Ppc_17q_jun2011

Transcript

SEC Number 168063_ File Number _______ PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION) Company’s Full Name 17th Floor Pryce Center, 1179 Chino Roces Avenue corner Bagtikan St., Makati City Company’s Address 899-44-01 (trunkline) Telephone Number December 31 Fiscal Year Ending (Month & Day) SEC Form 17-Q Form Type N/A Amendment Designation (if applicable) June 30, 2011 Period Ended Date N/A Secondary License Type and File Number 2 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended June 30, 2011 2. Commission identification number 168063 3. BIR Tax Identification No. 000-065-142-000 4. PRYCE CORPORATION (formerly Pryce Properties Corporation) 5. Metro Manila, Philippines 6. Industry Classification Code: 7. 17th Floor Pryce Center, 1179 Chino Roces Avenue cor. Bagtikan St. Makati City 1203 8. (0632) 899-44-01 (Trunkline) 9. N. A. Former name, former address and former fiscal year, if changed since last report 10. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA. Title of Each Class Issued Common Shares Subscribed Common Shares Debt Outstanding (Creditor Banks -principal only) No. of shares/Amount of Outstanding Debt 1,998,750,000 2,000,000,000 P 395,450,357 - parent company P 443,203,975 - subsidiary, re-structured loans only; and P 268,021,590 on debts for dacion 11. Are any or all of the securities listed on a Stock Exchange? Yes { / } No { } Philippine Stock Exchange Common Stock 12. Indicate by check mark whether the registrant: (a) has filed reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding twelve (12) months (or for such shorter period the registrant was required to file such reports) Yes { / } No { } 3 (b) has been subject to such filing requirements for the past ninety (90) days. Yes { / } No { } PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements. Please see attached. Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations Revenues on consolidated basis aggregated P1.517 billion for the six-month period ended June 30, 2011, broken down by product line as follows: liquefied petroleum gas (LPG), P1.299 billion (or 85.68% of total); industrial gases, P105.85 million (6.98%); other fuels, P73.37 million (4.77%); real estate sales, P18.46 million (1.2%); and hotel operations, P20.56 million (1.36%). Revenue and Volume Growth Total revenues expanded by a substantial 45.54% compared to that of the yearearlier period; this stemmed from the 54.25% growth in LPG sales. Sales of LPG for household cooking went up by 51.58% to P1.117 million, mainly driven by price which rose by 31.03% and, to a lesser extent, by volume which expanded by 15.69%. Sales of autogas surged by an even-higher 69.98% to P159.99 million, also driven by both volume and price rises, resulting from more aggressive marketing efforts. Sales of other fuels also swelled by 25.19%, mainly accounted for by the substantial growth in gasoline sales and upward price movements. Sales of industrial gases dropped by a minimal 3.12% primarily due to volume declines for oxygen and acetylene, which underscores the continuing tight competition in the industry. Market Demand and Price Movement Despite the 31.03% upturn in the price of LPG for household cooking to P55.98 per kilogram (mainly due to the escalating cost of import), demand for the product was sustained when volume increased by 15.69% to 19,950 MT. The price of autogas likewise went up by 28.58% but volume rose by an even higher 69.98% to 2,702 MT. The previouslyexperienced demand-price elasticity in the LPG market seems no longer applicable of late. The volume of gasoline sales surged by 43.58% notwithstanding the 18.67% rise in average price per liter to P49.13. There was, however, an appreciable decline in the volume of diesel sales which fell by 29.96% to 649,610 liters. The higher increase in price of diesel as compared to that of gasoline could have accounted for the divergent growth trends of these fuel products. 4 Competition The Company continues to make its presence felt in the LPG market despite stiff competition from the country’s oil majors. It registered significant growth in revenues and sales volume even with the substantial uptick in product prices. This is also evident from the increasing sales volume of LPG cylinders and accessories like gas stoves. In the industrial gas market, however, the Company somewhat suffers from the increasingly tight competition from various players, big and small, resulting in reduced sales revenues and volumes. This is true for both oxygen and acetylene, the mainstay products of the Company’s industrial gas division. Profitability Gross margin of LPG sales slid to 18.31% of sales from 22.77% of the year-ago period essentially because price increases in the LPG market lagged the upward movements in import cost of the product, as indicated in previous reports. Industrial gas gross margin, on aggregate basis, slumped to 35% from its historical levels of over 50% due to aging, costly-to-repair plants and the company’s strategy of acquiring inventory from other players. Gross margin of real estate sales essentially remained at levels approaching 80% due to the predominance of high-margin memorial lots sales while margins from hotel operations showed significant improvement due to bigger food and beverage sales. This resulted from increased volume of banquet and convention functions during the period. Total Cost and Expenses amounted to P1.469 billion, resulting in Income from Operations of P47.734 million which is larger by 26.68% from the year-ago figure of P37.68 million. Other Income (Charges) registered a net gain of P1.33 million, a reversal from the net charges of P13.03 million of the previous year. This net gain includes other income from dealers for repairs of gas cylinders as well as interest and penalties on installment sales amounting to some P17.13 million, net of financial charges. This has resulted in a pre-tax net income of P49.07 million which is almost double the precedent year’s P24.65 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) climbed to P149.3 million from P129.84 million of the previous year. Liquidity Cash and near-cash resources as of June 30, 2011 amounted to P431.63 million, which is an increase of 4.2% from the year-end 2010 figure of P414.06 million. These liquid assets are broken down into P121.98 million of Cash and cash equivalents and P309.66 million of financial assets at fair value (marketable securities). Total resources of the Company as of cut-off date amounted to P4.478 billion, of which P2.069 billion was contributed by equity. Debt-to-equity ratio stood at 1.16 to 1 while current ratio came up to 1.26:1. Balance Sheet Changes Compared to the December 31, 2010 audited accounts, the significant movements in balance sheets accounts are as shown below. PRYCE CORPORATION AND SUBSIDIARY Financial Statements June 30, 2011 and December 31, 2010 and Period June 30, 2011 and 2010 PRYCE CORPORATION AND SUBSIDIARY Consolidated Balance Sheets For the period ended June 30, 2011 (unaudited) and Dec. 31, 2010 (audited) 2011 ASSETS Current Assets Cash and cash equivalents - note 6 Financial assets at fair value through profit or loss - note 7 Trade and other receivables - note 8 Inventories - note 9 Real estate projects - note 10 Prepayments and other current assets (net) - note 11 TOTAL CURRENT ASSETS Noncurrent Assets Trade and other receivables Due from related parties (net) Investment in associates (net) - note 12 Property plant and equipment At revalued amounts (net) - note 13 At cost (net) - note 14 Assets held for dacion en pago - note 15 Other noncurrent assets (net) note 16 TOTAL NONCURRENT ASSETS TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses - note 17 Debts for dacion en pago covered by Rehabilitation Plan - notes 1, 8, 9 and 12 Restructured debts covered by Rehabilitation Plan - notes 1, 8, 9, 12 and 13 Estimated project development costs Customers' deposits Noncurrent Liabilities Restructured debts covered by Rehabilitation Plan - notes 1, 8, 9, 12 and 13 Retirement benefit obligations Due to related parties Deferred income tax liabilities 2010 121,975,292 309,658,468 140,322,570 442,070,734 1,195,895,800 60,938,072 2,270,860,936 40,359,179 119,942,732 523,000 686,455,259 1,093,105,727 197,662,548 68,897,066 2,206,945,511 4,477,806,447 115,779,424 298,279,642 153,745,443 428,773,229 1,197,845,440 35,066,207 2,229,489,385 40,362,609 116,608,369 523,000 732,162,980 1,136,854,186 197,662,548 68,897,066 2,293,070,758 4,522,560,143 804,679,809 861,245,740 53,388,985 87,900,534 1,807,215,068 845,171,444 861,244,231 107,059,646 86,528,686 1,900,004,007 389,814,901 76,749,199 51,430,566 83,643,553 601,638,219 389,814,901 74,458,397 54,495,862 83,643,554 602,412,714 Stockholders' Equity Common stock - P1 par value Authorized - 2,000,000,000 shares Issued - 1,998,750,000 shares Subscribed - 1,250,000 shares Additional paid-in capital Revaluation reserve Deficit TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (The accompanying notes are an integral part of these consolidated financial statements) 1,998,750,000 1,250,000 271,834,820 117,333,259 (320,214,919) 2,068,953,160 4,477,806,447 1,998,750,000 1,250,000 271,834,820 117,333,258 (369,024,656) 2,020,143,422 4,522,560,143 PRYCE CORPORATION AND SUBSIDIARY Consolidated Statements of Income For the period ended June 30, 2011 and 2010 2011 REVENUE (net) - note 3 Liquefied petroleum and industrial gases Real estate sales - note 4 Hotel operations 1,477,649,084 18,464,279 20,558,370 1,516,671,733 2010 1,009,471,568 14,310,772 18,328,074 1,042,110,414 COSTS Liquefied petroleum and industrial gases Real estate - note 4 Hotel operations 1,198,147,461 4,026,708 14,793,279 1,216,967,448 299,704,285 251,969,775 47,734,510 772,153,133 3,391,543 15,369,980 790,914,656 251,195,758 213,515,382 37,680,376 GROSS INCOME OPERATING EXPENSES - note 20 INCOME (LOSS) FROM OPERATIONS OTHER INCOME (CHARGES) - Net Gain on sale of securities Unrealized FOREX Gain (Loss) Finance costs Fees and other charges NET INCOME (LOSS) Attributable to: Equity holders of the Parent Company Minority interest absorbed by the Parent Company (3,624,314) (12,175,194) 17,133,825 1,334,317 49,068,827 (339,776) 1,252,576 (22,463,292) 8,515,963 (13,034,529) 24,645,847 48,082,544 986,283 49,068,827 0.0245 24,150,465 495,382 24,645,847 0.0123 EARNINGS (LOSS) PER SHARE (The accompanying notes are an integral part of these financial statements) PRYCE CORPORATION AND SUBSIDIARY Consolidated Statements of Income Period April 1 to June 30 2010 2011 REVENUE Liquefied petroleum and industrial gases Real estate sales Hotel operations 782,289,750 7,514,152 11,086,399 800,890,301 535,874,684 7,701,034 10,827,870 554,403,588 COSTS Liquefied petroleum and industrial gases Real estate Hotel operations 635,343,525 1,965,887 6,307,819 643,617,231 157,273,070 134,777,338 22,495,732 416,637,417 2,078,733 8,769,800 427,485,950 126,917,638 117,407,904 9,509,734 GROSS INCOME OPERATING EXPENSES - note 20 INCOME (LOSS) FROM OPERATIONS OTHER INCOME (CHARGES) - Net Gain on sale of securities Unrealized FOREX Gain (Loss) Finance costs Other charges (net) (2,670,070) (6,026,020) 9,479,562 783,472 23,279,204 (339,776) (3,208,099) (11,429,243) 4,133,163 (10,843,955) (1,334,221) NET INCOME (LOSS) Attributable to: Equity holders of the Parent Company Minority interest absorbed by the Parent Company 22,811,292 467,912 23,279,204 0.0116 (1,307,403) (26,818) (1,334,221) (0.0007) EARNINGS (LOSS) PER SHARE (The accompanying notes are an integral part of these financial statements) PRYCE CORPORATION AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Period ended June 30, 2011 and 2010 and December 31, 2009 Capital Stock Issued Subscribed BALANCE AT JANUARY 1, 2009 As previously reported Prior period adjustments As restated Additional Paid-in Capital P271,834,820 271,834,820 Revaluation Reserve P140,989,831 140,989,831 Deficit (1,641,045,134) (1,641,045,134) Consolidation Adjustment P1,030,726,843 1,030,726,843 Total P1,802,506,360 0 1,802,506,360 - P1,998,750,000 1,998,750,000 P 1,250,000 1,250,000 Prior period adjustment Issuanceof shares of stocks Transfer of revaluation reserve deducted from operations thru add'l depreciation charges Deferred income tax effect on revaluation reserve charged to operations thru add'l depreciation Effect on deferred income tax on due to change in income tax rate Net income for the year BALANCE AT DECEMBER 31, 2009 - (15,658,954) 15,658,954 - - - - 4,697,687 - 4,697,687 1,998,750,000 1,998,750,000 1,250,000 1,250,000 271,834,820 271,834,820 130,028,564 130,028,564 83,145,804 (1,542,240,376) (1,542,240,376) 25,980,068 1,998,750,000 1,998,750,000 1,250,000 1,250,000 271,834,820 271,834,820 130,028,564 130,028,564 (18,136,150) (1,516,260,308) (1,516,260,308) 1,030,726,843 1,030,726,843 1,030,726,843 1,030,726,843 83,145,804 1,890,349,851 1,890,349,851 25,980,068 1,916,329,919 1,916,329,919 - Balance at January 1, 2010 As previously reported Net income (loss) for the period BALANCE AT JUNE 30, 2010 BALANCE AT JULY 31, 2010 As previously reported Issuance of shares of stocks Transfer of revaluation reserve deducted from operations thru add'l depreciation charges Deferred income tax effect on revaluation reserve charged to operations thru add'l depreciation Prior Period Adjustment Fair Value Gain on Real Estate Properties/ Consolidation Adjustment - - 18,136,150 - - - 5,440,844 - 5,440,844 1,030,726,843 98,372,659 1,998,750,000 1,250,000 271,834,820 117,333,258 (369,024,656) (1,030,726,843) 98,372,659 Net loss for the year Adjusted Balance at December 31, 2010 Balance at January 1, 2011 As restated - 2,020,143,422 1,998,750,000 1,998,750,000 1,250,000 1,250,000 271,834,820 271,834,820 117,333,258 117,333,258 Net Income (loss) for the period BALANCE AT JUNE 30, 2011 (369,024,656) 48,809,737 (320,214,919) - 2,020,143,422 48,809,737 2,068,953,160 (The accompanying notes are an integral part of these financial statements) PRYCE CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows For the period ended June 30, 2011 and 2010 2011 CASH FLOWS FROM OPERATING ACTIVITIES Income (Loss) before income tax Adjustments for : Depreciation Finance cost Provision for (reversal of) impairment losses Retirement benefits Loss on sale of investment held for trading Gain from reversal of accrued interest Loss (gain) on dacion en pago Fair value adjustments Guarantee fee Unrealized loss (gain) on investment held for trading Unrealized foreign exchange losses (gains) Loss (gain) on sale of property, plant and equipment Interest income Dividend income Operating income before working capital changes Decrease (increase) in assets: Trade and other receivables Inventories Prepayments and other current assets Real estate projects Increase (decrease) in liabilities: Trade and other payables Estimated project development costs Debts covered by rehabilitation plan Customers' deposits Net cash generated from operations Interest received Dividend income Finance cost paid Income tax paid Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale held for trading Acquisition of investment held for trading Dividend received Decrease (increase) in: Financial assets at fair value through profit or loss Due from related parties Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Payment of restructured debts covered by the Rehabilitation Plan Benefits paid Increase (decrease) in due to related parties Net cash used in financing activities EFFECTOF EXCHANGE RATE CHANGES ON CASH NET INCREASE (DECREASE) IN CASH CASH AT BEGINNING OF YEAR AT END OF PERIOD P (The accompanying notes are an integral part of these financial statements.) 2010 P49,068,827 89,456,180 12,175,194 2,290,802 3,624,314 P130,541,131 184,844,541 27,870,592 12,851,390 (20,017,928) (529,290) 156,086,027 13,426,303 (13,297,505) (25,871,865) 1,949,640 (40,491,635) 1,371,848 93,172,813 529,290 (1,632,582) (68,192,108) (1,139,967) (1,731,853) (584,456) 262,808,760 (7,188,246) (29,040,418) 1,014,072 1,608,029 58,248,381 (3,438,858) 20,177,758 304,189,478 1,730,853 (9,278,984) (6,188,404) 290,452,943 (149,757,536) 57,629,073 93,702,103 (16,057,089) 584,456 (11,378,826) (3,334,363) (30,770,278) (119,053,754) 34,526,631 (176,071,130) (53,670,661) (3,065,296) (56,735,957) 6,195,868 115,779,424 121,975,292 P (108,201,503) (2,856,364) (17,310) (111,075,177) (51,269) 3,256,368 112,523,056 115,779,424 PRYCE CORPORATION (Parent Company) Aging of Accounts Receivable As of June 30, 2011 Type of Accounts Receivable Trade Receivables 1. Subdivision 2. Low-cost housing 3. Memorial Parks 4. Hotel 5. Head Office Sub Total Less: Allow for Doubtful Acct. Sub Total Non-trade Receivables Advances to Officers & Employees Advances to Suppliers & Contractors Others Sub Total Less: Allow. For Doubtful Accounts Sub Total Grand Total 1,631,712 3,567,895 4,905,899 10,105,506 10,917,123 (811,617) 56,839,001 998,214 4,239,793 1,975,476 5,686,785 1,457,490 6,535,566 2,328,503 13,060,364 421,907 18,019,563 24,857,058 592,811 292,567 112,836 998,214 1,038,901 602,974 333,601 1,975,476 Total 1-30 days 31-90 days 91-180 days Over 180 days 1-2 Years 3-5 years 5 Years above Past due accounts 2,262,582 8,345,857 53,975,621 1,152,504 733,323 66,469,887 8,819,269 57,650,618 196,967 168,745 1,538,966 1,152,504 184,397 3,241,579 299,950 297,490 2,564,943 548,926 3,711,309 437,933 536,234 4,103,909 296,225 1,201,841 9,233,795 463,687 1,744,310 15,389,659 290,950 3,421,759 21,144,349 276,870 975,478 1,252,348 8,819,269 5,078,076 10,731,861 17,597,656 24,857,058 3,241,579 3,711,309 5,078,076 10,731,861 17,597,656 24,857,058 - (7,566,921) 927,653 529,837 1,457,490 1,744,701 583,802 2,328,503 421,907 421,907 - 2,923,916 2,923,916 10,917,123 (7,993,207) ######### Accounts Receivable Description Collection period 1-7 years 1-15 years 1-5 years 1-30 days 1-3 months Type of Receivables 1. Installment Receivables Nature/Description Subdivision Low cost housing Memorial parks Hotel Head Office Page 1 PRYCE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2011 1. CORPORATE INFORMATION Pryce Corporation (the “Parent Company”) and Pryce Gases, Inc. (“PGI”), a 97.99% subsidiary (85.28% until June 30, 2004), collectively referred to as the “Group”, were incorporated in the Philippines on September 7, 1989 and October 8, 1987, respectively. The Parent Company is mainly engaged in the acquisition, purchase, lease, hold, sale or otherwise deal in land and real estate or any interest or right therein as well as real or personal property of every kind and description including but not limited to shares of stock in industrial, commercial, manufacturing and any other similar corporations. PGI is primarily engaged in the manufacture, production, purchase, sale and trade of all kinds of liquids and gases and other chemicals. As at balance sheet date, PGI has 16 fully operational liquefied petroleum gas (LPG) terminals and refilling plants of varying storage capacities. On July 14, 1997, PGI was registered with the Board of Investments (BOI) under the Omnibus Investment Code of 1987 [as amended by Republic Act (RA) No. 7369] otherwise known as Executive Order (EO) No. 226, and RA No. 8479 otherwise known as the Downstream Oil Deregulation Act of 1998, as a new operator of distribution facilities of LPG in various regions of the Philippines on a nonpioneer status. As a registered enterprise with the BOI, it is entitled to all benefits and incentives granted for under EO 226 and RA 8479. 2. STATUS OF OPERATIONS Real Estate The Parent Company earned positive income in the 2nd quarter of 2011, this reduced the deficit in 2010 of P390.4 million to P642.1 million as of June 30, 2011. The downturn in the real estate industry has led to a slowdown in the development of real estate projects, lower collections of trade receivables and restricted credit for the industry. To address the impact of these economic events, the Parent Company has instituted certain measures which include: (1) re-phasing of ongoing development work; (2) selective undertaking of new projects; and (3) comprehensive cost reduction and cash control programs. However, despite considerable efforts of implementing these counter measures, the Parent Company was not able to meet its projected revenue because of the slump in the property market. Thus, the Parent Company was not able to generate sufficient net cash inflows to pay maturing obligations from creditors banks, financing institutions and trade and non-trade suppliers. LPG and Industrial Gases PGI has a deficit of P1,070.2 million and P1,117.5 million as of June 30, 2011 and 2010, respectively. Page 2 From 1998 to 2000, PGI ventured into a massive expansion of its operations in Visayas and Mindanao regions by constructing bulk terminals and refilling plants, and financing initial costs of its dealers’ stations. PGI financed the expansion through borrowings from various creditor banks. However, PGI was not able to meet its sales volume in 2001 despite considerable efforts to promote its products in the market because of the continuing economic slowdown. Moreover, PGI’s gross margin from LPG products dropped because of high importation costs of LPG as a result of record high prices of petroleum products in the world market. Consequently, PGI suffered significant losses from operations in those years and failed to pay maturing obligations to its creditor banks, foreign financing company and certain suppliers. In the first quarter of 2006, PGI started selling LPG Auto gas which is considered excellent alternative for gasoline having fuel efficiency, low emission and low cost. To boost its sales, PGI set up Auto LPG dispensing stations to cater the needs of gas converted vehicles. It also sells auto gas cylinders to several transport groups, its main target market, in various regions in the Philippines. As of December 31, 2006, PGI has 35 Auto LPG dispensing stations in the country, mostly located in Visayas and Mindanao. In 2007, PGI started the business of reselling fuels which are purchased from a local supplier. As of December 31, 2008, the Company has 20 fuel refilling stations operating in some regions located in Visayas and Mindanao. Rehabilitation Plan of the Parent Company On July 12, 2004, the Parent Company filed a petition for corporate rehabilitation with the Regional Trial Court (RTC) of Makati City as an initial step towards the settlement of its outstanding loans. On July 13, 2004, the RTC issued a Stay Order deferring all claims against the Parent Company and appointing a rehabilitation receiver. Further, on September 13, 2004, the RTC issued an Order giving due course to the petition, and directing the rehabilitation receiver to evaluate and make recommendations on the Parent Company’s rehabilitation plan. On December 1, 2004, the rehabilitation receiver submitted an Amended Rehabilitation Plan (Rehabilitation Plan) to RTC which conforms to the scheme of liquidating all bank loans and long-term commercial papers by way of dacion en pago of real estate properties with certain revisions on the settlement of nonbanking and trade and other payables less than P500,000. On January 17, 2005, the RTC approved the Rehabilitation Plan. The important provisions and modes of settlement of the Rehabilitation Plan are as follows: • Payment of all indebtedness to creditor banks and long-term commercial papers (LTCPs) shall be made by way of dacion en pago of developed real estate properties of the Parent Company. Trade creditors holding claims of at least P500,000 shall be paid by way of dacion en pago of memorial park lots to be allocated equally, except the memorial park lots in Davao City which is mortgaged to China Banking Corporation (CBC). • • • Page 3 Trade creditors holding claims of less than P500,000 shall be paid in cash over a three-year period, without interest, on a quarterly basis. Payment in kind for all indebtedness is subject to certain guidelines detailed in the financial rehabilitation plan which includes valuation of memorial park lots at a discount off-the-retail selling prices of 62.5% for secured creditors with operating assets and 50% for all other classes of creditors. All accrued penalties are waived and interest shall be accrued only up to July 13, 2004, the date of issuance of the Stay Order. US Dollar-denominated loans will be converted to Philippine Pesos using the average exchange rate in 2003, which is P54.2033 to US$1.00, as quoted by the Bangko Sentral ng Pilipinas (BSP). • • Certain guidelines on payments covered by dacion en pago in the Rehabilitation Plan are fully discussed in Note 18. The indebtedness subject to Rehabilitation Plan is reflected in the consolidated financial statements as “Debts for dacion en pago covered by the Rehabilitation Plan” account in the consolidated balance sheets (see Note 18). Reversal of the Parent Company’s Rehabilitation Plan by the Court of Appeals (CA) The Parent Company’s creditor bank, CBC, appealed to the CA assailing the RTC’s Orders dated July 13, 2004, September 13, 2004 and January 17, 2005. On July 28, 2005, the CA promulgated its decision stating that the Orders of the RTC are hereby reversed and set aside. The Parent Company filed a motion for reconsideration but denied by the CA based on its decision promulgated on April 12, 2006. On June 9, 2006, the Parent Company filed a petition for review of the CA decision with the Supreme Court (SC), upon which the petition was given due course and the assailed decision and resolution of the CA be reversed and set aside. The SC had promulgated a decision on February 4, 2008 denying PC’s appeal and remanding the records to the RTC-Makati for further proceedings to determine the merits of the Company’s petition for corporate rehabilitation. The Parent Company, however, filed on February 29, 2008 its Omnibus Motion for Reconsideration and Referral to the court En Banc, while CBC filed its own Motion for Reconsideration appealing that the SC should have categorically set aside the Parent Company’s rehabilitation plan and that latter’s petition for rehabilitation should not have been remanded to the lower court. As of April 11, 2008, both motions are now pending resolution before the SC. On the Parent Company’s case with another creditor, Bank of the Philippine Islands (BPI), the CA issued its decision in favor of BPI on May 3, 2006. The Parent Company filed a Motion for Reconsideration on May 26, 2006 and the CA on May 23, 2007 reversed itself, ruling in favor of PC thereby affirming the ruling of the RTC-Makati. BPI filed a Petition for Review on Certiorari with the SC which was denied on January 30, 2008. BPI then filed a Motion for Reconsideration of the SC’s denial, which is now pending resolution by the SC. Page 4 Based on CA decision reversing the Rehabilitation Plan, although still pending appeal with the Supreme Court as of April 15, 2007, the Parent Company accrued interest on certain loans covered by the Rehabilitation Plan starting from July 13, 2004, the date of the effectivity of the Stay Order. The Parent Company also restated its US Dollar-denominated loans using the prevailing exchange rates at balance sheet dates. Under the Rehabilitation Plan, the US Dollar-denominated loans will be converted into Philippine Peso using the average exchange rate of P54.2033 to US$1. The effects of the adjustments are more fully discussed in Note 26. Rehabilitation Plan of PGI On June 7, 2002, PGI presented its financial rehabilitation plan to its various creditor banks and foreign financing company as an initial step towards restructuring its outstanding loans. On August 27, 2002, two of PGI’s creditors filed a petition in the RTC placing PGI under receivership. On September 2, 2002, the RTC issued a Stay Order pursuant to the interim rules of procedures on corporate rehabilitation. The significant terms of the Stay Order are as follows: • • • PGI is prohibited from selling, encumbering, transferring or disposing, in any manner, any of its properties except in the ordinary course of business. PGI is further prohibited from making any payment of its outstanding liabilities as of August 27, 2002. PGI’s suppliers of goods and services are likewise prohibited from withholding supply of goods and services in the ordinary course of business for as long as PGI makes payments for the services and goods supplied after the issuance of the Stay Order. The RTC appointed a rehabilitation receiver who shall formulate a financial rehabilitation plan, examine the books of accounts and review all disbursements. On July 3, 2003, the rehabilitation receiver submitted a revised rehabilitation plan (Rehabilitation Plan) to the RTC. The important provisions of the Rehabilitation Plan are as follows: • The Parent Company will infuse up to P2.03 billion in assets as additional equity contributions to PGI. The asset infusion by the Parent Company consists of 110,000 memorial park lots in various locations in Mindanao, as well as a number of residential, commercial and undeveloped properties in the cities of Cagayan de Oro, Davao and Iligan, which are mortgaged to certain creditors. The Parent Company will cede, transfer and convey to PGI or direct to the latter’s creditors the full ownership of those properties. Any indebtedness in excess of P1.25 billion shall be liquidated and paid by way of dacion en pago of real estate properties contributed by the Parent Company, subject to certain guidelines as fully discussed in Note 18. • • Page 5 Principal indebtedness to creditors of P1.25 billion will be paid in cash, subject to restructuring terms as fully discussed in Note 18. The indebtedness subject to dacion en pago and restructuring terms are reflected in the consolidated financial statements as “Debts for dacion en pago covered by the Rehabilitation Plan” and “Restructured debts covered by the Rehabilitation Plan” accounts, respectively, in the consolidated balance sheets. In accordance with the Rehabilitation Plan, the Parent Company contributed to PGI a total of 116,653 memorial park lots and several real estate properties with a total transfer value of P2.16 billion. 3. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The Group’s financial statements have been prepared in compliance with accounting principles generally accepted in the Philippines as set forth in Philippine Financial Reporting Standards (PFRSs). PFRSs include: a) PFRSs – corresponding to International Financial Reporting Standards; b) Philippine Accounting Standards (PASs) – corresponding to International Accounting Standards; and, c) Interpretations to existing standards – representing interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), formerly the Standing Interpretations Committee, of the IASB which are adopted by the FRSC. These financial statements have been prepared on the historical cost convention, except for certain property, plant and equipment which are carried at revalued amounts, and certain financial assets which are carried at fair values. The measurement bases are more described in note 4. New and Revised Accounting Standards Effective in 2007 The following new accounting standards, and amendments and interpretation to existing standards that became effective in 2007 were adopted by the Group: • PFRS 7, Financial Instruments: Disclosures and complementary amendment to PAS 1 (effective for annual periods beginning on or after January 1, 2007). PFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after November 1, 2006). It prohibits • Page 6 the impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. Effective in 2006 The Company adopted the following new standards beginning January 1, 2006: • PAS 19 (Amendment), Employee Benefits. It introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. PAS 39 (Amendment), The Fair Value Option. It changes the definition of financial instruments classified as at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. Philippine Interpretation IFRIC 4, Determining Whether and Arrangement Contains a Lease. Philippine Interpretation IFRIC 4 requires the determination of whether an arrangement is or contains a lease based on the substance of the arrangement. It requires an assessment of whether: (a) fulfillment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset. • • The standards have no impact on the Group’s prior period financial statements. Additional information and disclosures required by the new standards were included in the face of or notes to the financial statements where applicable. Effective subsequent to 2007 • PFRS 8 “Operating Segments” (effective January 1, 2009) requires an entity to report financial and descriptive information about its reportable segments, which are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. PFRS 8 also introduces a requirement to disclose information about transactions with major customers. If revenues from transactions with a single external customer amount to 10% or more of the entity’s revenues, the total amount of revenue from such a customer and the segment or segments in which those revenues are reported must be disclosed. PAS 23 (Revised) “Borrowing Costs” (effective January 1, 2009) eliminates the option available under the previous version of the standard to recognize all borrowing costs immediately as an expense. To the extent that borrowing costs relate to the acquisition, construction or production of a qualifying asset, the revised standard requires that they be capitalized as part of the cost of that asset. All other borrowing cost should be expensed as incurred. Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions, will be effective on January 1, 2008. This interpretation requires • • Page 7 arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholders of the entity provide the equity instruments needed. It also provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent. • Philippine Interpretation IFRIC 12, Service Concession Arrangement, will become effective on January 1, 2008. This interpretation covers contractual arrangements arising from public-to-private service concession arrangements if control of the assets remains in public hands but the private sector operator is responsible for construction activities, as well as for operating and maintaining the public sector infrastructure. Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, issued in June 2007 and becomes effective for annual periods beginning on or after July 1, 2008. This interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore, part of the fair value of the consideration received is allocated to the award credits and deferred over the period that the award credits are fulfilled. Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued in July 2007 and becomes effective for annual periods beginning on or after January 1, 2008. This interpretation provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognized as an asset under PAS 19, Employee Benefits. • • The Group will apply the relevant new accounting standards in accordance with the transitional provisions applicable to the Group. It is currently evaluating the impact of these standards on the financial statements, and has initially determined that the abovementioned standards and amendments will not materially affect the financial statements for 2008, as well as for the future periods. Principles of Consolidation The consolidated financial statements incorporate the financial statements of the Parent Company and PGI. A subsidiary is consolidated from the date on which control is transferred to the Parent Company and ceases to be consolidated from the date on which control is transferred out of the Parent Company. During acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets and liabilities acquired is considered as goodwill, which is shown as part of “Other noncurrent assets” account in the consolidated balance sheets. Page 8 Minority interest represents the 2.01% interest (14.72% until June 30, 2004) in PGI not owned by the Parent Company. The minority stockholders’ share in losses of PGI is limited to the investment made. Any additional losses are for the account of the Parent Company. All significant intercompany transactions and balances between the Group are eliminated in consolidation. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these financial statements are summarized below. The policies have been consistently applied to all the years presented, unless otherwise stated. Revenue and Expense Recognition Revenue is recognized when it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, while expenses are recognized upon utilization of the service or at the date they are incurred. The following specific recognition criteria must also be met before revenue is recognized: • • Revenues from sale of LPG and industrial gases are recognized when the risks and rewards of ownership of the goods have passed to the buyer. Revenues arising from hotel operations are recognized when services are rendered while those from banquet and other special events are recognized when the events take place. These are shown under “Hotel Operations” account in the consolidated statements of income. Real estate sales are recognized upon receipt of sufficient down payment. These are accounted for under the percentage-of-completion method where the Parent Company has material obligations to complete the development of the property sold. Under this method, the gain on sale is recognized as the related obligation is fulfilled. Cost of real estate projects sold before completion of the development and construction is determined based on the actual costs incurred to date plus estimated cost to complete the project as determined by the Parent Company’s technical staff and contractors. These estimates are reviewed periodically to take into consideration changes in cost estimates. The cost to complete the development of the sold portion of the subdivision lots, memorial park lots and condominium units are shown under “Estimated project development costs” account in the consolidated balance sheets. Interest income is recognized as the interest accrues taking into account the effective yield of the asset. • • • Page 9 Operating Lease Operating lease payments are recognized as expense in the consolidated statements of income based on the terms of the lease agreements. Financial Assets Financial assets include cash, financial assets at fair value through profit or loss, and trade and other receivables. The classification depends on the purpose for which the financial assets were acquired. The management determines the classification of the Group’s financial assets at initial recognition and reassesses their classification at every reporting date. All financial assets are recognized at their trade date, and are initially recognized at fair value. • • Cash – Cash includes cash on hand and deposits held in banks. Financial assets at fair value through profit or loss – This category includes financial assets that are classified as held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling them in the near term or if so designated by management. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months from balance sheet date. Subsequent to initial recognition, this category of assets is measured at fair value with changes in fair value recognized as profit or loss in the consolidated statements of income. Financial assets originally designated in this category may not be subsequently reclassified. • Trade and other receivables – These are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market, and with no intention of trading. They are classified as current assets, except for maturities greater than 12 months after balance sheet date, for which they are classified as noncurrent assets. Upon initial recognition, trade receivables are recognized at original invoice amount, while other receivables are recognized at face value. Subsequently, these receivables are measured at net recoverable value. Accordingly, an impairment loss is estimated for any doubtful accounts and for any anticipated adjustments which, in the normal course of events, will reduce the receivable amount. Impairment of Financial Assets The Group assesses at each balance sheet date whether a financial asset or a group of financial assets is impaired. • Assets carried at amortized cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount Page 10 of the asset shall be reduced through the use of an allowance account. The amount of the loss shall be recognized in the statements of income. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. • 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. Inventories Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • • Raw materials, and materials and supplies – Cost is determined primarily on the basis of moving average cost. Finished goods – Cost includes cost of raw materials used, direct labor and the applicable allocation of fixed and variable overhead costs. Net realizable value for finished goods is the estimated selling price in the ordinary course of business less the estimated cost of marketing and distribution. Net realizable value for raw materials and materials and supplies is the current replacement cost. Real Estate Projects Real estate projects are carried at the lower of cost or net realizable value. Cost consists of acquisition cost and expenditures for the development and improvement of subdivision and memorial park lots, and construction of the condominium units. Net realizable value is the estimated selling price less cost to complete and sell. Investment in Associates The Group carries its investment in shares of stock of associates at cost less any impairment losses. Page 11 Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of business acquisition over the fair values of the identifiable net assets and liabilities acquired. Subsequent to initial recognition, it is measured at cost less any accumulated impairment in value, and is reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Any impairment losses recorded are not reversed. When a subsidiary is sold, the difference between the selling price and the net assets plus the carrying amount of goodwill is recognized in the consolidated statements of income. Property, Plant and Equipment Property, plant and equipment are stated at cost less any accumulated depreciation and any impairment in value, except for the Parent Company’s land and improvements, buildings, and hotel and office equipment, and PGI’s land, buildings and structures, machinery and equipment, and oxygen and acetylene cylinders, which are carried at revalued amounts, as determined from independent appraisals, less any accumulated depreciation and any impairment in value. Additions subsequent to the dates of appraisals are stated at cost. The initial cost of property, plant and equipment consists of its purchase price and directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operations, such as repairs and maintenance and overhaul costs, are normally charged to expense in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property, plant and equipment. Independent appraisals on those property, plant and equipment were performed by an independent firm of appraisers as of December 31, 1992 for the Parent Company, and as of December 31, 1997 for PGI. The appraisal increment resulting from the appraisal is credited to “Revaluation reserve” account shown under the stockholders’ equity section in the consolidated balance sheets. Any appraisal decrease is first offset against revaluation reserve on earlier appraisal with respect to the property, plant and equipment, and is thereafter charged to operations. Upon disposal of revalued property, plant, and equipment, the relevant portion of the revaluation reserve realized with respect to previous appraisal is credited directly to deficit. Annually, an amount from the revaluation reserve, which is equal to the depreciation on appraisal increase, is transferred to deficit. Page 12 Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: Land improvements Building and structures LPG plant machinery and equipment LPG, oxygen and acetylene cylinders Machinery and equipment Hotel and office equipment Transportation equipment Furniture, fixtures, equipment and others In Years 5-15 20-40 20 15 9-10 9 5-6 5-6 Leasehold improvements are depreciated over the term of the lease or the estimated useful lives of the assets, whichever is shorter Construction in progress is stated at cost. This includes cost of construction and other direct costs, and is not depreciated until such time that the relevant assets are completed and put into operational use. The useful lives and depreciation method are reviewed periodically to ensure that the periods and method of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are retired or otherwise disposed of, the cost or revalued amount and the related accumulated depreciation and any impairment loss are removed from the accounts. Any resulting gain or loss is included in the consolidated statements of income in the period incurred. Assets Held for Dacion en Pago Assets held for dacion en pago consist of memorial park lots and real estate properties which are measured at the lower of its carrying amount and fair value less cost to sell. Impairment of Nonfinancial Assets The carrying values of assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their estimated recoverable amount. The estimated recoverable amount is the greater of net selling price or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an Page 13 asset that does not generate largely independent cash inflows, the estimated recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses, if any, are recognized in the consolidated statements of income, which are recognized as reduction in the revaluation reserve and any excess as a charge to current operations. Recovery of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The recovery is recorded in the consolidated statements of income. However, the increase in carrying amount of an asset due to recovery of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined had no impairment loss been recognized for that asset in prior years. Financial Liabilities Financial liabilities are recognized when the Company becomes a party to the contractual agreements of the instrument. Financial liabilities at FVPL. A financial liability is classified in this category if these result from trading activities or derivatives transactions that are not accounted for as accounting hedges, or when the Company elects to designate a financial liability under this category • Other financial liabilities. This category pertains to financial liabilities that are not held for trading or not designated as FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. The 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 of any related premium, discount and any directly attributable transaction costs. This category includes trade and other payables, restructured debts, advances from related companies and due from related parties. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such 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 and loss. Retirement Benefits The Group provides retirement benefits to employees through a defined benefit plan. A defined benefit plan is a pension plan that determines the amount of pension benefit an employee would receive upon retirement, usually dependent on several factors such as age, salary and length of service. Actuarial valuation, usually made every 2-3 years, is required under this plan to reliably measure the expense and obligation, and the possibility of recognizing actuarial gains and losses. The obligation recognized in the consolidated balance sheets is the present value of defined benefit obligation, which is actuarially determined using the projected unit credit method on a discounted basis. Page 14 Past service cost is recognized immediately to the extent that the benefits are already vested, and otherwise amortized on straight-line basis over the average period until the benefits become vested Borrowing Costs Borrowing costs are generally recognized as expense in the year in which these costs are incurred, except for those borrowing costs that are directly attributable to the development of real estate projects which are capitalized as part of the costs of the projects. The capitalization of borrowing costs as part of the costs of such assets: (a) commences when the expenditures and borrowing costs for the assets are being incurred and activities that are necessary to prepare the assets for their intended sale are in progress; (b) is suspended during the extended periods in which active development of the assets are interrupted; and, (c) ceases when substantially all activities necessary to prepare the assets for their intended sale are completed. Related Parties Parties are considered to be related if one party has the ability to control, directly or indirectly, the other party or exercise significant influence over the other party in making financial and operating decisions. It includes companies in which one or more of the directors and/or controlling stockholder of the Group either have a beneficial controlling interest or are in a position to exercise significant influence therein. Provisions and Contingencies Provisions are recognized only when: (a) the Group has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. They are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at balance sheet date, including risks and uncertainties. Any reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain, not exceeding the amount of related provision. 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. A contingent asset is not recognized but disclosed when an inflow of economic benefits is probable. Functional Currency and Foreign Currency Transactions • Functional and Presentation Currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Philippine Peso, which is the Group’s functional currency. Page 15 • Foreign Currency Transactions Transactions in foreign currencies are recorded in Philippine Peso using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing exchange rate at balance sheet date. All foreign exchange gains and losses are taken to the consolidated statements of income Income Taxes Deferred income tax is provided using the balance sheet liability method on temporary differences at balance sheet date between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the balance sheet liability method, with certain exceptions, deferred tax assets and liabilities are recognized for the future tax consequences attributable to: (1) the temporary differences between the financial reporting bases of assets and liabilities and their related tax bases; (2) carryforward benefit of the minimum corporate income tax (MCIT); and, (3) net operating loss carryover (NOLCO). Deferred tax assets and liabilities are measured using the tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled, and MCIT and NOLCO are expected to be applied. A valuation allowance is provided for the portion of deferred tax assets which is not expected to be realized in the future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at balance sheet date. Earnings (Loss) Per Share Earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares issued, subscribed and outstanding during the year, with retroactive adjustments for stock dividends declared. Subsequent Events Events that provide evidence of conditions that existed after balance sheet date (adjusting events) are recognized in the consolidated financial statements, while those that are indicative of conditions that existed after balance sheet date (non-adjusting events) are disclosed when material. 5. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of consolidated financial statements in conformity with PFRS requires the management to make judgments and estimates that affect the reported amounts of assets and liabilities at the date of consolidated financial statements, and revenue and expenses during the period reported. Judgments Page 16 In the process of applying the Group’s accounting policies, management has made the following judgments: • Functional Currency The Group has determined that its functional currency is the Philippine Peso, which is the currency of primary environment in which it operates. • Revenue Recognition The management requires certain judgments in selecting an appropriate revenue recognition method for real estate transactions based on sufficiency of payments by the buyer and completion of the project. Provisions and Contingencies Judgment is exercised by management to distinguish between provisions and contingencies. Policies on provisions and contingencies are discussed in Note 4, and relevant disclosure is presented under Note 32. • Estimates The estimates used in the consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances of the Group’s financial statements. Actual results could differ from those estimates. Management has determined the following relevant estimates: • Determining Selling Price of Inventories Management determines estimated selling price of inventories by taking into account the most reliable evidence available at the time the estimates are made. The Group’s LPG and industrial gases operations are primarily and continuously subject to price changes in the active market, thus may cause significant adjustments to its inventories within the next financial year. • Determining Real Estate Sales, Costs and Liability The Parent Company uses the percentage-of-completion method in accounting for its real estate transactions. The use of this method requires the Parent Company to estimate the revenue based on the stage of completion reached. The estimated costs incurred in reaching the stage of completion are matched with this revenue as determined by the Parent Company’s technical staff and contractors. Both the revenue and cost estimates are reviewed periodically and are updated if expectations differ from previous estimates. Real estate revenues amounted to P10.9 million in 2011 and P6.6 million in 2010, while related costs amounted to P2.1 million in 2011 and P1.3 million in 2010. • Useful Lives of Property, Plant and Equipment Page 17 Estimates are made on the useful lives of the Group’s property, plant and equipment based on the periods over which the assets are expected to be available for use. The estimated useful lives are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technological or commercial obsolescence, or other limits on the use of such assets. In addition, estimates are based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by the changes in estimates brought about by the factors mentioned above. • Retirement Benefits The present value of the defined benefit obligation is dependent on several factors that are determined upon actuarial valuation using a number of assumptions. Any changes in those assumptions will have effect on the balance of the retirement benefit obligation, thus actuarial gains and losses are recorded. • Realizability of Deferred Tax Assets At balance sheet date, the Group reviews deferred tax assets and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Management considers industry trends and projected performance in assessing the sufficiency of taxable income. • Impairment of Assets Management is required to perform test of impairment when impairment indicators are present. Property, plant and equipment and other long-lived assets, including goodwill, are periodically reviewed to determine any indications of impairment. Management is required to make estimates to determine future cash flows to be generated from the continued use and ultimate disposition of these assets in order to determine the value in use. Though management believes that the estimates and assumptions used in the determination of recoverable amounts are reasonable and appropriate, significant changes in these assumptions may materially affect the assessment of the recoverable amounts and any resulting impairment loss could have a material adverse effect in the results of operations. As of June 30, 2011 and 2010, goodwill amounted to P68.9 million (see Note 16). The Group further maintains allowance for impairment on potentially uncollectible receivables, advances, investments and other asset accounts, and writing off accounts considered uncollectible. The allowance and write-off are evaluated by management based on relevant facts and circumstances, including but not limited to, collection experience and length of relationship with customers and outside parties, current economic trends, changes in collection terms, pending litigations and other factors that may affect the Group’s ability to collect. Current trade and other receivables, net of allowance for impairment, amounted to P140.3 million and P153.7 million as of June 30, 2011 and 2010, respectively (see Note 8). Due from related parties, net of allowance for impairment losses, amounted Page 18 to P119.9 million and P116.6 million as of June 30, 2011 and 2010, respectively (see Note 19). Investment in associates, net of allowance for impairment, amounted to P0.5 million as of June 30, 2011 and 2010 (see Note 12). Other noncurrent assets, net of allowance for impairment, amounted to P68.9 million as of June 30, 2011 and 2010 (see Note 16). 6. CASH AND CASH EQUIVALENTS This account consists of: Cash on hand and undeposited collections Cash in banks 2011 P 12,925,583 109,049,709 P 121,975,292 Cash in banks generally earns interests at rates based on daily bank deposit rates. 2010 P21,191,335 94,588,089 P115,779,424 7. INVESTMENTS HELD FOR TRADING This consists of held-for-trading equity securities held from various listed companies in the Philippines. Fair values of these securities have been determined directly by reference to published prices quoted in the active market at balance sheet dates. 8. TRADE AND OTHER RECEIVABLES This account consists of: 2011 Current: Trade Interest receivable Advances to officers and employees Others Allowance for impairment Net Noncurrent: Trade Refundable deposits P 27,292,642 13,064,537 P 40,357,179 P27,292,642 13,069,967 P40,362,609 P 159,676,157 19,796,836 27,003,706 2,725,226 209,201,925 (68,879,355) P 140,322,570 2010 P149,969,071 19,796,836 17,470,174 35,388,717 222,264,798 (68,879,355) P153,745,443 Reconciliation of allowance for impairment at beginning and end of 2011 and 2010 is presented below: Page 19 Balance at beginning of year Impairment loss during the year – note 22 Write-off during the year Balance at end of year 2011 P 68,879,355 2010 P68,879,355 - P 68,879,355 P68,879,355 Trade receivables are usually due within 30-90 days and do not bear any interest. All trade receivables are subject to credit risk exposure. However, the Group has no significant concentration of credit risk as the amounts recognized represent a large number of receivables from various customers. Titles to the real estate sold are retained by the Group until fully paid by the customers. The balance of trade receivables includes current and noncurrent portions of installment contract receivables amounting to P54.6 million and P50.0 million as of June 30, 2011 and 2010, respectively. These receivables are usually due within three to five years and bears interest at a rate ranging from 17% to 19%. A major portion of the advances to officers and employees is non-interest bearing and collectible through salary deductions. Management considers the carrying amounts of trade and other receivables to be a reasonable approximation of their fair values. 9. INVENTORIES This account, which is stated at cost, consists of: 2011 Finished goods Material and supplies Raw materials P 346,474,140 72,996,466 22,600,128 P 442,070,734 10. REAL ESTATE PROJECTS Real estate projects consist of the following: 2011 Memorial park lots – notes 2, 13 and 15 Zamboanga Memorial Gardens 2010 2010 P362,245,987 59,685,739 6,841,503 P428,773,229 P Cagayan de Oro Gardens Mt. Apo Gardens Ma. Cristina Gardens Pryce Gardens-Manolo Fortich/CDO 93,015,433 98,884,675 89,604,023 31,178,950 27,653,770 P93,273,518 102,286,396 89,606,774 31,782,550 27,582,606 Page 20 Pryce Gardens – Bislig North Zamboanga Gardens Ozamis Memorial Gardens Pryce Gardens – Malita Pryce Gardens – Malaybalay Pryce Gardens – Alabel Subdivision lots – notes 2, 13 and 15 Iligan Town Center Puerto Heights Village Villa Josefina Resort Village Saint Joseph Homes Pryce Business Park Condominium units – Pryce Tower – note 28 Land held for future development Cagayan de Oro Davao Misamis Oriental Cotabato 24,588,147 29,594,474 22,724,440 17,885,428 18,450,652 19,422,008 99,151,717 93,750,232 37,801,232 24,157,353 892,524 125,119,066 24,593,876 29,684,621 22,791,791 17,885,428 18,375,494 19,422,008 99,483,113 93,750,232 37,801,232 21,492,535 892,523 125,119,066 164,022,529 142,460,537 27,979,122 7,559,489 P1,197,845,440 164,022,529 142,460,537 27,979,122 7,559,489 P1,195,895,800 Real estate projects are stated at costs which are lower than their net realizable values. 11. PREPAYMENTS AND OTHER CURRENT ASSETS This account consists of: 2011 P21,473,135 9,666,097 15,062,636 4,048,644 10,807,806 61,058,318 (120,246) P 60,938,072 2010 P 4,002,906 8,381,816 12,055,313 1,788,615 8,957,803 35,186,453 (120,246) P35,066,207 Deferred input tax and others Creditable withholding taxes Prepaid expenses Advance payments to suppliers and contractors Others Allowance for impairment Net Reconciliation of allowance for impairment at beginning and end of 2011 and 2010 is presented below: 2011 P 120,246 P 120,246 2010 P 120,246 P 120,246 Balance at beginning of year Write-off during the year Balance at end of year Page 21 12. INVESTMENTS IN ASSOCIATES This account consists of: 2011 Shares of stock of Pryce Finance Leasing Corporation (PFLC) – note 19 Others Allowance for impairment Net P 50,000,000 2,413,000 52,413,000 (51,890,000) P 523,000 2010 P 50,000,000 2,413,000 52,413,000 (51,890,000) P 523,000 A reconciliation of the allowance for impairment at beginning and end of 2011 and 2010 is as follows: 2010 2011 Balance at beginning of year P 51,890,000 P 51,890,000 Impairment loss during the year – note 22 Balance at end of year P 51,890,000 P 51,890,000 13. PROPERTY, PLANT AND EQUIPMENT AT REVALUED AMOUNTS Reconciliations of the carrying amounts at the beginning and end of 2011 and 2010, and the gross carrying amounts and the accumulated depreciation of revalued property, plant and equipment are as follows: 2011 Buildings and Structures Machinery and Equipment Oxygen and Acetylene Cylinders Hotel and Office Equipment Land and Improvements Net carrying amount, January 1, 2011 Additions Disposal and other movements Depreciation Net carrying amount, June 30, 2011 Cost Accumulated Depreciation Total P 259,793,269 (13,630,119) P 246,163,150 P 266,461,467 (6,922,966) P 297,635,477 (20,715,257) P276,920,220 P 599,533,990 (314,590,808) P 4,237,350 (1,376,975) P 2,860,375 P217,603,673 (204,746,423) P169,330,961 (9,867,850) P159,463,111 P647,960,559 (518,928,270) P 1,165,923 (117,520) P 1,048,403 P 56,886,912 (56,802,875) P 732,162,980 (45,707,721) P686,455,259 P1,788,446,601 (1,101,991,342) Net carrying amount P 259,538,501 P284,943,182 P 12,857,250 P129,032,289 P 84,032 P686,455,259 Page 22 June 30, 2011 2010 Land and Improvements Buildings and Structures Machinery and Equipment Oxygen and Acetylene Cylinders Hotel and Office Equipment Total Net carrying amount, January 1, 2010 P 259,904,789 Additions 41,206 Disposal and other movements Depreciation ( 152,726) Net carrying amount, December 31, 2010 P 259,793,269 Cost P 266,461,467 Accumulated Depreciation (6,668,198) Net carrying amount, December 31, 2010 P 259,793,269 P 314,627,214 P 26,256,722 P 188,164,282 P 2,240,939 375,357 P 791,193,946 416,563 ( ( 792,200) 58,655,329) ( 3,221,523) ( 13,770,214) P 297,635,477 P 599,533,990 (301,898,513) ( 9,372,030) ( 12,647,342) P 4,237,350 11,801,353 ( 30,634,674) P169,330,961 P647,960,559 (478,629,598) ( 1,450,373) P 1,165,923 P 56,886,912 (55,720,989) P 732,162,980 P 1,788,446,601 (1,056,283,621) P 217,603,673 (213,366,323) P 297,635,477 P 4,237,350 P169,330,961 P 1,165,923 P 732,162,980 Depreciation charged to operations was allocated as follows: 2011 P 42,421,056 986,782 2,299,883 P 45,707,721 2010 P 51,684,298 3,285,516 7,288,925 P 58,655,329 Cost of sales Selling expenses General and administrative expenses Depreciation charged to operations in 2011 and 2010 aggregating P45.7 million and P58.7 million, respectively. The appraised land, buildings and structures, machinery and equipment, and oxygen and acetylene cylinders of PGI with carrying values of P614.1 million and P662.9 million as of December 31, 2009 and 2008, respectively, were mortgaged as collaterals for PGI’s obligations (see Note 18). 14. PROPERTY, PLANT AND EQUIPMENT AT COST Reconciliations of the carrying amounts at the beginning and end of 2011 and 2010, and the gross carrying amounts and the accumulated depreciation of property, plant and equipment at cost are as follows: Page 23 June 30, 2011 LPG Plant Machinery and Equipment Net carrying amount, January 1, 2011 Additions Depreciation Disposals and other Movements Net carrying amount, June 30, 2011 P976,115,584 (25,531,296) Machinery and Equipment Transportation Leasehold Equipment Improvements P 84,873,720 (8,621,798) P 25,084 Furniture, Fixtures, Equipment and Others P16,729,752 (6,403,832) Construction In Progress P48,164,265 Total P1,136,854,186 (43,748,459) P10,945,777 (3,191,533) P950,584,288 P7,754,244 P 76,251,922 P 25,084 P13,177,883 48,164,265 P1,093,105,727 Cost Accumulated Depreciation Net carrying amount, June 30, 2011 P1,989,853,450 (1,036,255,867) P953,597,583 P24,644,004 (14,000,365) P10,643,639 P 204,673,566 (122,442,239) P 82,231,327 P 7,200,111 (7,175,027) P 25,084 P82,125,026 (66,837,680) P15,287,345 48,164,265 (16,843,517) 31,320,748 P2,356,660,422 (1,263,554,695) P1,093,105,727 December 31, 2010 LPG Plant Machinery and Equipment Net carrying amount, January 1, 2010 Additions Depreciation Disposals and other Movements Net carrying amount, December 31, 2010 P1,011,984,153 24,378,580 ( 104,063,450) 43,816,301 P 976,115,584 Machinery and Equipment P12,220,390 893,979 ( 3,326,880) 1,158,288 P 10,945,777 P 24,644,004 (13,698,227) P 10,945,777 Transportation Equipment P 42,989,793 41,629,806 ( 12,954,872) 13,208,993 P 84,873,720 P Leasehold Improvements P 94,878 ( 122,835) 53,041 25,084 Furniture, Fixtures, Equipment And Others P 6,849,199 11,627,453 ( 5,721,175) 3,974,275 P16,729,752 Construction in Progress P 37,631,850 10,532,615 P 48,164,465 P 48,164,265 P 48,164,265 Total P 1,111,770,263 89,062,433 ( 126,189,212) 62,210,898 P 1,136,854,186 Cost Accumulated Depreciation Net carrying amount, December 31, 2010 P1,989,853,450 (1,013,737,866) P 976,115,584 P204,673,566 (119,799,846) P 84,873,720 P 7,200,111 (7,175,027) P 25,084 P82,125,026 (65,395,274) 16,729,752 P 2,356,660,422 (1,219,806,240) P 1,136,854,186 Depreciation charged to operations was allocated as follows: Cost of sales Selling expenses General and administrative expenses 2011 P36,943,142 2,414,373 4,390,944 P43,748,459 2010 P102,423,608 8,289,545 15,476,059 P126,189,212 PGI’s LPG plant machinery and equipment, and transportation equipment with carrying values of P352,834,743 and P1,110,287,272 as of December 31, 2010 and 2009, respectively, were mortgaged as collaterals for PGI’s obligations (see Note 18). Page 24 15. ASSETS HELD FOR DACION EN PAGO Assets held for dacion en pago includes a number of memorial park lots contributed by the Parent Company to PGI in 2003 and 2004 for PGI’s increase in authorized capital stock in 2004. These assets shall be used by PGI in the settlement of debts for dacion en pago covered by the Rehabilitation Plan. 16. OTHER NONCURRENT ASSETS This account consists of: 2011 P 68,897,066 22,540,535 91,437,601 (22,540,535) P 68,897,066 2010 P 68,897,066 22,540,535 91,437,601 (22,540,535) P 68,897,066 Goodwill – notes 3 and 4 Others Allowance for impairment Net Reconciliation of allowance for impairment at beginning and end of 2011 and 2010 is presented below: 2010 2011 Balance at beginning of year P 22,540,535 P 22,540,535 Impairment loss during the year – note 22 Write-off during the year Balance at end of year P 22,540,535 P 22,540,535 The Group management believes that the goodwill is not impaired as of June 30, 2011 and 2010. 17. TRADE AND OTHER PAYABLES This account consists of: 2011 P 539,033,955 230,655,908 874,568 34,115,378 P 804,679,809 Significant portion of accrued expenses includes interest on restructured debts. Management considers the carrying amounts of trade and other payables to be a reasonable approximation of their fair values, due to their short duration. 2010 P 573,812,661 215,382,852 55,975,931 P 845,171,444 Trade Accrued expenses Unrealized gross profit Others Page 25 18. LIABILITIES COVERED BY THE REHABILITATION PLAN The liabilities covered by the Rehabilitation Plan, as mentioned in Note 2, consist Debts for dacion en pago Restructured debts – at amortized cost Current Noncurrent 2011 P861,245,740 53,388,985 389,814,901 443,203,886 P 1,304,449,626 2010 P 861,244,231 107,059,646 389,814,901 496,874,547 P1,358,118,778 a) Debts for Dacion En Pago of the Parent Company 2011 P208,581,499 363,696,160 20,946,491 P593,224,150 2010 P 208,581,499 363,694,651 20,946,491 P593,222,641 Long-term commercial papers (LTCPs) Loans from banks and other financial institutions Trade and non-trade creditors Under the terms of the Rehabilitation Plan, the above indebtedness of the Parent Company shall be liquidated and paid by dacion en pago of the real estate properties, subject to the following guidelines: • Payment of all indebtedness to creditor banks and long-term commercial papers (LTCPs) shall be made by way of dacion en pago of developed real estate properties of the Parent Company. Trade creditors holding claims of at least P500,000 shall be paid by way of dacion en pago of memorial park lots to be allocated equally, except the memorial park lots in Davao City which is mortgaged to CBC. Trade creditors holding claims of less than P500,000 shall be paid in cash over a three-year period, without interest, on a quarterly basis. The value of the real estate properties to be ceded to the creditors by way of dacion en pago shall be the average of three appraisals to be undertaken by firms accredited by the BSP nominated by the creditors. In the event that the value shall exceed the amount of obligation to be settled, the excess assets shall be released in favor of the Parent Company. In case of deficiency in the value of the real estate properties, the shortfall shall be settled by way of dacion en pago of memorial park lots. Memorial park lots shall be valued at P13,125 per lot for secured creditors and P17,500 for unsecured creditors. • • • • Page 26 Long-term commercial papers (LTCPs) These debts, which include principal and interest of P339.5 million, are secured by mortgaged trust indenture with CBC as mortgage trustee covering certain assets of the Parent Company in Cagayan de Oro and Davao City. The Parent Company transferred to a creditor bank a number of memorial park lots and a parcel of land as full settlement of its obligations amounting to P65.4 million and P103.3 million in 2006 and 2005, respectively. Loans from banks and other financial institutions These loans consist of foreign and local currency denominated loans, which include interest of P134.6 million, obtained by the Parent Company from a local bank on the assignment of trade receivables with recourse against the Parent Company. These loans are collateralized by certain real estate projects and property and equipment of the Parent Company. b) Debts for Dacion en Pago of PGI This account consists of: 2011 Debts secured by non-operating assets: Foreign-currency denominated trade payable Peso-denominated bank loan Unsecured debts: Peso-denominated trade payables P 82,739,276 123,521,054 61,761,259 P 268,021,589 2010 P 82,739,276 123,521,054 61,761,259 P 268,021,589 Under the terms of the Rehabilitation Plan, the amount in excess of P1.25 billion indebtedness shall be liquidated and paid by way of dacion en pago of real estate properties of the Parent Company, subject to the guidelines set forth below (See Note 2): 1. Real estate properties already mortgaged to a creditor or group of creditors shall be used as full payment of the debts to said creditors. 2. The value of the real properties to be ceded to the creditors by way of dacion en pago shall be the average of two appraisals to be undertaken by firms accredited by the BSP nominated by the creditors. In the event that the value shall exceed the amount of debts to be settled, the excess assets shall be released in favor of the Parent Company or mortgagor. In case of deficiency in the value of the real estate assets, the shortfall shall be settled by way of dacion en pago of memorial park lots. 3. All other debts neither eligible for restructuring nor covered by a mortgage over real estate properties not used for operations shall be settled also by way of dacion en pago. Page 27 4. Memorial park lots shall be valued at a discount off-the-retail selling price as stipulated in the court order, in line with the prices used for similar dacions completed with nine other creditors of PGI. 5. Unsecured creditors and suppliers whose total claims amounted to P789.4 million shall receive an aggregate of 49,500 memorial park lots at the stipulated dacion price. 6. All loans receivable acquired by the Parent Company from the various creditors of PGI through completed and prospective dacion en pago transactions shall be converted to additional equity of the Parent Company in PGI. These debts are classified as secured or unsecured. Debts secured by operating assets were fully settled in 2005. Debts secured by non-operating assets and unsecured debts are explained as follows: Debts Secured by Non-operating Assets The debts secured by non-operating assets, which include principal and interest of P17.6 million, represent Peso-denominated loans from local banks and a financing company, and US Dollar-denominated trade payable to a foreign supplier. The Peso-denominated loans represent clean loans obtained for working capital requirements, construction of LPG terminals and refilling plants in Visayas and Mindanao regions, and importation of commercial LPG mixtures from a foreign supplier. The Peso-denominated loans from local banks are collateralized by a chattel mortgage on project assets, which are guaranteed by the Parent Company (see Note 19). The Peso-denominated loans from a financing company are collateralized by various transportation equipment owned PGI (see Note 14). The creditors under this group shall get whatever properties already mortgaged to them at dacion values keyed to the average of two appraisals undertaken by firms accredited by the BSP. In the event that dacion values shall exceed the amount of obligations to be settled, the excess assets shall be released in favor of the Parent Company or the mortgagor, as the case may be. Certain bank, a mortgagee of a contiguous parcel of memorial development lot in Cagayan de Oro, and a foreign supplier, mortgagee of an eight-hectare portion of the Parent Company’s memorial park lots in Dipolog, may elect either of the following options: (1) receive their memorial park lot entitlement entirely from the property mortgaged to them, or (2) receive a proportionate share of the available lot inventory in each location. In 2005, PGI transferred several memorial park lots to a creditor bank as partial settlement of its debts amounting to P33.1 million. As of December 31, 2007 and 2006, debts under this classification amounted to P237 million. There were no transfers of memorial park lots made to the creditors during 2007 and 2006. Page 28 Unsecured Debts Unsecured trade payables represent the outstanding payables for purchases of goods and services from various suppliers of LPG, materials and supplies, repair services, freight and handling among others. In 2005, the PGI transferred memorial park lots totaling to P5.3 million to its trade debtors as partial settlement of its debts totaling to P84.7 million. In 2006, the unsecured trade payables was reduced by P17.6 million as a result of the offsetting of trade receivables from customers, who are also the trade debtors of the PGI covered by the Rehabilitation Plan. As of December 31, 2007 and 2006, debts under this classification amounted to P61.8. There were no transfers of memorial park lots made to trade creditors during 2007 and 2006. c) Restructured Debts of PGI This account consists of US Dollar- and Peso-denominated bank loans broken down as follows: June 30, 2011 Tranche A Foreign currency-denominated US$15 million loan granted by a foreign financing company Foreign currency-denominated US$4 million loan granted by a foreign commercial bank Peso-denominated loans granted by various local commercial banks Tranche B Total Current Noncurrent P212,586,061 P 52,197,470 P264,783,531 P 30,376,010 P 235,216,186 54,095,560 87,312,312 P353,993,753 13,286,629 23,725,943 P89,210,222 67,382,189 111,038,255 P443,203,975 7,726,388 15,286,587 P53,388,985 59,830,818 94,767,986 P389,814,990 December 31, 2010 Tranche A Foreign currency-denominated US$15.0 million loan granted by a foreign financing company P 237,619,172 Foreign currency-denominated US$4.0 million loan granted by a foreign commercial bank 60,329,644 Peso-denominated loans granted by various local commercial banks 99,550,165 P 397,498,981 Tranche B Total Current Noncurrent P59,404,793 P 297,023,965 P61,411,525 P 234,609,686 15,083,342 24,887,519 P99,375,655 75,412,987 124,437,684 P496,874,636 15,592,559 30,055,562 P107,059,646 59,566,009 95,639,295 P389,814,990 The fair values of the restructured debts are as follows: June 30, 2011 Tranche A Foreign currency-denominated US$15.0 million loan granted by a foreign financing company Foreign currency-denominated US$4.0 million loan granted by a foreign commercial bank Peso-denominated loans granted by various local commercial banks Tranche B Total Current Noncurrent P224,317,551 P 56,079,387 56,955,995 92,127,484 P373,401,030 14,238,998 16,094,895 P86,413,280 P280,396,938 71,194,993 108,222,379 P459,814,310 P 51,581,235 13,096,808 22,429,852 P87,107,895 P228,815,703 58,098,185 85,792,527 372,706,415 Page 29 December 31, 2010 Tranche A Tranche B Foreign currency-denominated US$15.0 million loan granted by a foreign financing company P 228,568,932 P 57,142,233 Foreign currency-denominated US$4.0 million loan granted by a foreign commercial bank 58,035,454 14,508,863 Peso-denominated loans granted by various local commercial banks 93,873,534 16,399,933 P 380,477,920 P88,051,029 Total Current Noncurrent P285,711,165 72,544,317 110,273,467 P 468,528,949 P 52,558,829 13,345,025 22,854,955 P 88,758,809 P 233,152,336 59,199,292 87,418,512 P 379,770,140 The fair values of restructured debts have been determined by calculating their present values at balance sheet dates using the fixed effective market interest rates available to PGI. However, any fair value changes have not been included in profit or loss, since restructured debts are carried at amortized cost in the consolidated balance sheets. Of PGI’s indebtedness as of August 27, 2002, only P1.25 billion will be paid in cash subject to restructuring terms under the Rehabilitation Plan (see Note 2). The terms are set forth as follows: 1. Tranche A – covering P1.0 billion out of the P1.25 billion restructured debts, upon which the principal will be paid over 29 quarters from June 2006 to June 2013 or 10 years inclusive of a three-year grace period on principal, with annual interest rate at prevailing 91-day Treasury Bill rate plus 1% for Pesodenominated loans and three-month London Interbank Offered Rate (LIBOR) plus 1% for US Dollar-denominated loans, reckoned from the date of approval of the Rehabilitation Plan. The interest will be paid when incurred reckoning from the approval of the Rehabilitation Plan up to the full settlement of Tranche A debt. 2. Tranche B – covering the remaining P250.0 million, payable as to interest and principal in 12 equal quarterly installments starting upon full settlement of Tranche A debt but in no case later than September 2013, and with annual interest at prevailing 91-day Treasury Bill rate plus 1% for Peso-denominated loans and three-month LIBOR plus 1% for US Dollar-denominated loans, reckoned from date of approval of the Rehabilitation Plan. Foreign currency denominated loans shall continue to be denominated in US Dollars to be computed at the prevailing Peso exchange rate at the time of payment. Interest will accrue yearly in their respective foreign currency denominations and will be reckoned from the approval of the Rehabilitation Plan but repaid only after Tranche A debt is retired. Interest accrued on Tranche B debt will not accrue any additional interest or penalties. Interest accrued on Tranche B debt up to the date of full repayment of Tranche A debt will be capitalized then repaid (without further interest) in 12 equal quarterly amortizations to coincide with principal repayments on Tranche B debt. Page 30 Both Tranche A and Tranche B debts shall be secured by the operating assets respectively mortgaged to the creditors involved. Non-operating assets, which will not be ceded by way of dacion en pago, shall be released from the mortgages. If, during the grace period, PGI is unable to meet payment on interest falling due, then such interest shall be deferred and paid when PGI is able to accumulate enough cash. Under no circumstances will the deferred interest be paid beyond the maturity of Tranche B debt. No penalty charges will accrue on such deferred interest. Details of the restructured debts are as follows: Foreign Currency-denominated US$15 Million Loan Granted by a Foreign Financing Company The US$15 million term loan, which includes principal and interest of P96.3 million as of August 31, 2002 has an original term of seven years, inclusive of three years grace period on principal repayment. This was obtained from a foreign financing company in 1999 to settle maturing short-term loans from local commercial banks. The loan is originally payable over eight consecutive semi-annual installments of US$1.9 million commencing on December 15, 2001 and bears annual interest at rates ranging from 2.5% to 3% over and above LIBOR. Foreign Currency-denominated US$4 Million Loan from a Foreign Commercial Bank The US$4 million loan, which includes principal and interest of P17.0 million as of August 31, 2002, bears interest at 4.59% to 5.25% in 2010 and 3.71% to 6.25% in 2009. The loan is collateralized by the PGI’s oxygen and acetylene cylinders with carrying values of P251 million and P188.2 million as of December 31, 2010 and 2009, respectively (see Note 13). Peso-denominated Loans Granted by Various Local Commercial Banks • The Peso-denominated loans granted by various local commercial banks consist of P425 million and P100 million loans. The 425 million Peso-denominated loans, which include principal and interest of P35.5 million as of August 31, 2002, represent availments from the PGI’s credit line obtained from various local commercial banks through a syndicated loan agreement. These loans were released in various dates in 1998 with an original term of seven years with two years grace period and payable in equal quarterly payments commencing at the end of the 9th quarter. The 1st quarterly payment started in April 2000. These loans bear interest at rates ranging from 1.78% to 4.97% in 2010 and 4.80% to 5.65% in 2009. The P100 million Peso-denominated loan, which includes principal and interest of P1.3 million as of August 31, 2002, represents availment from the PGI’s approved credit line from a certain local commercial bank. This loan was released in three tranches with an original term of five years with 1 ½ years grace period and is payable in 15 equal quarterly payments commencing at the end of the 5th quarter of the 2nd year. These loan tranches bear interest at rates ranging from 4.50% to 7.12% in 2010 and 4.67% to 6.705% in 2009. Page 31 The proceeds from Peso-denominated loans were used to fund the construction of PGI’s LPG terminals and refilling plants. An MTI on property, plant and equipment owned by PGI, was executed with a trustee bank to secure the abovementioned obligations. The loan agreements provide certain restrictions and requirements with respect to, among others, declaration of dividends, incurrence of additional indebtedness and maintenance of certain financial ratios. Failure of PGI to comply with one of these requirements shall make the loans due and payable as if an event of default has occurred. On March 11, 2005, PGI transferred to its creditor bank a number of memorial park lots as full settlement of its obligations amounting to P68.2 million. There were no transfers of memorial park lots made in 2010 and 2009. PGI made its first principal payments on Tranche A debts in October 2006. 19. RELATED PARTY TRANSACTIONS The Group has transactions with related parties in the normal course of business. The more significant of these transactions are as follows: a. PFLC extends loan financing to the PGI’s dealers for LPG product purchases. PFLC pays PGI for the LPG product and the dealer pays PFLC for the LPG product plus interest. In 2001, PFLC experienced difficulty in collecting its receivables from certain dealers, thus it was unable to pay PGI for the LPG products purchased by the dealers. Moreover, PGI absorbed the P150 million loan of PFLC from a commercial bank. Full allowance for impairment losses was provided on the amounts due from PFLC of P352.3 million (including the carrying amount of its investment of P50 million) as of December 31, 2010 and 2009. b. The Group has transactions with various affiliates involving the availment and granting of interest and non-interest bearing cash advances with no definite repayment period, and premium payments for educational and retirement plans provided to their employees. The consolidated balance sheets include the following amounts resulting from the above transactions with related parties: 2010 2011 Due from related parties: Pryce Finance and Leasing Corporation P 455,544,848 P 456,837,820 Pryce Development Corporation 265,519,705 265,519,705 Mindanao Gardens, Inc. 62,818,945 62,818,945 Pryce Securities, Inc. Pryce Plans, Inc. 43,642,348 41,407,595 Hinundayan Holdings 40,546,943 39,346,943 Pryce Drugstore.Com 4,179,810 3,375,761 Others 4,134,774 3,746,242 876,387,373 873,053,011 Allowance for impairment (756,444,642) (756,444,642) P119,942,732 P 116,608,369 Page 32 Due to related parties: Central Luzon Oxygen and Acetylene Corporation Pryce Insurance Consultant, Inc. Pryce Finance and Leasing Corporation Others P P3,675,254 649,035 635,441 46,470,836 51,430,566 P3,675,253 649,035 635,441 49,536,133 P54,495,862 A reconciliation of the allowance for impairment at beginning and end of 2011 and 2010 is as follows: 2010 2011 Balance at beginning of year P 756,444,642 P 756,444,642 Impairment losses during the year – note 22 Reversal of impairment loss Balance at end of year 20. OPERATING EXPENSES This account consists of: Personnel Repairs and maintenance Fuel and Oil Depreciation and amortization Professional fees & other outside servs. Rent and utilities Travel and transportation Freight and handling Taxes and licenses Materials and supplies Entertainment, amusement and recreation Advertisements Insurance Others Commission 2011 P 51,641,126 50,169,345 18,811,130 18,783,109 12,692,551 26,894,891 15,598,987 10,107,372 9,682,977 8,919,872 3,908,532 744,612 2,083,478 3,135,777 18,796,017 P 251,969,775 2010 P 47,223,014 43,437,532 16,878,027 13,831,416 20,130,851 15,459,780 12,084,547 11,977,897 5,883,399 7,370,608 897,223 1,042,351 1,312,918 14,827,104 1,158,715 P 213,515,382 P756,444,642 P 756,444,642 21. EMPLOYEE BENEFITS The Group maintains a retirement benefit plan covering all employees on regular employment status. The retirement plan of the Parent Company is funded, while that of PGI is not yet funded. The plans are noncontributory defined benefit plans that provide retirement benefits equal to the following: (a) 150% of monthly final salary for every year of service rendered for the first 20 years; (b) 175% of monthly final salary for every year of service rendered in excess of 20 years but not more than 25 years; and, (c) 200% of monthly final salary for every year of service rendered in excess of 25 years. The plans use the projected unit credit method of actuarial valuation in its retirement benefit cost computation. Page 33 In 2006, the Group obtained actuarial valuations to determine any transitional liabilities in accordance with PAS 19, “Employee Benefits”. The computed transitional liabilities amounted to P9.3 million as of January 1, 2005 for PGI and P15.2 million as of January 1, 2006 for the Parent Company. The transitional liabilities computed do not differ materially from the Group’s recorded obligation, net of advanced contributions, which has been determined using the provisions of RA 7641 and its existing retirement plans. 22. EARNING/LOSS PER SHARE Earning/loss per share is computed based on the weighted average number of common shares outstanding during the year. The number of shares used to compute basic EPS was 2,000,000,000 for each of the years 2011 and 2010. 23. CONSOLIDATION ADJUSTMENT The real estate properties transferred by the Parent Company to PGI as equity contribution have been taken up in the books of the Parent Company at cost. In the books of PGI, the real estate properties were taken up at their fair values. PGI transferred certain real estate properties by way of dacion en pago with a difference between fair value and cost of P129.1 million in 2005 and P901.5 million in 2004. In 2006, there were no real estate properties of PGI transferred to creditors by way of dacion en pago. The consolidation adjustment of P1,030.7 million as of March 31, 2011 and 2010 represents the net difference between the fair value and the related cost of real estate properties transferred to PGI creditors in settlement of its debts covered by the Rehabilitation Plan. The amount was arrived at in the elimination process of intercompany account balances and such difference was treated as “Consolidation adjustment” account and presented under the stockholders’ equity section in the consolidated balance sheets. In June 2011, this is presented in the Balance sheet to comply with the appropriate adjustment needed. 24. SIGNIFICANT AGREEMENTS a. Based on subscription agreements executed on December 11, 2006, three of the Parent Company’s stockholders made additional subscriptions to the remaining unsubscribed portion of its authorized capital stock amounting to P177,006,250, consisting of 177,006,250 shares at P1 par value. In exchange of the subscriptions, the stockholders transferred and assigned their real estate properties of the same amount to the Parent Company. b. PGI has entered in various lease agreements for its Makati office and Visayas and Mindanao sales offices with various local companies for a period of one year renewable thereafter upon mutual agreement of both parties. 25. CONTINGENCIES The Group is involved in litigations, claims and disputes arising in the ordinary course of business. The Group’s management believes that the ultimate liability, if any, with respect to such litigations, claims and disputes will not materially affect the financial position and results of operations of the Group. Page 34 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES There are several financial risks to which the Company is subject concerning both its operating and financing activities. The management of such financial risks is done in close cooperation with its Board of Directors; it adopts measures to strengthening the Company’s short- to medium-term cash flows as well as minimizing the exposure to financial markets. The Company does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Company is exposed to are described below: • Foreign Currency Risk A major portion of the Company’s restructured debts and purchase transactions, on the part of PGI, are in foreign currency. Though foreign exchange gains and losses are recognized for such transactions, and for translation of monetary assets and liabilities, the Company periodically monitors movements of foreign exchange rates with a proactive attitude so as not to significantly affect its operations. The Company has a foreign currency denominated financial liabilities of P561,701,986 (US$8,045,792) in 2010 and P622,664,067 (US$10,870,871) in 2009. In translating the foreign currency denominated financial liability into Philippine Peso, the exchange rates used were PHP43.885 to USD1.00 and PHP46.356 to USD1.00, the US dollar to Philippine peso exchange rates as of March 31, 2010 and 2009, respectively. • Price Risk This is a risk on the value of a financial instrument fluctuating as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issuer, or factors affecting all instruments traded in the market. The Company is exposed to such risk because its equity securities are classified as financial assets at fair value through profit or loss. The Company continuously monitors the market prices of these securities. • Credit Risk The maximum credit risk exposure of financial assets, in general, is the carrying amount of financial assets as shown in the face of consolidated statements of financial position. Credit risk therefore is only disclosed in Page 35 circumstances where the maximum potential loss differs significantly from the financial assets carrying amount. The Company’s trade and other receivables are actively monitored to avoid significant concentration of credit risk. a) Cash Credit risk for cash is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. b) Trade and other receivables With respect to trade and other receivables, the Company is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Trade receivables involve of a large number of customers in various industries and geographical areas. Based on historical information about customer default rates, management considers the credit quality of trade receivables, which are not past due or impaired, to be good. • Liquidity Risk There is significant exposure to liquidity risk because of debts under dacion en pago and restructured debts covered by the Rehabilitation Plan and payment of finance costs by PGI. This risk is managed by identifying events that would trigger liquidity problems, providing contingency plans, identifying potential sources of funds and monitoring compliance to policy on liquidity risk management. • Interest Rate Risk The exposure to interest rate risk relates primarily to the Company’s financial instruments with a floating interest rate and fixed interest rate. Floating rate financial instruments are subject to cash flow interest rate risk. Re-pricing of floating rate financial instruments is done every quarterly. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the PGI’s restructured debts (see Note 18). The impact on the Parent Company’s equity is immaterial. Increase (Decrease) In Basis Points 100 50 (100) (50) 100 50 (100) (50) Effect on Income After Income Tax (2,164,111) (271,013) 2,164,111 271,013 (124,411) (62,053) 124,411 62,053 2011 in-house as of June 30, 2011 2010 Audited • Page 36 Capital risk objective and management In order to support its business and maximize shareholder value, the primary objective of the Company’s management is to ensure that it maintains a strong credit rating and healthy capital ratios. Capital structure is controlled and adjustments are made, as necessary, in the light of changes in economic conditions. In maintaining the capital structure, the Company may adjust the dividend payment to shareholders, pay-off existing debts, return capital to shareholders or issue new shares. The Company’s capital gearing monitored by keeping track of the ratio of interestbearing debt to total capital and net interest-bearing debt to total capital. Interestbearing debt includes all short term and long term debt while net interest-bearing debt includes all short term and long term debt net of cash and cash equivalents, investments held for trading and available-for-sale investments. * * *