education • housing • business process outsourcing ... · 12th floor, phinma plaza, 39 plaza...

12th Floor, PHINMA Plaza, 39 Plaza Drive, Rockwell Center, Makati City, Philippines

Annual Report 2008

Bacnotan Consolidated Industries, Inc.

EDUCATION • HOUSING • BUSINESS PROCESS OUTSOURCING • ENERGY • FINANCIAL SERVICES

Annual Report 2008 | Bacnotan Consolidated Industries, Inc. 22

Table of

Contents

Annual Report 2008 | Bacnotan Consolidated Industries, Inc.

1 Consolidated Financial Highlights

2 Tribute

3 Message to our Shareholders

10 Corporate Social Responsibility

12 Report of Audit Committee

13 Statement of Management’s Responsibility for Financial Statements

14 Independent Auditors Report

15 Consolidated Balance Sheets

16 Consolidated Statements of Income

17 Consolidated Statements of Changes in Equity

18 Consolidated Statements of Cash Flows

20 Notes to Consolidated Financial Statements

56 Board of Directors

58 Management Team

60 Directory

Annual Report 2008 | Bacnotan Consolidated Industries, Inc. �Annual Report 2008 | Bacnotan Consolidated Industries, Inc.

Financial

Highlights

2008 2007 2006DURING THE YEAR Revenues 3,264,059 2,798,761 2,655,940 Net Income 317,227 367,255 353,381Net Income Attributable to BCII Equity Holders 273,160 330,410 336,886 Stock Dividend 234,307 305,618 339,575 Stock Dividend % 10% 15% 20% END OF THE YEAR Current Assets 4,282,122 4,192,788 4,384,201 Total Assets 8,474,059 7,956,671 7,724,028 Current Liabilities 1,274,330 1,010,126 1,111,825 Non-current Liabilities 584,705 627,637 636,068 Equity Attributable to BCII Equity Holders 5,789,243 5,537,564 5,191,534

PER SHARE Earnings 1.06 1.28 1.31 Book Value of Common shares 22.46 21.49 20.14

FINANCIAL RATIOS Current Ratio 3.36 4.15 3.94 Debt to Equity Ratio 0.32 0.30 0.34

(amounts in thousands except ratios and earnings per share)

�


In September 2008, the BCII family bade farewell to our founder and Chairman Emeritus, Ramon V. del Rosario, Sr., fondly referred to by most as “RVR”.

In 1957, RVR established Phinma and, together with Atty. Ernesto Escaler, spearheaded a group of local entrepreneurs that successfully bid for the Cebu Portland Cement (CEPOC) plant in Bacnotan, La Union. On March 12, 1957, the group established Bacnotan Cement Industries, Inc. (later renamed Bacnotan Consolidated Industries, Inc.) with RVR as its Founding President. Over the company’s fifty two year history, RVR oversaw

TRIBUTEBCII’s growth from a one-plant company to a holding company with the leadership position in the country’s cement industry, and with significant interests in steel roofing, energy and mining, paper and packaging, property development and, more recently, education.

RVR’s influence went beyond the corporations he built. Early in his career, he organized the first Philippine chapter of the Jaycees and later became the first Asian elected as World President of the Junior Chamber International. He also joined a group of pioneering business leaders that established the Asian Institute of Management (AIM). In 1978, RVR stepped into the arena of government service, with his appointment as Philippine Ambassador to Canada, and later went on to serve as Ambassador to Germany, and then Ambassador to Japan, until 1992.

As a private citizen, he served as an adviser to various charitable organizations, but was perhaps most involved as Vice Chairman of Caritas Manila, where he was active in the Caritas Restorative Justice Ministry through which he personally reached out and assisted prisoners. He believed, as he once said, that “to leave a lasting legacy of your life here on earth, you should espouse causes which are greater than your own.”

RVR is missed, but he continues to serve as our inspiration to be true professionals and to be men for others. We at BCII have all pledged to pay tribute to him by continuing his tradition of professionalism and service to others, and to be good stewards of the companies he has built over the years.

“To leave a lasting legacy of your life here on earth, you should espouse causes which are greater than your own.”

Amb. Ramon V. del Rosario, Sr.

Annual Report 2008 | Bacnotan Consolidated Industries, Inc. �

Message to our

Shareholders

As you may recall, after the sale by your Company of its investment in cement companies, we laid out our company’s plans for the future and formulated a new mission statement. This mission is to help build our nation through competitive and well-managed business enterprises that enable Filipinos to attain a better quality of life. In particular, we aim to build decent and affordable homes in wholesome communities, offer affordable high quality education, provide reliable and

affordable power and offer attractive investment opportunities and sound investment advice to encourage capital formation.

In pursuit of our mission of making life better for our fellow Filipinos, this past year has been dedicated to remolding our companies and laying the groundwork for growth in the coming years.

Annual Report 2008 | Bacnotan Consolidated Industries, Inc. ��

EDUCATION

This year, the company took major steps in the education business, with intensive discussions and negotiations that laid the groundwork for two major acquisitions. As a result the Company succeeded in acquiring early in 2009 a 70% stake in University of Pangasinan (Upang) in Dagupan City. Upang is the leading educational institution in Pangasinan, with total enrolled base of 9,300 students, offering courses in nursing, engineering, and accountancy, among others. Soon after its acquisition of Upang, the Company acquired a 70% interest in University of Iloilo (UI). Located in Iloilo City, UI currently serves approximately 7,200 students and offers courses in nursing, criminology, hotel and restaurant management, and accountancy.

We believe both UPang and UI are apt additions to the Company’s portfolio of schools. Both schools present attractive growth prospects, both being located in fast-growing areas with a significant student population. These acquisitions bring to four (4) the number of schools owned by Bacnotan Consolidated Industries, Inc. (BCII), with a total

student base of 27,000. Collectively, these schools now represent BCII’s biggest investment, reflecting our belief in the importance of education in nation-building.

For our first two schools, Araullo University (AU) and Cagayan de Oro College (COC), our efforts since acquisition have been focused on upgrading academic quality. Toward this end, AU and COC have implemented stricter academic retention policies and course requirements, and have emphasized faculty training and development. The results have been encouraging; in 2008, board passing rates for first-timers in criminology, education, accounting and engineering have improved and exceeded national passing rates.

However, for the academic year 2008-2009, AU and COC experienced a 3% decline in the number of enrollees. This decline is reflective of the slowdown in the economy, as both schools cater to tuition-sensitive markets which are highly vulnerable in a downturn. To assist our

Annual Report 2008 | Bacnotan Consolidated Industries, Inc.

Education


students, our schools aim to improve work-study programs and increase scholarships and financial aid. During the year, AU and COC also continued to operate under increased competition from a growing number of state and local government schools. COC, however, experienced a growth in freshman enrollment, indicating potential growth possibilities.

For the calendar year 2008, Araullo University and Cagayan de Oro College posted net income of P19.9 million and P11.9 million respectively.

Our challenge in this sector is to continue to deliver the best possible education we can provide our students while maintaining affordable tuition fees and providing a decent return to our shareholders.

Housing

HOUSING

Phinma Property Holdings Corporation (PPHC), BCII’s affiliate in the housing sector, continues to deliver to the public affordable units in medium-rise buildings. PPHC offers good-value housing options in wholesome communities within Metro Manila, with units starting at less than P1 million. Its projects continue to be well-received by the market, and its amenities and design have gained the nod of the public. Last year, PPHC’s Spazio Bernardo was awarded Best Condo Design by the Housing and Land Use Regulatory Board.

The year 2008 was a landmark year for PPHC, as the company achieved revenues of P1.0 billion. This was in large part due to the sale of units in San Benissa Garden Villas in Quezon City and Fountain Breeze in Sucat, Paranaque. The company also unlocked asset values with the sale of its property in Quezon City

Annual Report 2008 | Bacnotan Consolidated Industries, Inc. 66 Annual Report 2008 | Bacnotan Consolidated Industries, Inc.

to the Philippine government for P140 million for an important road extension project that will link Commonwealth Avenue to Quirino Highway.

In 2009, PPHC expects to launch the 840-unit Sofia Bellevue and the 870-unit Flora Vista, both in Quezon City. Also in the pipeline are other projects in various parts of Metro Manila.

Union Galvasteel Corporation (UGC), BCII’s steel roofing subsidiary, faced unprecedented market conditions in 2008; the spiralling prices for the industry’s material inputs put pressure on domestic prices and adversely affected demand. Towards year-end, the U.S. financial crisis caused the sudden fall in commodity prices. As a result, sales volume of UGC decreased 2% during the year, from 39.0 thousand metric tons in 2007 to 38.2 thousand metric tons in 2008. Nevertheless, UGC capped the year with a net income of over P140 million, up 74% from income of P80.9 million in 2007. This remarkable performance stemmed from forward buying positions for UGC’s material requirements and the successful implementation of price adjustments to ease the impact of sharp increases in production inputs.

During the year, UGC’s Polyurethane Line started commercial operations to manufacture insulated panels for cold chain storage facilities in the

agro-industrial markets. This line will further enhance the company’s strategy to produce and sell higher-margin products to serve new markets.

With many sectors seriously hit by the global economic recession, demand in 2009 is expected to weaken, and depressed prices are likely to squeeze profits. However, UGC is well-positioned to operate during this downturn

Annual Report 2008 | Bacnotan Consolidated Industries, Inc. 7Annual Report 2008 | Bacnotan Consolidated Industries, Inc.

because of its strong financial position, nationwide distributorship network, its efficient and reliable production facilities and its wider range of high value products.

BUSINESS PROCESS OUTSOURCING

We had also earlier made it our mission to aggressively seek new opportunities in the services sector which are globally competitive and which will provide attractive returns for our shareholders. Toward this end, the company has ventured into business process outsourcing, in particular outsourced animation production services. The Company invested $6.734 million for an 80% interest in One Animate Limited, a company which owns a ninety five (95%) interest in Toon City Animation, Inc. (Toon City). The latter is an award-winning animation studio providing 2D, Flash and 3D CGI animation services and counts among its clients international names like Walt Disney and Universal Studios.

This new investment showcases to the world Filipino talent and creativity. Employing some 800 animators and support staff, Toon City also keeps world-class talent home and brings to the Philippines much-needed jobs from abroad.

ENERGY

Trans-Asia Oil and Energy Development Corporation (TA Oil) and its subsidiaries, Trans-Asia Power Generation Corporation (TA Power) and CIP II Power Corporation (CIPP), continued to provide affordable and reliable power to their respective markets. During the year, energy generated and sold by TA Power totalled 116 GWh. Of this volume, 61GWh was supplied to its main customer Holcim Philippines, Inc. while 55 GWh was exported to the Wholesale Electricity Spot Market (WESM). Electricity sales of CIPP remained at 89.9 GWh.

BusinessProcess

Outsourcing

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FinancialServices

TA Oil continued its active participation in electricity trading through WESM, buying requirements of its customers, and selling the excess generation of affiliate TA Power.

TA Oil and its subsidiaries ended the year with consolidated net income of P88.4 million, or 13% higher than income of P78.2 million the previous year. Trading of electricity, which started last year, contributed to the increase in consolidated revenues from P1.4 billion in 2007 to P1.6 billion in 2008.

Late last year, TA Oil took significant strides towards renewable energy development, particularly in wind resource development. Prospects for wind farm projects are currently being pursued in several sites. We are encouraged by the results of a pre-feasibility study which indicates viable wind capacity in Guimaras island, along with 37 other sites being surveyed.

FINANCIAL SERVICES

The year was particularly tough for AB Capital and Investment Corporation (AB Capital), the Company’s investee in the financial services sector. During the second half of 2008, the global financial crisis took a turn for the worst. The Dow Jones Industrial Average tumbled 34% during the year, while the local equity market dropped 48%.

For 2008, the company turned in revenues of P176 million and earned income before provision of P65 million; however, as a result of the slump in the financial markets, AB Capital booked a mark-to-market loss of P 132.6 million, and sustained a net loss of P80 million for the year. AB Capital and other financial institutions will continue to face ambiguities in the markets this year and continues to identify short- and long-term measures that will address the difficulties expected to prevail in these trying times. However, AB Capital is supported by a solid balance sheet, with total assets of P1.2 billion and equity at P1.1 billion.

PARENT COMPANY

The parent company contributed income of P69 million, excluding dividends of P166 million from the above investee companies. The company benefited from the strengthening of the dollar, and booked a foreign exchange gain of P181 million, or P120 million net

Energy


We look to the immediate future with guarded optimism, knowing that the coming months will be challenging for all of our companies. But, as in the past, we know we can count on the support of our shareholders, our officers and employees, and the guidance of our directors to steer us through the challenges ahead.

Oscar J . HiladoChairman of the Board

Ramon R. Del Rosario, Jr .President

of losses on non-deliverable forward contracts. However, the company was not spared from the effects of the financial slowdown, and booked a P22 million mark-to- market loss on marketable securities.

The Company continues to have a strong balance sheet with current ratio of 3.4: 1 and debt to equity ratio of 0.3: 1.

Given the challenges and uncertainties posed by the markets during the year, we are pleased to report that BCII posted a respectable consolidated net income of P317 million, of which P273 million is income attributable to equity holders of the parent.

For the past five years, your Company has paid dividends in the form of cash or stock dividends. In 2008, the company distributed a 10% stock dividend equivalent to P234 million. More recently, your Company declared a cash dividend of P0.40 per share or a total of P103 million, which will be paid out on April 24.

OUTLOOK

This year is fraught with uncertainties. We look to the immediate future with guarded optimism, knowing that the coming months will be challenging for all of our companies. Nevertheless, we are enthusiastic about the recent investments in education and business process outsourcing. We feel that these acquisitions, together with the

Company’s existing investments, present bright prospects and will provide a steady stream of earnings for our shareholders in the long-term.

As in the past, we know we can count on the support of our shareholders, our officers and employees, and the guidance of our directors to steer us through the challenges ahead.

We also remember Amb. Ramon V. del Rosario, Sr. who founded this company more than fifty years ago as his response to the government’s call to transform the then-young country into an industrialized nation. Subsequently, he would set up other companies that would be the forerunners of the country’s biggest industries. These include Fil-Oil Refinery Corporation which ended the multinationals’ dominance in the petroleum industry, and Trans-Asia Oil and Energy Development Corporation, a pioneer in the country’s oil exploration industry. We are inspired by his leadership and his entrepreneurial spirit and resolve to continue his tradition of helping in nation-building.


Corporate

Social ResponsibilityDuring the year, Bacnotan Consolidated Industries, Inc. (BCII), along with its investee companies, strengthened its Corporate Social Responsibility (CSR) initiatives in pursuit of its mission of making life better for fellow Filipinos. Its programs focus on three key areas: education, the environment, and developing the spirit of volunteerism among its employees.

EDUCATION

BCII demonstrates its continued commitment to education by supporting the PHINMA National Scholarship (PNS) Program of the PHINMA Foundation. PNS currently supports 25 PNS scholars enrolled in engineering and accountancy at the University of the Philippines and in education at Philippine Normal University. The program includes leadership training programs, social activities, on-the-job training, and mentoring opportunities for the students.

Together with other PHINMA Group companies, BCII is a major supporter of the One Thousand Teachers Program of Philippine Business for Education (PBEd).

Our companies also support WIWAG, a five-day business management training program aimed at enhancing the business and economics education of college students. The program is implemented through the Education for Youth Enterprise Foundation, Inc. (EYE Foundation). Company officers volunteered to serve as trainers, and a total of 94 students attended and finished said the training.

BCII’s subsidiary, Union Galvasteel Corporation (UGC) helped in the repair and reconstruction of school facilities of Bagong Silang Elementary School and Sta. Cruz Academy School and conducted tutorial programs for the students of Bagong Silang Elementary School.


Social Responsibility ENVIRONMENT

Environmental concerns were also a key focus area during the year. UGC, together with the Calamba Green Stream Brigade, hosted Sagip Ilog to help save the Baranca de Sipit River in Laguna and held several tree planting activities in areas near its plant in Calamba, Laguna. TA Oil, another BCII affiliate, through its Energy Conservation (EnerCon) program, challenged all companies and employees in the PHINMA

Plaza to conserve energy. To date almost all the PHINMA Group Companies at the head office have exceeded the targeted 10% savings in KWHour usage.

Phinma Property Holdings Corporation (PPHC), on the other hand, continues to sponsor more than two hectares of forests in the La Mesa Watershed, the last remaining watershed of its size in Metro Manila.

INDIVIDUALSOCIAL

RESPONSIBILITY

PPHC also launched the Bagong Buhay program which aims to uplift the life of the Filipino by improving the quality of life in its host communities. Planned programs include adopt-a-park and adopt-a-barangay activities and “build-from-scrap” initiatives, where excess construction materials will be re-used and recycled to build much needed community projects such as chapels, classrooms, and public restrooms.

BCII and its employees also participated in the launch of the Phinma HERO (Helpful Employees Responsible for Others) Network.

This initiative of the Phinma Group aims to elevate the concept of CSR into Individual Social Responsibility or ISR and encourage volunteerism among our employees. The group recently organized a volunteer’s fair featuring Gawad Kalinga, Center for Restorative Activities Development and Learning Experiences (CRADLE), Philippine National Red Cross and Caritas Manila and thereby provided more opportunities for employees to volunteer. Our employees have responded favorably to this program, and more activities are scheduled this year.

Annual Report 2008 | Bacnotan Consolidated Industries, Inc.12

Report of

Audit Committee

The Audit Committee is composed of two (2) independent directors and two (2) executive directors. The Committee has an ample understanding of the Company’s financial management systems and environment.

We are pleased to report our activities for Calendar Year 2008.

ACTIVITIES

Committee Meetings We scheduled meetings during the year to review and endorsed for the approval of the Board the Company’s audited and interim financial statements as follows:

a. April 2008 - Audited statements for Calendar Year 2007 and Interim statements for the quarter ending March 31, 2008

b. July 2008 - Interim statements for the period ending June 30, 2008

c. October 2008 - Interim statements for the period ending September 30, 2008

In reviewing the Financial Statements, the Committee considered the accounting estimates, policies adopted and all significant judgment by the Company’s Management that materially impacted the financial results.

External Audit

We endorsed to the Board of Directors the nomination of Sycip, Gorres, Velayo and Company (SGV) as the Company’s external auditor including its corresponding audit fee for calendar year 2008. We reviewed and approved the scope and deliverables of the SGV audit plan. The Committee ensured that the SGV’s scope included the review of Company’s compliance with International Accounting Standards (IAS).

Internal Audit

We reviewed and approved the Internal Audit plan for 2008. Based on this plan, the Committee received and reviewed the audit reports submitted by Internal Audit. Various audit and control issues were discussed in the Committee meetings. Internal Audit’s reports included the review of the Company’s compliance with PSE and SEC reportorial requirements.

We received information and support from Management, the Compliance Officer and Internal Audit to enable us to carry out our function effectively.

FELIPE B. ALFONSO FR. NOEL D. VASQUEZ Chairman, Independent Director Independent Director

MAGDALENO B. ALBARRACIN, JR. VICTOR J. DEL ROSARIO Executive Director Executive Director


Statement of Management Responsibi l i ty for

Financial Statements

Securities and Exchange Commission SEC Building, EDSA, Greenhills Mandaluyong City

The management of BACNOTAN CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES is responsible for all information and representations contained in the consolidated balance sheets as of December 31,2008 and 2007 and the related consolidated statements of income, changes in equity and cash flows for the years ended December 31,2008, 2007 and 2006. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the Philippines and reflect amounts that are based on the best estimated and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the Company’s audit committee and to its external auditor : (i)all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process and report financial date; (ii) material weaknesses in the internal controls; and (iii) any fraud that involves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the consolidated financial statements before such statements are approved and submitted to the stockholders of the company.

SyCip Gorres Velayo & Co., the independent auditors appointed by the Board of Directors and stockholders, have audited the consolidated financial statements of the Company and its Subsidiaries in accordance with auditing standards generally accepted in the Philippines and have expressed their opinion on the fairness of presentation upon completion of such audit, in their report to the Stockholders and the Board of Directors.

OSCAR J. HILADOChairman of the Board

RAMON R. DEL ROSARIO, JR. VICTOR J. DEL ROSARIO President Executive Vice President and CFO


Independent

Auditors’ ReportThe Stockholders and the Board of DirectorsBacnotan Consolidated Industries, Inc.

We have audited the accompanying financial statements of Bacnotan Consolidated Industries, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2008 and 2007, and the consolidated statements of income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2008, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Bacnotan Consolidated Industries, Inc. and Subsidiaries as of December 31, 2008 and 2007, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2008 in accordance with Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

BENNETTE A. DAPLAS-BACHOCOPartnerCPA Certificate No. 86740SEC Accreditation No. 0112-AR-1Tax Identification No. 129-433-970PTR No. 1566405, January 5, 2009, Makati City

March 9, 2009


Consolidated

Balance Sheets December 31

2008 2007 (InThousands)

ASSETS

Current AssetsCash and cash equivalents (Notes 7, 29 and 30) P1,825,701 P1,660,878Short-term investments (Notes 29 and 30) 86,817 77,545Investments held for trading (Notes 8, 29 and 30) 787,295 1,046,308Trade and other receivables - net (Notes 9, 28, 29 and 30) 436,313 368,705Inventories - at lower of cost or net realizable value (Note 10) 1,042,356 824,363Input value-added taxes 79,018 125,910Derivative assets (Note 30) – 66,726Other current assets - net 24,622 22,353

Total Current Assets 4,282,122 4,192,788

Noncurrent AssetsInvestments in associates - at equity (Note 11) 1,251,378 1,192,065Available-for-sale investments - net (Notes 12, 29 and 30) 331,519 313,366Property, plant and equipment - net (Notes 13 and 19) 1,297,558 1,294,892Investment properties - net (Note 14) 774,132 784,577Installment contract receivable - net of current portion (Notes 9, 29 and 30) 58,482 84,473Intangibles - net (Notes 6 and 15) 420,078 67,464Deferred tax assets - net (Note 31) 13,960 –Other noncurrent assets - net (Note 16) 44,830 27,046

Total Noncurrent Assets 4,191,937 3,763,883P8,474,059 P7,956,671

LIABILITIES AND EQUITY

Current LiabilitiesNotes payable (Notes 17, 29 and 30) P123,818 P219,667Trade and other payables (Notes 18, 28, 29 and 30) 362,971 329,856Unearned revenues - inclusive of current portion of deferred rent revenue of P1.2 million

in 2008 and 2007 (Note 28) 73,513 79,070Trust receipts payable (Notes 10, 29 and 30) 537,252 191,302Income and other taxes payable 54,476 35,162Derivative liabilities (Notes 29 and 30) 26,857 –Due to related parties (Notes 28, 29 and 30) 143 17,469Current portion of long-term debt - net of debt issuance cost (Notes 13, 19, 28, 29 and 30) 95,300 137,600

Total Current Liabilities 1,274,330 1,010,126

Noncurrent LiabilitiesLong-term debt - net of current portion and debt issuance cost

(Notes 13, 19, 28, 29 and 30)P413,945 P464,007

Deferred rent revenue - net of current portion (Note 28) 50,726 51,892Deferred tax liabilities - net (Note 31) 101,613 65,981Pension and other post-employment benefits (Note 32) 5,152 3,438Other noncurrent liabilities (Note 28) 13,269 42,319

Total Noncurrent Liabilities 584,705 627,637

EquityEquity attributable to equity holders of the parent:

Capital stock (Note 20) 2,577,249 2,342,942Additional paid-in capital 255,785 255,785Share in equity component of convertible notes (Note 19) 13,443 13,443Share in unrealized gain on change in fair value of available-for-sale

investments of associates (Note 11)5,054 24,784

Unrealized gain (loss) on change in fair value of an available-for-sale investment (Note 12) (600) 1,151

Retained earnings (Note 20) 2,938,312 2,899,4595,789,243 5,537,564

Minority interest 825,781 781,344Total Equity 6,615,024 6,318,908

P8,474,059 P7,956,671

SeeaccompanyingNotestoConsolidatedFinancialStatements.


Consolidated Statements of

Income Years Ended December 312008 2007 2006

(InThousands,ExceptPerShareAmounts)

REVENUESale of goods P2,743,537 P2,123,785 P1,994,420Tuition and school fees 307,128 293,913 284,803Investment income (Note 21) 85,782 193,779 294,863Rental income 70,608 62,447 57,375Sale of real estate 35,829 102,937 4,970Port and cargo handling services 21,175 21,900 19,509

3,264,059 2,798,761 2,655,940

COSTS AND EXPENSESCost of sales, educational services and real estate

(Notes 22, 26 and 27)(2,347,838) (1,931,267) (1,822,742)

General and administrative expenses (Notes 23 and 27) (391,069) (374,353) (345,742)Selling expenses (Notes 24, 26 and 27) (179,338) (159,176) (143,484)

OTHER INCOME (CHARGES)Foreign exchange gains (losses) - net (Note 29) 190,728 (214,914) (76,404)Net gains (losses) on derivatives (Note 30) (100,314) 302,831 72,596Interest expense and other financial charges (Note 25) (99,862) (109,393) (123,893)Equity in net earnings of associates (Note 11) 41,586 108,478 133,598Gain on sale of available-for-sale investment (Note 28) – – 17,073Others - net (Note 19) 22,027 13,009 9,587

INCOME BEFORE INCOME TAX 399,979 433,976 376,529

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 31)Current 88,343 61,021 31,963Deferred (5,591) 5,700 (8,815)

82,752 66,721 23,148

NET INCOME P317,227 P367,255 P353,381

Attributable ToEquity holders of the parent P273,160 P330,410 P336,886Minority interest 44,067 36,845 16,495Net income P317,227 P367,255 P353,381Basic/Diluted Earnings Per Common Share - Attributable

to Equity Holders of the Parent (Note 34) P1.06 P1.28 P1.31




Changes in Equity Years Ended December 31

2008 2007 2006 (InThousands,ExceptParValueInformation)

CAPITAL STOCK - P10 par value (Note 20)Common shares - net of subscriptions receivable of P124 in

2008, 2007 and 2006 Balance at beginning of year P2,342,942 P2,037,324 P1,697,749

Stock dividends - 10% in 2008, 15% in 2007 and 20% in 2006 (Note 20) 234,307 305,618 339,575

Balance at end of year 2,577,249 2,342,942 2,037,324

ADDITIONAL PAID-IN CAPITAL 255,785 255,785 255,785

SHARE IN EQUITY COMPONENT OF CONVERTIBLE NOTES (Note 19) 13,443 13,443 15,409

SHARE IN UNREALIZED GAIN ON CHANGE IN FAIR VALUE OF AVAILABLE-FOR SALE INVESTMENTS OF ASSOCIATES (Note 11)

Balance at beginning of year 24,784 8,349 3,412Changes in fair value during the year* (19,730) 16,435 4,937Balance at end of year 5,054 24,784 8,349

UNREALIZED GAIN (LOSS) ON CHANGE IN FAIR VALUE OF AN AVAILABLE-FOR-SALE INVESTMENT* (Note 12)

Balance at beginning of year 1,151 – –Increase (decrease) in fair value gains

on available-for-sale investments (1,751) 1,151 –Balance at end of year (600) 1,151 –

RETAINED EARNINGSAppropriated for future investments (Note 20) 1,000,000 1,000,000 1,000,000Unappropriated:

Balance at beginning of year 1,899,459 1,874,667 1,877,356Net income* 273,160 330,410 336,886Stock dividends on common shares - 10% in 2008,

15% in 2007 and 20% in 2006 (Note 20) (234,307) (305,618) (339,575)Balance at end of year (Note 20) 1,938,312 1,899,459 1,874,667

2,938,312 2,899,459 2,874,667

MINORITY INTERESTBalance at beginning of year P781,344 P784,601 P629,473Net income ** 44,067 36,845 16,495Dividends (21,963) (15,005) (1,100)Business combination (Notes 6 and 7) 21,632 – 142,914Subscriptions 701 7,010 –Acquisition of minority interest – (32,107) (3,181)Balance at end of year (Note 21) 825,781 781,344 784,601

P6,615,024 P6,318,908 P5,976,135

* Total recognized income attributable to equity holders of the parent for the years ended December 31, 2008, 2007 and 2006 is P252,830, P347,996 and P341,823, respectively.

** Total recognized income attributable to minority interest for the years ended December 31, 2008, 2007 and 2006 is P44,067, P36,845 and P16,495, respectively.




Cash Flows Years Ended December 31

2008 2007 2006 (InThousands)

CASH FLOWS FROM OPERATING ACTIVITIESIncome before income tax P399,979 P433,976 P376,529Adjustments for: Depreciation and amortization (Notes 13 and 27) 137,952 137,461 147,638 Net losses (gains) on derivatives (Note 30) 100,314 (302,831) (72,596) Interest expense and other financial charges (Note 25) 99,862 109,393 123,893 Unrealized foreign exchange (gain) loss - net (87,728) 214,069 78,965 Investment income (Note 21) (85,782) (193,779) (294,863) Provisions for:

Doubtful accounts (Note 9) 44,909 27,984 22,750Unrecoverable input value-added tax 4,512 5,028 30,499

Equity in net earnings of associates (Note 11) (41,586) (108,478) (133,598) Retirement cost (Note 32) 12,632 17,667 1,844 Gain on:

Sale of property and equipment (631) (116) (417)Sale of available-for-sale investment – – (17,073)

Others (27,409) 21,798 –Operating income before working capital changes 557,024 362,172 263,571Decrease (increase) in: Trade and other receivables (63,765) (45,936) (98,765) Inventories (217,993) 60,857 (217,456) Other current assets 42,857 (3,292) (65,694)Increase (decrease) in: Trade and other payables (5,288) 37,072 123,893 Trust receipts payable 345,950 (213,453) 298,553 Other taxes payable (5,655) 601 (8,810) Unearned revenues (6,723) (5,692) 2,120Net cash generated from operations 646,407 192,329 297,412Interest paid (93,753) (112,713) (103,073)Income tax paid (63,374) (45,763) (11,681)Net cash provided by operating activities 489,280 33,853 182,658

CASH FLOWS FROM INVESTING ACTIVITIESBusiness combination: Cash paid - net of cash from business acquired (Note 6) (323,959) – –

Cash paid related to the adjustment in acquisition cost of a subsidiary

– (5,379) –

Increase in: Short-term investments (5,727) (76,545) – Other noncurrent assets 2,067 (2,792) (10,345)Proceeds from sale/settlement of: Investments held for trading 1,841,709 2,682,073 1,706,504 Available-for-sale investment – – 74,240 Forward currency contracts 20,774 254,298 19,713 Property, plant and equipment 687 2,931 1,758

(Forward)



Cash Flows Years Ended December 31

2008 2007 2006 (InThousands)

Interest income received P136,487 P119,944 P137,047Additions to:

Property, plant and equipment and investment properties (Notes 13 and 14)

(115,285) (65,567) (444,990)

Investments held for trading (1,624,003) (1,499,801) (1,186,635) Investments in shares of stock (83,350) (271,368) (91,127)Dividends received 31,359 60,975 19,130Net cash generated from (used in) investing activities (119,241) 1,198,769 225,295

CASH FLOWS FROM FINANCING ACTIVITIESPayments of: Notes payable (295,580) (269,543) (182,103) Long-term debt (96,251) (390,500) (78,069)Increase (decrease) in: Other noncurrent liabilities (29,050) (38,448) (979) Minority interest (21,262) (40,102) (4,281) Amounts due to related parties (17,326) 7,245 (7,191)Proceeds from: Notes payable 184,731 310,066 109,735 Long-term debt – 400,000 39,754Net cash used in financing activities (274,738) (21,282) (123,134)

NET INCREASE IN CASH AND CASH EQUIVALENTS 95,301 1,211,340 284,819

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 69,522 (162,664) (29,068)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,660,878 612,202 356,451

CASH AND CASH EQUIVALENTS AT END OF YEAR P1,825,701 P1,660,878 P612,202



Notes to Consolidated

Financial Statements1. Corporate Information

Bacnotan Consolidated Industries, Inc. (the “Parent Company” or “BCII”) and the following subsidiaries (collectively referred to as the “Company”), except for One Animate Limited (OAL) which is incorporated in Hong Kong, are incorporated in the Philippines and separately registered with the Philippine Securities and Exchange Commission (SEC):

Percentage of OwnershipName of Subsidiaries 2008 2007Atlas Holdings Corporation (AHC) 90.00 90.00Union Galvasteel Corporation (UGC) 80.50 80.50OAL and subsidiary (see Note 6) 80.00 –Pamantasan ng Araullo (Araullo

University), Inc. 78.64 78.64Cagayan de Oro College, Inc. (COC) 74.35 74.35Bacnotan Industrial Park Corporation

(BIPC) 60.00 60.00P & S Holdings Corporation (PSHC) 60.00 60.00Asian Plaza, Inc. (API) 57.62 57.62

OAL owns 95% interest in Toon City Animations, Inc. (Toon City).

The Parent Company’s principal activity is investment holdings in subsidiaries and associates and financial assets. The principal activities of its subsidiaries are as follows:

Name of Subsidiaries Principal ActivitiesAHC Investment holdingsUGC Manufacture of galvanized and pre-

painted iron sheets and allied products for roofing

OAL and Toon City Business process outsourcing for animation services

Araullo University Educational institution offering elementary, secondary and tertiary formal education, and post-graduate courses, as well as, post-secondary certificate courses

COC Educational institution offering elementary, secondary and tertiary formal education, and post-graduate courses

BIPC Development of a 110-hectare industrial park with port facilities

PSHC Real property holdingsAPI Lease of real property

The registered office address of the Parent Company is 12th Floor, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City.

The parent company of BCII is Philippine Investment-Management (PHINMA), Inc. BCII is also controlled by PHINMA under an existing management agreement. PHINMA is incorporated in the Philippines.

The accompanying consolidated financial statements of the Company were authorized for issuance by the Board of Directors (BOD) on March 9, 2009.

2. Basis of Preparation and Statement of Compliance

The accompanying consolidated financial statements of the Company have been prepared using the historical cost basis, except for investments held for trading, available-for-sale (AFS) investments and derivative assets and liabilities that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, which is the Company’s functional and presentation currency. All values are rounded to the nearest thousand peso unless otherwise stated.

The accompanying consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS).

3. Changes in Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following Philippine Interpretations which became effective on January 1, 2008, and an amendment to an existing standard that became effective on July 1, 2008. Adoption of these changes in PFRS did not have any significant effect to the Company:

• Philippine Interpretation International Financial Reporting Interpretation Committee (IFRIC) 11, “PFRS 2 - Group and Treasury Share Transactions”

• Philippine Interpretation IFRIC 12, “Service Concession Arrangements”

• Philippine Interpretation IFRIC 14, “Philippine Accounting Standard (PAS) 19, The Limit on a Defined Benefit Asset, Minimum Funding Requirement and their Interaction”

• Amendments to PAS 39, “Financial Instruments: Recognition and Measurement” and PFRS 7, “Financial Instruments: Disclosures - Reclassification of Financial Assets”

New Accounting Standards, Interpretations, and Amendments to Existing Standards Effective Subsequent to December 31, 2008

The Company will adopt the following standards and interpretations enumerated below when these become effective. Except as otherwise indicated, the Company does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on its financial statements.


Financial Statements Effectivein2009

• PFRS 1, “First-time Adoption of Philippine Financial Reporting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate”

The amended standard allows an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening PFRS financial statements) as one of the following amounts: a) cost determined in accordance with PAS 27, “Consolidated and Separate Financial Statements” ; b) at the fair value of the investment at the date of transition to PFRS, determined in accordance with PAS 39 or c) previous carrying amount (as determined under generally accepted accounting principles) of the investment at the date of transition to PFRS.

• PFRS 2, “Share-based Payment - Vesting Condition and Cancellations”

The revised standard clarifies the definition of a vesting condition and prescribes the treatment for an award that is effectively cancelled. It defines a vesting condition as a condition that includes an explicit or implicit requirement to provide services. It further requires non-vesting conditions to be treated in a similar fashion to market conditions. Failure to satisfy a non-vesting condition that is within the control of either the entity or the counterparty is accounted for as cancellation. However, failure to satisfy a non-vesting condition that is beyond the control of either party does not give rise to a cancellation.

• PFRS 8, “Operating Segments”

The Standard will replace PAS 14, “Segment Reporting”, and adopts a full management approach to identifying, measuring and disclosing the results of an entity’s operating segments. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such information may be different from that reported in the consolidated balance sheet and consolidated statement of income and the Company will provide explanations and reconciliations of the differences. This standard is only applicable to an entity that has debt or equity instruments that are traded in a public market or that files (or is in the process of filing) its financial statements with a securities commission or similar party. The Company will assess the impact of this standard to its current manner of reporting segment information.

• Amendments to PAS 1, “Presentation of Financial Statements”

This amendment introduces a new statement of comprehensive income that combines all items of income and expenses recognized in the profit or loss together with ‘other comprehensive income’

(OCI). Entities may choose to present all items in one statement, or to present two linked statements, a separate statement of income and a statement of comprehensive income. This amendment also prescribe additional requirements in the presentation of the balance sheet and statement of changes in equity as well as additional disclosures to be included in the financial statements.

• PAS 23, “Borrowing Costs”

The revised standard has been revised to require capitalization of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The Company’s current accounting policy requires capitalization of borrowing costs that relates to a qualifying asset in accordance with PAS 23.

• Amendments to PAS 27, “Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate”

This amendment prescribes changes in respect of the holding companies’ separate financial statements including (a) the deletion of ‘cost method’, making the distinction between pre- and post-acquisition profits no longer required; and (b) in cases of reorganizations where a new parent is inserted above an existing parent of the group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. All dividends will be recognized in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment.

• Amendment to PAS 32, “Financial Instruments: Presentation and PAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation”

This amendment specifies, among others, that puttable financial instruments will be classified as equity if they have all of the following specified features: (a) The instrument entitles the holder to require the entity to repurchase or redeem the instrument (either on an ongoing basis or on liquidation) for a pro rata share of the entity’s net assets; (b) The instrument is in the most subordinate class of instruments, with no priority over other claims to the assets of the entity on liquidation; (c) All instruments in the subordinate class have identical features; (d) The instrument does not include any contractual obligation to pay cash or financial assets other than the holder’s right to a pro rata share of the entity’s net assets; and (e) The total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, a change in recognized net assets, or a change in the fair value of the recognized and unrecognized net assets of the entity over the life of the instrument.


Notes to ConsolidatedFinancial Statements

• Philippine Interpretation IFRIC 13, “Customer Loyalty Programmes”

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 realized in income over the period that the award credits are redeemed or expire.

• Philippine Interpretation IFRIC 16, “Hedges of a Net Investment in a Foreign Operation”

This Interpretation provides guidance on identifying foreign currency risks that qualify for hedge accounting in the hedge of net investment; where within the group the hedging instrument can be held in the hedge of a net investment; and how an entity should determine the amount of foreign currency gains or losses, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment.

ImprovementstoPFRSs. In May 2008, the International Accounting Standards Board issued its first omnibus of amendments to certain standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard:

• PFRS 5, “Non-current Assets Held for Sale and Discontinued Operations”

When a subsidiary is held for sale, all of its assets and liabilities will be classified as held for sale under PFRS 5, even when the entity retains a non-controlling interest in the subsidiary after the sale.

• PAS 1, “Presentation of Financial Statements”

Assets and liabilities classified as held for trading are not automatically classified as current in the balance sheet.

• PAS 16, “Property, Plant and Equipment”

- The amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’, to be consistent with PFRS 5, (Non-current Assets Held for Sale and Discontinued Operations) and PAS 36, (Impairment of Assets).

- Items of property, plant and equipment held for rental that are routinely sold in the ordinary course of business after rental, are transferred to inventory when rental ceases and they are held for sale. Proceeds of such sales are subsequently shown as revenue. Cash payments on initial recognition of such items, the cash receipts from rents and subsequent sales are all shown as cash flows from operating activities.

• PAS 19, “Employee Benefits”

- Revises the definition of ‘past service costs’ to include reductions in benefits related to past services (‘negative past service costs’) and to exclude reductions in benefits

related to future services that arise from plan amendments. Amendments to plans that result in a reduction in benefits related to future services are accounted for as a curtailment.

- Revises the definition of ‘return on plan assets’ to exclude plan administration costs if they have already been included in the actuarial assumptions used to measure the defined benefit obligation.

- Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus on the point in time at which the liability is due to be settled.

- Deletes the reference to the recognition of contingent liabilities to ensure consistency with PAS 37, “Provisions, Contingent Liabilities and Contingent Assets”.

• PAS 20, “Accounting for Government Grants and Disclosures of Government Assistance”

Loans granted with no or low interest rates will not be exempt from the requirement to impute interest. The difference between the amount received and the discounted amount is accounted for as a government grant.

• PAS 23, “Borrowing Costs”

Revises the definition of borrowing costs to consolidate the types of items that are considered components of ‘borrowing costs’, i.e., components of the interest expense calculated using the effective interest rate method.

• PAS 28, “Investment in Associates”

- If an associate is accounted for at fair value in accordance with PAS 39, only the requirement of PAS 28 to disclose the nature and extent of any significant restrictions on the ability of the associate to transfer funds to the entity in the form of cash or repayment of loans will apply.

- An investment in an associate is a single asset for the purpose of conducting the impairment test. Therefore, any impairment test is not separately allocated to the goodwill included in the investment balance.

• PAS 29, “Financial Reporting in Hyperinflationary Economies”

Revises the reference to the exception that assets and liabilities should be measured at historical cost, such that it notes property, plant and equipment as being an example, rather than implying that it is a definitive list.

• PAS 31, “Interest in Joint Ventures”

If a joint venture is accounted for at fair value, in accordance with PAS 39, only the requirements of PAS 31 to disclose the commitments of the venturer and the joint venture, as well as summary financial information about the assets, liabilities, income and expense will apply.



• PAS 36, “Impairment of Assets”

When discounted cash flows are used to estimate ‘fair value less cost to sell’, additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate ‘value in use’.

• PAS 38, “Intangible Assets”

- Expenditure on advertising and promotional activities is recognized as an expense when the Company either has the right to access the goods or has received the services. Advertising and promotional activities now specifically include mail order catalogues.

- Deletes references to there being rarely, if ever, persuasive evidence to support an amortization method for finite life intangible assets that results in a lower amount of accumulated amortization than under the straight-line method, thereby effectively allowing the use of the unit of production method.

• PAS 39, “Financial Instruments: Recognition and Measurement”

- Changes in circumstances relating to derivatives - specifically derivatives designated or de-designated as hedging instruments after initial recognition - are not reclassifications.

- When financial assets are reclassified as a result of an insurance company changing its accounting policy in accordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a change in circumstance, not a reclassification.

- Removes the reference to a ‘segment’ when determining whether an instrument qualifies as a hedge.

- Requires use of the revised effective interest rate (rather than the original effective interest rate) when re-measuring a debt instrument on the cessation of fair value hedge accounting.

• PAS 40, “Investment Properties”

Revises the scope (and the scope of PAS 16) to include property that is being constructed or developed for future use as an investment property. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time as fair value can be determined or construction is complete.

• PAS 41, “Agriculture”

- Removes the reference to the use of a pre-tax discount rate to determine fair value, thereby allowing use of either a pre-tax or post-tax discount rate depending on the valuation methodology used.

- Removes the prohibition to take into account cash flows resulting from any additional transformations when estimating fair value. Instead, cash flows that are expected to be generated in the ‘most relevant market’ are taken into account.

Effectivein2010

• Revised PFRS 3, “Business Combinations and PAS 27, Consolidated and Separate Financial Statements”

The revised PFRS 3 introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs, and future reported results. The revised PAS 27 requires, among others, that (a) change in ownership interests of a subsidiary (that do not result in loss of control) will be accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling and non-controlling interests (previously referred to as ‘minority interests’); even if the losses exceed the non-controlling equity investment in the subsidiary; and (c) on loss of control of a subsidiary, any retained interest will be remeasured to fair value and this will impact the gain or loss recognized on disposal. The changes introduced by the revised PFRS 3 and PAS 27 must be applied prospectively and will affect future acquisitions and transactions with non-controlling interests.

• Amendment to PAS 39, “Financial Instruments:Recognition and Measurement - Eligible Hedged Items”

The amendment addresses only the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item.

Effectivein2012

• Philippine Interpretation IFRIC 15, “Agreement for Construction of Real Estate”

This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, “Construction Contracts”, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis, will also be accounted for based on stage of completion.



4. Summary of Significant Accounting Policies

Principles of Consolidation The consolidated financial statements include the accounts of the Parent

Company and the subsidiaries mentioned in Note 1. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

All intercompany balances, transactions, income and expenses and profits and losses resulting from intercompany transactions are eliminated in full.

Subsidiaries are fully consolidated from the date control is transferred to the Parent Company and cease to be consolidated from the date control is transferred out of the Parent Company.

OAL has been included in the 2008 consolidated financial statements using the purchase method of accounting. Accordingly, the 2008 consolidated statements of income and cash flows include the results of operations and cash flows of OAL from its initial acquisition date (December 24, 2008) to December 31, 2008. The purchase considerations have been allocated to the assets and liabilities on the basis of their fair value at the date of acquisition.

Minority interest represents the portion of profit or loss and net assets in subsidiaries not held by the Parent Company and is presented in the consolidated statement of income and within equity in the consolidated balance sheet, separately from equity attributable to equity holders of the parent. Aquisitions of minority interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognized as goodwill.

Business Combination Business combinations are accounted for using the purchase method

of accounting. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-

term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value.

Short-term Investments Short-term investments represent investments that are readily convertible

to known amounts of cash with original maturities of more than three months to one year.

Financial Assets and Liabilities Financial assets and financial liabilities are recognized initially at fair

value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit or loss (FVPL).

The Company recognizes a financial asset or a financial liability in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument.

All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date that the Company commits to purchase the assets. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

The fair value for financial instruments traded in active markets at the balance sheet date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not quoted in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which observable market prices exist, and other relevant valuation models.

Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (Day 1 Gain or Loss) in the consolidated statement of income unless it qualifies for recognition as some other type of asset. In cases where data which is not observable is used, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the “Day 1 Gain or Loss” amount.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interests, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity net, of any related income tax benefits.

Financial assets are classified into the following categories: Financial asset at FVPL, loans and receivables, held-to-maturity (HTM) investments, and AFS investments. Financial liabilities are classified into: Financial liabilities at FVPL, and other financial liabilities. The Company determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this designation at every reporting date.

• Financial Assets and Financial Liabilities at FVPL

Financial Assets or Financial Liabilities Designated as at FVPL on Initial Recognition

Financial assets or financial liabilities classified in this category included those that are designated by management on initial recognition as at FVPL when any of the following criteria are met:

a. The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or



b. The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

c. The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities designated as at FVPL are recorded in the consolidated balance sheet at fair value. Changes in fair value on financial assets and liabilities designated at FVPL are recorded in the consolidated statement of income under investment income. Interest earned or incurred is recorded in investment income and interest expense and other financial charges, respectively, while dividend income is recorded according to the terms of the contract, or when the right to receive has been established.

The Company has no financial asset or financial liability designated on initial recognition as at FVPL.

Financial Assets or Financial Liabilities Held for Trading Financial assets or financial liabilities held for trading are also

included in this category and are classified under financial assets and liabilities at FVPL. These financial instruments are recorded in the consolidated balance sheet at fair value. Changes in fair value relating to the held-for-trading positions are recognized in the consolidated statement of income as net gain (loss) on investment held for trading under investment income. Interest earned or incurred is recorded in investment income and interest expense and other financial charges, respectively, while dividend income is recorded when the right to receive payment has been established.

The Company’s investments in bonds, unit investment trust funds (UITFs), trust accounts, marketable equity securities and managed funds are classified as investments held for trading (see Note 8).

Derivatives recorded at FVPL The Company enters into short-term forward currency contracts to

hedge its currency exposure. Derivative instruments are initially recognized at fair value on the date in which a derivative transaction is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The Company has opted not to designate its derivative transactions under hedge accounting. Consequently, gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statement of income.

The fair values of freestanding forward currency transactions are calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

The Company’s derivative assets or liabilities are classified as financial assets or liabilities at FVPL (see Note 30).

• Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments and are not quoted in an active market. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired, as well as through the amortization process. Loans and receivables are included in current assets if maturity is within one year from the balance sheet date, and as noncurrent assets if maturity date is more than one year from the balance sheet date.

The Company’s cash and cash equivalents, short-term investments and trade and other receivables and installment contract receivables are classified as loans and receivables (see Notes 7 and 9).

• HTM Investments

Quoted nonderivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Company has the positive intention and ability to hold to maturity. Such assets are carried at amortized cost using the effective interest method.

Gains and losses are recognized in consolidated statement of income when the HTM investments are derecognized or impaired, as well as through the amortization process. HTM investments are classified as current if maturity is within 12 months from the balance sheet date. Otherwise, these are classified as noncurrent assets.

The Company did not classify any financial asset under HTM investments.

• AFS Investments

AFS financial assets are those nonderivative financial assets that are designated as AFS or are not classified in any of the three preceding categories. After initial recognition, AFS financial assets are measured at fair value with gains or losses being recognized as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income. AFS financial assets are classified as current if they are expected to be realized within 12 months from the balance sheet date. Otherwise, these are classified as noncurrent assets.

The Company’s investments in quoted and unquoted equity securities and other investments are classified as AFS financial assets (see Note 12).

Other Financial Liabilities Other financial liabilities are initially recognized at the fair value of

the consideration received less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method.



Gains and losses are recognized in the consolidated statement of income when the liabilities are derecognized as well as through the amortization process.

The Company’s notes payable, trade and other payables, trust receipts payable, due to related parties and long-term debt are classified as other financial liabilities.

Embedded Derivatives An embedded derivative is separated from the host contract and

accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss.

Embedded derivatives are measured at fair value and are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statement of income.

The Company makes a reassessment on whether an embedded derivative is to be separated from the host contract only if there is a change to the contract that significantly modifies the cashflows.

The Company has bifurcated embedded foreign currency derivatives (see Note 30).

Impairment of Financial Assets The Company assesses at each balance sheet date whether a financial

asset or group of financial assets is impaired.

AssetsCarriedatAmortizedCost.If there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Company. If in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is recognized in the consolidated statement of income. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. For the purpose of specific evaluation of impairment, the Company assesses whether financial assets are impaired through assessment of collectibility of financial assets considering the debtor’s capacity to pay, history of payment, and the availability of other financial support. For the purpose of a collective evaluation of impairment, if necessary, financial assets are grouped on the basis of such credit risk characteristics such as debtor type, payment history, past-due status and terms.

Assets Carried at Cost. If there is objective evidence (such as continuing losses or significant financial difficulties of the investee company) that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

AFS Investments. For AFS investments, the Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In the case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income. Increases in the fair value after impairment are recognized directly in equity.

In the case of debt instruments classified as AFS, impairment is based on the same criteria as loans and receivables and HTM investments. Future interest income is based on the reduced amount based on the rate of the interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the consolidated statement of income. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income.

Derecognition of Financial Assets and Liabilities

Financial Assets. A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where:



• the rights to receive cash flows from the asset have expired; or

• the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

• the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount

reported in the consolidated balance sheet when there is a currently legal right to set off the recognized amounts and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously.

Inventories Inventories, excluding land held for sale and development costs, are

valued at the lower of cost or net realizable value. Costs incurred in bringing each inventory to its present location and condition are accounted for as follows:

Finished goods - determined using the moving average method; cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excludes borrowing costs;

Raw materials, spare parts and others

- determined using the moving average method.

Land held for sale are valued at the lower of cost, which includes expenditures for development and improvements, or net realizable value.

The net realizable value of inventories, except spare parts, is the selling price in the ordinary course of business, less costs to complete, sell and distribute. The net realizable value of spare parts is the current replacement cost.

Investments in Associates The Company’s investments in its associates are accounted for under

the equity method. These are entities in which the Company has significant influence and which are neither subsidiaries nor joint ventures of the Company. The investments in associates are carried in the consolidated balance sheet at cost plus post-acquisition changes in the Company’s share in net assets of the associates, less any impairment in value. The consolidated statement of income reflects the Company’s share in the results of operations of the associates. Unrealized gains arising from transactions with its associates are eliminated to the extent of the Company’s interest in the associates against the related investments. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred. The Company’s investment in an associate includes goodwill on acquisition, which is recorded in accordance with the accounting policy for goodwill.

When the Company’s accumulated share in net losses of an associate equals or exceeds the carrying amount of the investment, including advances for future conversion to equity, the Company discontinues the recognition of its share in additional losses and the investment is reported at nil value. If the associate subsequently reports net income, the Company will resume applying the equity method only after its share in that net income equals the share in net losses not recognized during the period the equity method was suspended.

Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less

accumulated depreciation and any impairment loss. Land is carried at cost less any impairment loss. The cost of property, plant and equipment, comprises its purchase price, including any applicable import duties and capitalized borrowing costs (for property, plant and equipment other than land) and other costs directly attributable to bringing the asset to its working condition and location for its intended use.

Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, are normally charged to current operations in the year the costs are incurred.

Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

Plant site improvements 10–20 yearsBuildings and improvements 10–20 yearsPort facilities and equipment 22.5 yearsMachinery and equipment 5–20 yearsTransportation and other equipment 2–10 years



The useful lives and depreciation method are reviewed periodically to ensure that the periods and depreciation method are consistent with the expected pattern of economic benefits from items of property, plant and equipment.

When each major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are met.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is credited or charged to current operations.

Construction in-progress represents plant and properties under construction/development and is stated at cost. This includes cost of construction, plant and equipment, borrowing costs directly attributable to such asset during the construction period and other direct costs. Construction in-progress is not depreciated until such time when the relevant assets are completed and ready for operational use.

Investment Properties Investment properties are measured initially at cost, including direct

transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and impairment loss.

Depreciation is calculated on a straight-line basis over the estimated useful lives of 15 and 20 years.

Investment property is derecognized when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statement of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.

Goodwill Goodwill acquired in a business combination is initially measured

at cost being the excess of the cost of the business combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Where the costs of the business combination and the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities are determined provisionally, goodwill is initially measured using those provisional values. The Company recognizes any adjustments

to these provisional values and to the goodwill initially recognized, as a result of completing the initial accounting within twelve months from the acquisition date. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Company are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

• represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and

• is not larger than a segment based on the Company’s primary or the Company’s any secondary reporting format determined in accordance with PAS 14, “Segment Reporting.”

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Intangible Assets The cost of intangible assets acquired in a business combination is

the fair value as of date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Intangible assets are amortized on a straight-line basis over three years and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method are reviewed at least at each financial yearend. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates.

Provisions Provisions are recognized when the Company has a present obligation

(legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the



risks specific to the liability. Where discounting is used, the increase due to the passage of time is recognized as interest expense.

Revenue Recognition Revenue is recognized to the extent that it is probable that the

economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. The following specific recognition criteria must also be met before revenue is recognized:

SaleofGoods. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer.

Tuition and School Fees. Income from tuition and school fees is recognized as income when earned based on a time-proportion basis. Tuition and school fees received pertaining to the summer semester and the next school year are recorded as “Unearned revenues” in the consolidated balance sheet.

Rental. Revenue is recognized on a straight-line basis over the lease term.

Sale of Real Estate. Revenue from the sale of real estate, which includes cost of land and development, is accounted for under the percentage of completion method when the Company has material obligations under the sales contracts to complete the project after the property is sold. Under this method, revenue is recognized as the related obligations are fulfilled, measured on the basis of the ratio of actual cost incurred to date over the estimated total costs of the project as determined by the Company’s contractors and technical people.

Any excess of collections over the recognized receivables are included under the “Unearned revenues” account in the current liabilities section of the consolidated balance sheet.

If none of the revenue recognition criteria are met, deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers is presented as part of “Other noncurrent liabilities” account in the consolidated balance sheet.

Development cost of land sold before the completion of the development is determined based on actual costs and cost to complete. The estimated cost to complete for sold real estate are included under the “Other noncurrent liabilities” account in the consolidated balance sheet.

PortandCargoHandlingServices. Revenue from port operations is recognized when services are rendered.

Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Interest is included as part of “Investment income.”

Retirement Costs BCII, Araullo University, COC, BIPC and UGC have distinct

funded, noncontributory defined benefit retirement plans covering all permanent employees, each administered by their respective Retirement Committees. Retirement costs are actuarially determined

using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each plan at the end of the previous financial reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

Leases The determination of whether an arrangement is, or contains a

lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term;



c. There is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario b.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term.

Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs

are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded.

Impairment of Non-financial Assets The Company assesses at each reporting date whether there is an

indication that an asset may be impaired when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If any such indication exists and if the carrying value exceeds the estimated recoverable amount, the assets or cash generating units are written down to their recoverable amounts. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such

reversal is recognized in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

The following criteria are also applied in assessing impairment of specific assets:

Investments inAssociates. After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the Company’s net investment in the investee companies. The Company determined at each balance sheet date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Company calculates the amount of impairment being the difference between the fair value and the carrying value of the investee company and recognizes the difference in the consolidated statement of income.

ImpairmentofGoodwill.A test of impairment of goodwill is performed annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. Where the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Foreign Currency-denominated Transactions The consolidated financial statements are presented in Philippine

peso, which is the Company’s functional and presentation currency. Transactions denominated in foreign currencies are recorded using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing rate of exchange at the balance sheet date. Exchange gains or losses arising from foreign currency-denominated transactions are credited or charged to current operations.

Income Taxes

CurrentTax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date.

DeferredTax. Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:

• where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and



• in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carry-forward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused excess MCIT and unused NOLCO can be utilized except:

• where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries and associates. Deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same tax authority.

Earnings Per Common Share (EPS) attributable to the equity holders of the Parent

Basic EPS is computed by dividing net income (after deducting dividends on preferred shares) attributable to the common shareholders by the weighted average number of outstanding common shares during the year after giving retroactive effect to any stock dividend declared during the year.

The Company does not have potential common shares nor other instruments that may entitle the holder to common shares. Hence, diluted EPS is the same as basic EPS.

Segment Reporting The Company is organized into four major business segments. Such

business segments are the bases upon which the Company reports its primary segment information. Financial information on business segments is presented in Note 35 to the consolidated financial statements.

Contingencies Contingent liabilities are not recognized in the consolidated financial

statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

Events After the Balance Sheet Date Post year-end events that provide additional information about the

Company’s financial position at the balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

5. Significant Accounting Judgments and Estimates

The Company’s consolidated financial statements prepared in conformity with PFRS require management to make estimate and assumptions that affect amounts reported in the consolidated financial statements and related notes. In preparing the Company’s consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

The Company believes the following represents a summary of these significant estimates and judgments and related impact and associated risks in its financial statements.

Judgments

Operating Lease - theCompany as Lessor. The Company has entered into commercial property leases on its investment property portfolio. The Company has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Revenue Recognition. Selecting an appropriate revenue recognition method for a particular sale transaction requires certain judgments based on sufficiency of cumulative payments by the buyer and completion of development.



Estimation Uncertainty

Impairment Testing of Goodwill. The Company performs impairment testing of goodwill on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Value in use is determined by making an estimate of the expected future cash flows from the cash generating unit and applies a discount rate in order to calculate the present value of these cash flows. Goodwill acquired through business combination has been allocated to one cash-generating unit. The recoverable amount of the goodwill has been determined based on value in use calculation using cash flow projections covering a five year period. The carrying amounts of goodwill as of December 31, 2008 and 2007 are P329.6 million and P65.9 million, respectively, included under “Intangibles” account in the consolidated balance sheets (see Note 15). The carrying amount of goodwill, included under “Investments in associates” account, is P5.1 million as of December 31, 2008 and 2007 (see Note 11). No impairment loss on goodwill was recognized in 2008, 2007 and 2006.

Impairment of Investments in Associates. The Company assesses impairment on investments in associates whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This requires an estimation of the value in use of the cash-generating units. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amounts of investments in associates as of December 31, 2008 and 2007 are disclosed in Note 11 to the consolidated financial statements. Based on management’s assessment, the Company’s investments in associates are fairly stated, thus no impairment loss needs to be recognized.

Impairment of AFS Investments. The Company treats AFS equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Company treats “significant” generally as 20% more of the original cost of investment, and “prolonged”, greater than 6 months. In addition, the Company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities. The carrying values of AFS investments as of December 31, 2008 and 2007 are P331.5 million and P313.4 million, respectively. Based on management’s assessment, the Company’s AFS investments are fairly stated, thus, no additional impairment loss needs to be recognized in 2008 and 2007 (see Note 12).

Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized.

The recognized deferred tax assets as of December 31, 2008 and 2007 amounted to P50.4 million and P73.9 million, respectively (see Note 31).

The Company’s deductible temporary differences, unused NOLCO and MCIT for which no deferred tax asset is recognized in the consolidated balance sheet as of December 31, 2008 and 2007 amounted to P188.3 million and P485.2 million, respectively (see Note 31).

Input Value-Added Taxes. The carrying amounts of input taxes were reduced to the extent that it is no longer probable that sufficient revenue subject to value-added tax (VAT) will be available to allow all or part of the input VAT to be utilized. Allowance for unrecoverable input VAT amounted to P109.2 million and P104.7 million as of December 31, 2008 and 2007. The carrying amount of input VAT classified as current assets as of December 31, 2008 and 2007 amounted to P79.0 million and P125.9 million, respectively. The input VAT fully provided with allowance for unrecoverable amount as of December 31, 2008 and 2007 amounted to P109.2 million and P104.7 million, respectively (see Note 16).

Estimating Useful Lives of Property, Plant and Equipment, InvestmentProperties and Intangibles. The Company estimates the useful lives of property, plant and equipment, depreciable investment properties and intangibles with finite useful lives based on the period over which the property, plant and equipment, investment properties and intangibles with finite useful lives are expected to be available for use and on the collective assessment of industry practice, internal technical evaluation and experience with similar assets and in the case of intangibles, useful lives are also based on the contracts covering such intangibles. The estimated useful lives of property, plant and equipment and investment properties are reviewed periodically and updated if expectations differ materially from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the property, plant and equipment and investment properties. However, it is possible that future results of operations could be materially affected by changes in the estimates brought about by changes in factors. The amounts and timing of recording of expenses for any period would be affected by changes in these factors and circumstances. The carrying amounts of property, plant and equipment as of December 31, 2008 and 2007 amounted to P1,297.6 million and P1,294.9 million, respectively (see Note 13). The carrying amounts of depreciable investment properties as of December 31, 2008 and 2007 amounted to P235.1 million and P250.1 million, respectively (see Note 14). The carrying amounts of intangibles with finite useful lives amounted to P90.5 million and P1.6 million as of December 31, 2008 and 2007, respectively (see Note 15).

Impairment of TradeReceivables. The Company maintains allowance for doubtful accounts based on the result of the individual and collective assessments under PAS 39. Under the individual assessment, which considers the significant financial difficulties of the debtor, the Company is required to obtain the present value of estimated cash flows using the receivable’s original effective interest rate. Impairment loss is determined as the difference between the receivables’ carrying balance and the computed present value. The collective assessment would require the Company to group its receivables based on the credit risk characteristics (debtor type, past-due status and terms) of the debtors. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss



experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any year would differ depending on the judgments and estimates made for the year. The carrying amounts of trade and other receivables (including the current portion of installment contract receivables) as of December 31, 2008 and 2007 are disclosed in Note 9 to the consolidated financial statements. The noncurrent portion of the installment contract receivable amounted to P58.5 million and P84.5 million as of December 31, 2008 and 2007, respectively. The allowance for impairment of receivables specifically identified and collectively assessed amounted to P115.5 million and P96.1 million as of December 31, 2008 and 2007, respectively (see Note 9).

Estimating Net Realizable Value of Inventories. The Company carries inventories at net realizable value when this becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The carrying amounts of inventories as of December 31, 2008 and 2007 amounted to P1,042.4 million and P824.4 million, respectively (see Note 10).

Liability for LandDevelopment. Obligations to complete development of real estate are based on actual costs and project estimates of contractors and Company’s technical staff. These costs are reviewed at least annually and are updated if expectations differ from previous estimates. Liability to complete project included in liability for land development are presented under “Other noncurrent liabilities” account in the consolidated balance sheets amounted to P2.3 million and P19.1 million as of December 31, 2008 and 2007, respectively.

PensionBenefits. The determination of the Company’s obligation and cost of pension benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. The assumptions presented in Note 32 include among others, discount rates, expected rate of return on plan assets and rates of salary increase. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.

The Company’s net pension liability under “Pension and other post-employment benefits” account amounted to P0.3 million and P0.1 million as of December 31, 2008 and 2007, respectively. The net pension expense incurred in 2008, 2007 and 2006 amounted to P12.6 million, P17.7 million and P11.7 million, respectively (see Note 32).

6. Acquisition of Toon City Animation, Inc.

OAL, a limited liability company incorporated in Hong Kong in October 2008 was used as an acquisition vehicle in the purchase of the shares of stock of Toon City. On December 24, 2008, the Company, through OAL, acquired an effective interest of 76% in Toon City, a fifteen-year old animation studio in the Philippines providing services to clients abroad. OAL owns 95% equity interest in Toon City.

The fair values of the identifiable acquired assets and liabilities as of the date of acquisition determined provisionally are as follows:

Fair Value Recognized on Acquisition

(Determined Provisionally)(InThousands)

Cash and cash equivalents P723Receivables 20,492Prepayments and other current assets 2,746Property and equipment 13,362Customer contracts 90,525Refundable deposits and other noncurrent assets 19,851

147,699Accounts payable and accrued expenses (25,265)Loans payable (15,000)Deferred tax liability (27,158)

(67,423)Net assets 80,276Percentage of ownership 76%

61,011Goodwill arising from acquisition 263,671Total consideration P324,682

As of March 9, 2009, the Company is still in the process of determining the final fair values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities, hence the Company accounted for the combination using provisional values. The Company shall recognize any adjustments to those provisional values as a result of completing the initial accounting within twelve months from the acquisition date.

Management deemed it impracticable to disclose the carrying amounts of each of the acquired assets and liabilities, determined in accordance with PFRS, immediately before the business combination.

Goodwill determined provisionally from the acquisition amounted to P263.7 million (see Note 15).

Customer contracts pertain to the identifiable intangible asset acquired and are expected to be fully amortized within 12 months from the acquisition date.

The cash outflow related to the acquisition is as follows:

Amount(InThousands)

Cash paid on acquisition dates (cost of shares and costs associated with the acquisition amounting to P0.5 million)

P324,682

Less cash of acquired subsidiary 723Net cash outflow P323,959

The results of operations of OAL and Toon City from the acquisition date (December 24, 2008) until yearend is not significant and has not been included in the Company’s results of operations in 2008. Management deemed it impracticable to disclose the consolidated revenue and net income of OAL for the year ended December 31, 2008 as though the acquisition date for the business combination effected had been January 1, 2008.

The audit of the financial statements of OAL and Toon City as of and for the year ended December 31, 2008 and as of and for the period ended December 24, 2008 (acquisition date) is ongoing as of March 9, 2009.



7. Cash and Cash Equivalents

This account consists of:


Cash on hand and in banks P71,869 P40,098Short-term deposits 1,753,832 1,620,780

P1,825,701 P1,660,878

Cash in banks earn interest at applicable market rates. Short-term deposits are made for varying periods of up to three months depending on the immediate cash requirements of the Company and earn interest at the respective short-term deposit rates.

8. Investments Held for Trading



Investments in:Bonds P691,105 P594,666UITFs 76,949 287,149Trust accounts 17,682 57,451Marketable equity securities 1,559 5,631Managed funds – 101,411

P787,295 P1,046,308

The Company’s unrealized gains from investments held for trading (included in net gains on investments held for trading under “Investment income” account in the consolidated statement of income) amounted to (P28.3) million, P19.4 million and P103.1 million as of December 31, 2008, 2007 and 2006, respectively.

9. Trade and Other Receivables



Trade P411,756 P369,840Due from related parties (see Note 28) 32,127 8,342Current portion of installment contract

receivable 25,992 11,074Accrued interest 21,269 19,000Advances to suppliers and contractors 9,300 7,883Receivable from BCII Retirement/Gratuity Plan

(BCII Retirement) 8,939 8,929Advances to officers and employees 1,757 3,755Others 40,697 35,995

551,837 464,818Less allowance for doubtful accounts 115,524 96,113

P436,313 P368,705

Trade and other receivables are noninterest-bearing and are short-term in nature.

The installment contract receivable with 6% effective interest rate pertains to a receivable from a third party for the sale of parcels of land. Collection is on a monthly installment basis for 5 years with 9% interest rate until March 1, 2012. The noncurrent portion is presented under noncurrent assets section of the consolidated balance sheets.

Movements in allowance for doubtful accounts in 2008 and 2007 are as follows:

2008Trade Others Total

(InThousands)

Balance at January 1, 2008 P84,363 P11,750 P96,113Provisions 43,720 1,189 44,909Write-off (20,188) (5,310) (25,498)Balance at December 31, 2008 P107,895 P7,629 P115,524

Individual impairment P103,414 P7,629 P111,043Collective impairment 4,481 – 4,481

P107,895 P7,629 P115,524

2007Trade Others Total

(InThousands)Balance at January 1, 2007 P60,706 P7,423 P68,129Provisions (see Note 23) 23,657 4,327 27,984Balance at December 31, 2007 84,363 11,750 96,113

Individual impairment P82,013 P11,750 P93,763Collective impairment 2,350 – 2,350

P84,363 P11,750 P96,113

10. Inventories



At cost: Finished goods P836,262 P508,293 Land and development costs held for sale 122,051 143,226 Raw materials 41,869 147,402Other inventories 5,827 2,309At net realizable value -

Spare parts and others 36,347 23,133P1,042,356 P824,363

Land held for sale represents parcels of land located in Batangas Industrial Park (Park) which are available for sale. Land development costs pertain to expenditures for the development and improvement of the land held for sale in Phase 1 of the Park.

The acquisition cost of spare parts and other inventories carried at net realizable value amounted to P37.2 million and P23.9 million as of December 31, 2008 and 2007, respectively.



Under the terms of the agreements covering liabilities under trust receipts, inventories amounting to P537.2 million and P191.3 million as of December 31, 2008 and 2007, respectively, have been released to UGC in trust for the bank. UGC is accountable to the bank for the trusteed inventories or its sales proceeds.

11. Investments in Associates

This account consists of the Company’s investments in the following entities:

Percentage of OwnershipDirect Indirect

Phinma Property Holdings Corporation (PPHC)

35.27 –

Trans-Asia Oil and Energy Development Corporation (TA Oil)

27.03 –

AB Capital and Investment Corporation (AB Capital)

26.51 1.67

Luzon Bag Corporation(a) 20.61 –Asia Coal Corporation (Asia Coal)(a) (b) 12.08 5.99

(a)Ceasedcommercialoperations

(b) Considered as an associate although percentage of ownership is below 20% since theCompanyhassignificantinfluenceasevidencedinitsrepresentationintheBOD.

The movements and details of investments in associates are as follows:


Acquisition costs: Balance at beginning of year P1,473,643 P1,234,216 Additions 63,350 239,427 Balance at end of year 1,536,993 1,473,643Accumulated equity in net losses: Balance at beginning of year (306,362) (403,496) Equity in net earnings for the year 41,586 108,478 Dividends received (25,893) (11,344)

(290,669) (306,362)Share in net unrealized gain on change in fair

value of AFS investments of associates: Balance at beginning of year 24,784 8,349 Change in fair value during the year (19,730) 16,435 Balance at end of year 5,054 24,784

P1,251,378 P1,192,065

The detailed carrying values of investments in associates which are accounted for under the equity method are as follows:


TA Oil* P772,644 P775,787PPHC 323,976 228,706AB Capital 154,496 187,280Asia Coal 262 292

P1,251,378 P1,192,065

*ThefairvalueasofDecember31,2008and2007amountedtoP315.0millionandP557.0million.

The following table summarizes the financial information of the Company’s investments in associates:


Share in the associates’ net assets:Current assets P1,189,069 P1,203,516Noncurrent assets 606,046 626,772Current liabilities (312,453) (303,735)Noncurrent liabilities (103,810) (207,014)Preferred stock (132,550) (132,550)Net assets attributable to common

stockholders P1,246,302 P1,186,989

Share in the associates’ revenue and net income:Revenue P797,499 P724,814Net income 41,586 76,295

Carrying amount of the investments P1,251,378 P1,192,065

As of December 31, 2008 and 2007, the carrying amount of the Company’s investments exceeded its equity in the net assets of associates by P5.1 million representing goodwill related to AB Capital.

Status of operations and significant transactions of certain associates are as follows:

a. TA Oil

TA Oil is involved in power generation and oil and mineral exploration activities.

On March 25, 2008, the BOD of TA Oil declared a cash dividend of P0.04 a share to all common stockholders of record as of April 11, 2008. The Company received P18 million cash dividends from TA Oil.

On June 20, 2007, the SEC approved the stock rights offering of 552.5 million shares of TA Oil at the ratio of 1 share for every 2 shares held as of record date of November 23, 2007, at a price of P1.10 per share. The offer period commenced on November 28, 2007 and ended on December 11, 2007. Total proceeds raised from the stock rights offering, net of direct costs incurred, amounted to P599.0 million. The proceeds was used to fund petroleum and mineral explorations and for general corporate purposes. The Company subscribed to 165.6 million shares and fully paid its subscription at P182.2 million out of the 552.5 million shares issued.

Also, in 2007, the Company acquired 100.0 thousand shares of common stock amounting to P0.2 million.

On April 2, 2007, the BOD of TA Oil declared a cash dividend of P0.04 a share to all common stockholders of record as of April 19, 2007. The Company received P11.3 million cash dividends from TA Oil.

On July 2, 2007, Trans-Asia Gold and Minerals Development Corporation (TA Gold) (a wholly-owned subsidiary of TA Oil) was incorporated and registered with the SEC primarily to engage in the business of mining and mineral exploration within the Philippines and other countries. TA Gold has not yet started commercial operations as of December 31, 2008.

TA Oil has 100% equity interest in CIP II Power Corporation (CIPP) which operates a 21 MW Bunker C-fired power plant in CIP II Special Economic Zone in Calamba, Laguna.



b. PPHC

PPHC is engaged in real estate development, principally in low and middle cost housing and vertical development.

On April 15, 2008, the SEC approved the stock rights offering at the rate of 1 share for every 3 shares held as of record date of April 30, 2008, at a price of P0.12 per share. The availment period was from May 1 to 30, 2008. The Company availed of the stock rights offering and paid P63.4 million for 527.9 million shares.

On March 27, 2008, the BOD of PPHC declared cash dividend of P0.005 a share to all common stockholders of record as of March 31, 2008. The Company received P7.9 million cash dividends from PPHC.

c. AB Capital

AB Capital is an investment house that engages in corporate finance, fixed-income securities dealership, stock brokerage and fund management.

On February 14, 2007, the BOD of AB Capital approved the sale of 212,770 treasury shares to existing shareholders, PHINMA and BCII.

Also, in 2007, the Company purchased 438,890 common shares amounting to P57.1 million.

d. Asia Coal

Asia Coal is engaged in the trading of coal. Beginning November 1, 2000, Asia Coal ceased all trading operations.

12. AFS Investments

This account consists of investments in quoted and unquoted equity securities:

2008 2007(InThousands)

Quoted: Ayala Corporation preferred shares P8,400 P9,151 First Philippine Holdings Corporation

(FPHC) preferred shares19,000 –

Unquoted: AB Capital - preferred shares 250,000 250,000 Others 99,636 99,732

377,036 358,883Less accumulated impairment losses 45,517 45,517

P331,519 P313,366

AFS investments consist of ordinary shares, and therefore have no fixed maturity date or coupon rate.

The unquoted AFS investments are carried at cost less accumulated impairment losses since its fair value cannot be reliably measured. The quoted AFS securities which are listed in the Philippine Stock Exchange (PSE) are carried at fair value. Unrealized gain (loss) on change in fair value on such quoted AFS amounting to (P0.6 million) and P1.2 million were recognized in the 2008 and 2007 consolidated statement of changes in equity, respectively.

On February 14, 2007, the BOD of AB Capital declared cash dividend totaling P80.0 million to preferred stockholders as of March 30, 2007, payable on April 17, 2007 conditional upon the sale of 212,770 treasury shares at P345.14 per share. In March 2007, the Company together with PHINMA acquired the treasury shares. The Company acquired 106,385 treasury shares for P36.7 million. Thereafter, the Company received P42.3 million cash dividends on preferred shares from AB Capital.

Accumulated impairment losses pertain to unquoted AFS investments classified as others.

13. Property, Plant and Equipment

Following are the details of this account:

December 31, 2007 Additions Disposals Reclassification December 31, 2008(InThousands)

Cost: Land P354,573 P– P– (P4,606) P349,967 Plant site improvements 15,041 2,481 – 8,325 25,847 Buildings and improvements 748,967 34,917 (2,122) 23,403 805,165 Port facilities and equipment 223,664 2,357 (2,357) – 223,664 Machinery and equipment 583,983 18,286 2,237 604,506 Transportation and other equipment 282,299 26,863 (18,842) – 290,320

2,208,527 84,904 (23,321) 29,359 2,299,469Less accumulated depreciation: Plant site improvements 11,371 810 – – 12,181 Buildings and improvements 270,474 48,804 (2,066) – 317,212 Port facilities and equipment 82,729 11,295 (2,357) – 91,667 Machinery and equipment 346,369 39,294 – – 385,663 Transportation and other equipment 207,729 15,316 (18,842) – 204,203

918,672 115,519 (23,265) – 1,010,9261,289,855 (30,615) (56) 29,359 1,288,543

Construction in-progress 5,037 37,943 – (33,965) 9,015Net book value P1,294,892 P7,328 (P56) (P4,606) P1,297,558



December 31, 2006 Additions Disposals Reclassification December 31, 2007(InThousands)

Cost: Land P353,310 P1,263 P– P– P354,573 Plant site improvements 14,084 – – 957 15,041 Buildings and improvements 691,247 14,445 – 43,275 748,967 Port facilities and equipment 224,449 – – (785) 223,664 Machinery and equipment 585,763 8,996 – (10,776) 583,983 Transportation and other equipment 270,031 26,631 (5,146) (9,217) 282,299

2,138,884 51,335 (5,146) 23,454 2,208,527Less accumulated depreciation: Plant site improvements 10,410 656 – 305 11,371 Buildings and improvements 195,609 38,684 – 36,181 270,474 Port facilities and equipment 73,564 9,950 – (785) 82,729 Machinery and equipment 367,478 35,748 – (56,857) 346,369 Transportation and other equipment 156,948 26,686 (2,331) 26,426 207,729

804,009 111,724 (2,331) 5,270 918,6721,334,875 (60,389) (2,815) 18,184 1,289,855

Construction in-progress 9,502 13,719 – (18,184) 5,037Net book value P1,344,377 (P46,670) (P2,815) P– P1,294,892

As of December 31, 2008 and 2007, the unamortized capitalized borrowing costs included as part of property, plant and equipment amounted to P2.8 million and P3.1 million, respectively. No borrowing cost has been capitalized in 2008 and 2007.

Certain property, plant and equipment of UGC, Araullo University and PSHC totaling P928.5 million and P943.5 million as of December 31, 2008 and 2007 were used as security for their respective long-term debt and convertible notes as disclosed in Note 19 to the consolidated financial statements.

14. Investment Properties


December 31, 2007 Additions Reclassification December 31,2008(InThousands)

Cost: Land P534,463 P– P4,606 P539,069 Buildings for lease 302,112 5,800 – 307,912

836,575 5,800 4,606 846,981Less accumulated depreciation - Buildings for lease 51,998 20,851 – 72,849

P784,577 (P15,051) P4,606 P774,132

December 31, 2006 Additions December 31, 2007 (InThousands)

Cost: Land P533,950 P513 P534,463 Buildings for lease 302,112 – 302,112

836,062 513 836,575Less accumulated depreciation - Buildings for lease 31,191 20,807 51,998

P804,871 (P20,294) P784,577

Investment properties (except land) are stated at cost less accumulated depreciation and any impairment losses. Land is stated at cost less any accumulated impairment losses. The fair value of investment properties based on the latest valuation by independent firms of appraisers was P1.5 billion and P1.4 billion in December 31, 2008 and 2007, respectively.

The buildings for lease are being depreciated over 15 and 20 years.

15. Intangibles

Following are the details and movements of this account:

December 31, 2007 Additions December 31, 2008Cost: Goodwill (see Note 6) P65,882 P263,671 P329,553 Intangible - student lists 25,380 – 25,380 Intangible - customer contracts (see Note 6) – 90,525 90,525

91,262 354,196 445,458Accumulated amortization - Intangible - student lists 23,798 1,582 25,380

P67,464 P352,614 P420,078



December 31, 2006 Amortization Adjustments December 31, 2007 (InThousands)

Cost: Goodwill P40,058 P– P25,824 P65,882 Intangible - student lists 25,380 – – 25,380

65,438 – 25,824 91,262Accumulated amortization - Intangible - student lists 18,868 4,930 – 23,798

P46,570 (P4,930) P25,824 P67,464

In 2007, adjustments were made to the acquisition cost of the Company’s investment in Araullo University. This resulted to the recognition of additional goodwill of P5.4 million.

16. Other Noncurrent Assets



Input VAT - net of allowance for unrecoverable amount of P109.2 million and P104.7 million in 2008 and 2007, respectively P– P–

Others - net of allowance for doubtful advances of P66.7 million in 2008 44,830 27,046

P44,830 P27,046

17. Notes Payable

This account consists of notes payable of the following subsidiaries:


UGC P101,610 P219,667OAL 19,752 –COC 2,456 –

P123,818 P219,667

UGC’s notes payable consist of unsecured short-term peso-denominated loans from financial institutions with annual interest rates in 2008 and 2007 ranging from 6.75% to 7.5% and 6.0% to 8.25%, respectively.

18. Trade and Other Payables



Trade P34,094 P51,249Payable to third parties 75,522 52,068Accruals for: Personnel cost 35,322 38,590 Professional fees and others (see Note 28)

60,219 51,178

Interest (see Note 28) 19,018 21,737 Freight, hauling and handling 10,138 6,331Dividends 39,453 29,413Customers’ deposits 26,922 39,372Others 62,283 39,918

P362,971 P329,856

Trade and other payables are noninterest-bearing. Trade payables are normally settled on 30 to 60-day terms. Other payables are normally settled within twelve months.

19. Long-term Debt

This account consists of long-term liabilities of the following subsidiaries:


UGC: Banco de Oro (BDO) P210,000 P270,000 Rizal Commercial Banking Corporation

(RCBC) 70,000 90,000280,000 360,000

Less debt issuance cost (2,818) 1,653277,182 358,347

PSHC 146,422 145,134Araullo University 65,250 74,355BIPC 20,391 23,693COC – 78

509,245 601,607Less current portion - net of debt issuance cost

of P0.6 million in 200795,300 137,600

P413,945 P464,007

UGC On June 25, 2007, the outstanding BDO loan, syndicated loan and the

convertible notes obtained from five local financial institutions, namely, AB Capital, Bank of the Philippine Islands, Metropolitan Bank and Trust Company, Land Bank of the Philippines and Security Bank Corporation were preterminated by obtaining a term loan aggregating to P400.0 million from BDO and RCBC for which debt issue cost amounting to P2.0 million was paid. UGC charged a loss of P8.5 million to operations (included in “Others” under “Other income (expenses)” in the 2007 consolidated statement of income) and P2.4 million to equity portion of convertible notes as a result of pretermination of the loans. BCII’s share in the amount of loss charged to equity is P2.0 million. Amortization of debt issuance cost amounted to P0.3 million in 2007.

The salient terms of the agreement covering UGC’s long-term debt from BDO and RCBC are as follows:

Interest Fixed rate of 9.11% computed based on five year PDST- F plus a spread of 1.75% and applicable taxes at the time of the drawdown

Repayment period 20 equal quarterly installments until June 2012

As of December 31, 2008, the loans from BDO and RCBC are collateralized by a mortgage agreement on UGC’s existing land, plantsite improvements, buildings and installations, and machinery and equipment of Calamba and Davao plants with estimated market value of P566.8 million.



The foregoing loan agreements includes, among others, certain restrictions and requirements with respect to the following:

• Maintenance of the following ratios for the duration of the loan agreement: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 1.5:1; and (3) debt service ratio of 1.25:1; and

• Restrictions on declaration and payment of dividends, incurrence of new long-term debt, entering into management agreement with any party other than PHINMA, entering into merger or consolidation or any change of ownership, sale, lease or otherwise, transfer of a substantial portion of its assets except in the ordinary course of business, making any loans, advances or investments, making capital expenditures, prepayment of any other long-term debt and amendment of UGC’s Articles of Incorporation or By-laws.

As of December 31, 2008 and 2007, UGC is in compliance with the debt covenants.

PSHC This represents interest-bearing loan of P154.0 million payable to United

Pulp and Paper Co., Inc. (UPPC) arising from the acquisition of land from UPPC. UPPC was a former associate of the Company.

This loan is presented at amortized cost as of the balance sheet date. The present value of the loan at initial recognition in 2006 was calculated using an effective interest rate of 11.03%. The effective interest used in computing for the present value of the loan payable was derived based on the rate inherent to the loan after considering the carrying value and the future value of the loan payable at the coupon rate of 9.1%.

Initially, the said loan is payable in two installments amounting to P44.0 million on July 15, 2008 and P110.0 million on July 15, 2013. On July 8, 2008, a Memorandum of Agreement was executed by UPPC and PSHC amending the maturity date of P44.00 million from July 15, 2008 to July 15, 2013. A recomputation of the effective interest rate of 10.52% was made in 2008 to reflect the change in the payment terms of the liability in 2013. Additional interest expense resulting from the accretion of loan payable amounted to P1.29 million, P1.80 million and P1.66 million in 2008, 2007 and 2006 respectively. The details of the loan are as follows:


Loan payable to UPPC P154,000 P154,000Less unamortized discount 7,578 8,866

146,422 145,134Less current portion – 44,000

P146,422 P101,134

To secure the payment of the loan, PSHC constituted a mortgage over its land in favor of certain creditors of UPPC.

The payable of PSHC to UPPC incurs an annual interest at a rate subject to mutual agreement by UPPC and PSHC on each anniversary date. Interest expense on the amount payable to UPPC, computed at 9.1% of the outstanding principal balance, amounted to P14.0 million in 2008, 2007 and 2006.

Araullo University Araullo University’s long-term debt consists of:


Loan payable to China Banking Corporation (China Bank)

P65,250 P74,250

Car loan – 105P65,250 P74,355

Less current portion 9,000 9,105P56,250 P65,250

China Bank

Loan payable to China Bank represents a 10-year loan from China Bank - Cabanatuan Branch. The proceeds of the loan were used to preterminate restructured long-term debt from another local bank, to partially finance Araullo University’s building renovation, and to purchase various school equipment. The debt is payable on fixed monthly amortization of P750,000 starting April 17, 2006. Interest shall be payable monthly in arrears based on variable pass-on rate plus spread. Actual interest rate was 8.66% in 2008 and 8.75% in 2007.

Araullo University’s land, including existing and future improvements thereon is used as collateral for its long-term debt to China Bank. The net book value of the said land and improvements was P156.7 million as of December 31, 2008 and 2007.

Car Loan Car loan represents a bank loan obtained to finance Araullo University’s

acquisition of transportation equipment. The loan is collateralized by the same transportation equipment.

BIPC BIPC’s outstanding long-term debt due to Asiatrust Bank which is presented

at accreted value consists of:

(In Thousands)Balance, January 1, 2007 P22,830Interest accruals 863Balance, December 31, 2007 23,693Payments during the year (3,665)Interest accruals 363Balance at end of year P20,391


Current portion of long-term debt P6,945 P4,495Long-term debt - net of current portion 13,446 19,198

P20,391 P23,693



As of December 31, 2008 and 2007, the effective interest rate of the debt is 10.75% and 10.79% respectively.

The terms of BIPC’s debt are as follows:

Facility Long-term debt

Payment term Ten years, inclusive of a four-year grace period on principal repayment

Interest rate 8.0% fixed interest rate for the entire term of the loan

Interest payments 3-year grace period on interest payment through June 9, 2008. Interest to be incurred during the grace period, net of P4 million partial interest payment to be made on June 9, 2008 will be capitalized

Principal payment 3½-year grace period on principal amortization up to December 10, 2008 and seven equal semi-annual payments to commence on December 10, 2008

Security First party real estate mortgage over vacant industrial lots under Transfer Certificate Title (TCT) No. 98732 and TCT No. 100923 located at Barrio Lumbang Municipality of Calaca, Batangas registered under the name of BIPC aggregating to 62,342 square meters with appraised value of P58.4 million as of December 31, 2007

20. Equity

a. Capital Stock

The composition of the Parent Company’s capital stock as of December 31, 2008, 2007 and 2006 is as follows:

Number of Shares

2008 2007 2006

Preferred - cumulative, nonparticipating

Class AA

Authorized 50,000,000 50,000,000 50,000,000

Class BB

Authorized 50,000,000 50,000,000 50,000,000

Common

Authorized 420,000,000 420,000,000 420,000,000

Issued:

Balance at beginning of year 234,266,572 203,704,783 169,747,320

Stock dividends 23,430,741 30,561,789 33,957,463

Balance at end of year 257,697,313 234,266,572 203,704,783

Subscribed 39,994 39,994 39,994

Issued and subscribed 257,737,307 234,306,566 203,744,777

b. Retained Earnings

The BOD of BCII declared the following stock dividends:

Date Dividend rate Shareholders’ Record DateApril 14, 2008 10% June 13, 2008March 30, 2007 15% June 15, 2007May 31, 2006 20% August 11, 2006

On October 5 2005, the BOD appropriated P1.0 billion of retained earnings for future investments.

The balance of the Company’s retained earnings include the subsidiaries and associates undistributed net earnings of P808.4 million and P753.1 million as of December 31, 2008 and 2007, respectively, which are available for distribution only upon declaration of dividends by such subsidiaries and associates of the Parent Company.

21. Investment Income

Investment income consists of:

2008 2007 2006

(InThousands)

Interest income:

Cash and cash equivalents P66,544 P62,304 P22,292Investments held for

trading 42,351 54,323 79,157

Receivables 5,744 – –

114,639 116,627 101,449

Net gain (loss) on investments held for trading (34,323) 27,521 193,414

Dividend income 5,466 49,631 –

P85,782 P193,779 P294,863

22. Cost of Sales, Educational Services and Real Estate

Cost of sales, educational services and real estate consist of:

2008 2007 2006

(InThousands)

Cost of sales P2,171,695 P1,735,395 P1,664,970

Cost of educational services 148,681 145,503 155,226

Cost of real estate sold 27,462 50,369 2,546

P2,347,838 P1,931,267 P1,822,742



The details of cost of sales, educational services and real estate are as follows:

2008 2007 2006

(InThousands)

Inventories used P1,924,837 P1,532,504 P1,462,228

Personnel costs (see Note 26) 162,784 157,843 154,279

Depreciation (see Note 27) 76,669 70,869 64,705

Equipment running 16,330 16,248 13,334

Others 162,218 153,803 128,196

P2,342,838 P1,931,267 P1,822,742

23. General and Administrative Expenses

General and administrative expenses consist of:

2008 2007 2006

(InThousands)

Personnel costs (see Note 26) P106,893 P121,203 P93,348

Outside services 103,768 78,537 30,294


Provision (reversal of allowance) for doubtful accounts (see Note 9) 44,909 27,984 (6,362)

Taxes and licenses 20,389 18,049 24,352

Provision for unrecoverable input value - added tax 4,512 5,598 30,455

Transportation and travel 3,719 5,412 6,440

Provision for impairment losses – 15,393 49,284

Others 53,186 45,052 47,436

P391,069 374,353 P345,742

24. Selling Expenses

Selling expenses consist of:

2008 2007 2006

(InThousands)

Personnel costs (see Note 26) P48,285 P42,557 P34,907

Advertising 20,887 17,343 16,672

Transportation and travel 19,687 15,762 8,121

Commission 17,177 27,828 32,886


Others 67,293 51,149 46,920

P179,338 P159,176 P143,484

25. Interest Expense and Other Financial Charges


2008 2007 2006

(InThousands)

Interest expense on loans and borrowings P98,412 P105,405 P123,670

Other financial charges 1,450 3,988 223

P99,862 P109,393 P123,893

26. Personnel Costs

Personnel costs consist of:

2008 2007 2006

(InThousands)

Salaries, employee benefits and bonuses (see Note 28) P290,565 P267,133 P238,009

Retirement and other post-employment benefits (see Note 32) 14,227 17,970 23,528

Training 4,538 1,658 1,537

Others 12,147 34,842 19,460

P321,477 P321,603 P282,534

27. Depreciation and Amortization

Depreciation and amortization relate to the following assets:

2008 2007 2006

(InThousands)

Property, plant and equipment and investment properties:Cost of sales, educational

services and real estate P76,669 P70,869 P64,705General and administrative

expenses 53,693 57,125 70,495

Selling expenses 6,009 4,537 3,978

Intangible - schools -

General and administrative expenses - others 1,582 4,930 8,460

P137,953 P137,461 P147,638



28. Related Party Transactions

AssociatesandRelatedCorporations

UPPC UPPC is a subsidiary of Siam Pulp and Paper Public Company Limited,

who also owns 40% of the outstanding capital stock of PSHC.

PSHC receives assistance from UPPC in carrying out certain administrative functions. Starting October 1, 2005, PSHC pays, on a monthly basis, P0.02 million for various general accounting and financial services rendered by UPPC.

PSHC has noninterest-bearing cash advances from UPPC amounting to P0.5 million as of December 31, 2006. Such advances were settled in 2007.

On December 27, 2006, PSHC sold its investment in shares of stock of UPPC, which was acquired at P276.5 million, to Siam Pulp and Paper Public Company, Ltd. at a selling price of P=85.9 million. Accordingly, PSHC recorded a gain on sale of investment amounting to P17.1 million as “Gain on sale of available-for-sale investment” in the 2006 consolidated statement of income.

PSHC has outstanding long-term payable to UPPC arising from the acquisition of land from UPPC, then an associate (see Note 19). PSHC leases the land to UPPC for a period of 50 years, renewable for another 25 years upon the approval of the Philippine Department of Trade and Industry. Annual lease income during the entire lease term is initially fixed at P14.6 million. In connection with the lease, UPPC was required to make a lease deposit with PSHC of P55.5 million in July 2003 and

additional P2.9 million in April 2005, aggregated and reflected as “Other noncurrent liabilities” at amortized cost at balance sheet date, and refundable to UPPC upon the expiration of the lease. The lease deposit’s present value was calculated using an effective interest rate of 12.0% per annum. On August 2, 2006, PSHC and UPPC amended the lease agreement increasing the annual rent revenue from P14.6 million to P19.2 million effective January 1, 2006.

The difference between the face value of the lease deposit and its corresponding present value at inception was aggregated and reflected as deferred rent revenue, that is being amortized as rent revenue simultaneous with the accretion of the lease deposit. The details of lease deposit are as follows:

2008 2007

(InThousands)

Lease deposit P58,400 P58,400

Less unamortized discount (58,022) (58,063)

P378 P337

AB Capital Transactions with AB Capital pertain to short-term placements made by

the Company in AB Capital.

Others Other related party transactions primarily relate to the grant of advances

to and sharing of expenses with other companies which are also under the common control of PHINMA, namely, PPHC, TO Insurance Brokers, Inc., TA Oil and others.

Amounts and outstanding balances relating to the aforementioned transactions are as follows:

Related Party Nature of Transaction Year

Amount of Transactions

During the Year

Amount of Due to Related Parties

Amount of Due from

Related Parties

(InThousands)

UPPC

Share in expenses 2008 P– P– P–

2007 – – –

2006 8,310 – 96

AB Capital Share in expenses 2008 632 – 632

2007 747 – 517

2006 4,151 – 157

Others Raw materials purchases, technical service fees, advances and share in expenses

2008 35,296 143 31,495

2007 9,661 17,469 7,825

2006 10,374 – 6,493



Management and Directors’ Compensation

BCII, BIPC, UGC, COC and Araullo University are under common management by PHINMA, and pay PHINMA a fixed annual management fee plus an annual bonus based on a certain percentage of the respective companies’ adjusted net income, as defined in the management contract between PHINMA and the respective companies, pursuant to the provisions of the same contract.

Total management fees and bonuses incurred in 2008, 2007 and 2006 amounted to P63.1 million, P49.5 million and P44.1 million, respectively. The related unpaid amount, included under “Trade and other payables” account in the consolidated balance sheets, was P44 million and P32.6 million as of December 31, 2008 and 2007, respectively.

BCII and AHC recognized bonus to directors computed based on net income with preagreed adjustments. Directors’ bonus amounted to P29.6 million in 2008, P20.2 million in 2007 and P10.0 million in 2006. The related unpaid amount, included under “Trade and other payables” account in the consolidated balance sheets, was P27.1 million and P20.2 million as of December 31, 2008 and 2007, respectively.

Compensation of key management personnel of the Company are as follows:

2008 2007 2006Short-term employee benefits P37,820 P49,443 P42,956Post-employment benefits: Retirement benefits 3,355 6,650 6,358 Sick leave and vacation

leave 1,927 1,287 882P43,102 P57,380 P50,196

29. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments comprise of cash and cash equivalents, short-term investments, corporate promissory notes and bonds, government bonds, quoted and unquoted shares of stocks, currency forwards, investments in UITFs, and loans and borrowings in Philippine peso and U.S. dollar (USD) currencies. The main purpose of these financial instruments is to finance the Company’s investments. The Company also has financial assets and liabilities, such as trade and other receivables and trade and other payables that arise directly from operations.

The main risks arising from the Company’s treasury transactions are credit risk, liquidity risk, foreign currency risk, interest rate risk, and equity price risk. Careful study, skill, prudence and due diligence are exercised at all times in the handling of the funds of the Company. An Investment Committee reviews and approves policies and directions for investments and risks management. The basic parameters approved by the Investment Committee are:

Investment Objective

Safety of Principal

Tenor Three year maximum for any security, with average duration between one and two years

Exposure Limits a. For banks and fund managers: maximum of 20% of total funds of the Company per bank or fund

b. For peso investments: minimal corporate exposure except for registered bonds

c. For foreign currencies: maximum 50% of total portfolio. Limits on third currencies outside USD are set regularly and reviewed at least once a year by the Investment Committee

d. For investments in equities whether directly managed or managed by professional managers: limits are set as approved by the Investment Committee and based on current market outlook at the time of review

Credit Risk Credit risk is the risk that one party to a financial instrument will cause

a financial loss for the other party by failing to discharge an obligation. Due to the Company’s investing and operating activities, the Company is exposed to the potential credit-related losses that may occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations.

In managing credit risk on these financial instruments, the Company transacts only with the Company’s duly accredited domestic and foreign banks. Investments per financial institution are subject to a maximum of 20% of the Company’s investible funds. It is the Company’s policy that investments cannot exceed 10% of the trust or mutual fund’s total assets.

A comprehensive credit and business review in coordination with dealers or underwriters is performed whenever the Company invests in non-rated securities. Furthermore, the Company monitors the credit quality of corporate and sovereign bonds with reference to credit rating studies and updates from the major rating agencies.

The Company’s exposure to credit risk on its cash and cash equivalents, short-term investments, investments held for trading, AFS investments, trade and other receivables, and derivative instruments arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments.

CreditQualityofFinancialAssets. Cash and cash equivalents, short-term investments and derivative instruments are classified as high grade since these are deposited in/or transacted with reputable banks which have low probability of insolvency.



The following table illustrates credit quality of investments held for trading and AFS investments as of December 31, 2008 and 2007:

2008Neither Past Due nor Impaired

High GradeStandard

GradeSubstandard

Grade Impaired TotalInvestments held for trading: Investments in bonds P687,656 P3,449 P– P– P691,105 Investments in UITFs 76,949 – – – 76,949 Investments in trust accounts – 17,682 – – 17,682 Investments in marketable equity securities – 1,559 – – 1,559 Investment in managed funds – – – – –AFS investments: Quoted – 27,400 – – 27,400 Unquoted – 304,119 – 45,517 349,636Total P764,605 P354,209 P– P45,517 P1,164,331

2007Neither Past Due nor Impaired

High GradeStandard

GradeSubstandard

Grade Impaired TotalInvestments held for trading: Investments in UITFs P251,346 P35,803 P– P– P287,149 Investment in bonds 594,666 – – – 594,666 Investment in managed funds – 101,411 – – 101,411 Investments in trust accounts – 57,451 – – 57,451 Investments in marketable equity securities – 5,631 – – 5,631AFS investments: Quoted – 9,151 – – 9,151 Unquoted – 304,215 – 45,517 349,732Total P846,012 P513,662 P– P45,517 P1,405,191

The Company uses the following criteria to rate credit quality:

Class DescriptionHigh Grade Investments in instruments that have a recognized foreign or local third party rating or

instruments which carry guaranty/collateral.

Standard Grade Investments in instruments of companies that have the apparent ability to satisfy its obligations in full.

Substandard Grade Investments in instruments of companies that have an imminent possibility of foreclosure; those whose securities have declined materially in value, or those whose audited financial statements show impaired/negative net worth.

The credit quality of the Company’s trade and other receivables (including installment contract receivable) as of December 31, 2008 and 2007 are as follows:

2008Neither Past Due nor Impaired Past Due

High Grade Standard Grade and Impaired Total (InThousands)

Trade P213,313 P16,073 P182,370 P411,756Installment contract receivable (current and noncurrent) – 84,474 – 84,474Advances to suppliers and contractors 9,300 – – 9,300Accrued interest (see Note 29) 2,865 18,404 – 21,269Due from related parties (see Note 29) – 32,127 – 32,127Receivable from BCII Retirement – 8,939 – 8,939Advances to officers and employees 1,465 292 – 1,757Others 11,656 21,412 7,629 40,697

P238,599 P181,721 P189,999 P610,319



2007Neither Past Due nor Impaired Past Due

High Grade Standard Grade and Impaired Total (InThousands)

Trade P13,390 P149,817 P206,633 P369,840Installment contract receivable (current and noncurrent) – 95,547 – 95,547Advances to suppliers and contractors 7,883 – – 7,883Accrued interest (see Note 29) – 19,000 – 19,000Due from related parties (see Note 29) 38 4,472 3,832 8,342Receivable from BCII Retirement – 8,929 – 8,929Advances to officers and employees 1,338 1,287 1,130 3,755Others 5,564 21,914 8,517 35,995

P28,213 P300,966 P220,112 P549,291

Trade and other receivables are classified as: a.) high grade when the receivables are secured or covered with collaterals; b.) standard grade when the receivables are unsecured but debtors have good paying habits; or c.) substandard grade when the receivables are unsecured and debtors have poor paying habits.

There are no significant concentrations of credit risk within the Company.

As of December 31, 2008 and 2007, the aging analysis of trade and other receivables (including installment contract receivable) are as follows:

2008Neither Past

Past Due Past Due but not Impaired Due and

Total nor Impaired <30 Days 30-60 Days 60-90 Days 90-120 Days >130 Days Impaired(InThousands)

Trade P411,756 P229,386 P51,454 P8,085 P8,670 P4,453 P1,813 P107,895Installment contract receivable (current

and noncurrent) 84,474 84,474 – – – – – –Advances to suppliers

and contractors 9,300 9,300 – – – – – –Accrued interest (see Note 29) 21,269 21,269 – – – – – –Due from related parties

(see Note 29) 32,127 32,127 – – – – – –Receivable from BCII Retirement 8,939 8,939 – – – – – –Advances to officers

and employees 1,757 1,757 – – – – – –Others 40,697 33,068 – – – – – 7,629

P610,319 P420,320 P51,454 P8,085 P8,670 P4,453 P1,813 P115,524

2007Neither Past

Past Due Past Due but not Impaired Due andTotal nor Impaired <30 Days 30-60 Days 60-90 Days 90-120 Days >130 Days Impaired

(InThousands)Trade P369,840 P163,207 P47,795 P17,300 P9,122 P4,964 P38,175 P89,277Installment contract receivable (current

and noncurrent) 95,547 95,547 – – – – – –Advances to suppliers

and contractors 7,883 7,883 – – – – – –Accrued interest (see Note 29) 19,000 19,000 – – – – – –Due from related parties

(see Note 29) 8,342 4,510 – – – – 2,112 1,720Receivable from BCII Retirement 8,929 8,929 – – – – – –Advances to officers

and employees 3,755 2,625 – – – – – 1,130Others 35,995 27,478 1,097 286 426 1,902 820 3,986

P549,291 P329,179 P48,892 P17,586 P9,548 P6,866 P41,107 P96,113



Impaired financial instruments comprise of trade receivables from customers, related parties and advances to officers and employees.

Liquidity Risk Liquidity risk is defined as the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price. The Company

manages liquidity risks by restricting investments.

The Company manages liquidity risk by continuously monitoring weekly and monthly cash flows as well as updates of annual plans.

The maturities of the financial liabilities are determined based on the Company’s projected payments and contractual maturities. The average duration adheres to guidelines provided by the Investment Committee. It is the Company’s policy to restrict investment principally to publicly traded securities with a history of marketability and by dealing with only large reputable domestic and international institutions.

The table below summarizes the maturity profile of the Company’s financial liabilities as of December 31, 2008 and 2007 based on contractual undiscounted payments:

2008Within More than1 Year 1–2 Years 2–3 Years 3–5 Years 5 Years Total

(InThousands)Financial LiabilitiesFinancial liabilities at FVPL-Derivative liabilities P26,857 P– P– P– P– P26,857Other Financial Liabilities: Notes payable 123,818 – – P– P123,818 Trade and other payables 354,419 180 8,007 365 – 362,971 Trust receipts payable 537,252 – – – – 537,252 Due to related parties 143 – – – – 143 Long-term debt 96,322 134,110 226,554 58,750 52,250 567,986 P1,138,811 P134,290 P234,561 P59,115 P52,250 P1,619,027

2007Within More than1 Year 1–2 Years 2–3 Years 3–5 Years 5 Years Total

(InThousands)Financial LiabilitiesOther Financial Liabilities: Notes payable P223,533 P– P– P– P– P223,533 Trade and other payables 329,856 – – – – 329,856 Trust receipts payable 195,540 – – – – 195,540 Due to related parties 17,469 – – – – 17,469 Long-term debt 177,636 112,658 105,370 149,400 278,037 823,101

P944,034 P112,658 P105,370 P149,400 P278,037 P1,589,499

Market Risk Market risks are managed by constant review of global and domestic economic and financial environments as well as regular discussions with banks’

economists/strategy officers to get multiple perspectives on interest rate trends/forecasts. Regular comparison of the portfolio’s marked-to-market values and yields with defined benchmarks are also made.

Foreign Currency Risk The Company’s financial assets that are exposed to foreign currency risk are foreign currency denominated cash and cash equivalents, short-term

investments, investment in managed funds, investments in UITFs, and investment in bonds.

Foreign exchange risks on the USD and other foreign currencies are managed through constant monitoring of the political and economic environment. Returns are also calibrated on a per currency basis to account for the perceived risks with higher returns expected from weaker currencies. The Company also enters into currency forward contracts to manage its currency risk.



The following table shows the foreign currency-denominated financial assets and their peso equivalents as of December 31, 2008 and 2007:

2008 2007Foreign

CurrencyPeso

EquivalentForeign

CurrencyPeso

Equivalent(InThousands)

In US Dollar: Cash and cash equivalents US$15,785 P750,103 US$16,581 P684,464 Short-term investments 985 46,807 886 36,574 Investments in bonds 7,648 363,432 3,814 157,442 Investments in UITFs – – 5,469 225,760 Investment in managed funds – – 2,457 101,411

US$24,418 P1,160,342 US$29,207 P1,205,651

There are no financial liabilities denominated in foreign currency as of December 31, 2008 and 2007.

In translating foreign currency-denominated financial assets into peso amounts, the exchange rates used were P47.52 to US$1.00 and P41.28 to US$1.00 as of December 31, 2008 and December 31, 2007, respectively.

The following table demonstrates the sensitivity to a reasonably possible change in the exchange rate, with all other variables held constant, of the Company’s profit before tax (due to the changes in the fair value of monetary assets) as of December 31, 2008 and 2007. There is no impact on the Company’s equity other than those already affecting the profit or loss. The effect on profit before tax already includes the impact of derivatives outstanding as of December 31, 2008 and 2007.

2008Increase/Decrease

in Peso-Dollar Exchange Rate

Effect on Profit

Before Tax (InMillions)

BCII P.50 P1.4(0.50) 7.0

UGC 0.50 .2(0.50) (.2)

AHC 0.50 0.03(0.50) (0.04)

2007Increase/Decrease

in Peso-Dollar Exchange Rate

Effect on Profit

Before Tax (InMillions)

BCII P1.00 P9.9(1.00) (6.5)

UGC +5.0% 11.4-5.0% (11.4)

AHC 2.00 2.7(2.00) (2.5)

Interest Rate Risk

a. Cash Flow Interest Rate Risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company is exposed to cash flow interest rate risk due to Araullo University’s variable rate loan from China Bank (see Note 19).

The following table demonstrates the effect of changes in market interest rates, on the Company’s profit before income tax, based on the Company’s expectation, with all other variables held constant as of December 31, 2008. There is no other significant impact on the Company’s equity other than those already affecting the profit or loss.

2008

Increase/Decrease in Basis

Points

Effect on Profit

Before Tax

(InThousands)Loan payable from China Bank +0.50% (P351)

-0.50% 351

2007

Increase/Decrease in Basis

Points

Effect on Profit

Before Tax

(InThousands)Loan payable from China Bank +0.25% (P175)

-0.25% 175

b. Price Interest Rate Risk

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Company accounts for its debt investments at fair value. Thus, changes in benchmark interest rate will cause changes in the fair value of quoted debt instruments.



The following table sets out the carrying amount (in thousands), by maturity, of the Company’s financial instruments that are exposed to interest rate risk as of December 31, 2008 and 2007:

2008

Interest Rates Within 1 Year 1–2 Years 2–3 Years 3–5 YearsMore than

5 Years Total(InThousands)

Fixed RateSpecial savings account (PHP) .05–1.5% P3,752 P– P– P– P– P3,752Placements (PHP) 2.75–9.3788% 892,753 – – – – 892,753Placements (US$) 0.005–5.405% 734,299 – – – – 734,299Short-term investments (PHP) 2.001–2.101% 2,245 – – – – 2,245Short-term investments (US$) 1.85–2.10% 44,574 – – – – 44,574Time deposits (US$) 3.00–4.00% 11,204 – – – – 11,204Investments in bonds (PHP) 8.5–17.5% – 27,490 273,346 13,758 13,079 327,673Investments in bonds (US$) 8.375–10.5% 126,930 166,648 69,854 – – 363,432

2007

Interest Rates Within 1 Year 1–2 Years 2–3 Years 3–5 YearsMore than

5 Years Total(InThousands)

Fixed RateSpecial savings account (PHP) .05–4% P20,241 P– P– P– P– P20,241Placements (PHP) 2.4–7.73% 805,971 – – – – 805,971Placements (US$) 3.2–4.58% 663,779 – – – – 663,779Short-term investments (PHP) 4.95–5.69% 41,000 – – – – 41,000Short-term investments (US$) 3.0–6.25% 33,460 – – – – 33,460Time deposits (US$) 3.75–4.5% 13,645 – – – – 13,645Investments in bonds (PHP) 8.5–17.5% 8,175 34,270 84,036 139,368 171,375 437,224Investments in bonds (US$) 8.125–9% 144,852 12,590 – – – 157,442

Interest on financial instruments classified as fixed rate was fixed until the maturity of the instrument.

Other financial assets at FVPL are noninterest-bearing investments and are therefore not subject to interest rate volatility.

The following tables demonstrate the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Company’s profit before tax as of December 31, 2008 and December 31, 2007. There is no impact on the Company’s equity other than those already affecting the profit and loss.

2008Increase/

Decrease in Basis Points

Effect on Profit

Before Tax(InThousands)

BCII - peso (50) (P853) - dollar (100) (7,547)UGC - peso (50) (2,771)AHC - peso (50) (362) - dollar (100) (134)

2007Increase/

Decrease in Basis Points

Effect on Profit


BCII +0.25% (P2,912)-0.25% 2,912

UGC +0.25% 745-0.25% (745)

AHC +0.25% (941)-0.25% 941

Equity Price Risk Equity price risk is the risk that the fair values of equities decrease as

a result of changes in the levels of the equity indices and the values of individual stocks. The Company’s exposure to equity price risk relates primarily to its equity investments listed in the PSE classified under investments held for trading.

The Company’s policy is to maintain the risk to an acceptable level. Movement of share price is monitored regularly to determine impact on the Company’s financial position.

The following tables demonstrate the effect on the Company’s profit before income tax (as a result of a change in the fair value of equity instruments held as investment held for trading) due to a reasonably possible change in equity indices, based on the Company’s expectation, with all other variables held constant as of December 31, 2008. There is no other significant impact on the Company’s equity other than those already affecting the profit or loss.

2008Increase/Decrease in Stock

Exchange Index

Effect on Profit


BCII +10% P1,118-10% (1,118)

AHC +10% 295-10% (295)



2007Increase/Decrease in Stock

Exchange Index

Effect on Profit

Before Tax

(InThousands)BCII +13.00% P6,062

-13.00% (6,062)AHC +13.00% 263

-13.00% (263)

Capital Management The objective of the Company’s capital management is to ensure that the

Company maintains a healthy capital structure in order to maintain strong credit rating and maximize shareholder value.

The Company closely monitors and manages its debt-to-equity ratio, which it defines as total current and noncurrent liabilities divided by total equity. The Company considers its equity as the total of capital stock, additional paid-in-capital, share in equity component of convertible notes, unrealized gain on change in fair value of an AFS investment, share in unrealized gain on change in fair value of AFS investments of associates, retained earnings, and minority interest.

To ensure that there are sufficient funds to settle its liabilities, the Company’s policy is to keep debt-to-equity ratio below 1:1. The Company’s consolidated debt-to-equity ratio as of December 31, 2008 and 2007 are as follows:


Total liabilities P1,859,035 P1,637,763

Total equity 6,615,024 6,318,908Debt-to-equity ratio 0.28:1 0.26:1

30. Financial Instruments

Fair Value Set out below is a comparison by category of carrying amounts and fair

values of all of the Company’s financial instruments that are carried in the consolidated balance sheets.

Carrying Amount Fair Value2008 2007 2008 2007

(InThousands)Financial AssetsLoans and receivables: Cash and cash equivalents P1,825,701 P1,660,878 P1,825,701 P1,660,878 Short-term investments 86,817 77,545 86,817 77,545 Trade and other receivables:

Trade 303,861 280,563 303,861 280,563Due from related parties 32,127 6,622 32,127 6,622Accrued interest 21,269 19,000 21,269 19,000Receivable from BCII Retirement/Gratuity Plan (BCII Retirement) 8,939 8,929 8,939 8,929Advances to suppliers and contractors 9,300 7,883 9,300 7,883Advances to officers and employees 1,757 3,008 1,757 3,008Others 33,068 31,626 33,068 31,626

Installment contract receivable* 84,474 95,547 78,237 97,0802,407,313 2,191,601 2,401,076 2,193,134

Financial assets at FVPL: Investments held for trading:

Investments in bonds and FXTNs 691,105 594,666 691,105 594,666Investments in unit investment trust funds 76,949 287,149 76,949 287,149Investments in managed funds – 101,411 – 101,411Investments in trust accounts 17,682 57,451 17,682 57,451Investments in marketable equity securities 1,559 5,631 1,559 5,631

Derivative asset – 66,726 – 66,726787,295 1,113,034 787,295 1,113,034

AFS investments: Quoted 27,400 9,151 27,400 9,151 Unquoted 304,119 304,215 304,119 304,215

331,519 313,366 331,519 313,366P3,526,126 P3,618,001 P3,519,890 P3,619,534

Financial LiabilitiesFinancial liabilities at FVPL- Derivative liabilities P26,857 – P26,857 –Other financial liabilities: Notes payable 123,818 P219,667 123,818 P219,667 Trade and other payables 362,971 329,856 362,971 329,856 Trust receipts payable 537,252 191,302 537,252 191,302 Due to related parties 143 17,469 143 17,469 Long-term debt (including current portion) 509,245 601,607 518,396 621,299

1,533,429 1,359,901 1,542,580 1,379,593P1,560,286 P1,359,901 P1,569,437 P1,379,593

* Currentportionisincludedin“Tradeandotherreceivables”accountwhilenoncurrentportionispresentedasaseparatelineitemintheconsolidatedbalancesheets.



The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents, Trade and Other Receivable, Short-termInvestments,Notes Payable, Trade andOther Payables, Trust ReceiptsPayableandDuetoRelatedParties. The carrying amounts approximate fair values due to the relatively short-term maturities of the financial instruments.

Installment Contract Receivable. The fair value of this financial asset is based on the discounted value of expected future cash flows using the effective market rate. Discount rates used range from 4% to 8% in December 31, 2008 and December 31, 2007.

InvestmentsHeldforTradingandAFSInvestments. Quoted market prices have been used to determine the fair value of financial assets at FVPL and listed AFS investments. Unquoted AFS investments are measured at cost less accumulated impairment loss since the fair value is not readily determinable. The Company does not intend to dispose the unquoted AFS in the near future.

Long-termDebt. The fair values are based on the expected cash flows on the instruments, discounted using the prevailing interest rate as at December 31, 2008 and 2007 for a comparable instrument in the market or discounted using MART 1 plus 4% interest as of December 31, 2008 and 2007 of 10.73% and 6.62%, respectively.

Derivative Instruments

FreestandingDerivatives. The fair value of freestanding currency forward transactions is calculated by reference to current forward exchange rates for contracts with similar maturity profile.

The Company has outstanding currency forward contracts with an aggregate notional amount of US$29.6 million as of December 31, 2008 and US$19.5 million as of December 31, 2007. The Company is on a “Sell-USD” position. The weighted average contracted forward rate is P46.75 to US$1.00 and P46.91 to US$1.00 as of December 31, 2008 and 2007, respectively. The net fair values of these outstanding currency forward contracts amounted to P26.9 million loss and P57.0 million gain as of December 31, 2008 and 2007, respectively.

The net movements in fair value changes of these derivative assets (liabilities) are as follows:


Balance at beginning of year P56,964 P40,326Net change in fair value during the year (63,047) 270,936Fair value of settled contracts (20,774) (254,298)Balance at end of year (P26,857) P56,964

Embedded Derivatives. Embedded foreign currency derivatives were bifurcated from certain of the Company’s purchase contracts, which are denominated in a currency that is neither the functional currency of a party to the contract nor the routine currency for the transaction.

The Company has outstanding embedded forward contracts with an aggregate notional amount of US$5.6 million and a weighted average contracted forward rate of P42.97 as of December 31, 2007.

The net movements in fair value changes of these embedded derivatives are as follows:


Balance at beginning of year P9,762 P2,480Net changes in fair value during the year (37,267) 31,895Fair value of settled contracts 27,505 (24,613)Balance at end of year P– P9,762

The net changes in fair values of derivatives and embedded derivatives in 2008 and 2007 are presented as “Net gains (losses) on derivatives” in the Company’s consolidated statement of income.

31. Income Tax

The components of the Company’s deferred tax assets and liabilities are as follows:


Deferred tax assets: NOLCO P35,515 P5,256 Allowance for doubtful accounts 6,662 7,047 Revalued net assets of a subsidiary 4,903 5,185 Unrealized foreign exchange losses 1,984 44,575 Accrued retirement expense 753 722 Impairment loss 314 314 Deferred:

Interest income on refunds from Meralco 131 178Cost of sale – 6,058

Excess of straight-line recognition of management fee over contract payment terms

56 92

Advances from students 43 – Unearned tuition fee 12 3,286 MCIT – 1,184

50,373 73,897Deferred tax liabilities: Revalued net assets (52,660) (28,054) Unrealized foreign exchange gains (33,992) (6,500) Revaluation increment (27,594) (27,593) Expansion of school facilities (12,435) (12,445) Pension asset (6,628) (5,978)

Excess of straight-line lease over lease contract terms (2,428) (3,137)

Unamortized debt issuance cost (937) (529) Unamortized capitalized borrowing cost (840) (961) Unrealized gain on change in fair value (512) (18,157) Derivative assets – (23,354) Deferred sale on real estate – (13,170)

(138,026) (139,878)(P87,653) (P65,981)



The deferred tax assets and liabilities are presented in the consolidated balance sheets as follows:

2008 2007Deferred tax assets - net P13,960 P–Deferred tax liabilities - net (101,613) (65,981)

(P87,653) (P65,981)

The Company’s deductible temporary differences, unused NOLCO and MCIT for which no deferred tax asset is recognized in the consolidated balance sheets, are as follows:


NOLCO P43,101 P217,538Allowance for: Doubtful accounts 32,409 30,909

Write-down of inventories to net realizable value 849 849

Unrealized loss on change in fair value of investments held for trading 29,961 –

Unrealized loss on derivatives 26,857 –Accrual for retirement benefits 19,888 24,584Unamortized past service cost 15,293 16,487MCIT 12,860 11,582Unrealized foreign exchange losses 5,259 183,278Accrued personnel cost 1,790 –

P188,267 P485,227

Some of the Company’s deferred tax assets were not recognized since management believes that it is not probable that sufficient future taxable profit will be available to allow said deferred tax assets to be utilized.

Araullo University and COC, as private educational institutions, are taxed based on the provisions of Republic Act (R.A.) No. 8424, which was passed into law effective January 1, 1998. Section 27(B) of R.A. No. 8424 defines and provides that: “A Proprietary Educational Institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports, or Commission on Higher Education, or Technical Education and Skills Development Authority, as the case may be, in accordance with the existing laws and regulations - shall pay a tax of ten percent (10%) on their taxable income.”

MCIT totaling P12.9 million can be deducted against regular corporate income tax (RCIT) due while NOLCO totaling P151.3 million can be claimed as deduction against taxable income as follows:

AmountDate Incurred Expiry Date MCIT NOLCO

(InThousands)December 31, 2006 December 31, 2009 P1,900 P139,630December 31, 2007 December 31, 20010 7,670 –December 31, 2008 December 31, 2011 3,290 11,680

P12,860 P151,310

MCIT and NOLCO totaling P1.4 million and P72.5 million, respectively, expired in 2008. MCIT and NOLCO totaling P1.8 and P20.4 million were claimed as deduction against 2008 regular taxable income.

A reconciliation between the statutory tax rates and the Company’s effective tax rates on income before income tax and minority interest is as follows:

2008 2007 2006Applicable statutory tax rate 35.0% 35.0% 35.0%Income tax effects of: Interest income subjected to lower

final tax rate(2.6) (2.4) (6.0)

Dividend income (0.5) (3.9) (2.7) Nondeductible interest expense 0.1 0.1 0.4 Change in unrecognized deferred

tax assets and others (11.3) (13.4) (20.6)

Effective tax rates 20.7% 15.4% 6.1%

32. Pension and Other Post-employment Benefits

BCII, UGC, BIPC, COC and Araullo University have actuarially computed retirement plans covering all permanent employees.

Pension and other post-employment benefits consist of accruals for:


Net pension liability P255 P136Vacation and sick leave 4,897 3,302

P5,152 P3,438

Employee benefits included under general and administrative expenses consist of:

2008 2007 2006 (InThousands)

Net pension expense P12,632 P17,667 P11,657Vacation and sick leave 1,595 303 11,871

P14,227 P17,970 P23,528

Annual contribution to the retirement plans consists of a payment to cover the current service costs for the year plus a payment toward funding the actuarial accrued liability.

The following tables summarize the components of net benefit expense recognized in the consolidated statements of income and the funded status and amounts recognized in the consolidated balance sheets for the respective plans.

Net pension expense consists of:

2008 2007 2006 (In Thousands)

Current service cost P8,174 P9,228 P5,183Interest cost on defined benefit

obligation7,348 7,722 7,638

Expected return on plan assets (4,554) (3,530) (1,804)Net actuarial loss recognized 1,664 2,429 640Effects of curtailment in COC

pension plan on:Unrecognized net actuarial

losses – 6,635 –Present value of the defined

benefit obligation – (4,817) –Net pension expense P12,632 P17,667 P11,657



Details of net pension liability are as follows:

2008 2007 (In Thousands)

Present value of defined benefit obligation P47,564 P86,921Fair value of plan assets (73,022) (64,809)Unfunded obligation (25,458) 22,112Unrecognized net actuarial losses (gains) 25,713 (21,976)Benefit liability P255 P136

Changes in the present value of the defined benefit obligation are as follows:


Balance at beginning of year P86,921 P107,929Actuarial gains (49,843) (9,004)Interest cost 7,348 7,722Current service cost 8,174 9,228Benefits paid (5,036) (24,137)Curtailment in COC pension plan – (4,817)Balance at end of year P47,564 P86,921

Change in the fair value of plan assets are as follows:


Balance at beginning of year P64,809 P50,363Expected return 4,554 3,530Contributions by employer 12,513 23,725Actuarial gains (losses) (3,818) 11,328Benefits paid (5,036) (24,137)Balance at end of year P73,022 P64,809Actual return on plan assets P736 P14,858

The Company expects to contribute P6.7 million to its defined benefit pension plans in 2008.

The principal assumptions used in determining pension benefits are as follows:

2008 2007 2006Discount rates 8-30% 8–9% 7%Expected rates of return on plan assets

5-10% 5–7% 6%

Rates of salary increase 5-11% 5–9% 10%

The major categories of plan assets as a percentage of the fair value of the plan assets are as follows:

2008 2007Equities 13% 20%Mutual and trust funds 13 9Property 6 6Fixed income securities and others 68 65

100% 100%

The expected return on plan assets is based on the Company’s expectation that assets will yield at least equal to the risk-free rate for the applicable period over which the obligation is to be settled.

The plan assets include shares of stock of BCII with a fair value of P1.8 million and P15.2 million in 2008 and 2007, respectively.

Experience adjustments on plan assets and plan liabilities are P.036 million gain and P1.9 million gain, respectively, in 2008.

Experience adjustments on plan assets and plan liabilities are P11.3 million gain and P1.0 million loss, respectively, in 2007.

33. Commitment and Contingencies

a. Unused Credit Lines

UGC has the following unused approved credit lines with local banks and financial institutions as of December 31, 2008:

Nature Amount(InThousands)

Letters of credit/trust receipts P540,748Bills purchase line 145,000Invoice financing 100,000Settlement risk 200,000Forward contract 65,000

b. Commitments Under Operating Lease Agreements

LesseeUGC entered into lease agreements covering its warehouse premises which have terms ranging from one to two years, renewable at the option of UGC under certain terms and conditions.

Future minimum rental payable as of December 31, 2008 are as follows:

Amount(In Thousands)

2009 5,9582010 4,480

LessorAPI’s lease contracts related to its building space were for five to seven years ending 2011 to 2013, respectively. The lease contracts included a provision for an annual escalation of 5%, 7% or 10%.

Future minimum rental receivables under the non-cancelable operating leases as of December 31, 2008 and 2007 are as follows:


Within one year P42,899 P41,157After one year but not more than five years 49,373 85,775

P92,272 P126,932

PSHC’s commitment under its operating lease agreement with UPPC is discussed in Note 28 to the consolidated financial statements.

c. Property Agreement

On March 2, 2006, API entered into an agreement with Paramount Property Management Company for services to manage, administer, operate and maintain the building for a monthly rate of P0.07 million exclusive of VAT. In consideration, API shall pay a pre-agreed management fee. Such fee is subject to an annual escalation of 10%. The agreement shall be for a period of five years up to March 2, 2011.

d. Others

There are contingent liabilities arising from lawsuits primarily involving collection cases filed by third parties and for tax assessments occurring in the ordinary course of business. On the basis of information furnished by the Company’s legal counsel, management believes that none of these contingencies will materially affect the Company’s financial position and results of operations.



34. EPS Computation

2008 2007 2006(InThousands)

Net income attributable to equity holders of the parent P273,160 P330,410 P336,886

2008 2007 2006Number of shares outstanding at beginning of year 234,306,566 203,744,777 169,787,314Effects of 10%, 15% and 20% stock dividends declared in 2008, 2007 and 2006 23,430,741 53,992,530 87,949,993Weighted average number of common shares outstanding 257,737,307 257,737,307 257,737,307Basic/Diluted EPS attributable to equity holders of the parent P1.06 P1.28 P1.31

35. Segment Information (see page 54)

Segment information is prepared on the following basis:

Business Segments The Company conducts the majority of its business activities in the

following areas:

• Steel• Property development• Investment holdings• Educational services

36. Other Matters

a. BIPC’s Port Operations

BIPC was granted a Permit to Operate a permanent and non-commercial port by the PPA on April 6, 1999 until the expiration date of the Foreshore Lease Contract on July 22, 2022.

On October 11, 2003, the PPA granted BIPC a Permit to Operate a private commercial port up to May 14, 2005. On March 14, 2005, BIPC filed for the renewal of the said permit at the Batangas Philippine Ports Authority. As of July 30, 2007, BIPC was granted a one year temporary permit to operate commercially effective October 25, 2007.On July 30, 2007, BIPC was granted a one year temporary permit to operate commercially effective October 25, 2007 which expired last October 25, 2008. Application for the renewal has already been filed at the PPA. BIPC has also secured a Foreshore Lease Agreement from the Department of Energy and National Resources for 78,331 sq.m. foreshore area and has completed its Port Operating Policy with emphasis on safety and proper port use, orderly berth reservation in order to avoid congestion and conflict in berth schedule and efficient load and/unload operations.

b. License to Sell of BIPC

BIPC is registered with the Housing and Land Use Regulatory Board under EO No. 648 and was granted a License to Sell.

37. Amendments on VAT and Income Tax Laws

In May 2005, R.A. No. 9337 was signed into law, amending certain provisions of Tax Reform Act of 1997 including the Expanded Value Added Tax (VAT) Act (EVAT). R.A. No. 9337 took effect on November 1, 2005.

R.A. No. 9337 introduces the following changes, among others:

a. Lifting of exemptions on power, fuel and on services of doctor and lawyers, among other transactions.

b. Upon recommendation of the Secretary of Finance and after any of the following conditions has been satisfied, the President of the Philippines is given the power to increase the EVAT rate from 10% to 12% starting January 1, 2006 if the following conditions have been satisfied:

• VAT collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

• National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1½%).

c. RCIT rate increased to 35% from 32% effective November 1, 2005 and will decrease to 30% effective January 1, 2009. The RCIT rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the year by the taxable income of the corporation for the year, divided by twelve.

d. Input VAT credit in every quarter shall not exceed 70% of the output VAT.

Beginning February 1, 2006, the EVAT rate shall be 12%.

38. Events after the Balance Sheet Date

a. Business Acquisition

On February 2, 2009, the Company completed the First Closing on a transaction to acquire 69.90% of the capital stock of University of Pangasinan, Inc. (UPANG), a university with principal office and campus located at Dagupan City.

On February 25, 2009, the Company completed the closing on the purchase of 34,997 shares of University of Iloilo (UI) in the amount of P315 million, with the Company shouldering the corresponding tax. The Company likewise completed the subscription and payment for 1,190,0000 shares in UI at P100 per share or a total of P119 million. The shares represent 70% interest in UI after the issuance of new shares.

Since the audit of the financial statements of UPANG and UI is still ongoing as of March 9, 2009, management deemed it impracticable to disclose:

− the amounts recognized at the acquisition date for each of the acquiree’s assets, liabilities and contingent liabilities, and carrying amounts for each of those classes, determined in accordance with PFRS, immediately before the combination; and

− the amount of the acquirees’ net income since the acquisition dates included in the Company’s net income for the year ended December 31, 2008.

b. On March 9, 2009, the Company’s BOD declared a cash dividend of P0.40 per share to all common shareholders of record as of March 30, 2009 payable on April 24, 2009.



Segment Information

Business Segments Data

2008 2007 2006

SteelProperty

DevelopmentInvestment

HoldingsEducational

Services BPO SteelProperty


HoldingsEducational

Services SteelProperty


HoldingsEducational

Services

Eliminations Consolidated

2008 2007 2006 2008 2007 2006

Revenues

Segment revenue (a) P2,723,285 P99,915 P25,395 P329,682 P– P2,105,295 P187,553 P36,532 P312,403 P1,982,785 P61,502 P20,353 P296,437 P– (P36,801) P– P3,178,277 P2,604,982 P2,361,077

Investment income 832 8,768 238,514 1,341 – 864 4,993 187,268 654 1,283 344 292,774 462 (163,673) – – 85,782 193,779 294,863

Total revenues P2,724,117 P108,683 P263,909 P331,023 P– P2,106,159 P192,546 P223,800 P313,057 P1,984,068 P61,846 P313,127 P296,899 (P163,673) (P36,801) P– P3,264,059 P2,798,761 P2,655,940

Results

Segment results P281,773 P17,935 P131,811 P39,530 P– P207,322 P61,136 (P6,878) P41,564 P163,850 P2,802 (P65,934) P16,998 (P56,989) P46,446 P87,843 P414,059 P349,590 P205,559


Interest expense and other financial charges (69,941) (6,679) (16,793) (6,449) – (78,402) (19,759) (354) (10,878) (75,041) (4,215) (15,353) (14,965) – – (14,319) (99,862) (109,393) (123,893)

Benefit from (provision for) income tax (72,364) (5,684) (4,435) (2,539) – (48,912) (7,689) (6,578) (6,366) (29,731) (4,724) (2,244) 4,037 2,270 2,824 9,514 (82,752) (66,721) (23,148)

Share of minority interest – – – – – – – – – – – – – (44,067) (36,845) (16,495) (44,067) (36,845) (16,495)

Net income (loss) P140,300 P14,340 P349,096 P31,883 P– P80,872 P38,681 P173,458 P24,974 P60,361 (P5,793) P209,243 P6,532 (P262,459) P12,425 P66,543 P273,160 P330,410 P336,886

Equity in net earnings of an associate P– P39,839 P– P– P– P– P19,526 P– P– P– P17,189 P– P– P– P– P– P39,839 P19,526 P17,189

Segment assets P1,939,046 P972,339 P6,129,210 P699,258 505,549 P1,684,826 P1,321,321 P5,124,315 P703,595 P1,576,302 P943,010 P5,528,810 P696,988 (P1,785,303) (P877,386) (P1,021,494) P8,460,099 P7,956,671 P7,723,616

Deferred tax assets – 283 – 8,774 - – – – – 212 278 – 8,644 4,903 – (8,722) 13,960 – 412

Total assets P1,939,046 P972,622 P6,129,210 P708,032 505,549 P1,684,826 P1,321,321 P5,124,315 P703,595 P1,576,514 P943,288 P5,528,810 P705,632 (P1,780,400) (P877,386) (P1,030,216) P8,474,059 P7,956,671 P7,724,028

Segment liabilities P1,053,072 P56,575 P482,359 P202,714 122,574 P898,387 P322,159 P154,894 P219,522 P1,065,173 P101,939 P297,705 P261,064 (P214,348) (P58,342) (P60,800) P1,702,946 P1,536,620 P1,665,081

Income and other taxes payable 40,562 8,802 2,704 2,408 – 25,128 1,165 5,422 3,447 14,159 1,943 1,886 1,315 – – – 54,476 35,162 19,303

Deferred tax liabilities 68,992 2,372 – 38,252 – 77,336 5,354 – 29,384 11,412 818 – 34,307 (8,003) (46,093) 16,972 101,613 65,981 63,509

Total liabilities P1,162,626 P67,749 P485,063 P243,374 122,574 P1,000,851 P328,678 P160,316 P252,353 P1,090,744 P104,700 P299,591 P296,686 (P222,351) (P104,435) (P43,828) P1,859,035 P1,637,763 P1,747,893

Capital expenditures P80,353 P8,661 P530 P25,741 13,362 P20,954 P14,986 P2,153 P27,474 P30,441 P372,259 P– P42,290 P– P– P– P128,647 P65,567 P444,990

Depreciation and amortization 55,593 36,905 8,041 35,832 – P50,008 P36,407 P8,247 P32,963 P50,042 P52,741 P6,639 P38,216 P6,487 P9,836 P– 137,953 P137,461 P147,638

(a) There are no inter-segment revenues.



Segment Information

Business Segments Data

2008 2007 2006

SteelProperty


HoldingsEducational

Services BPO SteelProperty


HoldingsEducational

Services SteelProperty


HoldingsEducational

Services

Eliminations Consolidated

2008 2007 2006 2008 2007 2006

Revenues

Segment revenue (a) P2,723,285 P99,915 P25,395 P329,682 P– P2,105,295 P187,553 P36,532 P312,403 P1,982,785 P61,502 P20,353 P296,437 P– (P36,801) P– P3,178,277 P2,604,982 P2,361,077


Total revenues P2,724,117 P108,683 P263,909 P331,023 P– P2,106,159 P192,546 P223,800 P313,057 P1,984,068 P61,846 P313,127 P296,899 (P163,673) (P36,801) P– P3,264,059 P2,798,761 P2,655,940

Results

Segment results P281,773 P17,935 P131,811 P39,530 P– P207,322 P61,136 (P6,878) P41,564 P163,850 P2,802 (P65,934) P16,998 (P56,989) P46,446 P87,843 P414,059 P349,590 P205,559


Interest expense and other financial charges (69,941) (6,679) (16,793) (6,449) – (78,402) (19,759) (354) (10,878) (75,041) (4,215) (15,353) (14,965) – – (14,319) (99,862) (109,393) (123,893)

Benefit from (provision for) income tax (72,364) (5,684) (4,435) (2,539) – (48,912) (7,689) (6,578) (6,366) (29,731) (4,724) (2,244) 4,037 2,270 2,824 9,514 (82,752) (66,721) (23,148)

Share of minority interest – – – – – – – – – – – – – (44,067) (36,845) (16,495) (44,067) (36,845) (16,495)

Net income (loss) P140,300 P14,340 P349,096 P31,883 P– P80,872 P38,681 P173,458 P24,974 P60,361 (P5,793) P209,243 P6,532 (P262,459) P12,425 P66,543 P273,160 P330,410 P336,886

Equity in net earnings of an associate P– P39,839 P– P– P– P– P19,526 P– P– P– P17,189 P– P– P– P– P– P39,839 P19,526 P17,189

Segment assets P1,939,046 P972,339 P6,129,210 P699,258 505,549 P1,684,826 P1,321,321 P5,124,315 P703,595 P1,576,302 P943,010 P5,528,810 P696,988 (P1,785,303) (P877,386) (P1,021,494) P8,460,099 P7,956,671 P7,723,616

Deferred tax assets – 283 – 8,774 - – – – – 212 278 – 8,644 4,903 – (8,722) 13,960 – 412

Total assets P1,939,046 P972,622 P6,129,210 P708,032 505,549 P1,684,826 P1,321,321 P5,124,315 P703,595 P1,576,514 P943,288 P5,528,810 P705,632 (P1,780,400) (P877,386) (P1,030,216) P8,474,059 P7,956,671 P7,724,028

Segment liabilities P1,053,072 P56,575 P482,359 P202,714 122,574 P898,387 P322,159 P154,894 P219,522 P1,065,173 P101,939 P297,705 P261,064 (P214,348) (P58,342) (P60,800) P1,702,946 P1,536,620 P1,665,081

Income and other taxes payable 40,562 8,802 2,704 2,408 – 25,128 1,165 5,422 3,447 14,159 1,943 1,886 1,315 – – – 54,476 35,162 19,303

Deferred tax liabilities 68,992 2,372 – 38,252 – 77,336 5,354 – 29,384 11,412 818 – 34,307 (8,003) (46,093) 16,972 101,613 65,981 63,509

Total liabilities P1,162,626 P67,749 P485,063 P243,374 122,574 P1,000,851 P328,678 P160,316 P252,353 P1,090,744 P104,700 P299,591 P296,686 (P222,351) (P104,435) (P43,828) P1,859,035 P1,637,763 P1,747,893

Capital expenditures P80,353 P8,661 P530 P25,741 13,362 P20,954 P14,986 P2,153 P27,474 P30,441 P372,259 P– P42,290 P– P– P– P128,647 P65,567 P444,990

Depreciation and amortization 55,593 36,905 8,041 35,832 – P50,008 P36,407 P8,247 P32,963 P50,042 P52,741 P6,639 P38,216 P6,487 P9,836 P– 137,953 P137,461 P147,638

(a) There are no inter-segment revenues.


Board of

Directors

Oscar J. HiladoChairman

Ramon R. Del Rosario, Jr.President

(R to L:)


Annual Report 2008 | Bacnotan Consolidated Industries, Inc. 57Annual Report 2008 | Bacnotan Consolidated Industries, Inc.Annual Report 2008 | Bacnotan Consolidated Industries, Inc.

Roberto M. LaviñaDirector

Felipe B. Alfonso Director

Magdaleno B. Albarracin, Jr.Director

Jose L. CuisiaDirector

Guillermo D. LuchangcoDirector

Victor J. Del RosarioDirector

Noel D. Vasquez, S.J.Director

Rizalino S. NavarroDirector


ManagementTeam

Ramon R. Del Rosario, Jr.President

Magdaleno B. Albarracin, Jr.Senior Executive Vice President

Victor J. Del RosarioExecutive Vice President & Chief Financial Officer


(L to R:)


Roberto M. LaviñaSenior Vice President- Treasurer

Juan L. DiazCorporate Secretary

Regina B. AlvarezSenior Vice President-Finance

Carlos I. ArguellesVice President- Compliance Officer

Cecille B. ArenilloVice President - Treasury

Onisimo L. PradoAssistant Vice President-Internal Audit

Rizalina P. AndradaAssistant Vice President- Finance

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HEAD OFFICE 12th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

Telephone: (632) 870-0100Fax: (632) 870-0456 INDEPENDENT PUBLIC ACCOUNTANTS Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue, Makati City TRANSFER AGENT Stock Transfer Services, Inc. 8th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City UNION GALVASTEEL CORPORATION 12th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

Plants: Calamba, Laguna Poro, San Fernando, La Union Ilang, Davao City

TRANS-ASIA OIL AND ENERGY DEVELOPMENT CORPORATION 11th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

AB CAPITAL AND INVESTMENT CORPORATION 8th Floor PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

ATLAS HOLDINGS CORPORATION12th Floor, PHINMA Plaza39 Plaza Drive, Rockwell Center, Makati City

PAMANTASAN NG ARAULLO (ARAULLO UNIVERSITY), INC.Barangay Bitas, Maharlika HighwayCabanatuan City, Nueva Ejica

CAGAYAN DE ORO COLLEGEMax Suniel St., CarmenCagayan de Oro City, Misamis Oriental

BACNOTAN INDUSTRIAL PARK CORPORATION 7th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

Batangas Union Industrial Park Kilometer 116, National Highway Calaca, Batangas

ASIAN PLAZA, INC. 12th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

P & S HOLDINGS CORPORATION 5th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City

ONE ANIMATE LIMITEDUnit 1202, 12th Floor Malaysia Bldg.50 Goucester Road, Wanchai, Hong Kong

Directory

www.bcii .com.ph


www.bcii .com.ph

12th Floor, PHINMA Plaza, 39 Plaza Drive, Rockwell Center, Makati City, Philippines

Annual Report 2008


EDUCATION • HOUSING • BUSINESS PROCESS OUTSOURCING • ENERGY • FINANCIAL SERVICES

education • housing • business process outsourcing ... · 12th floor, phinma plaza, 39 plaza...

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