,244,928 Investment in equity
securities 183,913 183,913 173,693 173,693 Investment in government Securities 1,692,804 1,692,804 1,617,703 1,617,703 Others 34,904 34,904 29,788 29,788 P=4,270,186 P=4,270,186 P=3,489,532 P=3,489,532 The Plans’ assets and investments consist of the following:
§ Cash and cash equivalents includes regular savings and time deposits.
§ Investments in debt and other securities, consisting of both short-term and long-term corporate loans, notes and bonds, which bear interest ranging from 5.45% to 8.46% and have maturities from April 2014 to September 2022;
§ Investment in common trust funds consists of unit investment trust fund.
§ Investment in equity securities consists of listed and unlisted equity securities.
§ Investments in government securities, consisting of retail treasury bonds that bear interest ranging from 5.00% to11.14% and have maturities from July 2013 to October 2037; and
§ Other financial assets held by the Plan are primarily accrued interest income on cash deposits and debt securities held by the Plan.
As at and for the year ended December 31, 2012, the following table summarizes the outstanding balances and transactions of the Plan with the reporting entity and BDO Unibank, Inc., a related party:
2012 (In Thousands)
Cash and cash equivalents P=171,151 Interest income from cash and cash equivalents 2,826 Investment in common trust funds 1,736,086 Gains from Investment in common trust funds 456,634 P=2,366,697
The Group expects to contribute about P=341.9 million to its defined benefit pension plan in 2013.
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26. Income tax
The details of the Group’s deferred tax assets and liabilities are as follows:
2012 2011 (In Thousands)
Deferred tax assets - net: Unamortized past service cost and defined
benefit liability P=100,129 P=188,582 Unrealized foreign exchange loss and others 362,005 305,681 Accrued leases 43,070 105,585 MCIT 79,253 61,248 Unrealized marked-to-market loss
on investments 40,517 36,708 Deferred income on sale of real estate – (12,823) NOLCO 17,131 9,663 P=642,105 P=694,644
Deferred tax liabilities - net: Trademarks and brand names P=1,837,429 P=1,879,000 Capitalized interest 1,276,303 1,293,396 Unrealized foreign exchange gain 791,671 783,361 Unrealized gross profit on sale of real estate 301,382 366,982 Accrued/deferred rent income 169,831 88,842 Unrealized marked-to-market gain
on investments 45,723 63,052 Unamortized past service cost and
defined benefit asset 54,905 46,969 Others 65,674 (13,623) P=4,542,918 P=4,507,979
The Group’s consolidated deferred tax assets as at December 31, 2012 and 2011 have been reduced to the extent that part or all of the deferred tax assets may no longer be utilized in the future.
The components of deductible temporary differences of certain balance sheet items and the carryforward benefits of unused MCIT and NOLCO, which pertains to the Parent Company, for which no deferred tax assets have been recognized in the consolidated balance sheets, are as follows:
2012 2011 (In Thousands)
Net unrealized foreign exchange loss P=2,011,810 P=2,011,810 Allowance for impairment losses 1,889,215 1,889,215 NOLCO 1,630,269 – Accretion on convertible bonds 297,707 296,428 MCIT 122,669 – Non-refundable advance rentals 66,456 65,280 Past service cost 36,672 15,817 P=6,054,798 P=4,278,550
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NOLCO and MCIT applied as deduction from taxable income and income tax due amounted to nil in 2012, and P=467.5 million and P=155.6 million in 2011, respectively.
The following are the movements in NOLCO and MCIT:
2012 2011 (In Thousands) NOLCO: Balance at beginning of year P=– P=467,458,462 Additions 1,630,269 – Applications – (467,458,462) Balance at end of year P=1,630,269 P=– MCIT: Balance at beginning of year P=– P=155,551,401 Additions 122,669 – Applications – (155,551,401) Balance at end of year P=122,669 P=–
The reconciliation between the statutory tax rates and the Group’s effective tax rates on income before income tax is as follows:
2012 2011 2010 Statutory income tax rate 30% 30% 30%Add (deduct) income tax effects
of reconciling items: Equity in net earnings of associates (7) (5) (5) Dividend income exempt from tax (1) (1) (1) Interest income subjected to final tax (3) (3) (3) Gain on sale of shares of stock – (3) (2) Others (3) (2) (2) Change in unrecognized deferred
tax assets – (1) 1 Effective income tax rates 16% 15% 18%
27. Lease Agreements
The lease agreements of SM Prime and its subsidiaries with their tenants are generally granted for a term of one year, with the exception of some of the larger tenants operating nationally, which are granted initial lease terms of five years, renewable on an annual basis thereafter. Upon inception of the lease agreement, tenants are required to pay certain amounts of deposits. Tenants likewise pay either a fixed monthly rent, which is calculated by reference to a fixed sum per square meter of area leased, or pay rent on a percentage rental basis, which comprises of a basic monthly amount and a percentage of gross sales or a minimum set amount, whichever is higher.
The Parent Company’s lease agreements with its tenants are generally granted for a term of one to twenty-five years. Tenants likewise pay a fixed monthly rent which is calculated by reference to a fixed sum per square meter of area leased except for few tenants, which pay either a fixed monthly rent or a percentage of gross sales, whichever is higher.
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Upon inception of the lease agreement, tenants are required to pay certain amounts of deposits. Tenants’ deposits amounted to P=11,691.8 million and P=10,104.6 million as at December 31, 2012 and 2011, respectively.
The minimum lease receivables under the noncancellable operating leases of the Parent Company as at December 31 are as follows:
2012 2011 (In Thousands) Within one year P=738,122 P=763,355 After one year but not more than five years 2,230,084 1,937,989 After five years 5,512,218 4,180,161 Balance at end of year P=8,480,424 P=6,881,505
SM Prime and its subsidiaries also lease certain parcels of land where some of their malls are situated or constructed. The terms of the lease are for periods ranging from 15 to 50 years, renewable for the same period under the same terms and conditions. Rental payments are generally computed based on a certain percentage of the gross rental income or a certain fixed amount, whichever is higher.
The minimum lease payables under the noncancellable operating leases of SM Prime as at December 31 are as follows:
2012 2011 (In Thousands)
Within one year P=427,541 P=425,473 After one year but not more than five years 1,809,929 1,767,203 After five years 21,041,694 21,511,962 Balance at end of year P=23,279,164 P=23,704,638
SVI has finance leases for several computer equipment included under “Property and equipment” account. The leases provide options to SVI to purchase the computer equipment at the end of the lease terms.
SVI’s obligation under finance lease ended on May 27, 2011. Total lease payments amounted to nil in 2012 and P=3.6 million in 2011.
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28. Financial Risk Management Objectives and Policies
The Group’s principal financial instruments, other than derivatives, comprise of bank loans, long-term debt, AFS investments, investments held for trading, time deposits and short-term investments and cash and cash equivalents. The main purpose of these financial instruments is to finance the Group’s operations. The Group has other financial assets and liabilities such as receivables and accounts payable and other current liabilities, which arise directly from its operations.
The Group also enters into derivative transactions, principally, cross currency swaps, interest rate swaps, foreign currency call options, non-deliverable forwards and foreign currency range options. The purpose is to manage the interest rate and foreign currency risks arising from the Group’s operations and its sources of finance.
The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, liquidity risk, credit risk and equity price risk. The BOD reviews and agrees policies for managing each of these risks and they are summarized in the following tables. The Group’s accounting policies in relation to derivatives are set out in Note 3.
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Interest Rate Risk The following tables set out the carrying amount, by maturity, of the Group’s long-term financial liabilities that are exposed to interest rate risk as at December 31, 2012 and 2011: 2012 Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years Total Debt Issue Cost Carrying Amount
(In Thousands)
Fixed Rate Foreign Currency Loans: US$400 million fixed rate bonds $– $– $– $381,042 $– P=15,641,760 (P=127,984) P=15,513,776 Interest rate – – – 5.50% – US$500 million fixed rate bonds – 379,156 – – – 15,564,354 (89,610) 15,474,744 Interest rate – 6.00% – – – US$350 million fixed rate bonds 245,623 – – – – 10,082,824 (17,119) 10,065,705 Interest rate 6.75% – – – – US$250 million convertible bonds – – 229,173 – – 9,407,559 (183,247) 9,224,312 Interest rate – – 1.63% – – US$500 million Senior bonds – – – – 500,000 20,525,000 (215,069) 20,309,931 Interest rate – – – – 4.25% Peso Loans: Three-year, five-year, seven-year and
ten-year fixed rate notes P=2,078,500 P=78,500 P=10,078,500 P=8,077,400 P=6,650,100 26,963,000 (144,816) 26,818,184 Interest rate 5.86%-6.81% 5.86%-6.81% 5.86%-7.73% 5.86%-6.81% 5.86%-9.85% Five-year and seven-year retail bonds – 8,400,000 – 1,000,000 – 9,400,000 (32,108) 9,367,892 Interest rate – 8.25% – 9.10% – Seven-year and Ten-year retail bonds – – – – 14,282,270 14,282,270 (118,549) 14,163,721 Interest rate – – – – 6.00%-6.94% Five-year fixed rate notes 1,000 1,000 1,000 6,696,043 – 6,699,043 (36,984) 6,662,059 Interest rate 6.17% 6.17% 6.17%– 6.17% – Five-year and ten-year corporate notes – – – – 1,100,000 1,100,000 (7,849) 1,092,151 Interest rate – – – 10.11% Seven-year and ten-year corporate notes 5,000 5,000 5,000 10,000 4,970,000 4,995,000 (37,757) 4,957,243 Interest rate 5.75%-6.63% 5.75%-6.63% 5.75%-6.63% 5.75%-6.63% 5.75%-6.63% Five-year, seven-year and ten-year corporate notes 20,000 20,000 1,097,300 66,145 756,555 1,960,000 (10,332) 1,949,668 Interest rate 5.79%-6.65% 5.79%-6.65% 5.79%-6.65% 5.89%-6.65% 6.65% Other bank loans 8,750 1,380,500 1,339,300 1,200,000 2,050,000 5,978,550 (13,070) 5,965,480 Interest rate 6.75% 5.69%-6.75% 3.6%-7.28% 9.75% 6.71%-8.79% Variable Rate Foreign Currency Loans: US$ five-year term loans $– $– $– $280,000 $– 11,494,000 (195,854) 11,298,146 Interest rate – – – LIBOR+margin % – China Yuan renminbi loans ¥77,476 ¥375,168 ¥60,900 ¥– ¥– 3,383,486 – 3,383,486
(Forward)
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2012 Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years Total Debt Issue Cost Carrying Amount
(In Thousands)
Interest rate 5.76%-6.20% 5.76%-6.20% 5.76% – US$ bilateral loans $25,000 $– $– $– $– P=1,026,250 (P=5,008) P=1,021,242 Interest rate LIBOR+margin % – $– – – Other bank loans $– $– $50,000 $– $– 2,052,500 (15,572) 2,036,928 Interest rate – – LIBOR+margin % – – Peso Loans: Peso loans collateralized with time deposits – – 3,000,000 – – 3,000,000 (6,635) 2,993,365 Interest rate – – PDST-F+margin% – – Five-year, seven-year and ten-year corporate notes 30,000 30,000 2,880,000 – – 2,940,000 (25,829) 2,914,171 Interest rate PDST-F+margin% – PDST-F+margin% – – Five-year floating rate loan 96,500 96,500 96,500 8,360,500 950,000 9,600,000 (64,382) 9,535,618 Interest rate PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin% Five-year bilateral loans – – – 500,000 – 500,000 (2,009) 497,991 Interest rate – – – PDST-F+margin% – Other bank loans 30,000 5,180,000 4,955,000 3,000,000 – 13,165,000 (18,384) 13,146,616 Interest rate PDST-F+margin% PDST-F+margin% PDST-F+margin% PDST-F+margin% – P=189,760,596 (P=1,368,167) P=188,392,429
2011 Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years Total Debt Issue Cost Carrying Amount
(In Thousands)
Fixed Rate Foreign Currency Loans: US$400 million fixed rate bonds $– $– $– $– $378,649 P=16,599,952 (P=160,739) P=16,439,213 Interest rate – – – – 5.50% US$500 million fixed rate bonds – – 379,156 – – 16,622,199 (146,602) 16,475,597 Interest rate – – 6.00% – – US$350 million fixed rate bonds – 245,623 – – – 10,768,112 (49,831) 10,718,281 Interest rate – 6.75% – – – Peso Loans: Three-year, five-year, seven-year and
ten-year fixed rate notes P=990 P=2,000,990 P=990 P=9,194,060 P=800,000 11,997,030 (67,129) 11,929,901 Interest rate 9.60% 6.76% 9.60% 7.73%-9.60% 9.85% Five-year and seven-year retail bonds – – 8,400,000 1,000,000 – 9,400,000 (47,421) 9,352,579 Interest rate – – 8.25% 9.10% – Five-year fixed rate notes – – – 6,700,000 – 6,700,000 (49,708) 6,650,292 Interest rate – – – 6.16% – Five-year and ten-year corporate notes 5,550 – 5,550 2,978,850 1,100,000 4,089,950 (23,804) 4,066,146
(Forward)
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2011 Below 1 Year 1-2 Years 2-3 Years 3-5 Years Over 5 Years Total Debt Issue Cost Carrying Amount
(In Thousands)
Interest rate 8.4% – 8.4% 8.4% 10.11% Seven-year and ten-year corporate notes – – – – 5,000,000 P=5,000,000 (P=42,578) P=4,957,422 Interest rate – – – – 5.75%-6.63% Five-year, seven-year and ten-year corporate notes 20,000 20,000 20,000 1,105,960 814,040 1,980,000 (16,074) 1,963,926 Interest rate 5.79%-6.65% – 5.79%-6.65% 5.79%-6.65% 5.79%-6.65% Other bank loans 500 500 – 4,236,000 3,250,000 7,487,000 (19,660) 7,467,340 Interest rate 8.57% 8.57% – 7%-8.57% 6.71%-9.75% Variable Rate Foreign Currency Loans: US$ five-year term loans $– $– $– $145,000 $– 6,356,800 (255,267) 6,101,533 Interest rate – – – LIBOR+margin % – China Yuan renminbi loans ¥40,000 ¥– ¥501,382 ¥60,900 ¥– 4,176,648 – 4,176,648 Interest rate 5.32%-6.65% – 5.32%-6.65% 5.32%-6.65% – US$ bilateral loans $– $– $25,000 $– $– 1,096,000 (11,071) 1,084,929 Interest rate – – LIBOR+margin % – – US$300 million convertible bonds 22,346 – – – – 979,645 (8,256) 971,389 Interest rate 6.65% – – – – Other bank loans $– $20,000 $– $50,000 $– 3,068,800 (38,021) 3,030,779 Interest rate – LIBOR+margin % – LIBOR+margin % – Peso Loans: Peso loans collateralized with time deposits P=5,950,000 P=– P=– P=3,000,000 P=– 8,950,000 (15,070) 8,934,930 Interest rate PDST-F+margin% – – PDST-F+margin% – Five-year, seven-year and ten-year corporate notes 50,000 50,000 50,000 4,800,000 – 4,950,000 (29,755) 4,920,245 Interest rate PDST-F+margin% – PDST-F+margin% PDST-F+margin% – Five-year floating rate loan 50,000 – 50,000 100,000 4,800,000 5,000,000 (37,587) 4,962,413 Interest rate PDST-F+margin% – PDST-F+margin% PDST-F+margin% PDST-F+margin% Redeemable preferred shares - Series 2 200,000 – – – – 200,000 (131) 199,869 Interest rate PDST-F+margin% – – – – Corporate notes 300 – 300 198,800 – 199,400 (653) 198,747 Interest rate PDST-F+margin% – PDST-F+margin% PDST-F+margin% – Five-year bilateral loans 46,875 – – – 500,000 546,875 (2,584) 544,291 Interest rate PDST-F+margin% – – – PDST-F+margin% Other bank loans 10,000 – 5,010,000 6,245,000 – 11,265,000 (26,490) 11,238,510 Interest rate PDST-F+margin% – PDST-F+margin% PDST-F+margin% – P=137,433,411 (P=1,048,431) P=136,384,980
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Fixed rate financial instruments are subject to fair value interest rate risk while floating rate financial instruments are subject to cash flow interest rate risk.
Repricing of floating rate financial instruments is mostly done at intervals of three months or six months.
The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. The Group’s guideline is to keep between 50% to 60% of its borrowings at fixed interest rates. To manage this mix in a cost-efficient manner, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional amount. These swaps economically hedge the underlying debt obligations. As at December 31, 2012 and 2011, after taking into account the effect of interest rate swaps, approximately 64% and 56%, respectively, of the Group’s borrowings are kept at a fixed rate of interest, considering market conditions.
Interest Rate Risk Sensitivity Analysis. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant of the Group’s income before income tax and equity after income tax, through the impact of floating rate financial liabilities and debt securities classified as at FVPL and AFS investments, respectively.
Increase (Decrease)
in Basis Points
Effect on Income
Before Tax
Effect on Equity After Income Tax
(In Millions)
2012 100 (P=437.2) (P=133.5) 50 (218.6) (58.9) (100) 437.2 174.8 (50) 218.6 95.2 2011 100 (482.7) (265.1) 50 (241.3) (174.2) (100) 482.7 112.5 (50) 241.3 14.5
Fixed rate debts, although subject to fair value interest rate risk, are not included in the sensitivity analysis as these are carried at amortized costs. The assumed movement in basis points for interest rate sensitivity analysis is based on currently observable market environment, showing a significantly higher volatility as in prior years.
Foreign Currency Risk The Group’s exposure to foreign currency risk arises as the Parent Company and SM Prime have significant investments and debt issuances which are denominated in U.S. dollars. To manage its foreign exchange risk, stabilize cash flows and improve investment and cash flow planning, the Group enters into foreign currency swap contracts, foreign currency call options, non-deliverable forwards and foreign currency range options with the aim of reducing and/or managing the adverse impact of changes in foreign exchange rates on financial performance and cash flows.
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The following tables show the Group’s foreign currency-denominated financial assets and liabilities and their peso equivalents as at December 31, 2012 and 2011:
2012 US$ PhP= (In Thousands)
Current assets: Cash and cash equivalents $20,355 P=835,593 Time deposits and short-term investments 111,941 4,595,167 AFS investments 17,875 733,752 Receivables 334,142 13,716,529 Noncurrent assets: AFS investments 146,028 5,994,458 Time deposits 1,095,480 44,969,454 Derivative assets 2,679 109,973 Other noncurrent assets 24,151 991,431 Total foreign currency-denominated financial assets 1,752,651 71,946,357 Current liabilities: Bank loans 50,000 2,052,500 Accounts payable and other current liabilities 92,297 3,788,792 Current portion of long-term debt 245,623 10,082,824 Noncurrent liabilities: Long-term debt - net of current portion 1,762,239 72,339,915 Derivative liabilities 5,952 244,330 Total foreign currency-denominated financial liabilities 2,156,111 88,508,361 Net foreign currency-denominated financial liabilities $403,460 P=16,562,004
2011 US$ PhP= (In Thousands)
Current assets: Cash and cash equivalents $11,636 P=510,101 Time deposits and short-term investments 24,999 1,095,974 Investments held for trading 5,175 226,872 Receivables 222,916 9,772,656 Noncurrent assets: AFS investments 133,237 5,841,108 Time deposits 853,480 37,416,563 Derivative assets 2,637 115,619 Total foreign currency-denominated financial assets 1,254,080 54,978,893 Current liabilities: Bank loans 88,000 3,857,920 Accounts payable and other current liabilities 19,024 834,001 Current portion of long-term debt 23,258 1,019,613 Noncurrent liabilities: Long-term debt - net of current portion 1,228,338 53,850,334 Derivative liabilities 7,262 318,359 Total foreign currency-denominated financial liabilities 1,365,882 59,880,227 Net foreign currency-denominated financial liabilities $111,802 P=4,901,334
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As at December 31, 2012 and 2011, approximately 39.5% and 36.4%, respectively, of the Group’s total consolidated bank loans and long-term debt were denominated in US Dollars. Thus, appreciation of the Philippine peso against the US Dollar will decrease both the principal amount of the foreign currency-denominated debt and interest expense on the Group’s debt in Philippine peso terms.
The Group has recognized in its consolidated statements of income, net foreign exchange gain of P=565.1 million, P=242.9 million and P=407.2 million on its net foreign-currency denominated assets and liabilities for the years ended December 31, 2012, 2011 and 2010, respectively. This resulted from the movements of the U.S. dollar against the Philippine peso as shown in the following table:
U.S. Dollar
to Peso December 31, 2010 43.84 December 31, 2011 43.84 December 31, 2012 41.05
Foreign Currency Risk Sensitivity Analysis. The following table demonstrates the sensitivity to a reasonably possible change in U.S. dollar to Philippine peso exchange rate, with all other variables held constant, of the Group’s income before income tax (due to changes in the fair value of monetary assets and liabilities, including the impact of derivative instruments).
Appreciation (Depreciation) of P= Effect on Income Before Tax (In Millions) 2012 1.50 P=605.2 1.00 403.5 (1.50) (605.2) (1.00) (403.5) 2011 1.50 167.7 1.00 111.8 (1.50) (167.7) (1.00) (111.8)
Liquidity Risk Liquidity risk arises from the possibility that the Group may encounter difficulties in raising funds to meet commitments from financial instruments.
The Group seeks to manage its liquidity profile to be able to finance capital expenditures and service maturing debts. To cover its financing requirements, the Group intends to use internally generated funds and proceeds from debt and equity issues and sales of certain assets.
As part of its liquidity risk management program, the Group regularly evaluates its projected and actual cash flow information and continuously assesses conditions in the financial markets for opportunities to pursue fund-raising initiatives. These initiatives may include bank loans, export credit agency-guaranteed facilities and debt capital and equity market issues.
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The Group’s financial assets, which have maturities of less than 12 months and used to meet its short-term liquidity needs, include cash and cash equivalents, current portion of time deposits and short-term investments, investments held for trading and current portion of AFS investments-bonds and corporate notes amounting to P=60,714.2 million, P=29,090.3 million, P=459.3 million and P=1,734.0 million, respectively, as at December 31, 2012 and P=56,050.3 million, P=879.4 million, P=457.5 million and P=1,000.0 million, respectively, as at December 31, 2011 (see Notes 7, 8 and 9). The Group also has readily available credit facility with banks and related parties to meet its long-term financial liabilities.
The tables below summarize the maturity profile of the Group’s financial liabilities as at December 31, 2012 and 2011 based on the contractual undiscounted payments:
2012
On Demand Less than 1 Year 2 to 5 Years More than
5 Years Total (In Thousands)
Bank loans P=– P=33,146,253 P=– P=– P=33,146,253 Accounts payable and other
current liabilities* – 55,531,106 – – 55,531,106 Long-term debt (including
current portion) – 16,077,517 144,860,929 69,106,024 230,044,470 Derivative liabilities:** Non-deliverable forward – 18,501 – – 18,501 Interest rate swaps – – 244,330 – 244,330 Foreign currency swap – 2,020 – – 2,020 Multiple derivatives
on convertible bonds – 2,473,130 – – 2,473,130 Dividends payable – 97,282 – – 97,282 Tenants’ deposits – 146,360 11,123,172 77,786 11,347,318 P=– P=107,492,169 P=156,228,431 P=69,183,810 P=332,904,410
2011
On Demand Less than 1 Year 2 to 5 Years More than
5 Years Total (In Thousands)
Bank loans P=– P=25,947,425 P=– P=– P=25,947,425 Accounts payable and other
current liabilities* – 43,323,757 – – 43,323,757 Long-term debt (including
current portion) – 10,010,330 120,904,570 36,026,066 166,940,966 Derivative liabilities:** Non-deliverable forwards – – 43,842 – 43,842 Interest rate swaps – – 237,980 – 237,980 Multiple derivatives
on convertible bonds – 80,380 – – 80,380 Dividends payable – 25,696 – – 25,696 Tenants’ deposits – 290,923 13,459,693 – 13,750,616 P=– P=79,678,511 P=134,646,085 P=36,026,066 P=250,350,662 * Excluding payable to government agencies of P=2,334.8 million and P=1,426.2 million at December 31, 2012 and 2011, respectively,
the amounts of which are not considered as financial liabilities. **Based on estimated future cash flows.
Credit Risk The Group trades only with recognized, creditworthy related and third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on a regular basis which aims to reduce the Group’s exposure to bad debts at a minimum level. Given the Group’s diverse base of customers, it is not exposed to large concentrations of credit risk.
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With respect to credit risk arising from the other financial assets of the Group, which comprise of cash and cash equivalents, time deposits and short-term investments, investments held for trading, AFS investments and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments, without considering the effects of collateral.
Since the Group trades only with recognized related and third parties, there is no requirement for collateral.
Receivable from sale of real estate has minimal credit risk and is effectively collateralized by respective unit sold since title to the real estate properties are not transferred to the buyers until full payment is made.
As at December 31, 2012 and 2011, the financial assets, except for certain receivables and AFS investments, are generally viewed by management as good and collectible considering the credit history of the counterparties. Past due or impaired financial assets are very minimal in relation to the Group’s total financial assets.
Credit Quality of Financial Assets The credit quality of financial assets is managed by the Group using high quality and standard quality as internal credit ratings.
High Quality. Pertains to counterparty who is not expected by the Group to default in settling its obligations, thus credit risk exposure is minimal. This normally includes large prime financial institutions, companies and government agencies.
Standard Quality. Other financial assets not belonging to high quality financial assets are included in this category.
As at December 31, 2012 and 2011, the credit analyses of the Group’s financial assets that are neither past due nor impaired are as follows:
2012 High Quality Standard Quality Total
(In Thousands) Cash and cash equivalents
(excluding cash on hand) P=59,646,460 P=– P=59,646,460 Time deposits and short-term investments
(including noncurrent portion) 58,523,185 – 58,523,185 Investments held for trading - Bonds 459,343 – 459,343 AFS investments 19,303,356 4,488 19,307,844 Receivables - net (including noncurrent
portion of receivables from real estate buyers) 25,883,925 4,623,017 30,506,942
Advances and other receivables - net (included under “Other current assets” account in the consolidated balance sheet) 11,148,979 – 11,148,979
(Forward)
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2012 High Quality Standard Quality Total
(In Thousands) Treasury bonds (included under “Other
current and noncurrent assets” account in the consolidated balance sheet) P=200,000 P=– P=200,000
Long-term notes (included under “Other noncurrent assets” account in the consolidated balance sheet) 306,724 – 306,724
Derivative assets 128,480 – 128,480 P=175,600,452 P=4,627,505 P=180,227,957
2011 High Quality Standard Quality Total
(In Thousands) Cash and cash equivalents
(excluding cash on hand) P=54,991,002 P=– P=54,991,002 Time deposits and short-term investments
(including noncurrent portion) 38,295,972 – 38,295,972 Investments held for trading - Bonds 457,496 – 457,496 AFS investments 13,930,761 4,633 13,935,394 Receivables - net (including noncurrent
portion of receivables from real estate buyers) 16,428,092 3,873,746 20,301,838
Advances and other receivables - net (included under “Other current assets” account in the consolidated balance sheet) 8,816,370 – 8,816,370
Receivable from a related party (included under “Other noncurrent assets” account in the consolidated balance sheet) 6,000,000 – 6,000,000
Treasury bonds (included under “Other current and noncurrent assets” account in the consolidated balance sheet) 200,000 – 200,000
Long-term notes (included under “Other noncurrent assets” account in the consolidated balance sheet) 506,724 – 506,724
Derivative assets 159,461 – 159,461 P=139,785,878 P=3,878,379 P=143,664,257
Equity Price Risk The Group’s exposure to equity price pertains to its investments in quoted equity shares which are classified as AFS investments in the consolidated balance sheets. Equity price risk arises from the changes in the levels of equity indices and the value of individual stocks traded in the stock exchange.
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As a policy, management monitors the equity securities in its investment portfolio based on market expectations. Material equity investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by management.
The effect on equity after income tax (as a result of change in fair value of AFS investments as at December 31, 2012 and 2011) due to a possible change in equity indices, based on historical trend of PSE index, with all other variables held constant is as follows:
2012
Change in
Equity Price
Effect on Equity After Income Tax
(In Millions)
AFS investments +14.37% P=1,950.50 -14.37% (1,950.50)
2011
Change in
Equity Price
Effect on Equity After Income Tax
(In Millions)
AFS investments +17.58% P=1,209.09 -17.58% (1,209.09)
Capital Management Capital includes equity attributable to the owners of the Parent.
The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value.
The Group manages its capital structure and makes adjustments to it, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, pay-off existing debts, return capital to shareholders or issue new shares.
The Group monitors its capital gearing by measuring the ratio of net interest-bearing debt divided by total capital plus net interest-bearing debt and interest-bearing debt divided by total capital plus interest-bearing debt. Net interest-bearing debt includes all short-term and long-term debt, reduced by related pledged time deposits, net of cash and cash equivalents, time deposits and short-term investments, investments in bonds held for trading, AFS investments (redeemable preferred shares and bonds and corporate notes) and long-term notes included under “Other noncurrent assets” account, while interest-bearing debt includes all short-term and long-term debt, reduced by related pledged time deposits. The Group’s guideline is to keep the gearing ratio at not lower than 50:50.
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As at December 31, 2012 and 2011, the Group’s ratio of net interest-bearing debt to total capital plus net interest-bearing debt and ratio of interest-bearing debt to total capital plus interest-bearing debt were as follows:
Net Interest-bearing Debt to Total Capital plus Net Interest-bearing Debt
2012 2011 (In Thousands)
Bank loans P=31,793,975 P=25,747,920 Current portion of long-term debt 13,859,558 7,920,961 Long-term debt - net of current portion and pledged
time deposits 174,532,871 128,464,019 Less cash and cash equivalents, time deposits
(net of pledged) and short-term investments, investments in held for trading bonds, AFS investments (bonds and corporate notes and redeemable preferred shares) and long-term notes included under “Other noncurrent assets” account (126,574,773) (100,803,702)
Total net interest-bearing debt (a) 93,611,631 61,329,198 Total equity attributable to owners of the Parent 188,074,132 157,666,331 Total net interest-bearing debt and equity
attributable to owners of the Parent (b) P=281,685,763 P=218,995,529
Gearing ratio (a/b) 33% 28%
Interest-bearing Debt to Total Capital plus Interest-bearing Debt
2012 2011 (In Thousands)
Bank loans P=31,793,975 P=25,747,920 Current portion of long-term debt 13,859,558 7,920,961 Long-term debt - net of current portion and pledged
time deposits 174,532,871 128,464,019 Total interest-bearing debt (a) 220,186,404 162,132,900 Total equity attributable to owners of the Parent 188,074,132 157,666,331 Total interest-bearing debt and equity attributable
to owners of the Parent (b) P=408,260,536 P=319,799,231
Gearing ratio (a/b) 54% 51%
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29. Financial Instruments
Fair Values The following table sets forth the carrying values and estimated fair values of financial assets and liabilities, by category and by class, recognized as at December 31, 2012 and 2011:
2012 2011 Carrying Value Fair Value Carrying Value Fair Value
(In Thousands)
Financial Assets Financial assets at FVPL: Investments held for trading - Bonds P=459,343 P=459,343 P=457,496 P=457,496 Derivative assets 128,480 128,480 159,461 159,461 587,823 587,823 616,957 616,957 Loans and receivables: Cash and cash equivalents 60,714,720 60,714,720 56,050,322 56,050,322 Time deposits and short-term
investments (including noncurrent portion) 58,523,185 62,048,610 38,295,972 42,325,254
Receivables - net (including noncurrent portion of receivables from real estate buyers) 30,767,065 29,466,700 20,504,264 19,517,334
Advances and other receivables - net (included under “Other current assets” account in the consolidated balance sheets) 11,316,886 11,316,886 8,816,370 8,816,370
Receivable from a related party (included under “Other noncurrent assets” account in the consolidated balance sheets) _ _ 6,000,000 6,292,484
Long-term notes (included under “Other noncurrent assets” account in the consolidated balance sheets) 306,724 331,519 506,724 523,977
161,628,580 163,878,435 130,173,652 133,525,741 Held-to-Maturity - Treasury bonds (included under “Other
current assets and other noncurrent assets” account in the consolidated balance sheets) 200,000 225,695 200,000 220,468
AFS Investments: Shares of stock 11,618,836 11,618,836 7,088,955 7,088,955 Bonds and corporate notes 7,728,240 7,728,240 6,841,109 6,841,109 Club shares 5,900 5,900 5,330 5,330 19,352,976 19,352,976 13,935,394 13,935,394 P=181,769,379 P=184,044,929 P=144,926,003 P=148,298,560
Financial Liabilities Financial Liabilities at FVPL - Derivative liabilities P=2,737,981 P=2,737,981 P=362,202 P=362,202 Other Financial Liabilities: Bank loans 31,793,975 31,793,975 25,747,920 25,747,920 Accounts payable and other current
liabilities* 55,531,106 55,531,106 43,323,577 43,323,577 Long-term debt (including current
portion and net of unamortized debt issue cost) 188,392,429 230,044,469 136,384,980 150,553,342
Dividends payable 97,282 97,282 25,696 25,696 Tenants’ deposits and others 14,500,317 14,976,358 13,713,302 13,718,285 290,315,109 332,443,190 219,195,475 233,368,820 P=293,053,090 P=335,181,171 P=219,557,677 P=233,731,022 * Excluding payable to government agencies of P=2,334.8 million and P=1,426.2 million as at December 31, 2012 and 2011,
respectively, the amounts of which are not considered financial liabilities.
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The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value:
Investments Held for Trading. The fair values are based on the quoted market prices of the instruments.
Cash and Cash Equivalents. The carrying amounts reported in the consolidated balance sheets approximate its fair value, due to its short-term nature.
Time Deposits and Short-term Investments. The estimated fair value is based on the discounted value of future cash flows using the prevailing interest rates. The discount rates used range from 0.50%% to 6.55% and 1.13% to 1.65% as at December 31, 2012 and 2011, respectively.
Receivables and Advances and Other Receivables included under “Other current assets” account. The carrying values of short-term receivables approximate their fair values due to their short-term maturities. The estimated fair value of the noncurrent portion of receivables from real estate buyers is based on the discounted value of future cash flows using the prevailing interest rates on sales of Group’s accounts receivable. The discount rates used ranged from 5.5% to 8.0% and 8.0% to 10.0% as at December 31, 2012 and 2011, respectively.
Receivable from a Related Party and Long-term Notes included under “Other noncurrent assets” account. The estimated fair values of receivable from a related party and long-term notes are based on the discounted value of future cash flows using the prevailing interest rates. Discount rates used for receivable from a related party range from 2.21% to 5.41% as at December 31, 2011. Discount rates used for long-term notes range is 7.5% and 2.21% to 5.41% as at December 31, 2012 and 2011, respectively.
Held-to-Maturity Investments. The fair value is based on quoted market prices of the investments at a rate of 112.85% and 110.23% as at December 31, 2012 and 2011, respectively.
AFS Investments. The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market bid prices at the close of business. For investment in debt instruments, such as the investments in mandatorily redeemable preferred shares where there is no active market, the fair value is based on the present value of future cash flows discounted at prevailing interest rates. The discount rates used is 3.88% to 8.25% and 4.24% as at December 31, 2012 and 2011, respectively. For unlisted equity securities, these are carried at cost less allowance for impairment loss since there are no quoted prices and due to the unpredictable nature of future cash flows and lack of suitable methods for arriving at reliable fair value.
Bank Loans. The carrying value approximates fair value because of recent and regular repricing (i.e., quarterly) based on market conditions.
Accounts Payable and Other Current Liabilities and Dividends Payable. The carrying values reported in the consolidated balance sheets approximate the fair value due to the short-term maturities of these liabilities.
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Long-term Debt. Fair value is based on the following:
Debt Type Fair Value Assumptions Fixed Rate Loans
Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of loans. Discount rates used range from 1.52% to 9.10% and 2.60% to 6.48% as at December 31, 2012 and 2011, respectively.
Variable Rate Loans For variable rate loans that re-price every three months, the carrying value approximates the fair value because of recent and regular repricing based on current market rates. For variable rate loans that re-price every six months, the fair value is determined by discounting the principal amount plus the next interest payment amount using the prevailing market rate for the period up to the next repricing date. Discount rates used was 1.73% to 5.91% and 1.98% to 2.70% as at December 31, 2012 and 2011, respectively.
Tenants’ Deposits. The estimated fair value is based on the discounted value of future cash flows using the applicable rates. The discount rates used range from 0.50% to 5.91% and 2.97% to 3.67% as at December 31, 2012 and 2011, respectively.
Derivative Assets and Liabilities. The fair values of the interest rate swaps and non-deliverable forwards are based on quotes obtained from counterparties. The fair value of the options relating to the Parent Company’s convertible bonds were computed using the indirect method of valuing multiple embedded derivatives. This valuation method compares the fair value of the option-free bond against the fair value of the bond as quoted in the market. The difference of the fair values is assigned as the value of the embedded derivatives.
Fair Value Hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
Level 1: Quoted prices in active markets for identical assets or liabilities, except for related embedded derivatives which are either classified as Level 2 or 3 and redeemable preferred shares categorized as AFS investments under Level 2;
Level 2: Those measured using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices);
Level 3: Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs).
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The following tables show the Group’s financial instruments carried at fair value as at December 31:
2012 Level 1 Level 2 Level 3 (In Thousands)
Financial Assets Financial assets at FVPL: Investments held for trading -
bonds P=459,343 P=– P=– Derivative assets – 128,480 – 459,343 128,480 – AFS investments: – – Shares of stocks 11,471,584 – 102,120 Bonds and corporate notes 7,728,240 – – Club shares 5,900 – – 19,205,724 – 102,120 P=19,665,067 P=128,480 P=102,120
Financial Liabilities Financial liabilities at FVPL -
Derivative liabilities P=– P=264,851 P=2,473,130
2011 Level 1 Level 2 Level 3 (In Thousands)
Financial Assets Financial assets at FVPL: Investments held for trading -
bonds P=457,496 P=– P=– Derivative assets – 159,461 – 457,496 159,461 – AFS investments: Shares of stocks 7,031,822 – – Bonds and corporate notes 6,841,109 – – Club shares 5,330 – – 13,878,261 – – P=14,335,757 P=159,461 P=–
Financial Liabilities Financial liabilities at FVPL -
Derivative liabilities P=– P=281,822 P=80,380
During the years ended December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.
The financial instrument classified under Level 3 pertains to the derivative liability arising from the options in the Parent Company’s convertible bonds. This was classified under Level 3 because of the credit spreads used as inputs to the fair value calculation of the options which were assessed by the Group as having a significant impact to its fair values.To assess the impact of the credit spreads used, the Group performed a sensitivity analysis using an increase (decrease) assumption in the credit spreads, the result of which is shown below:
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Increase (Decrease) in Credit Spread Net Effect on Fair Values of Option (In Thousands)
2012 100 bps (P=370,183) (100) bps 387,334 2011 100 bps (2,278) (100) bps 2,294
Derivative Financial Instruments To address the Group’s exposure to market risk for changes in interest rates arising primarily from its long-term floating rate debt obligations and to manage its foreign exchange risks, the Group entered into various derivative transactions such as cross-currency swaps, interest rate swaps, foreign currency call options, non-deliverable forwards and foreign currency range options. The Group also has embedded derivatives bifurcated from the Parent Company’s bonds.
Derivative Assets
2012 2011 (In Thousands)
Parent - Non-deliverable forwards P=18,501 P=43,842 Subsidiary - Interest rate swaps 109,979 115,619 P=128,480 P=159,461
Derivative Liabilities
2012 2011 (In Thousands)
Parent - Non-deliverable forwards P=18,501 P=43,842 Options arising from convertible bonds 2,473,130 80,380 Foreign currency swap 2,020 - Subsidiary - Interest rate swaps 244,330 237,980 P=2,737,981 P=362,202
Derivative liabilities of the Parent Company are included under “Accounts payable and other current liabilities” account in the consolidated balance sheets (see Note 18).
The table below shows information on the Group’s interest rate swaps presented by maturity profile:
2012 <1 Year >1-<2 Years >2-<5 Years (Amounts in Thousands)
Floating-Fixed Outstanding notional amount $145,000 $145,000 $145,000 Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin% 6 months
LIBOR+margin% Pay-fixed rate 2.91%–3.28% 2.91%–3.28% 2.91%–3.28%
(Forward)
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2012 <1 Year >1-<2 Years >2-<5 Years (Amounts in Thousands)
Outstanding notional amount $30,000 $30,000 $30,000 Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin% 6 months
LIBOR+margin% Pay-fixed rate 3.53% 3.53% 3.53% Outstanding notional amount $20,000 $20,000 $– Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin% Pay-fixed rate 3.18% 3.18% Outstanding notional amount $25,000 $– $– Receive-floating rate 6 months
LIBOR+margin% Pay-fixed rate 4.10% Fixed-Floating Outstanding notional amount P=970,000 P=960,000 P=950,000 Receive-fixed rate 5.44% 5.44% 5.44% Pay-floating rate 3MPDST-F 3MPDST-F 3MPDST-F Outstanding notional amount P=970,000 P=960,000 P=950,000 Receive-fixed rate 7.36% 7.36% 7.36% Pay-floating rate 3MPDST-F+margin% 3MPDST-F+margin% 3MPDST-F+margin%
2011 <1 Year >1-<2 Years >2-<5 Years
(Amounts in Thousands)
Floating-Fixed Outstanding notional amount $145,000 $145,000 $145,000 Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin% 6 months
LIBOR+margin% Pay-fixed rate 2.91%-3.28% 2.91%-3.28% 2.91%-3.28% Outstanding notional amount $50,000 $50,000 $50,000 Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin% 6 months
LIBOR+margin% Pay-fixed rate 3.18%-3.53% 3.18%-3.53% 3.18%-3.53% Outstanding notional amount $25,000 $25,000 $– Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin%
Pay-fixed rate 4.10% 4.10% Outstanding notional amount $20,000 $20,000 $– Receive-floating rate 6 months
LIBOR+margin% 6 months
LIBOR+margin%
Pay-fixed rate 3.41% 3.41%
Fixed-Floating Outstanding notional amount P=980,000 P=970,000 P=960,000 Receive-floating rate 5.44% 5.44% 5.44% Pay-fixed rate 3MPDST-F 3MPDST-F 3MPDST-F Outstanding notional amount 980,000 970,000 960,000 Receive-fixed rate 7.36% 7.36% 7.36% Pay-floating rate 3MPDST-F
+margin% 3MPDST-F +margin%
3MPDST-F +margin%
Options Arising from Investment in Convertible Bonds. The Parent Company invested in US$ denominated convertible bonds of a public company which it classified as AFS investments. The bonds contain multiple embedded derivatives such as long equity call, short call and long put options which were accounted for as compound derivatives. Such multiple embedded derivatives were bifurcated by the Parent Company from the host bonds on the respective purchase dates of
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the bonds. The net positive fair value of the options at inception amounted to P=3.7 million. The long equity call option pertains to the right of the Parent Company to convert the bonds into common shares of the issuer at the conversion price of P=63.7 (P=26.9 at present) per share at the fixed exchange rate of P=40.6 per US$1.0 until January 31, 2013, subject to a cash settlement option on the part of the issuer. The short call option pertains to the right of the issuer to early redeem the bonds on or after February 11, 2010 subject to the conditions stated in the bond agreement. On the other hand, the long put option, which expired on February 11, 2011, pertains to the right of the Parent Company to require the issuer to redeem the bonds at 115.6%.
As at December 31, 2012 and 2011, all outstanding embedded derivatives have nil values.
Options Arising from Convertible Bonds. The Parent Company’s convertible bonds contain multiple embedded derivatives such as short equity call option, long call option and short put option, which were bifurcated and accounted for as compound derivatives.
Short equity call option pertains to the option of the bondholders to convert the bonds into SMIC’s common shares prior to maturity. If a bondholder exercised its conversion option, the Parent Company can choose either to settle the bonds in cash or issue common shares, and such option on the part of the Parent Company is a long call option.
US$300.0 Million Convertible Bonds The Bonds are denominated in U.S. dollar while the currency of the underlying shares is denominated in Philippine peso. The contracting parties have fixed the exchange rate at P=48.37 per US$1. Considering the exposure of the Parent Company, the option was assessed as a short put option. In addition, the bondholder may require the Parent Company to redeem all or some of the Bond at 110.79% of the principal amount on March 19, 2010.
As at December 31, 2012 and 2011, the fair value of these options, which is shown as a current liability in the consolidated balance sheets amounted to nil and P=80.4 million, respectively. Net fair value change recognized by the Group in the 2012 consolidated statement of income includes P=219.3 million option value that was transferred to “Additional paid-in capital” account in the consolidated balance sheets as a result of the exercise of the conversion option (see Note 20), P=131.5 million mark-to-market loss on derivatives and P=28.8 million gain arising from the expiry of options which are reflected under “Gain (loss) on fair value changes on derivatives - net”account in the consolidated statements of income. Net fair value change recognized by the Group in 2011 amounting to positive P=36.3 million is also included under “Gain (loss) on fair value changes on derivatives - net”.
US$250.0 Million Convertible Bonds The Bonds are denominated in U.S. dollar while the currency of the underlying shares is denominated in Philippine peso. The contracting parties have fixed the exchange rate at P=42.71 per US$1. Considering the exposure of the Parent Company, the option was assessed as a short put option. In addition, the bondholder may require the Parent Company to redeem all or some of the Bonds on February 15, 2015 at their Early Redemption Amount, together with accrued but unpaid interest.
As at December 31, 2012, the fair value of these options, which is shown as a current liability in the consolidated balance sheets, amounted to P=2,473.1 million. At inception date, the negative fair value of these options amounted to P=1,193.9 million. In 2012, the Group recognized a fair value change from these options amounting to P=1,279.2 million loss which is recognized under “Gain (loss) on fair value changes on derivatives – net” account in the consolidated statements of income.
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Interest Rate Swaps. In 2011, SM Prime entered into US$ interest rate swap agreements with notional amount of US$145 million. Under the agreements, SM Prime effectively converts the floating rate U.S. dollar-denominated term loan into fixed rate loan with semi-annual payment intervals up to March 21, 2015 (see Note 19). As at December 31, 2012 and 2011, the floating to fixed interest rate swap has negative fair value of P=157.9 million and P=142.4 million, respectively.
SM Prime also entered into US$ interest rate swap agreement with notional amount of US$20 million in 2011. Under the agreement, SM Prime effectively converts the floating rate U.S. dollar-denominated five-year bilateral unsecured loan into fixed rate loan with semi-annual payment intervals up to November 30, 2014 (see Note 19). As at December 31, 2012 and 2011, the floating to fixed interest rate swaps has negative fair value of P=16.7 million and P=14.8 million, respectively.
In 2010, SM Prime entered into the following interest rate swap agreements:
§ A US$ interest rate swap agreement with nominal amount of US$30.0 million. Under the agreement, the Parent Company effectively converts the floating rate U.S. dollar-denominated five-year bilateral unsecured loan into fixed rate loan with semi-annual payment intervals up to November 30, 2015 (see Note 19). As at December 31, 2012 and 2011, the floating to fixed interest rate swap has a negative fair values of P=47.7 million and P=37.8 million, respectively.
§ Two Philippine peso interest rate swap agreements with notional amount of P=1,000.0 million each, with amortization of P=10.0 million every anniversary. The combined net cash flows of the two swaps effectively converts the Philippine peso-denominated five-year inverse floating rate notes into floating rate notes with quarterly payment intervals up to June 2015 (see Note 19). As at December 31, 2012 and 2011, these swaps have positive fair values of P=110.0 million and P=115.6 million, respectively.
§ A US$ interest rate swap agreement with notional amount of US$40.0 million. Under the agreement, SM Prime effectively converts the floating rate U.S. dollar-denominated three-year club loan into fixed rate loan with semi-annual payment intervals up to October 28, 2012 (see Note 19). On May 9, 2011 and July 28, 2011, the interest rate swap agreement was preterminated as a result of the prepayment of the underlying loan. Fair value changes from the preterminated swap recognized in the consolidated statements of income amounted to P=4.0 million loss in 2011.
§ A US$ interest rate swap agreement with notional amount of US$20.0 million. Under the agreement, SM Prime effectively converts the floating rate U.S. dollar-denominated three-year bilateral unsecured loan into fixed rate loan with semi-annual payment intervals up to January 14, 2013 (see Note 19). As at December 31, 2011, the floating to fixed interest rate swap has a negative fair value of P=3.2 million. On January 13, 2012, the interest rate swap was preterminated as a result of prepayment of the underlying loan. Fair value changes from the preterminated swap recognized on the consolidated statements of income amounted to P=1.1 million loss in 2012.
In 2009, SM Prime entered into US$ interest rate swap agreements with an aggregate notional amount of US$145.0 million. Under these agreements, SM Prime effectively converts the floating rate US$30.0 million two-year bilateral loan, US$90.0 million three-year term loans and US$25.0 million five-year bilateral loan into fixed rate loans with semi-annual payment intervals up to November 2011, May 2012 and November 2013, respectively (see Note 19). SM Prime preterminated the US$30.0 million swap on November 30, 2010 and the US$90.0 million swap on May 16, 2011. Fair value changes from the preterminated swap recognized in the consolidated
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statements of income amounted to P=9.0 million loss in 2011 P=6.0 million gain in 2010. As at December 31, 2012 and 2011, the outstanding US$25 million floating to fixed interest rate swap has negative fair values of P=22.1 million and P=39.8 million, respectively.
In 2009, SM Prime entered into Philippine peso interest rate swap agreement with a notional amount of P=750.0 million. Under these agreement, SM Prime effectively converts the floating rate Philippine peso-denominated four-year bullet term loan into fixed rate loan with quarterly payment intervals up to April 2013 (see Note 19). On October 17, 2011, the interest rate swap was preterminated as a result of the prepayment of the underlying loan. Negative fair value changes from the preterminated swap recognized in the consolidated statements of income amounted to P=14.0 million in 2011.
In 2008, SM Prime entered into Philippine peso interest swap agreements with an aggregate notional amount of P=1,000.0 million with repayment of P=5.0 million every anniversary. Under these agreements, SM Prime effectively swaps the fixed rate Philippine peso-denominated five-year syndicated fixed rate notes into floating rate loans based on PDST-F plus an agreed margin with quarterly payment intervals up to June 2013 (see Note 19). On March 14, 2011, the interest rate swap was preterminated as a result of the prepayment of the underlying loan. Fair value changes from the preterminated swap recognized in the consolidated statements of income amounted to P=27.0 million loss in 2011.
Foreign Currency Options. In 2010, SM Prime simultaneously entered into two plain vanilla long call currency options and two plain vanilla short put currency options with notional amounts of US$5 million each. SM Prime combines the long call option and the short put option such that the net effect of the two options will be similar to that of a foreign currency range option. If the spot rate is above the strike rate of the long call option, SM Prime, on a net-settlement basis, will buy US$ and sell P= at the strike rate of the long call option based on the notional amount. On the other hand, if the spot rate is below the lower strike rate of the short put option, SM Prime, on a net-settlement basis, will buy, US$ and sell P= at the strike rate of the short put option based on the notional amount. However, should the spot rate fall within the range of the two strike rates, there will be no settlement between parties as both options would be unfavorable. The average strike rates of the long call and short put currency options are P=47.41 to US$1.00 and P=47.36 to US$1.00, respectively. As at December 31, 2010, there are no outstanding currency options as these matured during the year. Net fair value changes from these option contracts recognized in the consolidated statements of income amounted to P=0.8 million gain in 2010.
Foreign Currency Swap. In 2012, the Parent Company entered into sell P= and buy US$ forward contracts. It entered into sell US$ and buy P= with the same aggregate notional amount. The Parent Company recognized derivative liability with a corresponding negative on net fair value changes amounting to P=2.0 million loss and P=9.0 million gain from the outstanding and settled foreign currency swaps, respectively, as at December 31, 2012.
Non-deliverable Forwards. In 2012, 2011 and 2010, the Parent Company and SM Prime entered into sell P= and buy US$ forward contracts. It entered into sell US$ and buy P= with the same aggregate notional amount. The Group recognized derivative asset and derivative liability amounting to P=18.5 million and P=43.8 million from the outstanding forward contracts as at December 31, 2012 and 2011, respectively. Net fair value changes from the settled forward contracts of the Group amounted to P=87.7 million and P=480.0 million gain, in 2012 and 2011, respectively.
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Fair Value Changes on Derivatives The net movements in fair value changes of all derivative instruments as at December 31 are as follows:
2012 2011 (In Thousands)
Balance at beginning of year (P=202,741) (P=98,312) Net change in fair value (2,304,958) (295,268) Fair value of derivatives on settled contracts (101,802) 190,839 Balance at end of year (P=2,609,501) (P=202,741)
In 2012, the net changes in fair value amounting to negative P=2,305.0 million comprise of interest paid amounting to P=26.8 million, which is included under “Interest expense” account in the consolidated statements of income, net marked-to-market loss on derivatives amounting to P=1,403.4 million, which is included under “Gain (loss) on fair value changes on derivatives - net” account in the consolidated statements of income, P=1,193.7 million pertaining to the valuation of the option on convertible bond, P=219.3 million transferred to “Additional paid-in capital” account in the consolidated balance sheets and P=99.6 million gain recognized under “Foreign exchange gain – net”.
In 2011, the net changes in fair value amounting to negative P=295.3 million comprise of interest paid amounting to P=22.0 million, which is included under “Interest expense” account in the consolidated statements of income, net marked-to-market gain on derivatives amounting to P=366.2 million, which is included under “Gain (loss) on fair value changes on derivatives - net” account in the consolidated statements of income and P=639.5 million loss recognized under Other expenses.
The reconciliation of the amounts of derivative assets and liabilities recognized in the consolidated balance sheets is as follows:
2012 2011 (In Thousands)
Derivative assets (see Notes 10 and 16) P=128,480 P=159,461 Derivative liabilities (see Note 18) (2,737,981) (362,202) Balance at end of year (P=2,609,501) (P=202,741)
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30. EPS Computation
2012 2011 2010 (In Thousands, Except for Per Share Data)
Net Income Attributable to Common Owners of the Parent
Net income attributable to common owners of the Parent for basic earnings (a) P=24,674,381 P=21,224,592 P=18,440,169
Effect on net income of convertible bonds, net of tax – 43,813 –
Net income attributable to common equity holders of the Parent adjusted for the effect of dilution (b) P=24,674,381 P=21,268,405 P=18,440,169
Weighted Average Number of Common Shares Outstanding
Weighted average number of common shares outstanding for the period (c) 619,166 612,038 611,218
Dilutive effect of convertible bonds 12,146 2,132 – Weighted average number of common shares
outstanding for the period adjusted for the effect of dilution (d) 631,312 614,170 611,218
Basic EPS (a/c) P=39.85 P=34.68 P=30.17
Diluted EPS (b/d) P=39.08 P=34.63 P=30.17
The effect of the convertible bonds on net income and on the number of shares were not considered due to its antidilutive effect, which if included, will arrive at an EPS of P=30.32 in 2010.
31. Reclassification
The comparative information in 2011 and 2010 consolidated statements of income has been reclassified to conform to the presentation of the financial statements for the period ended December 31, 2012.
32. Other Matters
In 1988, the Parent Company acquired the former Baguio Pines Hotel properties from the Development Bank of the Philippines (DBP) through a negotiated sale and purchased the Taal Vista Lodge (the Lodge) from the Taal & Tagaytay Management Corp., the original purchaser of the Lodge from DBP.
Previously, in 1984, certain minority stockholders of Resort Hotel Corp. (RHC), the previous owner of the former Baguio Pines Hotel properties and the Lodge, filed with the Regional Trial Court (RTC) of Makati a derivative suit against the DBP questioning the foreclosure by the DBP of the mortgages of these properties. The Parent Company was impleaded as a party defendant in 1995. The RTC of Makati voided the foreclosure by the DBP on the mortgaged properties and declared the Parent Company a buyer in bad faith.
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The DBP and the Parent Company have appealed the RTC’s decision to the Court of Appeals. On May 25, 2007, the Court of Appeals issued a decision completely reversing and setting aside the February 13, 2004 decision of the RTC Makati and, consequently, dismissing the said RTC case. The appellees (certain non-controlling stockholders of RHC) filed a Motion for Reconsideration with the Court of Appeals and on November 9, 2007, the Court of Appeals issued a resolution denying the appellees’ Motion for Reconsideration. The appellees filed a Petition for Review on Certiorari before the Supreme Court appealing the decision of the Court of Appeals reversing the said decision of the RTC Makati. On December 23, 2009, the Supreme Court rendered a decision decreeing, among others, that the foreclosures of the mortgaged Baguio Pines Hotel and Taal Vista Lodge properties were valid; and on October 24, 2010, the Supreme Court issued a Resolution denying petitioners (certain non-controlling stockholders of RHC) Motion for Reconsideration of the Resolution dated June 21, 2010 denying with finality the separate Motion for Partial Reconsideration filed by Petitioner and DBP since it was treated as a second Motion for Reconsideration, a prohibited pleading under the Rules of Court.
33. Events After the Reporting Period
a) At various dates in January 1 to March 6, 2013, the bondholders of US$19.4 million (P=796.4 million) opted to convert their holdings into 1,060,328 SMIC’s shares. This resulted to an increase in capital stock and additional paid-in capital amouting to P=10.6 million and P=1,030.6 million, respectively, and a decrease in liability of P=1,041.2 million.
b) On January 7, 2013, SM Prime and SM Retail have entered into a joint venture with Waltermart Mall Group of Companies (Waltermart). Waltermart is engaged in the business of shopping and supermarket businesses. Waltermart currently operates 17 shopping centers accross Metro Manila, North and South Luzon. As at March 6, 2013, the final terms and conditions of the joint venture are still subject to due diligence and discussion.
PARTIES TO THE OFFER
Issuer
SM INVESTMENTS CORPORATION
Issue Manager and Sole Bookrunner
BDO CAPITAL & INVESTMENT CORPORATION
Joint Lead Underwriters
BDO CAPITAL & INVESTMENT CORPORATION BPI CAPITAL CORPORATION
CHINA BANKING CORPORATION FIRST METRO INVESTMENT CORPORATION
Participating Underwriters
LAND BANK OF THE PHILIPPINES UNITED COCONUT PLANTERS BANK
Trustee
PHILIPPINE NATIONAL BANK TRUST BANKING GROUP
Registrar and Paying Agent
PHILIPPINE DEPOSITORY AND TRUST CORPORATION
Legal Counsel to the Underwriters
PICAZO BUYCO TAN FIDER & SANTOS
Independent Auditor
SGV & CO.