Document 6527067

COVER SHEET
A S 0 9 3 - 0 0 8 8 0 9
SEC Registration Number
P A C I F I C
ON L I N E
COR P OR A T I ON
S Y S T EMS
A N D
S U B S I D I A R I E S
(Company’s Full Name)
22 n d
F l o o r ,
S t o c k
R o a d ,
W e s t
E x c h a n g e
O r t i g a s
T o w e r , P h i l i p p i n e
C e n t r e ,
C e n t e r ,
E x c h a n g e
P a s i g
C i t y
(Business Address: No. Street City/Town/Province)
Mr. Rhederick B. Inciong
636-5281
(Contact Person)
(Company Telephone Number)
1 2
3 1
17 - A
Month
Day
(Form Type)
Month
(Fiscal Year)
Day
(Annual Meeting)
(Secondary License Type, If Applicable)
CFD
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
P 265.6 million
59
Total No. of Stockholders
Domestic
Foreign
To be accomplished by SEC Personnel concerned
File Number
LCU
Document ID
Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17
OF THE SECURITIES REGULATION CODE AND SECTION 141
OF THE CORPORATION CODE OF THE PHILIPPINES
1. For the fiscal year ended December 31, 2008
2. SEC Identification Number : AS093-008809
3. BIR Tax Identification No. 003-865-392-000
4. Exact name of registrant as specified in its charter: PACIFIC ONLINE SYSTEMS CORPORATION
5. Metro Manila, Philippines
Province, Country or other jurisdiction of
Incorporation or organization
6. _________________ (SEC Use Only)
Industry Classification Code
7. 22/F, West Tower, PSE Centre, Exchange Road, Ortigas Center, Pasig City
Address of principal office
1605
Postal Code
8. 632/636-5281
Registrant’s telephone number, including area code
9.
Not applicable
Former name, former address, and former fiscal year, if changed since last report.
10. Securities registered pursuant to Sections 4 and 8 of the RSA
Number of Shares of Common Stock
Title of Each Class
Outstanding and Amount of Debt Outstanding
Common Stock, P1.00 par value
199,715,000
11. Are any or all of these securities listed on the Philippine Stock Exchange.
Yes [ x ]
No [ ]
12. Indicate by check mark whether the registrant:
(a)
has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the
RSA and RSA Rule 1 (a)-1 thereunder, and Section 26 and 141 of the Corporation Code of the Philippines during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports):
Yes [ x ]
No [ ]
(b)
has been subject to such filing requirements for the past 90 days.
Yes [ x ]
No [ ]
13. Aggregate market value of voting stock held by non-affiliates :
P 1.67 billion
This was computed by multiplying the number of voting stocks held by non-affiliates by the stock’s closing price on March 31,
2009.
TABLE OF CONTENTS
PART I - BUSINESS AND GENERAL INFORMATION
Item
Item
Item
Item
1.
2.
3.
4.
Page No.
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
1
8
9
9
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Management Discussion and Analysis of Operating Performance and
Financial Condition
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
9
12
15
15
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9. Directors and Executive Officers of the Registrant
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
16
22
23
24
PART IV - CORPORATE GOVERNANCE
26
PART V - EXHIBITS AND SCHEDULES
Item 13. Exhibits and Reports on SEC Form 17-C
27
SIGNATURES
28
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
PART I - BUSINESS AND GENERAL INFORMATION
Item 1.
Business
The Company was incorporated in the Philippines and was registered with the SEC on November
11, 1993. As of December 31, 2006, the Company had an authorized capital stock of 500,000,000
Common Shares, each with a par value of P1.00, of which 125,250,000 Common Shares have
been issued and outstanding. On February 9, 2007 the Company issued an additional 54,000,000
shares from its authorized capital stock thus increasing the issued and outstanding shares to
179,250,000. On March 27, 2007 the Company offered its shares for sale to the public through
an initial public offering (IPO) consisting of 11,800,000 common shares and a secondary offer of
28,000,000 common shares. On November 19, 2007, the SEC approved the issuance of 8,048,000
common shares from the Company’s unissued authorized capital stock resulting from the
valuation of the deposits for future subscription as consideration for the issuance of shares, at the
total subscription price of P124,744,000. On May 19, 2008, grantees of the stock options
exercised 617,000 shares of the Company’s stock at P8.88 per share. On July 11, 2008, the BOD
authorized the Parent Company to buy back up to 2,000,000 shares from the public as a means of
preserving the value of the Company’s shares and maintaining investor confidence and on
another board meeting on October 14, 2008 approved to extend its share buy back program of
10% of the Company’s outstanding capital stock. As of December 31, 2008, the Company has
acquired and paid 4,414,000 shares of capital stock.
The Company is engaged in the development, design and management of on-line computer
systems, terminals and software for the Philippine gaming industry. It brokers technology from
leading global suppliers of integrated gaming systems and leases to the PCSO the equipment
needed for its on-line lottery operations in the VisMin regions under the terms of an eight-year
Equipment Lease Agreement (ELA), which was entered into on November 25, 1995. The
Company also provides the PCSO the necessary technical support through a Maintenance Repair
Agreement (MRA) that is coterminous with the ELA.
The ELA, which was last amended on February 13, 2004, allows the Company to deploy a total
of 1,800 on-line terminals around its covered regions. General terms of the amended ELA and
MRA stipulate a 10 per cent share by the Company of all PCSO sales from the conduct of on-line
lottery and digit games in the VisMin area and a term of eight (8) years commencing from the
date of commercial operations of the Company. Commercial operation, as amended, was defined
to be the operation of not less than 800 terminals. However, commercial operation was formally
effected on April 1, 2005, setting the term of the Company’s ELA up to 2013, even if the PCSO
had actually begun operations of the Company’s on-line terminals since 1996. Major reasons for
the delay in the deployment of the required number of terminals to constitute commercial
operation were mainly due to strong opposition from religious sector leaders and certain Local
Government Unit (LGU) officials experienced during the introductory phase and due to the
absence of telecommunications service in some areas particularly in Mindanao. As of December
31, 2007 and 2008, the Company had already deployed 1,401 and 1,600 on-line terminals
around the VisMin territory, respectively.
From 1995 to 2005, the Company had provided the PCSO a single integrated system for its online lottery operations. On February 15, 2005, the Company, having assessed the obsolescence of
its previous infrastructure, entered into a Supply and Service Contract with Scientific Games
Page 1 of 28
International (Scientific Games), a global marketing and technology leader in the lottery, parimutuel, and telecommunications industries, for the provision of a new system, AEGISTM. On
November 21, 2005, the Company implemented the migration from the traditional Legacy lottery
system provided by GTECH, a leading gaming technology and systems corporation, into the new
AEGISTM System. On March 13, 2006, the Company entered into another Contract with Intralot,
a company duly existing and organized under the laws of Greece and a leading supplier of
integrated gaming and transaction processing systems, for the provision of another new system
using the LOTOS® application software. Since December 2006, therefore, the Company has
been providing the PCSO a two-network system for its VisMin on-line lottery operations.
The area covered by the Company’s ELA with the PCSO encompasses 72 cities and 841
municipalities in the VisMin regions, including the provinces of Masbate (assigned to Region 7),
Romblon (assigned to Region 6) and Palawan. As of the end of 2008, the Company’s total
terminal deployment covered 67 cities and 461 municipalities.
For the year ended December 31, 2008, the Company generated P 809.6 million of revenues
primarily through equipment rentals and maintenance and repair fees charged to PCSO, and
posted P 139.4 million of net income. As of the same date, the Company had total assets of
P779.8 million and shareholders’ equity of P 400.2 million.
Other Gaming-Related Investments
In addition to its core gaming operations, the Company, on April 13, 2004, purchased 50 per cent
of the outstanding capital stock of Innovative Solutions Consultancy Group, Corp. (Innovative), a
joint stock company incorporated to manage enterprises engaged in the gaming business. On May
31, 2004, Synergy, in turn, acquired 80 per cent of the outstanding capital stock of Total Gaming
Technologies, Inc. (TGTI), a domestic corporation founded in October 2002 to develop new
games for the Philippine gaming industry and to provide consultancy service and state-of-the-art
equipment to the local gaming operators through its strategic partnership with Intralot. TGTI has
entered into an Equipment Lease Agreement with the PCSO for the nationwide operation of the
Fast Keno game. A Shareholders’ Agreement was executed whereby Innovative shall provide
management counsel and expertise to TGTI to ensure proper execution of the Fast Keno game,
among others.
Recent Developments
¾ Acquisitions and investments. In April 2008, the Company purchased 37.38 percent
of the other venturer in Innovative, which effectively increased its stake from 50 to 87.38
percent.
¾ Increase in terminal roll-out. The Company increased its presence in the VisMin
territory through the roll-out of about 200 terminals, from 1,401 terminals as of
December 31, 2007 to 1,600 terminals by December 31, 2008.
Page 2 of 28
¾ Aggressive distribution. The Company secured approval from PCSO for 8 instant
scratch ticket variants and launched 40 million tickets.
¾ Wider network of retail lotto outlets. Through its subsidiaries – Loto Pacific Leisure
Corporation and Lucky Circle Corporation, operated lotto sites grew from 39 to 68.
Agreement with the Philippine Charity Sweepstakes Office
The Company has an Equipment Lease Agreement with the PCSO which provides for the lease to
PCSO of the Equipment needed for its on-line lottery operations in VisMin for a period of eight
years from the start of commercial operations. For purposes of the ELA, a terminal is deemed
ready for commercial operation if it is capable of issuing a lottery ticket. Rental billed to PCSO
is equivalent to 4.3 per cent of the gross amount of ticket sales from all on-line lottery operations
in the VisMin regions or a fixed annual rental of =
P35,000 per terminal in commercial operation,
whichever is higher. The ELA also provides PCSO an option to purchase the equipment upon the
expiration of the lease period for a sum of P
=25.0 million.
Furthermore, the ELA provides that the total number of betting stations that should be installed to
constitute commercial operations is 1,250 terminals.
A Maintenance and Repair Agreement which runs concurrently with the ELA, was also entered
into by the Company with the PCSO, whereby, the Company will provide maintenance and repair
services on the equipment leased by PCSO for a fee equivalent to 0.15 per cent of the gross
amount of ticket sales from all on-line lottery operations in VisMin.
On February 13, 2004, the Company and PCSO agreed on certain amendments to the ELA to
address the financial viability of the agreement. Under the terms of the amended ELA, the
Company will charge PCSO an adjusted pre-agreed fee based on 10 per cent of the gross amount
of lotto ticket sales from the operation of all PCSO’s lotto terminals in VisMin to cover for
equipment rental, maintenance and repairs fee and communication and service fee.
The amended ELA reduced the number of betting stations that should be installed to constitute
commercial operations from 1,250 to 800 terminals. Furthermore, the option to purchase the
equipment upon the expiration of lease period was reduced to P15.0 million.
On April 1, 2005, the PCSO and the Company mutually agreed to effect commercial operation of
the on-line terminals, setting the ELA’s term up to March 31, 2013.
Government Regulation and Environmental Compliance
The Company does not need any government approval for its principal products or services since
its business is in the development, design and management of on-line computer systems,
terminals and software for the Philippine gaming industry and not in the operation of the lottery
business. The Company is not required to comply with specific environmental laws.
Page 3 of 28
Technology Development, Supply and Service Contracts
Scientific Games
From 1995 to 2005, the Company had provided the PCSO a single integrated system for its online lottery operations. On February 15, 2005, the Company, having assessed the obsolescence of
its previous GTECH infrastructure, entered into a Contract with Scientific Games for the
provision of a new system, AEGISTM. On November 20, 2005, the Company implemented the
migration from the traditional Legacy lottery system provided by GTECH into the new AEGISTM
System.
Under the terms of the Contract, Scientific Games will provide the Company with 900 Extrema®
terminals as well as the required training necessary for its operation. In consideration of the
foregoing, the Company shall pay Scientific Games 12.5% of its revenue from the conduct of online lottery games running under the system provided by Scientific Games. This Contract is
coterminous with the Company’s ELA with the PCSO.
Intralot
On March 13, 2006, the Company entered into a contract with Intralot, a company incorporated
under the laws of the Greece, for the supply of Equipment necessary for the operation of a new
on-line lottery system effective December 8, 2006. Under the terms of the Contract, Intralot will
provide the Company with the computer hardware, the license to use Intralot’s Lottery
Application Software consisting of the software platform, LOTOS® Application Software, and
the Games Application Software, the terminals as well as the required training necessary to
operate the system. Based on the amended contract signed on July 7, 2006, Intralot will provide
the Company with 600 Coronis HEE terminals. In consideration of the foregoing, the Company
shall pay Intralot 15% of the revenue generated by the terminals from the conduct of on-line
lottery and digit games running on its system or a fixed amount of US$110 per terminal per
month, whichever is higher.
On July 10, 2006, Intralot entered into an agreement with its subsidiary, Intralot Inc., a company
domiciled in Atlanta, Georgia, through which Intralot assigned whole of the contract, including
all its rights and obligations arising from its said subsidiary. This Contract is coterminous with
the Company’s ELA with the PCSO.
Having two (2) on-line lottery systems running in parallel has expanded the availability of lottery
terminals in VisMin and provides a safety net for PCSO’s operations in the unlikely event of
either system crashing for whatever reasons.
The new technology also helps provide versatility in connectivity given the country’s hybrid
telecommunications network. The new systems are now capable of being connected using GPRS
technology (mobile phone connectivity) and are also capable of using Internet connectivity (IPbased). Terminal connectivity is now a lot easier due to compatibility of the lottery terminals with
widespread mobile phone cell sites in VisMin. On-line connectivity in VisMin is now available
wherever there is a cell site of Globe Telecoms and Smart Telecoms. In addition, GPRS
connectivity is also the least cost among all communication links (leased-line, radio modem and
satellite)
Page 4 of 28
Terminal Deployment
As of December 31, 2008, the Company had deployed a total of 1,600 on-line lottery terminals
in the covered VisMin regions.
Philippine Lottery Sector
The Philippine lottery sector is regulated by the PCSO, a government-owned and controlled
corporation. PCSO was created primarily to raise funds for health and charity programs, generate
funds for the government, and regulate gambling and games of chance in order to protect certain
sectors of society, especially the youth. It is estimated that the gaming market in the Philippines is
worth over P100 billion per year, and illegal gaming accounts for half of the country’s gaming
industry revenues.
Government-authorized Lotteries
Although there are many types of lottery games worldwide, government-authorized lotteries
generally can be categorized into three principal groups: instant ticket, on-line and traditional
draw-type lotteries. An instant ticket lottery is typically played by removing a coating from a
preprinted ticket to determine whether it is a winner. On-line lotteries are based on a random
selection of a series of numbers. On-line lottery prizes are generally based on the number of
winners in which lottery terminals in retail outlets are continuously connected to a central
computer system. On-line lottery systems may also be used to validate instant tickets to confirm
large prize levels and prevent duplicate payments. Internationally, the older form of traditional
draw-type lottery games, in which players purchase tickets which are manually processed for a
future drawing for prizes on a fixed amount is a popular form of play. In addition, lotteries may
offer Keno, video lottery, sports and other lottery games.
On-line Lottery
For over 60 years, since the inception of PCSO, the traditional Sweepstakes had been the lone
source of funds for the PCSO. In 1995, the PCSO launched the very first on-line lottery, better
known as the lotto, in the Philippines. This innovation brought a new dimension of fun and
excitement for the betting public. The Company bids out the use of its terminals to prospective
investors who, upon approval and appointment by the PCSO, become its agents with regard to the
conduct of lottery and digit games.
The PCSO currently holds three (3) 6-pick number games, the 6/42 Lotto, 6/45 Mega Lotto, and
the 6/49 Super Lotto, and also conducts four (4) digit games, 6-digit (6D), 4-digit (4D), 3-digit
(Suertres Lotto), and 2-digit (EZ2). Modifications and enhancements of existing games and/or
the introduction of new games are directed by the PCSO.
Market Segmentation
Due to the manner by which the Philippine gaming market is segmented, the on-line lottery
system providers associated with PCSO do not directly compete with each other. On-line lottery
operations in the country are segmented as Luzon operations and VisMin operations. While the
Company is the on-line lottery system provider in the VisMin regions, Prime Gaming
Management Corporation (PGMC) is the system provider in the Luzon regions. Although
Page 5 of 28
approximately 75 per cent of the lottery fund is being contributed by PCSO’s Luzon operations,
its growth for the past three (3) years has been driven by the 23 per cent average growth of its
VisMin operations. Lottery operations in Luzon, whose largest market is in the National Capital
Region, generate thrice as much as that of VisMin mainly due to the disparity in the average
disposable income that is earned by the residents of the two (2) segments.
Of the eight (8) games held by the PCSO, all games are currently being played in Luzon; seven
(7) games are being played in VisMin. The 6-digit game is held by the PCSO only in Luzon.
On-line Lottery Operations and Products
The sales generated by PCSO, and, in turn, by the Company, highly depend on the average sales
generated by the different on-line games and the number of terminals deployed by the Company.
As mentioned, the Company had already deployed a total of 1,600 on-line terminals as of
December 31, 2008. The table below shows the minimum jackpot, or MGA, and the draw
frequencies of the different on-line games played in VisMin.
Games
6/42 Lotto ………..
6/45 Mega Lotto …
6/49 Super Lotto …
5/55 + 1/10 Power
Lotto
4D ………………..
Suertres Lotto …...
EZ2 ………………
Minimum Jackpot /
Minimum
Guaranteed Amount
Draw Frequencies
Php 3,000,000.00 2x a week - Tuesdays and Saturdays
Php 4,500,000.00 3x a week - Mondays, Wednesdays, and Fridays
Php 16,000,000.00 3x a week – Tuesdays, Thursdays, and Sundays
Php 50,000,000.00
Php10,000.00
Php 4,500.00
Php 4,000.00
1x a week-Saturdays
3x a week - Mondays, Wednesdays, and Fridays
Thrice daily
Daily
In support of PCSO’s operations and in order to continuously innovate the on-line lottery sector
and bring fun and excitement to the betting public, the Company spent a total of P 392.72 million
from 2006 to 2008 for its development activities broken down as follows:
Development Activities
Revenues
% of Revenues
2008
138.20
809.6
17.1%
2007
130.35
511.5
25.5%
2006
124.17
413.60
30.0%
Market Penetration
The area covered by the Company’s ELA with the PCSO encompasses 72 cities and 841
municipalities in the VisMin regions, including the provinces of Masbate (assigned to Region 7),
Romblon (assigned to Region 6) and Palawan. As of the end of 2008, the Company’s total
terminal deployment covered 67 cities and 461 municipalities.
Page 6 of 28
Competition
The Company does not expect to face any competition, at least until 2013, when its ELA with the
PCSO expires. However management is aware of the prevalence of illegal gambling similar to
lotto particularly in interior towns and remote areas. In spite of this, improved sales of lotto under
PCSO have exhibited growth due to better payouts under a more transparent system.
Organization and Manpower
As of December 31, 2008, the Company had a total of 88 employees. While Loto Pacific
Leisure Corporation and its subsidiary Lucky Circle Corporation had a total headcount
(including contractual personnel) of 216 as of December 31, 2008. In view of the planned
expansion in the deployment of terminals and more aggressive distribution of instant scratch
tickets, at least 25 staff members will be added to the manpower complement. None of the
employees of the Company have organized themselves into any labor union. The Company
believes that it has maintained amicable relationships with the rank and file and does not
anticipate any labor-management issues to arise in the near term. The Company believes that its
relationship with its employees have been consistently good and productive. The Company has a
stock option plan as part of its remuneration to all its directors and key employees which was
approved by the Board of Directors on December 12, 2006.
Risks
Some of the risks that the Company and its subsidiary may be exposed to are the following:
1. General Risks
The Company experienced some opposition from Local Government Unit (“LGU”) officials
in certain VisMin areas during its introductory phase. Future opposition from government
officials in certain areas is difficult to predict. Any opposition may hinder or slowdown the
opening of other untapped areas in VisMin into Lotto. Any incidence of, or a perception of
political resistance may adversely affect the Company’s business and financial growth.
2. Risks Relating to the Equipment Lease Agreement with Philippine Charity Sweepstakes
Office
The Company entered into an ELA with the PCSO for its VisMin operations. The ELA
provides for the lease of, among others, the central computer, communication equipment
including its accessories, terminals and draw equipment for a period of eight (8) years
commencing on the date of commercial operations by PCSO. The MRA was also entered into
by the Company and the PCSO whereby the Company provides maintenance and repair
services on the equipment leased by PCSO. Equipment rental and maintenance and repair
charges billed to PCSO are fixed at a pre-agreed fee based on a certain percentage, currently
at 10 per cent, of the gross amount of ticket sales from all on-line lottery operations in the
VisMin territory, which for the periods ending December 31, 2008, 2007, and 2006 amounted
P 652.3 million, P 479.6 million, and P 413.6 million, respectively.
Page 7 of 28
Any subsequent amendments to the Company’s ELA with PCSO may affect the Company’s
future results of operations. More importantly, the term of the Company’s ELA with PCSO
shall terminate by the year 2013. In the event that the ELA’s term is not extended, the
Company will stop generating revenues from PCSO’s on-line lottery operations.
3. Risks Relating to the Company and its Subsidiary
a. Dependence on Suppliers
The Company’s lottery operations are anchored on a two-system network. The Company has
existing contracts, each distinct and entered into separately, with two global leaders in the
lottery industry, namely Scientific Games and Intralot, for the supply of computer supported
lottery on-line gaming systems.
In the event that the contracts, whether collectively or individually, are terminated or
suspended, operations and business of the Company may be impaired.
b. Business Interruption Risk
The operations of the Company and its subsidiary are dependent on the reliability of its
system and the communications infrastructure needed to run it. Any breakdown or failure in
the system provided by its suppliers, failure in the communication infrastructure may
negatively affect the Company’s financial performance. However, this risk of business
interruption is unlikely due to the double redundancy offered by the two suppliers
4. Management of Risks
Aside from the discussions above, the Company in general, will mitigate the risks above
through the implementation of its Plans and Prospects.
Item 2. Properties
The Parent Company’s operations are substantially conducted in its head office in Pasig City and
its business/data center in Cebu.
The major assets of the Company are lottery equipment under finance lease which consist mainly
of lottery terminals, data center equipment, software and operating systems. It is planned that the
present lottery terminals of 1,600 will be increased by at least 200 at year-end 2009.
There are no real properties owned and there are no plans to acquire them in the next twelve (12)
months. The Company leases the premises for the offices in Manila and Cebu and the warehouse
in Mabolo, Cebu.
These aforementioned properties are not mortgaged nor are there any liens and encumbrances that
limit ownership or usage of the same.
The leased property for offices and business center is approximately 700 sq.m. and the warehouse
is about 360 sq.m. Lease terms for certain office spaces are for a period of one to five years. All
lease agreements have provisions for renewal subject to terms and conditions mutually agreed
Page 8 of 28
upon by all parties. The lease agreements provide for minimum rental commitment with annual
rental escalation rate of 5 per cent. Rent expense charged to operation amounted to P 2.8 million
in 2008 and P3.3 million in 2007.
The equipment provided by the Company to PCSO for its lottery operations are described under
the “Business” section.
The contracts for the supply of online lottery system entered into by the Company with Scientific
Games and Intralot contain a lease which is accounted for as finance lease. These are included as
part of lottery equipment under “Property and Equipment” account in the balance sheets. The
details are as follows:
Property and equipment under finance
lease
Less accumulated depreciation
TOTAL
Item 3.
2008
2007
P 383,357,899
129,405,650
P 253,952,249
P 356,675,393
75,991,428
P280,683,965
Legal Proceedings
There are no legal proceedings, material or otherwise, pending or threatened against the Company
or its subsidiaries, or in which the property and/or equipment of the Company or its subsidiaries
is the subject thereof, that could potentially affect their operations and financial capabilities.
Item 4.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the period covered by this
report.
PART II - OPERATIONAL FINANCIAL INFORMATION
Item 5. Market for Registrant’s Common Equity and Related
Stockholder Matters
Market Information
The Company became a listed company with the listing of its shares on April 12, 2007.
As of December 31, 2006, the Company had an authorized capital stock of 500,000,000 Common
Shares, each with a par value of P1.00, of which 125,250,000 Common Shares have been issued
and outstanding. On February 9, 2007 the Company issued an additional 54,000,000 shares from
its authorized capital stock thus increasing the issued and outstanding shares to 179,250,000. On
March 27, 2007, the Company offered its shares for sale to the public through an initial public
Page 9 of 28
offering (IPO) made a primary offer of 11,800,000 common shares and a secondary offer of
28,000,000 common shares. Prior to the Offer, there has been no public trading market for the
Company’s Common Shares. On November 19, 2007, the SEC approved the issuance of
8,048,000 common shares from the Company’s unissued authorized capital stock resulting from
the valuation of the deposits for future subscription as consideration for the issuance of shares, at
the total subscription price of P124,744,000. On May 19, 2008, grantees of the stock options
exercised 617,000 shares of the Company’s stock at P8.88 per share. On July 11, 2008, the BOD
authorized the Parent Company to buy back up to 2,000,000 shares from the public as a means of
preserving the value of the Company’s shares and maintaining investor confidence and on
another board meeting on October 14, 2008 approved to extend its share buy back program of
10% of the Company’s outstanding capital stock. As of December 31, 2008, the Company has
acquired and paid 4,414,000 shares of capital stock.
There is no provision in the Company’s charter or by-laws that would delay, deter, or prevent a
change in control of the Company.
Stock Prices
2008
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
10.75
10.50
9.60
9.30
8.90
7.80
7.30
7.20
As of December 31, 2008, POSC’s market capitalization amounted to P 1,497,862,500 based
on the closing price of P 7.50 per share. Likewise, POSC’s market capitalization as of March
31, 2009 amounted to P 1,817,406,500 based on the closing price of P 9.10 per share.
Security Holders
Pacific Online Systems Corporation had 59 shareholders as of December 31, 2008. Common
shares outstanding as of December 31, 2008 totaled 199,715,000. The top 20 stockholders as of
December 31, 2008, with their corresponding shareholdings and percentage thereof to total
shares outstanding, are:
Name
No. of Shares
Held
% to Total
1
PCD NOMINEE CORPORATION-FILIPINO
73,959,500
37.03
2
ABACUS CONSOLIDATED RESOURCES &
HOLDING
36,295,522
18.17
3
PACIFIC AUTOMATED SYSTEMS CORPORATION
26,659,407
13.35
4
BELLE CORPORATION
24,608,761
12.32
5
SUBCO TECHNOLOGY, INC.
17,733,610
8.88
6
OCIER, WILLY N.
15,868,900
7.95
Page 10 of 28
7
8
9
10
11
12
13
14
15
16
17
18
19
20
PCD NOMINEE CORPORATION NON-FILIPINO
SY, HANS TAN
WS FAMILY FOUNDATION, INC.
KILAYKO, GREGORIO U.
OCIER, MISCHEL GABRIELLE E.Y
DE LEON, MANUEL, A.
BENITEZ, ALFREDO B.
MEDALLA, TARCISIO M.
ZARRAGA, CLARITA T.
INCIONG, RHEDERICK B
TAN, A. BAYANI K.
CHAN, CARMELITA
NACORDA, CLODOVEO G.
DAVID, LAMBERTO V.
3,456,600
400,000
100,000
100,000
70,000
50,100
34,100
34,100
34,100
34,000
34,000
34,000
25,000
25,000
1.73
0.20
0.05
0.05
0.035
0.025
0.017
0.017
0.017
0.017
0.017
0.017
0.012
0.012
Recent Sale of Unregistered Securities
Other than the issuance of a total 54,000,000 new shares out of its unissued and authorized capital
stock, the Company has not issued or sold new shares within the past three (3) years which were
not registered pursuant to the requirements of the SRC.
The foregoing issuance of 54,000,000 new shares was made to less than twenty (20) persons or
entities, hence, exempt from the SRC registration requirements pursuant to Section 10.1 (k). The
Commission’s confirmation of such exempt status was not sought for the purpose. The shares
were issued at the par value of One Peso (P1.00) per share and were paid for in cash. No
underwriter was engaged in connection with the foregoing share issuance.
Voting Rights
At each meeting of the shareholders, every stockholder entitled to vote on a particular question or
matter involved shall be entitled to one vote for each share of stock standing in his name in the
books of the Company at the time of closing of the transfer books for such meeting.
Dividend Rights of Common Shares
The Company’s board of directors is authorized to declare cash, property, or stock dividends or a
combination thereof. A cash dividend declaration requires the approval of the Board and no
shareholder approval is necessary. A stock dividend declaration requires the approval of the
Board and shareholders representing at least two-thirds of the Company’s outstanding capital
stock. Holders of outstanding shares on a dividend record date for such shares will be entitled to
the full dividend declared without regard to any subsequent transfer of shares.
Other than statutory limitations, there are no restrictions that limit the Company from paying
dividends on common equity.
Page 11 of 28
Appraisal Rights
As provided for by law, any stockholder shall have a right to dissent and demand payment of the
fair value of his shares in the following instances:
1.
In case any amendment of the articles of incorporation has the effect of changing or
restricting the rights of any stockholders or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2.
In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Corporation Code of
the Philippines and;
3.
In case of merger or consolidation.
Item 6.
Management Discussion and Analysis of Operating
Performance and Financial Condition
Results of Operations and Financial Condition
For the year ended and as of December 31, 2008 compared to the year ended and as of December
31, 2007.
The Company posted significant growth in its operating revenues in 2008 compared to the
previous year. From 2007 level of P511.5 million, it realized a 58 percent growth in revenues,
pushing revenues to P809.6 million in 2008 mainly due to record high PCSO sales from lottery
operations, increased terminal roll-out, aggressive distribution of instant scratch tickets, and
wider reach of retail operations by the Company’s subsidiaries. As a result of this, operating
income before other income and charges grew by 42 percent from P 200.8 million in 2007 to P
285.6 million in 2008.
Total operating expenses, including depreciation and amortization increased by P212.0 million or
74 per cent from P285.4 million in 2007 to P497.4 million in 2008. This variance was
principally due to increases in various operating expenses, as follows:
Depreciation and amortization increased by P20.1 million or 36 percent from P55.5 million in
2007 to P75.6 million in 2008, because of additional depreciation charges of assets under finance
lease as a result of the increase in terminals deployed from 1,401 terminals at year-end 2007 to
1,600 terminals at year-end 2008.
Personnel costs increased from P33.1 million in 2007 to P 71.5 million in 2008 or a growth of
116 percent or P 38.4 million due to salary increases given and after consolidating the people
Page 12 of 28
costs of subsidiaries which were acquired by the Company in 2007, and the expansion of the
instant ticket division due to the growth of ticket sales and distribution.
Travel and accommodation increased by P 50.7 million or 336 percent from P 15.1 million in
2007 to P 65.8 million in 2008 principally due to higher traveling expenses related to aggressive
terminal roll-out; instant scratch tickets product launch, development and distribution; and
lotto site expansion and the growth of Keno operations.
Communication costs of P 2.3 million or 5.6 percent increased from P 40.5 million in 2007 to P
42.8 million in 2008. This is attributed to the increase in the number of communication links
which is directly proportional to surge in terminal deployment for Lotto and Keno..
Increase in management fees by P15.1 million or 59 per cent from P25.6 million in 2007 to
P40.7 million in 2008 was due to the Company’s improvement in financial performance.
Management fees are based on the Company’s earnings before tax.
Rent and utilities increased by P 16.9 million or 144 percent from P11.7 million in 2007 to
P28.6 million in 2008, due to escalation of rental rates accompanied by higher rates of utilities in
the offices. Rental costs for retail lotto outlets in various locations incurred by the Company’s
subsidiaries, attendant to the opening of new sites, substantially accounted for the increase.
Software and license fees are based on sales, thus it increased by P16.5 million or 717 percent
from P2.3 million in 2007 to P18.8 million in 2008 which was accrued to the suppliers - SGI
and Intralot.
Operating supplies increased by P 14.5 million or 453 percent from P 3.2 million in 2007 to P
17.7 million in 2008 due to rise in spare parts consumption after the lapse of warranty period on
some installed terminals.
Professional fees increased by P 21.9 million or 664 percent from P 3.3 million in 2007 to
P25.2 million in 2008 due to the resolution of some legal issues.
Increase in taxes and licenses of P 5.9 million or 104 percent from P5.6 million in 2007 to P11.4
million in 2008 was due to higher business taxes paid because of higher gross revenues.
Repairs and maintenance expenses increased marginally by P 0.48 million or 4.6 percent from
P10.6 million in 2007 to P11.0 million in 2008 due to increase in various maintenance costs and
outside services.
Representation expenses such as entertainment amusement, recreation and other expenses
increased by P4.8 million or 94 percent from P5.1 million in 2007 to P9.9 million in 2008 due
to marketing efforts employed.
“Others” account increased by P 14.8 million or 59 percent from P25.0 million in 2007 to
P39.8 million in 2008 due mainly to wider promotional campaigns for the Instant Scratch
tickets.
Consultancy fees decreased by P10.4 million or 21 percent from P48.9 million in 2007 to P 38.5
million in 2008 due to the termination of some consultancy contracts held by the Company.
Page 13 of 28
The Company equitized losses of P 5.9 million and P 9.2 million, 2007 and 2006 respectively,
because of the losses incurred by Total Gaming Technologies, Inc. (TGTI) where the Company
had an indirect interest of 40 per cent through their subsidiary, Innovative Solutions Consultancy
Group Corp. (Innovative). In April 2008, the existing Company’s interest in Innovative increased
by 37.38 percent from 50 percent in 2007 to 87.38 percent in 2008. Indirect ownership in TGTI
also increased from 40 percent to 69.9 percent. From the date of acquisition to December 31,
2008, Innovative and TGTI reduced the net income of the Group by P 9.3 million.
After considering the foregoing other items, which were deducted from the Company’s operating
income, this resulted in a 3.2 per cent marginal rise in net income from P135.0 million in 2007
to P 139.4 million in 2008.
Total assets as of December 31, 2008 of P779.8 million increased by P43.3 million or 6 per cent
growth compared to P736.5 million as of December 31, 2007.
The trade and other receivables are principally receivables from PCSO representing 10 per cent
ELA/MRA share of the Company. The increase of 73 per cent or P49.1 million from P67.7
million in 2007 to P116.8 million in 2008 was due to the increase in sales.
Total current liabilities increased by P66.4 million from P 109.7 million in 2007 to P 176.1
million in 2008 mainly due to higher trade payables, which consist of payables to PCSO for
unremitted cash receipts from the sale of lotto tickets and payable to suppliers of sweepstakes and
other tickets; higher income tax payable; and obligations under finance lease.
Cash and cash equivalents as of December 31, 2008 decreased to P103.4 million from P151.4
million as of December 31, 2007 or a decrease of P48.0 million. The principal reasons for the
decrease were payment of cash dividends of P 99.4 million and acquisition of treasury shares
amounting to P 37.1 million.
Summarized below are relevant measures used in analyzing the Company’s result of operations.
Return on Stockholders’ Equity …………………….
Return on Assets …………………………………….
Earnings per Share ………………………………….
Revenues Growth ……………………………
Net Profit Margin ……………………………………
2008
34.8%
17.9%
0.71
58.3%
17.2%
2007
33.98%
18.28%
0.73
23.7%
26.3%
Due to its consistent profitability over recent years, the Company’s debt to equity ratio still
maintained at a healthy level of 0.95 from 0.86. The Company’s working capital efficiency,
measured by current ratio at 1.86 from 2.93.
The Company and subsidiaries:
a) Have no known trends or any demands, commitments, events or uncertainties that will
result in or that are likely to result in the liquidity increasing or decreasing in any material
way;
b) Have no events that will trigger direct or contingent financial obligation that is material to
the company, including any default or acceleration of an obligation;
Page 14 of 28
c) Have no material off-balance sheet transactions, arrangements, obligations (including
contingent obligations), and other relationships with unconsolidated entities or other
persons created during the reporting period; and
d) Have not breached any loans, leases or other indebtedness or financing agreement.
Plans and Prospects
As of December 31, 2008, the Company has deployed a total of 1,600 on-line lottery terminals.
With the approval of the PCSO and as provided by the Contracts held with Scientific Games and
Intralot, the Company targets to roll out 1,800 terminals by year-end 2009 by way of a finance
lease. In order to realize this terminal roll-out, the Company plans to penetrate into identified
untapped areas. The PCSO also plans to increase the draw frequency of lotto and digit games.
Through its subsidiaries, Loto Pacific Leisure Corporation and Lucky Circle Corporation, the
Company targets to have about 120 operating retail outlets within the next 12 to 18 months from
68 outlets as of December 31, 2008. These outlets, selling exclusively PCSO products are
strategically located in SM Malls and other large malls, nationwide. With the variety of product
lines being offered by PCSO, it is envisioned that this network of retail outlets will be able to
provide professional excellent service to customers.
The PCSO instant scratch ticket project ushered the entry of the Company into instant games in
mid 2007. The successful launch of their first products, the “Triple Cash” and “Money Bags”
tickets opened the door to provide customers with another PCSO product, thereby not limiting the
Company’s role to lotto alone. In November 2007, the Company entered into a new
Memorandum of Agreement (MOA) with PCSO to undertake the printing, distribution and sale
of 20 million tickets “Lucky 8, Payday, Fast Cash and Diamond Dash Promo” in the amount of
P400 million. In June 2008, the PCSO’s BOD authorized the amendment of the MOA signed in
November 2007 to increase the number of scratch tickets from the initial 20 million tickets to 40
million tickets. The additional 20 million tickets dubbed as: “Mega Money, Red Hot 7, Gold
Rush and Double Dollar” all in the amount of P400 million. With the new tickets being offered,
the Company is building up a marketing network that would readily provide a distribution system
to reach PCSO customers.
Item 7.
Financial Statements
The audited Financial Statements and Supplementary Schedules as of and for the year ended
December 31, 2008 listed in the accompanying index to Financial Statements and Supplementary
Schedules are filed as part of this Form 17-A.
Item 8.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
SGV & Co. audited the Company’s balance sheets as at December 31, 2008, and the statements
of income, statements of changes in stockholders’ equity and statements of cash flows for each of
the three years in the period ended December 31, 2008, 2007 and 2006 and a summary of
significant accounting policies and other explanatory notes. SGV & Co.’s responsibility is to
Page 15 of 28
express an opinion on these financial statements based on their audit. The audits were conducted
in accordance with Philippine Standards on Auditing.
The Company’s Board of Directors in the annual shareholders’ meeting on June 25, 2008
recommended, and the shareholders approved, the reappointment of SGV & Co. as the
Company’s independent public accountant for the fiscal year ending December 31, 2008. The
previous SGV & Co. audit partner of the Company was Mr. Jose Joel M. Sebastian, on
engagement for less than 5 years and handled audit of calendar years ending December 31,
2006 and December 31, 2005. Belle Corporation, one of the major stockholders of the
Company, recommended that their SGV & Co. audit partner, Mr. Juanito A. Fullecido, be
likewise requested to handle the Company’s external audit. The Company adopted the
recommendation of Belle Corp.
In the Company’s two (2) most recent fiscal years, there has neither been a change in nor
disagreement with its auditor on accounting and financial disclosures.
The aggregate fees billed for each of the last three (3) fiscal years for professional services
rendered by the external auditor are as follows:
Audit fee
Tax services
Other fees
Total
2008
660,000.00
2007
600,000.00
2006
550,000.00
n/a
660,000.00
n/a
600,000.00
n/a
550,000.00
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9.
Directors and Executive Officers of the Registrant
Directors and Senior Management
The following sets forth certain information as to the Directors and executive officers of the
Company:
Name
Willy N. Ocier
Manuel A. de Leon
Alfredo B. Benitez
Manuel A. Gana
Clarita T. Zarraga
Tarcisio M. Medalla
Leonardo S. Gayao
Jerry C. Tiu
Position with the Company
Chairman / President*
Vice Chairman – EVP*
Director*
Director
Director
Director
Director
Independent Director
Page 16 of 28
Roger S. Go
Clodoveo G. Nacorda
Lamberto V. David
Valentino L. Kintanar
Romeo J. Roque, Jr.
A. Bayani K. Tan
Independent Director
SVP – Corporate Affairs &
Marketing
Chief Financial Officer and VP –
Finance and Administration
VP – Computer Operations
Senior Manager-Technical Services
Senior Manager – Communications
Corporate Secretary
Stanley L. Tan
Assistant Corporate Secretary
Rhederick B. Inciong
* Members of the Executive Committee
Board of Directors
The present members of the Board of Directors (“BOD”) were elected during the annual
stockholders’ meeting held on June 25, 2008. The term of the current members of the BOD shall
be until the next stockholders’ meeting in June 2009. The following are the incumbent members
of the Board of Directors (“BOD”) of the Company:
Willy N. Ocier, Filipino, 52, is the Chairman and President of the Company and a director since
July 29, 1999. He also serves as Co-Vice Chairman of Belle Corporation and Highlands Prime,
Inc.; as Chairman of Tagaytay Midlands Golf Club, Inc., APC Group, Inc., and Sinophil
Corporation; as Vice Chairman of Tagaytay Highlands International Golf Club, Inc.; and as a
Director of iVantage Corporation. He was also previously affiliated with Eastern Securities
Development Corporation being its past President and Chief Operations Officer.
Manuel A. de Leon, Filipino, 77, is the Vice Chairman and Executive Vice President of the
Company since August 25, 2000. He was the former Chairman, and is currently a Director, of
listed firm Abacus Consolidated Resources and Holdings, Inc. He is also presently a Director of
the Philippine Regional Investment Development, Corp., Asean Publishers, Inc., and Asean
Integrated Management, Inc. He also served as Director of the Manila Banking Corporation. He
likewise served as the Advertising and Marketing Director of the Manila Chronicle Newspaper
from 1968 to 1969, as Advertising and Marketing Manager at the Philippine Refining Company
from 1964 to 1968 and was assigned to work in Spain and the United Kingdom for a year during
that term, and as Account Group Head at J. Walter Thompson (Phil.) Inc. from 1960 to 1964.
Alfredo B. Benitez, Filipino, 42, is a Director of the Company since December 10, 2001. He is
also currently the President of Sinophil Corporation, Leisure and Resorts World Corporation, AB
Leisure Exponent Inc., AB Gaming Leisure Specialist, Inc., ABLE Holdings Inc., First Cagayan
Leisure and Resorts Corporation, Binondo Leisure Resources, Inc. and, Royal Highland Leisure
and Resorts Corporation. He is currently the Chairman of Zoraymee Holdings Inc and a Director
of Mango Orchard Resources & Development and Manila Building Loan Association. He
graduated from St. Mary’s College, Williamsburg, Virginia with a degree in B.S. Mathematics in
1988.
Manuel A. Gana, Filipino, 51, is a Director of the Company since December 10, 2001. He also
serves as Senior Vice President for Finance and Chief Financial Officer of Belle Corporation and
Page 17 of 28
Sinophil Corporation. He joined Belle Corporation in 1997 as Vice President for Corporate
Development and Special Projects, during which time he was also assigned as the Vice PresidentFinance and Chief Financial Officer for a Sinophil subsidiary, MagiNet Corporation. He is also a
Director of APC Group, Inc. and was previously a Director of Investment Banking at Nesbitt
Burns Securities Incorporated in New York. He also previously worked for Bank of Montreal and
Merrill Lynch Capital Markets (both in New York), and for Procter and Gamble Philippine
Manufacturing Corp. Mr. Gana holds a Master of Business Administration degree from the
Wharton School of the University of Pennsylvania. He is a Certified Public Accountant.
Clarita T. Zarraga, Filipino, 68, is a Director of the Company since May 15, 1996. She is also
currently the President of listed firm Abacus Consolidated Resources and Holdings, Inc. She also
serves as director and Treasurer of Philippine Regional Investment Development Corp. and
director of Blue Stock Development Farms, Inc., Rural Bank of Batangas, Inc., Batangas Plaza,
Inc., Montemayor Aggregates and Mining Corporation and Alpha Asia Hotels and Resorts, Inc.
She is a Certified Public Accountant and a licensed real estate broker.
Tarcisio M. Medalla, Filipino, 60, is a Director of the Company since December 10, 2001. He is
currently the Chairman and President of listed firm Paxys, Inc. (formerly Fil-Hispano Holdings
Corp.) and the Chairman of the Board of Advanced Contract Solutions, Inc. He is concurrently a
director of NGL Pacific Limited, a privately-held investment company with an RHQ in Manila
and affiliated with ACSH Ltd. He has been connected with NGL since 1983. He graduated with
the BSC degree, major in Accounting, from De La Salle University. He attended the Advanced
Management Program (AMP) at the Harvard Business School. He is a Certified Public
Accountant.
Leonardo Gayao, Filipino, 62, is a Director of the company since February 21, 2007. He is also
the President of the Philippine Regional Investment Development Corporation and Omnicor
Industrial Estate & Realty Center, Inc. and Legal Counsel/Director/Vice President of Abacus
Consolidated Resources & Holdings, Inc., Director/Vice President of Abacus Global
Technovisons, Inc., and other Directorship in Blue Stock Development Farms, Inc., Batangan
Plaza, Inc., Alpha Asia Hotels & Resorts, Inc. and Rural Bank of Batangas. He graduated with a
degree of Bachelor of Laws in San Beda College , 1973.
Independent Director
Pursuant to the requirements of Section 38 of the SRC, the Company’s Board of Directors and
stockholders approved the amendment of the Company’s By-Laws adopting the requirement on
the nomination and election of independent directors. In line with this, the Board of Directors has
elected Messrs. Jerry C. Tiu and Roger Go as the Company’s independent directors.
Jerry C. Tiu, Filipino, 52, is an independent director of the Company since February 21, 2007.
He is the Director and the President of Tagaytay Highlands Community Condominium
Association, Inc., Tagaytay Midlands Community Homeowners’ Association, Inc., and
Greenlands Community Homeowners’ Association, Inc. He is likewise the President of reporting
companies such as: Tagaytay Highlands International Golf club, Inc., The Country Club at
Tagaytay Highlands, Inc., Tagaytay Midlands Golf Club, Inc., The Spa & Lodge at Tagaytay
Highlands, Inc. He is also the Chairman of Mega Magazine Publishing, Inc. and a former
Director of the Manila Polo Club. He holds a Bachelor of Science degree in Commerce
(Marketing) from the University of British Columbia..
Page 18 of 28
Roger S. Go, Filipino, 53, is an independent director of the Company since April 11, 2007. He is
also the President and General Manager of London Biscuit Company, Inc.
Executive Officers
Clodoveo G. Nacorda, Filipino, 58, is Senior Vice President for Corporate Affairs and
Marketing of the Company. He joined the Company in January 1996. He served as Vice
President for VisMin Division at Vitarich Corporation from 1994 to 1995, as Vice President for
Sales and Marketing-South Philippines at La Tondeña Distillers, Inc. (LTD) from 1991 to 1994,
and as an Assistant Vice President of LTD from 1987 to 1991. He also served as Department
Manager-General Services Division at San Miguel Corporation from 1983 to 1987. He graduated
with the Bachelor of Arts in Economics degree from University of Santo Tomas. He was credited
with Master in Business Administration academic units from Letran College of Business. He
obtained his Diploma in Urban and Regional Planning from the University of the Philippines and
earned his Doctor in Public Administration degree from Cebu Normal University.
Rhederick B. Inciong, Filipino, 42, is Chief Financial Officer and Vice President for Finance
and Administration of the Company. He is concurrently the Chief Financial Officer of Total
Gaming Technologies, Inc. and Lucky Circle Corporation, indirect subsidiaries of the Company.
He joined the Company in April 1996. He served as Administrative and Finance Manager for
Rentokil (Philippines), Inc. from 1995 to 1996. He also served as Comptroller for Philippine
Telephone Directory, Inc. during his employment from 1991 to 1995. He graduated with the
degree of Bachelor in Accountancy from Polytechnic University of the Philippines. He holds a
Master of Business Administration degree from De La Salle University. He is a Certified Public
Accountant.
Lamberto V. David, Filipino, 59, is Vice President for Computer Operations of the Company.
He joined the Company in February 1997. He was the sole proprietor of Sweet Mannah
Marketing distributing consumer products from 1994 to 1996. He served as Division Manager for
Information Systems from 1990 to 1993 and as Manager for Computer Operations of Atlas
Consolidated Mining and Development Corporation from 1981 to 1989. He graduated with the
degree of Bachelor of Science in Electronic Engineering from the University of Santo Tomas.
Valentino L. Kintanar, Filipino, 48, is Senior Manager for Technical Services of the Company.
He joined the Company in 1996. He served as Technical Services Manager of EMCOR, Inc. He
also served as a Systems Engineer of Technics, Philippines from 1983-1987. He also previously
worked as Senior Shift Technician of Fairchild Semiconductors, Phil. from 1980-1983.He
graduated with Bachelor of Science in Electronics and Communications Engineering at the
University of Southern Philippines.
Romeo J. Roque, Jr., Filipino, 41, is Senior Manager for the Communications Department of the
Company. He joined the Company in February 1996. He served as Product Support Manager for
Infonet Solutions, Inc. from 1995 to 1996. He also served as Systems Engineer for ATS Software
Pte Ltd in Singapore from 1993 to 1995. He also previously worked for Electroword as Systems
Consultant from 1991 to 1993. He graduated with the Bachelor of Science in Computer
Engineering degree from University of San Carlos. He was credited with Master in Business
Administration academic units from University of the Philippines.
A. Bayani K. Tan, Filipino, 53, is the Corporate Secretary of the Company. He is also currently
a Director, Corporate Secretary, or both, of the following reporting companies: First Abacus
Page 19 of 28
Financial Holdings Corporation, Belle Corporation, Sinophil Corporation, Tagaytay Highlands
International Golf Club, Inc., Tagaytay Midlands Golf Club, Inc., The Country Club at Tagaytay
Highlands, Inc., The Spa and Lodge at Tagaytay Highlands, Inc., iVantage Corporation, Destiny
Financial Plans, Inc., Philequity Funds, Inc., Philequity PSE Index Funds, Inc., Philequity Dollar
Income Fund, Inc., Philequity Money Market Fund, Inc. and TKC Steel Corporation. He is the
Managing Partner of Tan Venturanza Valdez Law Offices and also a Director, Corporate
Secretary, or both of private companies such as Sterling Bank of Asia Inc, Belle Bay City
Corporation, Oakridge Properties, Inc., JTKC Equities, Inc., The Discovery Leisure Company,
Inc., Goodyear Steel Pipe Corporation, Hella-Phil, Inc., Metro Manila Turf Club, Inc., Monte Oro
Resources & Energy Inc., Herway, Inc. and Highlands Gourmet Specialist Corp. Atty. Tan is a
member of the Philippine Bar. He holds a Bachelor of Arts Degree from the San Beda College, a
Bachelor of Laws Degree from the University of the Philippines College of Law, and a Master of
Laws Degree from the New York University School of Law.
Stanley L. Tan, Filipino, 38, is the Assistant Corporate Secretary of the Company. He is
concurrently the Corporate Secretary of the Electroparts Development Corporation, Shamrock
Development Corp., Phil. Asahi Material Corp., and Destiny Financial Plans, Inc. Mr. Tan was
formerly Corporate Secretary of SCT Wood Products, Inc., Taiyo Machineries, Inc., , SCT
Electro-Component Corp., Tagum Mining and Development Corp., City Cane Corp., Starmakers,
Inc., and the Philippine Fireworks Exporters Association, Inc. as well as the President & Director
of the Paseo de Magallanes Commercial Center Association, Inc. He is also the Assistant
Corporate Secretary of the following reporting companies: Tagaytay Highlands International Golf
Club, Inc., The Country Club at Tagaytay Highlands, Inc., Tagaytay Midlands Golf Club, Inc.,
and the Spa and Lodge at Tagaytay Highlands, Inc. Mr. Tan is a member of Integrated Bar of the
Philippines and holds a Bachelor’s Degree in Laws as well as Bachelor of Science’s Degree in
Economics from the University of the Philippines.
Family Relationships
Stanley L. Tan is the nephew of A. Bayani K. Tan
Significant Employees
The Company is not dependent on the services of any particular employee. It does not have any
special arrangements to ensure that any employee will remain with the Company and will not
compete upon termination.
Stock Option Plan
The Company’s Board (“BOD”) approved the proposed Stock Option Plan (“the Plan”) on
December 12, 2006. The Company’s Stock Option Plan provides an incentive and mechanism to
employees and officers to become stockholders of the Company, as well as to qualified directors,
officers and employees, who are already stockholders, to increase their equity in the Company
and thereby increase their concern for the Company's well-being. All such full-time and regular
employees of the Company, its subsidiaries and affiliates, their officers and directors, and such
other qualified persons who may be recommended from time to time by the Executive Committee
or the Board to the Committee as qualified, are eligible to participate in the Plan. Shares of stock
Page 20 of 28
subject to the Plan amount to five per cent (5%) of the Company’s total outstanding common
stock.
The purchase price of the shares shall not in any case be less than the Fair Market Value of the
Company’s shares at the time of grant, and, in no case, be less than the Offer Price at which the
Company’s shares are initially offered for sale to the public. Further, the purchase price shall be
subject to adjustment for subsequent stock dividends or splits.
The shares covered by any one grant shall be offered for subscription over a period of Three (3)
years from and after the effectivity date of each grant that may be determined by the Committee.
The Participants may exercise their right to subscribe to shares under the Plan in accordance with
the following schedule:
•
1/3 of total grant within One (1) year from the effectivity date of each grant
•
1/3 of total grant within Two (2) years from the effectivity date of each grant
•
1/3 of total grant within Three (3) years from the effectivity date of each grant
On February 15, 2008, SEC approved the Company’s application requesting that its proposed
issuance on 9,954,900 common shares is exempt from the registration requirements of the
Securities Regulation Code.
On May 6, 2008, the BOD approved the allocation of 2,174,000 shares to its executives and
employees and to the officers of Lucky Circle under the Plan which is exercisable over of a
period of three years from May 6, 2008 until May 6, 2011. The purchase price upon exercise of
the option was fixed at P8.88 per share.
On May 19, 2008, grantees of the stock options exercised 617,000 shares of the Company’s
stock at P8.88 per share.
Involvement in Certain Legal Proceedings
There are no legal proceedings, material or otherwise, pending or threatened against the Company
or its subsidiaries, or in which the property and/or equipment of the Company or its subsidiaries
is the subject thereof.
At present, the Company is not aware of:
ƒ
any bankruptcy petition filed by or against any business of which the incumbent Directors or
senior management of the Company was a general partner or executive officer, either at the
time of the bankruptcy or within five years prior to that time;
ƒ
any conviction by final judgment in a criminal proceeding, domestic or foreign, pending
against any of the incumbent Directors or senior management of the Company;
ƒ
any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court
of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring,
suspending or otherwise limiting the involvement of any of the incumbent Directors or senior
Page 21 of 28
management of the Company in any type of business, securities, commodities or banking
activities; and
ƒ
any finding by domestic or foreign court of competent jurisdiction (in civil action), the SEC
or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or
said regulatory organization, that any of the incumbent Directors or senior management of the
Company has violated a securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
Item 10.
Executive Compensation
The following table shows the aggregate compensation received by the directors and officers of
the Company for calendar years 2007 and 2008, as well as the estimated aggregate compensation
for calendar year 2009.
Name and Principal Position
Year
Salary
Bonus
Other Annual
Compensation
Willy N. Ocier
Chairman & President
Manuel A. de Leon
Vice Chairman & Executive Vice President
Clodoveo G. Nacorda
SVP for Corporate Affairs & Marketing
Rhederick B. Inciong
Treasurer & Chief Financial Officer
Total for the Executive Officers as a group
Total for the Directors and Executive Officers as
a group
1
2009 1
2008
2007
2009
P12,825,805
P11,659,823
P9,655,981
P18,981,734
2008
2007
P17,256,121
P12,272,648
2009 figures are estimates only.
Other than those disclosed above, there are no other standard or other arrangements wherein
directors of the Company are compensated, or are to be compensated, directly or indirectly, for
any services provided as a director.
There is no compensatory plan or arrangement, including payments to be received from the
Company, with respect to any of its executive officer, which will result from the resignation,
retirement or any other termination of any of its executive officer’s employment with the
Company and its subsidiaries or from a change-in-control of the Company or in any of its
executive officer’s responsibilities, following a change-in-control and the amount involved,
including all periodic payments or installments, which exceeds P 2.5 million.
Page 22 of 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Certain Record and Beneficial Owners
The following persons or group are known to the Company as directly or indirectly the record or
beneficial owners of more than five percent (5%) of the Company’s voting securities as of 31
December 2008:
Title of Class
Common
Common
Common
Common
Common
Common
Name and Address of
Record Owner and
Relationship with Issuer
Name of Beneficial
Owner
PCD NOMINEE
CORPORATION
PCD NOMINEE
CORPORATION
ABACUS GLOBAL
TECHNOVISIONS, INC.
28-I N. Domingo St.,
New Manila, Quezon City
PACIFIC AUTOMATED
SYSTEMS CORP.
4/F Centrum II, 150 Valero
St.
Salcedo Village, Makati City
BELLE CORPORATION
28/F East Tower, PSE Centre
Exchange Road, Ortigas
Center
Pasig City
SUBCO TECHNOLOGY,
INC.
28/F East Tower, PSE Centre
Exchange Road, Ortigas
Center
Pasig City
WILLY N. OCIER
28/F East Tower, PSE Centre
Exchange Road, Ortigas
Center
Pasig City
ABACUS GLOBAL
TECHNOVISIONS,
INC.
PACIFIC
AUTOMATED
SYSTEMS CORP.
Citizens
hip
No. of
Shares
Held
%
Filipino
73,959,500
37.03
Filipino
36,295,522
18.17
Filipino
26,659,407
13.35
Filipino
24,608,761
12.32
Filipino
17,733,610
8.88
Filipino
15,868,900
7.95
BELLE CORP.
SUBCO
TECHNOLOGY,
INC.
WILLY N. OCIER
Security Ownership of Directors and Management
The following table shows the shares beneficially owned by the directors and executive officers
of the Company as of 31 March 2009:
Title of
Class
Common
Common
Name of Beneficial
Owner
Willy N. Ocier
Manuel A. de Leon
Amount and nature of
beneficial ownership
15,883,900
Direct
50,100
Direct
Citizenship
Filipino
Filipino
Percent of
Class
7.95
0.02
Page 23 of 28
Common
Common
Common
Common
Common
Common
Common
Alfredo B. Benitez
Manuel A. Gana
Clarita T. Zarraga
Tarcisio M. Medalla
Jerry C. Tiu
Roger S. Go
Leonardo S. Gayao
34,100
100
34,100
34,100
100
1,000
2,100
Direct
Direct
Direct
Direct
Direct
Direct
Direct
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
0.02
0.00
0.02
0.02
0.00
0.00
0.00
Common
Clodoveo G. Nacorda
25,000
Direct
Filipino
0.01
Common
Common
Common
Rhederick B. Inciong
Lamberto V. David
Carmelita D.L. Chan
34,000
25,000
34,000
Direct
Direct
Direct
Filipino
Filipino
Filipino
0.02
0.01
0.02
Common
A.Bayani K. Tan
34,000
Direct
Filipino
0.02
Common
Stanley L. Tan
17,000
Direct
Filipino
0.00
Common
All directors and
executive officers as a
group
Item 12.
16,208,600
8.11
Certain Relationships and Related Transactions
The Company has had significant transactions with related parties in the normal course of
business. The amounts included in the financial statements with respect to these transactions are
as follows:
a.
PMP Management Services Sdn Bhd (“PMP”), an affiliate of Pacific Automated Systems
Corp. (“PASC”) (a 20% shareholder of the Company) provides consultancy support in the
operation and development of the leased online lottery equipment and accessories and the
provision of maintenance and repair services. PASC provides operational support services
to the Company similar to the scope of PMP. Both PMP and PASC are wholly-owned
subsidiaries of Tanjong Public Limited Company, an English company. Agreements with
PMP and PASC were terminated on March 16, 2006 and April 6, 2006, respectively.
b.
AB Gaming manages the day-to-day operations of the Company as provided in a MA
entered into on June 10, 2002. Under the terms of the MA, the Company shall elect the
president of AB Gaming as the President, Chief Executive Officer and Administrative
Officer of the Company. The MA shall be effective for five years until June 10, 2007 and
shall be automatically renewed for a similar period unless terminated by either party.
In March 2004, the Company and AB Gaming amended the MA effective February 15,
2004. Under the amended MA, AB Gaming foregoes its entitlement to have its President
designated as President and Chief Executive Officer of the Company although the scope of
the services remains unchanged.
Total management fees amounted to =
P 35.2 million, =
P 25.6 million and =
P19.2 million in
2008, 2007 and 2006, respectively. Outstanding payable as of December 31, 2008 and
Page 24 of 28
2007 amounted to P
=3.4 million and =
P2.2 million, respectively.
c.
The Company had noninterest-bearing advances from Belle Group (43% shareholder),
Abacus (37% shareholder) and PASC (20% shareholder) totaling =
P34.5 million as of
December 31, 2005. In 2006, the advances were paid in full.
d.
The Company granted advances to TGTI which was covered by a Loan Agreement. The
Company has indirect interest in TGTI. Under the terms of Loan Agreement, the Company
shall provide short-term financial assistance credit of =
P25.0 million to TGTI. Any
outstanding loan shall be subject to simple interest calculated using the applicable shortterm placement rate with monthly repricing plus add-on rate of 0.50% and payable as soon
as the increase in capitalization of TGTI is received or as soon as proper demand is made
by the Company’s Board.
As of December 31, 2007, total advances granted to TGTI and unpaid interest (included
under “Investment and advances” account in the balance sheets) amounted to P
=67.4
million. TGTI became an indirect subsidiary through Innovative in April 2008. Prior to
obtaining control, the Parent Company accounted for its investment in Innovative using
equity method. Given that Innovative is now classified as a subsidiary, the Group now
prepares consolidated financial statements to include Innovative in its consolidation and
accordingly, the related investments and advances were eliminated.
e.
In 2006, the Company granted interest-bearing advances to Abacus for working capital
purposes. The advances were subject to an annual interest rate of 4.6%. Outstanding
advances as of December 31, 2006 amounted to =
P5.0 million. In 2007, these advances
were fully paid.
f.
Compensation and benefits of key management personnel of the Company are as follows:
2008
Short-term employee benefits
Post-retirement benefits
Share-based payment
Total
=
P7.2
0.8
0.9
P
=8.9
2007
(in millions)
=
P6.4
0.6
P
=7.0
2006
=
P5.7
0.5
P
=6.2
PART IV - CORPORATE GOVERNANCE
Page 25 of 28
The Company remains focused on insuring the adoption of systems and practices of good
corporate governance in enhancing value for its shareholders.
In compliance with the initiative of the Securities and Exchange Commission (“SEC”) under
Memorandum Circular No. 2, Series of 2002, the Company, upon the approval of its Board on
February 21, 2007, submitted its Corporate Governance Manual (“the Manual) to the SEC.
Even prior to the submission of its Manual, in a special joint meeting with the Board of Directors
held on November 21, 2006, the Company’s stockholders approved the creation of various Board
level committees. These committees were comprised of an Executive Committee, a Nomination
Committee for selection and evaluation of qualifications of directors and officers, a
Compensation and Remuneration Committee to look into an appropriate remuneration system,
and an Audit Committee to review financial and accounting matters. A Compliance Officer was
also appointed on that date. Members of various committees are expected to serve for a term one
(1) year.
The Company is not aware of any non-compliance with its Manual of Corporate Governance, by
any of its officers or employees.
PART V - EXHIBITS AND SCHEDULES
Page 26 of 28
Item 13.
Exhibits and Reports on SEC Form 17-C
a. Exhibits
There are no exhibits to be provided/are applicable to the Company.
b. Reports on SEC Form 17-C
DOCUMENT
DATE FILED
ITEM NO.
MATTER
SEC Form 17-C dated
October 14, 2008
October 15, 2008
Item 9 (a) (13) / 9 (b)9
Extension of Buy-Back Program and
Payment date for Cash Dividend
SEC Form 17-C dated
August 8, 2008
August 11, 2008
Item 9 (a) (13) / 9 (b)
Payment date for Cash Dividend
SEC Form 17-C dated
June 26, 2008
June 26, 2008
Item 4
Annual Stockholders’ Meeting
SEC Form 17-C dated
May 7, 2008
May 7, 2008
Item 9 (a) (13) / 9 (b)
Cash Dividend
SEC Form 17-C dated
March 12, 2008
March 14, 2008
Item 9 (a) (12)
Postponement of Annual Stockholders’
Meeting
SEC Form 17-C dated
January 18, 2008
January 18, 2008
Item 9(4) (b)
Appointment of Mr. Jerry C. Tiu as
head of the Compensation and
Remuneration Committee
Page 27 of 28
SIGNATURES
Pursuantto the requirements
of Section17 of the SecuritiesRegulationCodeand Section141of the
CorporationCode,this reportis signedon^[ehglflof the issuerby the undersigned,thereuntoduly
authorized, in the
of Pasigon
By:
President
ChiefFinancialOffi-cer
Vice President-Finance
&
-.-'.2
--="-
. BavaniK. Tan
rporate Secretary
APR2e2!9J"
SUBSCRIBEDAND SWORN to before me this
affiants exhibiting to me their C_ommunityTax Certificates,as follows:
NAME
COMMI]NITY TAX
CERTIFICATE NO.
DATE OF ISSUE
2009,
PLACE OF ISSUE
Willy N. Ocier
zJo44Zll
Jarmary 28, 2009
Manila
RhederickB. Inciong
13605962
January t2, 2009
Pasig City
A. BayaniK. Tan
r90L7579
January !2, 2oO9
lhnila -:
[lTY.-DEtFtfP
noc.No. f
Book No. Z-
PageNo.
l/Y/
Seriesof 2009
,t6T
-,,
R0Ltrfo.24
f s pl i s 7 5 4 + 3 *. n* rF " a E - 0 9
\{il*F il{i:qr'0f}!f,
" o t f F v h t f ' lf l r n n B t . ' 3 9
'ia*fi
Page 28 of 28
PACIFIC ONLINE SYSTEMS CORPORATION AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Page No.
Financial Statements
Statement of Management's Responsibility for Financial Statements
Report of Independent Public Auditors
Balance Sheets as of December 31, 2008 and 2007
Statements of Income
for the years ended December 31, 2008 and 2007
Statements of Changes in Stockholders' Equity
for the years ended December 31, 2008 and 2007
Statements of Cash Flows
for the years ended December 31, 2008 and 2007
Notes to Financial Statements
) See Attached
) FS
)
)
)
)
)
)
)
)
Supplementary Schedules
Report of Independent Public Auditors on Supplementary Schedules
A.
B.
C.
D.
E.
F.
G.
H.
I.
Short-term Cash Investments
Amounts Receivable from Director's, Officers, Employees, Related Parties and
Principal Stockholders (Other than Associates)
Other Long-term Investments and Other Investments
Indebtedness to Unconsolidated Subsidiaries and Associates
Other Assets
Long-term Debt
Indebtedness to Affiliates and Related Parties (Long-term Loans from Related
Companies)
Guarantees of Securities of Other Issuers
Capital Stock
*
SEE ATTACHED
SEE ATTACHED
SEE ATTACHED
SEE ATTACHED
SEE ATTACHED
SEE ATTACHED
*
*
SEE ATTACHED
* These schedules, which are required by Part IV(e) of RSA Rule 48, have been omitted because they are either not
required, not applicable or the information required to be presented is included in the Company's consolidated
financial statements or the notes to consolidated financial statements.
PAtrIFItr
ENLINE
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
FOR THE FINANCIAL STATEMENTS
S E C U R I T I EA
S N D E X C H A N G EC O M M I S S I O N
SECBuilding,EDSA Greenhills
City, Metro Manila
Mandaluyong
for all inlormationard representations
The management
of PacificOnline SystemsCorporationis responsible
for theyearsendedDecember
31,2006,December
31, 2007,ald December
containedin the financialstatements
31, 2008. The filancial statementshave beenpreparedin conformitywith PhilippineFinancialReporting
Standardsard reflect amountsthat axebasedon the bestestimatesand informedjudgment of managementwith
anappropriate
consideration
to materiality.
In this regard,management
maintainsa systemof accountingand reportingwhich providesfor the necessary
intemal controlsto ensurethat transactionsare properly authorizedand recorded,assetsare safeguardedagainst
unauthorizeduse or dispositionand liabilities are recognized.The managementlikewise disclosesto the
company'sextemalauditors;(i) all significantdeficienciesin the designor operationof internalcontrolsthat
in the
could adverselyaffect its ability to record,process,and reportfinancialdata;(ii) materialweaknesses
who exercisesignificantroles
intemalcontrols;and(iii) any fraudthat involvesmanagement
or otheremployees
in internalcontrols.
beforesuchstatements
are approveda.ndsubmittedto
The Boardof Directorsreviewsthe financialstatements
ofthe company.
thestockholders
haveauditedthe financial
auditorsappointedby the stockholders,
SycipGorresVelayo& Co., the independent
with auditing
of the Companyas of andthe for the periodendedDecember31, 2008 in accordance
statements
presentation
generallyacceptedin the Philippinesandhaveexpressed
on
the
fairness
of
their opinion
upon
ofsuch audit in their reDortto stockholde$.
oathby the following:
C.4/TevAM//,,
rNggNG
RHEDERTCK
RHEDERICK
B.
B. IN
Chairman
ofthe BoardandPresident
ChiefFinanciallOffictrt'
to me their
AND SWORNto beforeme this APR Aagffi0$ril 2009affiantsexhibited
SUBSCRIBED
asfollows:
andotheridentificationdocuments,
respective
CommunityTax Certificates
WILLY N. OCIER
RHEDERICKB. INC]ONG
Date/PlaceIssued
CTC No./Passport
No./OtherI.D.
23644222
TT0034832/1
1360s962
/ /
03-9232025-2'tSS$
z
l.28.2009iManila
5.03.2006/Manila
CiE
1.12.2009/Pasie
wtr
?a\
--
/1
ATIY,0E[Fflt1
D o c . N o --lL
. :l
Pug"no.
-i
BookNo. LXX[/
I
Sedesof2009
;
i'!''trdi{ffi
l"Tf,If Jy-".
f ! glalor.0.,_oc
F_4
lpj
HtJ
t re-5r.-{is'_bi
fto;tr'-oir'#j
!LE
fot{.EXprf;E0
{ri oegios
16/F MetrobankPlaza
OsmefraBoulevard,CebuCity 6000
Tel.No. 032-255-0721
Fax No. 032-255-0635
sa[l[r
PaciticOnlineSystemsCorporation
2201-A.22lFWestTower
Centre
StockExchange
Philippine
Ortigascenter,PasigCity,M.M.1605
Tel.No.02-636-5281
FaxNo.02-6361657
Pacific Online Systems Corporation and Subsidiaries
Consolidated Financial Statements
December 31, 2008 and 2007
and Years Ended December 31, 2008, 2007 and 2006
and
Independent Auditors’ Report
SyCip Gorres Velayo & Co.
SyCip Gorres Velayo & C o.
6760 Ayala Av enue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Pacific Online Systems Corporation
We have audited the accompanying financial statements of Pacific Online Systems Corporation and
Subsidiaries, which comprise the consolidated balance sheets as at 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. We did not audit the 2008
and 2007 consolidated financial statements of Loto Pacific Leisure Corp. and subsidiary, a wholly
owned subsidiary, and Innovative Solutions Consultancy Group, Corp. and subsidiary, an 87.38%
subsidiary effective April 1, 2008 (previously a 50% joint-venture entity). These subsidiaries’ total
assets included in the 2008 consolidated financial statements amounted to P
=136.7 million
(representing 17.52% of the 2008 consolidated assets), while their revenue amounted to P
=68.4 million
(which increased the 2008 consolidated revenue by 8.99%). The total assets of Loto Pacific Leisure
Corp. and subsidiary included in the 2007 consolidated financial statements amounted to P
=59.2 million
(representing 7.93% of the 2007 consolidated assets), while their revenue amounted to P
=13.2 million
(which increased the 2007 consolidated revenue by 2.66%). Also in 2007, we did not audit the
financial statements of Innovative Solutions Consultancy Group, Corp., a 50% joint-venture entity, the
investment of which was reflected in the 2007 consolidated financial statements using the equity
method of accounting. The balance of such investment represented 6.40% of the total assets as of
December 31, 2007. The subsidiaries’ and the 50% joint-venture entity financial statements were
audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as
it relates to the amounts included for such subsidiaries, is based solely on the reports of the other
auditors.
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.
*SGVMC211961*
A member firm of Ernst & Young Global Limited
-2An 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 and the reports of other auditors are sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial
statements present fairly, in all material respects, the financial position of Pacific Online Systems
Corporation 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.
Juanito A. Fullecido
Partner
CPA Certificate No. 25543
SEC Accreditation No. 0080-AR-1
Tax Identification No. 102-086-897
PTR No. 1566432, January 5, 2009, Makati City
April 2, 2009
*SGVMC211961*
PACIFIC ONLINE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS
Current Assets
Cash and cash equivalents (Notes 10 and 28)
Investments held for trading (Notes 11 and 28)
Trade and other receivables (Notes 2, 12, 19 and 28)
Other current assets - net (Notes 13 and 16)
Total Current Assets
Noncurrent Assets
Investment and advances (Notes 8, 14, 19 and 28)
Property and equipment - net (Notes 15, 16 and 24)
Deferred tax assets - net (Note 23)
Goodwill - net (Note 8)
Other noncurrent assets
Total Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Trade and other current liabilities (Notes 16, 19, 24 and 28)
Withholding taxes payable
Income tax payable
Current portion of installment payable (Notes 15, 24 and 28)
Current portion of obligations under finance lease
(Notes 15, 24 and 28)
Total Current Liabilities
Noncurrent Liabilities
Installment payable - net of current portion (Notes 15, 24 and 28)
Obligations under finance lease - net of current portion
(Notes 15, 24 and 28)
Defined benefit liability (Note 26)
Total Noncurrent Liabilities
Equity Attributable to Equity Holders of the Parent
Capital stock (Notes 17 and 18)
Additional paid-in capital (Notes 17 and 18)
Treasury shares (Note 17)
Retained earnings (Note 17)
Minority Interests (Note 8)
Total Equity
2008
2007
P
=103,424,773
54,810,517
116,796,975
52,569,459
327,601,724
=151,417,401
P
58,213,480
67,667,916
43,763,032
321,061,829
–
399,497,752
3,276,796
39,275,519
10,177,695
452,227,762
P
=779,829,486
47,135,294
347,546,171
2,000,616
13,363,484
5,343,393
415,388,958
=736,450,787
P
P
=71,128,214
5,736,821
32,488,173
4,269,134
=20,609,359
P
3,973,747
26,924,515
2,326,433
62,471,714
176,094,056
55,849,197
109,683,251
2,349,000
–
196,462,736
4,716,198
203,527,934
228,244,156
2,485,398
230,729,554
199,715,000
198,223,654
(37,061,041)
47,797,006
408,674,619
(8,467,123)
400,207,496
P
=779,829,486
199,098,000
190,371,690
–
6,568,292
396,037,982
–
396,037,982
=736,450,787
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC211961*
PACIFIC ONLINE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2007
2008
REVENUE
Equipment rentals (Notes 2 and 24)
Commission income
Instant scratch ticket project with PCSO (net of prizes,
share of PCSO and direct expenses) (Note 21)
Maintenance and repair fees (Note 2)
COSTS AND EXPENSES
Operating expenses (Notes 15, 16, 18, 19, 20, 24 and 26)
Finance charges (Notes 15 and 24)
OTHER INCOME (CHARGES)
Mark-to-market gain (loss) on investments
held for trading (Note 11)
Interest income (Notes 10, 19 and 22)
Foreign exchange gain (loss)
Gain (loss) on sale of:
Property and equipment (Note 15)
Investments held for trading
Equity in net losses of a joint venture (Note 14)
Provisions for:
Impairment loss (Note 8)
Probable losses (Note 13)
Gain on condonation of liability (Notes 16 and 19)
Others - net (Note 25)
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM)
INCOME TAX (Note 23)
Current
Deferred
NET INCOME
Attributable to:
Equity holders of the parent (Note 27)
Minority interests
Basic/Diluted Earning Per Share Attributable to
Equity Holders of the Parent (Note 27)
2006
P
=642,598,196
65,239,995
=472,368,287
P
13,210,086
=402,042,400
P
–
92,074,582
9,737,152
809,649,925
21,011,172
7,193,426
513,782,971
–
11,591,988
413,634,388
(497,400,296)
(26,636,655)
(524,036,951)
(287,672,265)
(25,345,169)
(313,017,434)
(321,812,304)
(20,476,312)
(342,288,616)
(48,008,254)
3,294,967
388,143
(11,178,317)
5,484,443
(86,997)
2,623,862
3,171,489
1,496,537
1,655,770
–
(5,927,929)
(36,906,038)
1,131,030
(9,185,674)
(142,832)
–
–
24,255,582
14,059,720
–
(2,820,539)
39,156,556
10,562,753
9,229,976
8,928
–
–
–
–
–
10,488,887
(33,827,329)
251,785,645
214,825,257
80,575,748
113,639,678
(1,276,180)
112,363,498
79,167,719
1,065,769
80,233,488
24,995,623
5,113,572
30,109,195
P
=139,422,147
=134,591,769
P
=50,466,553
P
P
=140,597,374
(1,175,227)
P
=139,422,147
=134,591,769
P
–
=134,591,769
P
=50,466,553
P
–
=50,466,553
P
=0.73
P
=0.40
P
P
=0.71
See accompanying Notes to Consolidated Financial Statements.
*SGVMC211961*
PACIFIC ONLINE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Additional
Paid-in
Capital
Capital Stock
(Notes 17
(Notes 17
and 18
and 18)
P
=199,098,000 P
=190,371,690
Balance at December 31, 2007
Minority interest at date of acquisition
of the controlling interest in a joint
venture entity (subsidiary)
–
Additional subscription (Note 17)
617,000
Share-based payment (Note 18)
–
Cash dividends (Note 17)
–
Treasury shares acquired
–
Net income (loss) during the year
–
Balance at December 31, 2008
P
=199,715,000
Balance at December 31, 2006
Subscriptions and conversion of
deposit for stock subscriptions
before initial public offering (IPO)
IPO shares subscriptions
Stock issuance costs
Net income during the year
Balance at December 31, 2007
=125,250,000
P
Balance at December 31, 2005
Net income during the year
Balance at December 31, 2006
=125,250,000
P
–
=125,250,000
P
62,048,000
11,800,000
–
–
=199,098,000
P
Deposit for
Stock
Subscription
(Note 17)
P
=–
Treasury
Shares
(Note 17)
P
=–
Retained
Earnings
(Deficit)
(Note 17)
P
=6,568,292
–
–
–
–
(37,061,041)
–
(P
=37,061,041)
–
–
–
(99,368,660)
–
140,597,374
P
=47,797,006
Minority
Interests
(Note 8)
Total
P
=– P
=396,037,982
–
4,855,960
2,996,004
–
–
–
P
=198,223,654
–
–
–
–
–
–
P
=–
=–
P
=124,750,000
P
=– (P
P
=128,023,477)
=–
P
=121,976,523
P
(124,750,000)
–
–
–
=–
P
–
–
–
–
=–
P
–
–
–
–
=–
P
54,000,000
104,784,000
(19,314,310)
134,591,769
=396,037,982
P
=124,750,000
P
–
=124,750,000
P
=– (P
P
=178,490,030)
–
50,466,553
=– (P
P
=128,023,477)
=–
P
–
=–
P
=71,509,970
P
50,466,553
=121,976,523
P
116,702,000
92,984,000
(19,314,310)
–
=190,371,690
P
=–
P
–
=–
P
–
–
–
134,591,769
=6,568,292
P
(7,291,896)
(7,291,896)
–
5,472,960
–
2,996,004
–
(99,368,660)
–
(37,061,041)
(1,175,227)
139,422,147
(P
=8,467,123) P
=400,207,496
See accompanying Notes to Consolidated Financial Statements.
*SGVMC211961*
PACIFIC ONLINE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2008
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization (Notes 15, 20 and 21)
Unrealized mark-to-market loss (gain) on investments
held for trading (Note 11)
Finance charges (Notes 15 and 24)
Minority interests of acquired subsidiary
Interest income (Notes 19 and 22)
Share-based compensation (Notes 18 and 20)
Dividend income (Note 25)
Loss (gain) on or sale of:
Property and equipment (Note 15)
Investments held for trading
Gain on condonation of liability (Notes 16 and 19)
Provisions for:
Equity in net losses of a joint venture (Note 14)
Impairment loss (Note 8)
Probable losses (Note 13)
Unrealized foreign exchange losses (gain)
Operating income before working capital changes
Increase in:
Trade and other receivables
Other current assets
Increase (decrease) in:
Trade and other current liabilities
Withholding taxes payable
Defined benefit liability
Income tax paid
Interest received
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to:
Property and equipment (Notes 15 and 24)
Investments held for trading (Note 11)
Acquisition of a subsidiary, excluding cash
(Notes 8 and 10)
Increase (decrease) in other noncurrent assets
Dividend received
Proceeds from sale of:
Property and equipment
Investments held for trading (Note 11)
Notes receivable issued and advances to Total Gaming
Technologies, Inc.
Net cash used in investing activities
Years Ended December 31
2006
2007
P
=251,785,645
=214,825,257
P
=80,575,748
P
75,634,129
55,489,063
42,788,288
48,008,254
26,636,655
7,291,896
(3,294,967)
2,996,004
(903,100)
11,178,317
25,345,169
–
(5,484,443)
–
(466,268)
(2,623,862)
20,476,312
–
(3,171,489)
–
(11,150)
(8,928)
–
–
(1,655,770)
–
–
36,906,038
(1,131,030)
39,156,556
–
–
–
–
408,145,588
5,927,929
142,832
–
58,997
305,361,083
(48,767,870)
(7,659,167)
(46,158,325)
(26,416,527)
(2,834,176)
(4,775,873)
23,138,741
1,763,074
2,230,800
(108,076,020)
3,387,853
274,162,999
3,187,240
(1,281,497)
(3,242,398)
(58,227,893)
5,660,878
178,882,561
(92,070,293)
585,579
1,313,364
(19,010,934)
3,105,798
109,788,552
(87,268,223)
(44,605,291)
(52,986,434)
(58,841,397)
(10,832,069)
(10,380,953)
25,528,184
(3,171,657)
903,100
(17,913,696)
(1,995,566)
466,268
8,928
–
–
(108,604,959)
1,655,770
–
(10,814,570)
(140,429,625)
9,185,674
–
2,820,539
(1,496,537)
223,475,087
–
21,310
11,150
3,250,880
9,864,565
(27,759,814)
(35,824,931)
(Forward)
*SGVMC211961*
-2Years Ended December 31
2007
2006
2008
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of:
Cash dividends (Note 17)
Obligations under finance lease
Installment payable
Loans
Acquisition of treasury shares (Note 17)
Interest paid
Cash proceeds from issuance of shares of stock
(net of issuance costs)
Decrease in payable to stockholders
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS
AT END OF YEAR (Note 10)
(P
=99,368,660)
(53,630,839)
(2,326,433)
–
(37,061,041)
(26,636,655)
P
=–
(41,537,761)
(1,582,575)
–
–
(25,353,390)
P
=–
(29,891,974)
–
(825,825)
–
(18,289,634)
5,472,960
–
(213,550,668)
139,469,690
–
70,995,964
–
(34,452,122)
(83,459,555)
(47,992,628)
109,448,900
(9,495,934)
151,417,401
41,968,501
51,464,435
P
=103,424,773
=151,417,401
P
=41,968,501
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC211961*
PACIFIC ONLINE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
Corporate Information
Pacific Online Systems Corporation (POSC or Parent Company) and the following subsidiaries
(collectively referred to as “the Group”) are incorporated in the Philippines and registered with the
Philippine Securities and Exchange Commission (SEC) on various dates:
Subsidiaries
Loto Pacific Leisure Corporation (LotoPac)
Lucky Circle Corporation (Lucky Circle)*
Innovative Solutions Consultancy Group Corp. (Innovative)
Total Gaming Technologies, Inc. (TGTI)**
**
**
Percentage of Ownership
Direct
Indirect
100.00
–
–
100.00
87.38
–
–
69.90
Indirectly owned through LotoPac (see Note 8)
Indirectly owned through Innovative (see Note 8)
The Parent Company with registered office address at 22nd Floor, West Tower, Philippine Stock
Exchange (PSE) Centre, Exchange Road, Ortigas Center, Pasig City, is engaged in the
development, design and management of online computer systems, terminals and software for the
gaming industry. The Parent Company can also engaged in any lawful arrangement for sharing
profits, union of interest, unitization or formal agreement, reciprocal concession, or cooperation,
with any corporation, association, partnership, syndicate, entity, person or governmental,
municipal or public authority, domestic or foreign.
On November 11, 2006, the Parent Company’s Board of Directors (BOD) and stockholders
authorized the Parent Company to conduct an IPO of 39,800,000 parent company common shares
(the “offer shares”), which consist of 11,800,000 new common shares and 28,000,000 existing
common shares owned by the selling shareholders of the Parent Company; and apply for the
listing thereof on the PSE.
On March 23, 2007, the SEC and PSE approved the Parent Company’s application for public
listing and trading of its shares which commenced on April 12, 2007 (see Note 17).
On March 16, 2007, LotoPac was incorporated primarily to acquire, establish, own, hold, lease,
sell, conduct, operate, and manage amusement, recreational and gaming equipment facilities, and
enterprise of every kind and nature, as well as places for exhibitions, recreation, gaming,
amusement and leisure of the general public, and to acquire, hold, and operate any and all
privileges, rights, franchises and concessions as may be proper, necessary, advantageous, or
convenient in the conduct of its business. On August 29, 2007, LotoPac acquired Lucky Circle, an
authorized agent of Philippine Charity Sweepstakes Office (PCSO) to operate several online
lottery betting stations located at branches of the SM Supermalls nationwide.
*SGVMC211961*
-2In April 2008, the Parent Company acquired 37.38% ownership of the other venturer in
Innovative. Innovative, a holding company whose primary purpose is to provide management
counsel for business enterprises engaged in gaming business, has 80% interest in TGTI. TGTI has
an Equipment Lease Agreement (ELA) with PCSO for its Online Keno Lottery Project. TGTI
provides consultancy service and “Online Keno” equipment and necessary accessories to PCSO
through its partnership with Intralot S.A. Integrated Lottery Systems and Services (Intralot).
Approval for the Issuance of the Financial Statements
The accompanying consolidated financial statements were approved and authorized for issuance
by the BOD on April 2, 2009.
2. Agreement with PCSO
Parent Company with PCSO
ELA. The Parent Company has an ELA with PCSO which provides for the lease to PCSO of,
among others, central computer, communications equipment including its accessories, 1,250
terminals, the right to use the application software and manuals for the central computer system
and terminals and draw equipment for a period of eight years from April 1, 2005.
A maintenance and repair agreement which runs concurrently with the ELA, was also entered into
by the Parent Company with PCSO, whereby, the Parent Company will provide maintenance and
repair services on the equipment leased by PCSO for a fee. The ELA also provides PCSO an
option to purchase the equipment upon the expiration of the lease period for a sum of
=25.0 million.
P
Rental billed to PCSO is based on a certain percentage of gross amount of lotto ticket sales from
the operation of all PCSO’s lotto terminals in Visayas-Mindanao (VIS-MIN) to cover for
equipment rental, maintenance and repairs fee, and communication and service fee. Total number
of terminals installed as of December 31, 2008 and 2007 was 1,600 and 1,401, respectively.
Rental income of the Parent Company amounted to P
=639.4 million, P
=472.4 million and
=402.0 million in 2008, 2007 and 2006, respectively. Receivables from PCSO amounted to
P
=38.0 million and P
P
=26.4 million as of December 31, 2008 and 2007, respectively (see Note 12).
Instant Scratch Ticket Project. On June 13, 2007, the BOD approved the Deed of Assignment
entered into by the Parent Company with AB Gaming and Leisure Specialist, Inc. (AB Gaming),
the assignor, to assume and undertake the sale of 10 million Instant Scratch Tickets (tickets)
“Money Bags and Triple Cash” in the amount of P
=200.0 million to be sold for a period of not
more than six months at no cost to PCSO. All rights, interest and obligations of AB Gaming
under the original Memorandum of Agreement (MOA) dated March 23, 2007 with PCSO were
ceded, transferred, or assigned in favor of the Company, which resulted to the assumption of AB
Gaming’s obligation amounting to P
=39.2 million.
On November 19, 2007, the Parent Company entered into another MOA with PCSO to undertake
the printing, distribution and sale of 20 million tickets “Lucky 8, Payday, Fast Cash and Diamond
Dash Promo” in the amount of P
=400.0 million to be sold within six months to one year, and
guaranty the sale of all tickets on “good-as-sold basis”, at no cost to PCSO. PCSO’s share is fixed
at P
=60.0 million payable in 12 equal monthly installments of P
=5.0 million.
*SGVMC211961*
-3On June 11, 2008, the PCSO’s BOD authorized the amendment of the MOA dated November 19,
2007 to increase the number of scratch tickets from the initial 20 million tickets to 40 million
tickets. The additional 20 million tickets “Mega Money, Red Hot 7, Gold Rush and Double
Dollar” in the amount of P
=400.0 million guarantees additional P
=60.0 million share for PCSO.
Refer to Note 21 for the financial performance.
On February 5, 2009, the Parent Company entered a new MOA with PCSO to undertake the
printing, distribution and sale of 30 million new batch of tickets comprising of a maximum of
8 game variants to be called the “Diamond Anniversary Series” in the amount of P
=600.0 million to
be sold within eighteen months, and guaranty the sale of all tickets on “good-as-sold basis,” and
again at no cost to PCSO. PCSO’s share is also fixed at P
=90.0 million in 18 equal monthly
installments of P
=5.0 million.
Development and Delivery of the Game Software. In 2007, the PCSO’s BOD authorized the
Parent Company to develop the game software for Powerlotto. In consideration for this service,
an amount of P
=9.9 million (net of output value added-tax (VAT)) was received in 2008
(see Note 25).
TGTI Equipment Rental with PCSO
TGTI has an ELA with PCSO which provides also for the lease of the necessary equipment for the
“Online KENO” games. The term of the lease shall be for ten (10) years, commencing on the date
of the establishment of at least two hundred (200) KENO outlets and shall mean the actual
operation of at least 200 outlets. Rental billed to PCSO is based on certain percentage of the gross
amount of the “Online KENO” game or a fixed annual rental of P
=40,000 per terminal in
commercial operation, whichever is higher, and maybe extended and/or renewed upon the mutual
consent of the parties.
On July 15, 2008, TGTI and PCSO agreed on certain amendments to the ELA. Under the terms of
the amended ELA, TGTI shall provide the services of telecommunications integrator for the
Online KENO operations in Luzon and VISMIN areas. In consideration of such services, PCSO
shall pay a communication integration service fee based on certain percentage of the gross amount
of ticket sales from all “Online KENO” operations.
The amended ELA also provides that TGTI shall procure supplies for PCSO’s Online KENO
operations in Luzon and VISMIN for a fee based on certain percentage of the gross amount of
ticket sales from all “Online KENO” operations computed and payable bi-weekly.
Rental income from “Online KENO” game amounted to P
=3.2 million in 2008.
3. Basis of Preparation and Statement of Compliance
Basis of Preparation
The accompanying consolidated financial statements have been prepared on a historical cost basis,
except for investments held for trading that have been measured at fair value. The consolidated
financial statements are presented in Philippine peso, the Group’s functional and presentation
currency, and all values are rounded to the nearest peso, except when otherwise indicated.
*SGVMC211961*
-4Statement of Compliance
The accompanying consolidated financial statements have been prepared in compliance with
Philippine Financial Reporting Standards (PFRS), which include Philippine Accounting
Standards (PAS) and Philippine Interpretations from International Financial Reporting
Interpretations Committee (IFRIC) interpretations issued by the Financial Reporting Standards
Council.
Basis of Consolidation
The consolidated financial statements include the accounts of the Parent Company, LotoPac and
Lucky Circle and in 2008, the accounts of Innovative and TGTI. The financial statements of the
subsidiaries are prepared for the same reporting year as the Parent Company using consistent
accounting policies. Adjustments are made to bring into line any dissimilar accounting policies
that may exist.
The subsidiaries are fully consolidated from the date of acquisition, being the date on which the
Parent Company obtains control, and continue to be consolidated until the date that such control
ceases. Where there is a loss of control of a subsidiary, the consolidated financial statements
include the results for the part of the reporting year during which the Parent Company has control.
Control is normally evident when the Parent Company owns, either directly or indirectly through
its subsidiaries, more than 50% of the voting rights of a company’s capital stock, and is able to
govern the financial and operating policies of a company so as to benefit from its activities.
Minority interests represent the portion of profit or loss and net assets or liabilities not held by the
Parent Company and are presented separately in the consolidated statements of income and within
stockholders’ equity in the consolidated balance sheets, separately from equity attributable to
equity holders of the Parent.
Losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in
the subsidiary’s equity. The excess, and any further losses applicable to the minority, are allocated
against the majority interest except to the extent that the minority has a binding obligation and is
able to make an additional investment to cover the losses. If the subsidiary subsequently reports
profits, such profits are allocated to the majority interest until the minority’s share of losses
previously absorbed by the majority has been recovered.
All intra-group balances, transactions, income and expenses and profits and losses resulting from
intra-group transactions that are recognized in assets and liabilities, are eliminated in full.
Unrealized losses are eliminated unless costs cannot be recovered.
4. Changes in Accounting Policies
The accounting policies adopted in the preparation of the Group’s financial statements 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 July 1, 2008:
§
Philippine Interpretation IFRIC 11, “PFRS 2, Group and Treasury Share Transactions” —
This interpretation indicates how to account for circumstances where goods and services are
received in return for an entity’s own equity instruments and how to account for circumstances
*SGVMC211961*
-5when a parent entity grants its own equity instruments to the employees of a subsidiary. As
indicated in Note 18, the Parent Company has Stock Option Plan (the Plan) for its executives
and employees and those of Lucky Circle. This interpretation however has no impact in the
Group’s financial statements.
§
Philippine Interpretation IFRIC 12, “Service Concession Arrangements” — This interpretation
covers contractual arrangements arising from private entities providing public services and is
not relevant to the Group’s current operations.
§
Philippine Interpretation IFRIC 14, “PAS 19 — The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction” - This interpretation provides general
guidance on how to assess the limit in PAS 19, “Employee Benefits,” on the amount of the
surplus that can be recognized as an asset. It also explains how the pension asset or liability
may be affected when there is a statutory or contractual minimum funding requirement. This
interpretation has no impact on the Group’s financial statements as the defined benefit scheme
is currently in deficit.
§
Amendments to PAS 39, “Financial Instruments: Recognition and Measurement”, and
PFRS 7, “Financial Instruments: Disclosure” — The amendments to PAS 39 introduce the
possibility of reclassification of securities out of the trading category in rare circumstances and
reclassification to the loans and receivable category if there is intent and ability to hold the
securities for the foreseeable future or to held-to-maturity if there is intent and ability to hold
the securities until maturity. The amendments to PFRS 7 introduce the disclosures relating to
these reclassifications. These amendments has no impact in the Group’s financial statements
since the Group did not avail of the reclassification allowed under the amended standard.
5. Summary of Significant Accounting and Financial Reporting Policies
Business Combination and Goodwill
Business combinations are accounted for using the purchase method of accounting. This involves
recognizing identifiable assets (including previously recognized intangible assets, if any) and
liabilities (including contingent liabilities and excluding future restructuring of the acquired
business at fair value).
Goodwill acquired in the business combination is initially measured at cost being the excess of the
cost of the business combination over the Parent Company’s interest in the net fair value of the
acquiree’s identifiable assets, liabilities and contingent liabilities. 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.
*SGVMC211961*
-6Impairment is determined by assessing the recoverable amount of the cash-generating unit (or
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 (or 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.
When subsidiaries are sold, the difference between the selling price and the net assets plus
cumulative translation differences, if any, is recognized in the consolidated statement of income.
PFRS 3, “Business Combination” provides that if the initial accounting for a business combination
can be determined only provisionally by the end of the period in which the combination is effected
because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities or
contingent liabilities or the cost of the combination can be determined only provisionally, the
acquirer shall account for the combination using those provisional values. The acquirer shall
recognize any adjustments to those provisional values as a result of completing the initial
accounting within twelve months of the acquisition date as follows; (i) the carrying amount of the
identifiable asset, liability or contingent liability that is recognized or adjusted as a result of
completing the initial accounting shall be calculated as if its fair value at the acquisition date had
been recognized from that date; (ii) goodwill or any gain recognized shall be adjusted by an
amount equal to the fair value of the identifiable asset, liability or contingent liability being
recognized or adjusted; and (iii) comparative information presented for the periods before the
initial accounting for the combination is complete shall be presented as if the initial accounting
had been completed from the acquisition.
Cash and Cash Equivalents
Cash includes cash on hand and cash in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from the date of acquisition and that are subject to an insignificant risk of change in
value.
Financial Instruments
Initial Recognition. Financial assets within the scope of PAS 39 are classified as financial assets
at fair value through profit or loss (FVPL), loans and receivables, held-to-maturity (HTM)
investments, available-for-sale (AFS) financial assets, or as derivatives designated as hedging
instruments in an effective hedge, as appropriate. Financial liabilities are categorized as financial
liabilities at FVPL or other financial liabilities. The Group determines the classification of its
financial instruments at initial recognition.
The Group has no financial assets classified as HTM investments and AFS investments and no
financial liabilities at FVPL as of December 31, 2008 and 2007.
Financial assets and liabilities are recognized initially at fair value plus, in the case of financial
assets and liabilities not at FVPL, directly attributable transaction costs.
*SGVMC211961*
-7Purchases or sales of financial assets that require delivery of assets within a time frame established
by regulation or convention in the marketplace (regular way purchases) are recognized on the
trade date, i.e. the date that the Group commits to purchase or sell the asset.
Subsequent Measurement. The subsequent measurement of financial assets depends on their
classification as follows:
Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and
financial assets designated upon initial recognition as at FVPL. Financial assets are classified as
held for trading if they are acquired for the purpose of selling in the near term. Derivatives,
including separated embedded derivatives, are also classified as held for trading unless they are
designated as effective hedging instruments. Financial assets at FVPL are carried in the
consolidated balance sheet at fair value with gains or losses recognized in the consolidated
statement of income. Interest earned or incurred is recorded in interest income or expense,
respectively, while dividend income is recorded in other income when the right to receive payment
has been established.
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 measured at fair value
with changes in fair value reported in net profit or loss. The Group assesses whether embedded
derivatives are required to be separated from the host contracts when the Group first becomes a
party to the contract. Reassessment only occurs if there is a change in the terms of the contract
that significantly modifies the cash flows that would otherwise be required.
The Group’s investments held for trading consists mainly of investments in quoted securities
(see Note 11).
Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or
determinable payments that are not quoted in an active market. Such financial assets are carried at
amortized cost using the effective interest method less any allowance for impairment. Gains and
losses are recognized in the consolidated statement of income when the loans and receivables are
derecognized or impaired, as well as through the amortization process. Loans and receivables are
included in current assets if maturity is within twelve months from balance sheet date. Otherwise,
these are classified as noncurrent assets.
This category includes the Group’s cash and cash equivalents, trade and other receivables and
advances to previously held joint-venture (included as part of “Investments and advances” account
in the 2007 consolidated balance sheet) (see Notes 10, 12 and 14).
Other Financial Liabilities. This category pertains to financial liabilities that are not held for
trading or designated as FVPL upon inception of the liability. These include liabilities arising
from operations or borrowings. The financial liabilities are recognized initially at fair value and
are subsequently carried at amortized cost, taking into account the impact of applying the effective
interest method of amortization for any related premium, discount and any directly attributable
transaction costs. These financial liabilities are included in current liabilities if maturity is within
twelve months from the balance sheet date. Otherwise, these are classified as noncurrent
liabilities.
*SGVMC211961*
-8This category includes trade and other current liabilities, installment payable and obligations under
finance lease (see Notes 15, 16 and 24).
Offsetting of Financial Instruments. Financial assets and financial liabilities are offset and the net
amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable
right to offset the recognized amounts and there is intention to settle on a net basis, or to realize
the asset and settle the liability simultaneously.
“Day 1” Profit. Where the transaction price in a nonactive market is different from the fair value
of other observable current market transactions in the same instrument or based on a valuation
technique whose variables include only data from observable market, the Group recognizes the
difference between the transaction price and fair value (a “Day 1” profit) in the consolidated
statement of income unless it qualifies for recognition as some other type of asset. In cases where
use is made of data which is not observable, the difference between the transaction price and
model value is only recognized in the consolidated statement of income when the inputs become
observable or when the instrument is derecognized. For each transaction, the Group determines
the appropriate method of recognizing the “Day 1” profit amount.
Derecognition of Financial Assets and Liabilities
Financial Assets. A financial asset (or, where applicable a part of a financial asset or part of a
group of similar financial assets) is derecognized when:
§
the right to receive cash flows from the asset have expired;
§
the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a “pass-through” arrangement;
or
§
the Group has transferred its right to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the assets, or (b) has neither transferred
nor retained substantially all the risks and rewards of the asset, but has transferred control of
the asset.
Where the Group has transferred its rights to receive cash flows from an asset 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
Group’s continuing involvement in the asset. Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at the lower of original carrying amount of the
asset and the maximum amount of consideration that the Group could be required to repay.
Financial Liability. A financial liability is derecognized when the obligation under the liability is
discharged, cancelled, or has expired.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in the consolidated
statement of income.
*SGVMC211961*
-9Impairment of Financial Assets
The Group assesses at each balance sheet date whether there is any objective evidence that a
financial asset or a group of financial assets is impaired. A financial asset or a group of financial
assets is deemed to be impaired if, an only if, there is objective evidence of impairment as a result
of one or more events that has occurred after the initial recognition of the asset (an incurred “loss
event”) and that loss event has an impact on the estimated future cash flows of the financial asset
of the group of financial assets that can be reliably estimated. Evidence of impairment may
include indications that the debtors or a group of debtors is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will
enter bankruptcy or other financial reorganization and where observable data indicate that there is
a measurable decrease in the estimated future cash flows such as changes in arrears or economic
conditions that correlate with defaults.
Assets Carried at Amortized Cost. For assets carried at amortized cost, the Group first assesses
whether objective evidence of impairment exists individually for financial assets that are
individually significant, and individually or collectively for financial assets that are not
individually significant. If there is objective evidence that an impairment loss has been incurred,
the amount of the loss is measured as the difference between the asset’s carrying amount and the
present value of estimated future cash flows discounted at the financial asset’s original effective
interest rate. The carrying amount of the financial asset is reduced through 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 effective interest rate
of the asset.
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.
The Group provides an allowance for loans and receivables which they deemed to be uncollectible
despite the Group’s continuous effort to collect such balances from the respective clients. The
Group considered those past due receivables as still collectible if they become past due only
because of a delay on the completion of the services to be rendered by the Group as agreed in the
contract and not due to incapability of the clients to fulfill their obligation. However, for those
receivables associated to pre-terminated contracts, the Group directly writes them off from the
account since there is no realistic prospect of future recovery.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in the consolidated statement of income, to the extent that the carrying value of the
asset does not exceed its amortized cost at the reversal date.
*SGVMC211961*
- 10 In relation to trade receivables, a provision for impairment is made when there is objective
evidence (such as probability of insolvency or significant financial difficulties of the debtor) that
the Group will not be able to collect all of the amounts due under the original terms of the invoice.
The carrying amount of the receivable is reduced through the use of an allowance account. The
financial assets, together with the associated allowance accounts, are written off when there is no
realistic prospect of future recovery and all collateral has been realized.
Instant Scratch Tickets Supplies
Instant scratch ticket supplies (included under “Other current assets” account in the consolidated
balance sheet) are valued at cost, less any impairment loss.
Spare Parts and Supplies
Spare parts and supplies (included under “Other current assets” account in the consolidated
balance sheets) are valued at the lower of cost or net realizable value. Cost, which includes all
costs attributable to acquisition, is determined using the first-in, first-out method. Net realizable
value of spare parts and supplies is its current replacement cost.
Property and Equipment
Property and equipment are stated at cost, excluding the costs of day-to-day servicing, less
accumulated depreciation, amortization and any impairment in value. Such cost includes the cost
of replacing part of such property and equipment when that cost is incurred if the recognition
criteria are met.
Depreciation and amortization are computed using the straight-line method over the following
estimated useful lives:
Lottery equipment
Leasehold improvements
Office furniture and fixtures
Transportation equipment
4–8 years or term of the lease,
whichever period is shorter
4 years or term of the lease,
whichever period is shorter
4 years
4–5 years
Equipment under installation are stated at cost, which includes purchase price and other direct
costs. Such assets are not depreciated until such time when the relevant property and equipment
are available for its intended use.
The asset’s residual values, useful lives and depreciation and amortization method are reviewed,
and adjusted if appropriate, at each financial year-end.
When each major repairs and maintenance is performed, its cost is recognized in the carrying
amount of the property and equipment as a replacement if the recognition criteria are satisfied.
Fully depreciated property and equipment are retained in the accounts until they are no longer in
use and no further depreciation is charged to current operations.
*SGVMC211961*
- 11 An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of
the asset) is included in the consolidated statement of income in the year the asset is derecognized.
Impairment of Nonfinancial Assets
The Group assesses at each balance sheet date whether there is an indication that an asset may be
impaired. If any such indication exists and when annual impairment testing for an asset is
required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is the higher of an asset’s cash-generating unit’s fair value less costs to sell or 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 determining fair value less costs to sell, an appropriate valuation model
is used. These calculations are corroborated by valuation multiples or other available fair value
indicators. In assessing value in use, the estimated future cash flows are discounted to their
present value using a pretax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset. Impairment losses are recognized in the
consolidated statement of income in the expense category consistent with the function of the
impaired asset.
For asset excluding goodwill, an assessment is made at each balance sheet date as to whether there
is any indication that previously recognized impairment losses may no longer exist or may have
decreased. If such indication exists, the Group makes an estimate of recoverable amount. A
previously recognized impairment loss is reversed only if there has been a change in the estimates
used to determine the asset’s recoverable amount since the last impairment loss was recognized. If
that is the case, the carrying amount of the asset is increased to its recoverable amount. That
increased amount cannot exceed the carrying amount that would have been determined, net of
depreciation and amortization, had no impairment loss been recognized for the asset in prior years.
Such reversal is recognized in the consolidated statement of income unless the asset is carried at
revalued amount, in which case the reversal is treated as a revaluation increase.
Treasury Shares
Own equity instruments which are reacquired (treasury shares) are recognized at cost and
deducted from equity. No gain or loss is recognized in the consolidated statement of income on
the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference
between the carrying amount and the consideration upon reissuance or cancellation is recognized
as part of “Additional paid-in capital” (APIC).
Business Segments
The Group’s operating businesses are organized and managed separately according to the nature
of the products and services provided, with each segment representing a strategic business unit
that offers different products.
Segment Assets and Liabilities. Segment assets include all operating assets used by a segment and
consist principally of operating cash, receivables, inventories, and property and equipment, net of
allowances and provision. Segment liabilities include all operating liabilities and consist
principally of accounts payable and other liabilities. Segment assets and liabilities do not include
deferred income taxes, investments and advances, and borrowings.
*SGVMC211961*
- 12 Inter-segment Transactions. Segment revenue, segment expenses and segment performance
include transfers among business segments. The transfers, if any, are accounted for at competitive
market prices charged to unaffiliated customers for similar products. Such transfers are eliminated
in consolidation.
Revenue
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Group and the revenue can be reliably measured. The following specific recognition criteria must
also be met before revenue is recognized:
Equipment Rentals and Maintenance and Repair Fees. Income from equipment rentals, consisting
of central computer, communications equipment including its accessories, terminals, the right to
use the application software and manuals for the central computer system and terminals and draw
equipment, as well as maintenance and repair fees is recognized based on a certain percentage of
gross sales of the lessee’s online lottery operations or a fixed annual rental per terminal in
commercial operations, whichever is higher.
Sale of Instant Scratch Tickets. Revenue is recognized upon distribution of Instant Scratch Tickets
(tickets) to third parties.
Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on
the asset.
Dividends. Dividend is recognized when the Group’s right to receive payment is established.
Commission Income. Commission is recognized by the subsidiaries as certain percentages of their
sales of PCSO lottery, sweepstake and instant scratch tickets.
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement is dependent on
the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after inception 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 the term of the renewal or
extension was initially included in the lease term;
c. There is a change in the determination of whether fulfillment is dependent on a specified
asset; or
d. There is 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 and at the date of
renewal or extension period for scenario b.
*SGVMC211961*
- 13 As a Lessor. Leases where the Group does not transfer substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating
an operating lease are added to the carrying amount of the leased asset and recognized over the
lease term on the same bases as rental income. Contingent rents are recognized as revenue in the
period in which they are earned.
As a Lessee. Finance leases, which transfer to the Group substantially all the risks and benefits
incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair
value of the leased property or, if lower, at the present value of the minimum lease payments.
Lease payments are apportioned between the finance charges and reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges
are charged in the consolidated statement of income.
Operating lease payments are recognized as expense in the consolidated statement of income on a
straight-line basis over the lease term or based on the term of the lease agreements, as applicable.
Share-based Payment Transactions
Under the Plan, employees and executives (including directors) of the Group and its affiliates
receive remuneration in the form of share-based payment transactions, whereby employees and
executives render services as consideration for equity instruments (“equity-settled transactions”)
of the Group.
Equity-Settled Transactions. Share-based payment transactions in which the Parent Company
grants rights to equity on its instruments to the Parent Company’s employees and executives and
to those of Lucky Circle are accounted for as equity-settled transactions.
The cost of equity-settled transactions with executives and employees is measured by reference to
the fair value at the date on which they are granted. The fair value is determined using an optionpricing model, further details of which are set forth in Note 18. In valuing equity-settled
transactions, no account is taken of any performance conditions, other than linked to the price of
the shares of the Parent Company (“market condition”), if applicable. The cost of the Plan is
measured by reference to the market price at the time of the grant less subscription price.
The cost of equity-settled transactions is recognized, together with a corresponding increase in
“Additional paid-in capital” account, over the period in which the performance and/or service
conditions are fulfilled, ending on the date on which the relevant employees become fully entitled
to the award (the vesting date). The cumulative expense recognized on equity-settled transactions
at each balance sheet date until the vesting date reflects the extent to which the vesting period has
expired and the Group’s best estimate of the number of equity instruments that will ultimately
vest. The stock compensation expense incurred for the period represents the expense recognized
in the current period for stock option grants pertaining to Group’s executives and employees.
No expense is recognized for awards that do not ultimately vest, provided that all other service
conditions are satisfied.
Where the terms of a share-based award are modified, as a minimum, an expense is recognized as
if the terms had not been modified. In addition, an expense is recognized for any modification,
which increases the total fair value of the share-based payment arrangement, or is otherwise
beneficial to the employee as measured at the date of modification.
*SGVMC211961*
- 14 Where an equity-settled award is cancelled, it is treated as if it had vested on the date of
cancellation, and any expense not yet recognized for the award is recognized immediately.
However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if they were a
modification of the original award, as described in the previous paragraph.
Retirement Cost
The Parent Company has a funded, noncontributory defined benefit retirement plan covering
substantially all of its qualified employees. The defined benefit plan requires contributions to be
made to a separately administered fund. The obligation and costs of retirement benefits are
actuarially computed by a professionally qualified independent actuary using projected unit credit
method. This method reflects service rendered by employees to the date of valuation and
incorporates assumptions concerning employees’ projected salaries. Past service costs, experience
adjustments, and the effects of changes in actuarial assumptions are amortized over the average
remaining working lives of employees participating in the plan.
The past service cost is recognized as an expense on a straight-line basis over the average period
until the benefits become vested. If the benefits are already vested immediately following the
introduction of, or changes to, a pension plan, past service cost is recognized immediately.
Actuarial gains and losses are recognized as income or expense when the net cumulative
unrecognized actuarial gains and losses at the end of the previous reporting period exceeded 10%
of the higher of the defined benefit obligation and the fair value of plan assets at that date. These
gains or losses are recognized over the expected average remaining working lives of the
employees participating in the plan.
The defined benefit liability is the aggregate of the present value of the defined benefit obligation
less past service cost not yet recognized and the fair value of plan assets out of which the
obligations are to be settled directly. The value of any asset is restricted to the sum of any past
service cost not yet recognized 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.
Actuarial valuations are made with sufficient regularity that the amounts recognized in the
consolidated financial statement do not differ materially from the amounts that would be
determined at balance sheet date.
Foreign Currency-denominated Transactions
Transactions denominated in foreign currency are recorded in Philippine peso by applying to the
foreign currency amount the exchange rate between the Philippine peso and the foreign currency
at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are
restated using the closing exchange rate at balance sheet date. All exchange rate differences
including those arising from translation or settlement of monetary items at rates different from
those at which they were initially recorded are recognized in the consolidated statement of income
in the year such differences arise.
*SGVMC211961*
- 15 Taxes
Current Tax. Current tax assets and liabilities for the current and prior years are measured at the
amount expected to be recovered from or paid to the taxation authority. The tax rates and tax laws
used to compute the amount are those that are enacted or substantively enacted at balance sheet
date.
Deferred Tax. Deferred tax is provided using the balance sheet liability method on all temporary
differences at 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 income nor taxable income or loss; and
§
in respect of taxable temporary differences associated with investments in subsidiaries,
associates and interests in joint ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse
in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences to the extent that it is
probable that future taxable profit will be available against which the deductible temporary
differences 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 income nor taxable income or
loss; and
§
in respect of deductible temporary differences associated with investments in subsidiaries,
associates and interests in joint ventures, deferred tax assets are recognized only to the extent
that it is probable that the temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the deductible 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 income 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 income 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 balance sheet date.
Deferred tax assets and liabilities are offset, if a legally enforceable right exists to offset current
tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and
the same taxation authority.
*SGVMC211961*
- 16 Basic/Diluted Earnings Per Share (EPS)
Basic EPS is computed by dividing the net income for the period attributable to equity holders of
the Parent by the weighted-average number issued and outstanding common shares during the
period.
For the purpose of computing diluted EPS, the net income for the period attributable to equity
holders of the Parent and the weighted-average number of issued and outstanding common shares
are adjusted for the effects of all potential dilutive instruments.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event; it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are discounted using a
current pretax rate that reflects, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provisions due to the passage of time is recognized as a
finance cost.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. They are
disclosed in the consolidated notes to consolidated financial statements unless the possibility of an
outflow of resources embodying economic benefits is remote. A contingent asset is not
recognized in the consolidated financial statements but disclosed in the notes to consolidated
financial statements when an inflow of economic benefits is probable.
Events After the Balance Sheet Date
Post balance sheet events that provide additional information about the Group’s financial position
at balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post
balance sheet events that are not adjusting events are disclosed in the notes to consolidated
financial statements when material.
6. Significant Accounting Judgments, Estimates and Assumptions
The preparation of the Group’s consolidated financial statements requires management to make
judgments, estimates and assumptions that affect the reported amounts of revenue, expenses,
assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However,
uncertainty about these assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected in the future.
Judgments
In the process of applying the Group’s accounting policies, management has made judgments,
apart from those involving estimations, which has the most significant effect on the amounts
recognized in the consolidated financial statements.
Leases. The evaluation of whether an arrangement contains a lease is based on its substance. An
arrangement is, or contains a lease when the fulfillment of the arrangement depends on a specific
asset or assets and the arrangement conveys a right to use the asset.
*SGVMC211961*
- 17 The Group has entered into operating lease agreements as a lessor and as a lessee. The Group, as
a lessee, has determined that the lessor retains all significant risks and rewards of ownership of
these properties which are on operating lease agreements. As a lessor, the Group retains
substantially all the risks and benefits of ownership of the assets.
The Group has also entered into finance lease agreements covering certain lottery equipment. The
Group has determined that it bears substantially all the risks and benefits incidental to ownership of
the said properties which are on finance lease agreements.
The carrying value of lottery equipment under finance lease amounted to =
P254.0 million and
=280.7 million as of December 31, 2008 and 2007, respectively (see Notes 15 and 24).
P
Legal Contingencies. The estimate of the probable costs for the resolution of possible claims has
been developed in consultation with outside legal counsel handling the Group’s defense in these
matters and is based upon a thorough analysis of potential results. As of April 2, 2009, the Group
is not involved in any legal cases. No provision for probable losses arising from legal
contingencies was recognized in the consolidated financial statements as of December 31, 2008
and 2007.
Estimates and Assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at
balance sheet date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.
Allowance for Doubtful Accounts. The Group maintains allowance for doubtful accounts at a level
considered adequate to provide for potential uncollectible receivables. The level of this allowance
is evaluated by the management on the basis of factors that affect the collectibility of the accounts.
These factors include, but not limited to, the age and status of receivable, the length of relationship
with the customers, the customer’s payment behavior and known market factors. The Group
reviews the allowance on a continuous basis. Accounts that are specifically identified to be
potentially uncollectible are provided with adequate allowance through charges to consolidated
statement of income in the form of provision for doubtful accounts. A provision is also
established as a certain percentage of receivables not provided with specific reserves. This
percentage is based on a collective assessment of historical collection, current economic trends,
changes in customer payment terms and other factors that may affect the Group’s ability to collect
payments.
As of December 31, 2008 and 2007, there were no provisions for doubtful accounts recognized in
the consolidated financial statements. Trade and other receivables amounted to P
=116.8 million
and P
=67.7 million as of December 31, 2008 and 2007, respectively (see Note 12).
Impairment of Nonfinancial Assets (except Goodwill). PFRS requires that an impairment review be
performed when certain impairment indicators are present. Determining the value of property and
equipment requires the determination of future cash flows expected to be generated from the
continued use and ultimate disposition of such assets, requires the Group to make estimates and
assumptions that can materially affect the consolidated financial statements. Future events could
cause the Group to conclude that the property and equipment are impaired. Any resulting impairment
loss could have a material adverse impact on the Group’s financial condition and financial
performance.
*SGVMC211961*
- 18 The net carrying values of property and equipment amounted to P
=399.5 million and =
P347.5 million as
of December 31, 2008 and 2007, respectively (see Note 15).
Impairment of Goodwill. The Parent Company’s management conducts an annual review for any
impairment in value of the goodwill. The impairment on the goodwill is determined by comparing:
(a) the carrying amount of the cash-generating unit; and (b) the present value of the annual projected
cash flows for five years and the present value of the terminal value computed under the discounted
cash flow method. The key assumptions used in the impairment test of goodwill are discussed in
Note 8 to the consolidated financial statements.
The carrying amount of goodwill amounted to =
P39.3 million and P
=13.4 million as of December 31,
2008 and 2007, respectively (see Note 8).
Provision for impairment loss of goodwill amounted to =
P0.1 million in 2007. No impairment loss
was recognized in 2008 and 2006.
Purchase Price Allocation in Business Combinations. The purchase method requires extensive use of
accounting estimates and judgments to allocate the purchase price to the fair market values of the
acquiree’s identifiable assets and liabilities at acquisition date. It also requires the acquirer to
recognize goodwill. The Group’s acquisitions have resulted in goodwill (see Note 8).
Net Realizable Value of Inventory. The Group provides an allowance for inventories whenever the
value of inventories becomes lower than its cost due to damage, physical deterioration, obsolescence,
changes in price levels or other causes. The lower of cost and net realizable value of inventories is
reviewed at each reporting date to reflect the accurate valuation in the consolidated financial
statements. Spare parts and supplies identified to be obsolete and unusable are written off and
charged as expense for the period.
As of December 31, 2008 and 2007, the aggregate carrying value of instant scratch tickets and spare
parts and supplies (included under “Other current assets” account in the consolidated balance sheets)
amounted to P
=23.9 million and =
P12.1 million, respectively (see Note 13).
Allowance for Probable Losses. The Group provides an allowance for probable losses on input valueadded (VAT) tax based on amount recoverable from taxation authority. The allowance account is
reviewed on an annual basis. An increase in the allowance for probable losses would increase the
recorded expenses and decrease current assets.
As of December 31, 2008 and 2007, the carrying value of input VAT (included under “Other current
assets” account in the consolidated balance sheets) amounted to P
=23.1 million and P
=17.8 million,
respectively (see Note 13).
Estimated Useful Lives of Property and Equipment. The useful life of each of the Group’s property
and equipment is estimated based on the period over which the asset is expected to be available for
use. Such estimation is based on a collective assessment of industry practice, internal technical
evaluation and experience with similar assets. The estimated useful life of each asset is reviewed
periodically and updated if expectations differ from previous estimates due to physical wear and tear,
technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible,
however, that future financial performance could be materially affected by changes in the amounts
and timing of recorded expenses brought about by changes in the factors mentioned above. A
reduction in the estimated useful life of any property and equipment would increase the recorded
operating expenses and decrease noncurrent assets.
*SGVMC211961*
- 19 The carrying value of property and equipment as of December 31, 2008 and 2007 amounted to
=399.5 million and P
P
=347.5 million, respectively (see Note 15).
Share-based Payments. The Group measures the cost of equity-settled transactions with executives
and employees by reference to the option value using the Black-Scholes Option Pricing Model. The
valuation model requires determining the expected volatility, risk-free rate and dividend yield. The
Group recognizes expenses based on the estimated number of grants that will ultimately vest and will
receive settlement. The Group’s average turnover rate over the past few years is used to determine
the attrition rate in computing the benefit expense and the estimated liability.
Share-based compensation expense amounted to P
=3.0 million in 2008 (see Note 18).
Retirement Cost. The present value of the retirement obligation depends on a number of factors
that are determined on an actuarial basis using a number of assumptions. The assumptions used in
determining the net cost for pension include the discount rates and rate of future salary increase.
In accordance with PFRS, actual results that differ from the Group’s assumptions are accumulated
and amortized over future periods and therefore, generally affect the recognized expense and
recorded obligation in such future periods.
The Group determines the appropriate discount rate at the end of each year. This is the interest
rate that is used to determine the present value of estimated future cash outflows expected to be
required to settle the retirement obligation. In determining the appropriate discount rate, the
Group considers the interest rates on government bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating the terms of the
related retirement liability.
Other key assumptions for retirement obligation are based in part on current market conditions.
While it is believed that the Group’s assumptions are reasonable and appropriate, significant
differences in actual experience or significant changes in assumptions may materially affect the
Group’s retirement obligation.
Defined benefit liability amounted to P
=4.7 million and P
=2.5 million as of December 31, 2008 and
2007, respectively (see Note 26).
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. Management expects future
operations will generate sufficient taxable income that will allow all or part of the deferred tax assets
to be utilized.
Deferred tax assets recognized in the consolidated balance sheets amounted to =
P3.4 million and
P2.0 million as of December 31, 2008 and 2007, respectively. There are no unrecognized deferred
=
tax assets as of December 31, 2008 and 2007 (see Note 23).
*SGVMC211961*
- 20 Fair Value of Financial Instruments. PFRS requires certain financial assets and liabilities to be
carried and disclosed at fair value, which requires extensive use of accounting estimates and
judgments. While significant components of fair value measurement were determined using
verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates), the
amount of changes in fair value would differ if the Group utilized a different valuation
methodology. Any changes in fair value of these financial assets and liabilities would directly
affect the statement of income and statement of changes in equity.
The fair value of financial assets amounted to P
=275.0 million and P
=344.6 million as of
December 31, 2008 and 2007, respectively. The fair value of financial liabilities amounted to
=334.4 million and P
P
=304.8 million as of December 31, 2008 and 2007, respectively (see Note 28).
7. Future Changes in Accounting Policies
The Group will adopt the following standards and interpretations enumerated below when these
become effective. Except as otherwise indicated, the Group does not expect the adoption of these
new and amended PFRS and Philippine Interpretations to have significant impact on its
consolidated financial statements.
Effective in 2009
§
Revised PFRS 1, “First-time Adoption of Philippine Financial Reporting Standards - Cost of
an Investment in a Subsidiary, Jointly Controlled Entity or Associate” — This standard has
been revised to allow 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; (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.
§
Amendments to PFRS 2, “Share-based Payment - Vesting Condition and Cancellations” —
The amended 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. The
Group is in the process of quantifying the impact of adoption of this amendment when it
becomes effective on January 1, 2009.
§
PFRS 8, “Operating Segments” — This standard adopts a management approach to reporting
segment information. PFRS 8 will replace PAS 14, “Segment Reporting,” and is required to
be adopted only by entities whose debt or equity instruments are publicly traded, or are in the
process of filing with the SEC for purposes of issuing any class of instruments in a public
market. The Group is in the process of assessing the impact of the standard on its current
manner of reporting segment information.
*SGVMC211961*
- 21 §
Revised PAS 1, “Presentation of Financial Statements” — This standard has been revised to
enhance the usefulness of information presented in the financial statements. Companies will
need to consider whether to present the statement of comprehensive income as a single
statement or two statements. This may also impact the information disclosed in the other
announcements by the Group, such as press releases. Adoption of this amendment will not
have significant impact on the Group except for the additional disclosures to be included in the
consolidated financial statements.
§
PAS 23, “Borrowing Costs” — This standard requires capitalization of borrowing costs when
such costs relate to a qualifying asset. A qualifying asset is an asset that takes a substantial
period of time to get ready for its intended use or sale. In accordance with the transitional
requirements of this standard, the Group will apply these prospectively upon adoption. No
changes will be made for borrowing costs incurred to this date that have been expensed.
§
Amendments to PAS 27, “Consolidated and Separate Financial Statements – Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate Amendments” — This
standards has been amended in respect of the holding companies separate financial statements
including (a) the deletion of “cost method”, making the distinction between pre- and postacquisition 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. The Group expects significant changes in its accounting policies
when it adopts the foregoing accounting changes effective January 1, 2009.
§
Amendments to PAS 32, “Financial Instruments: Presentation” and PAS 1 - Puttable Financial
Instruments and Obligations Arising on Liquidation — These amendments specify, 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.
§
Philippine Interpretation IFRIC 13, “Customer Loyalty Programmes” — This interpretation
addresses accounting by entities that grant loyalty award credits (such as “points” or travel
miles) to customers who buy other goods or services. Specifically, it explains how such
entities should account for their obligations to provide free or discounted goods or services
(“awards”) to customers who redeem award credits.
*SGVMC211961*
- 22 §
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.
Improvements to PFRS
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. These improvements will be effective for annual periods beginning on or after
January 1, 2009. The Group has not yet adopted the following amendments and anticipates that
these changes will have no material effect on the consolidated financial statements.
§
PAS 1, “Presentation of Financial Statements” — The improvement clarifies that 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 improvement replaces the term “net selling
price” with “fair value less costs to sell”, to be consistent with PFRS 5, “Noncurrent Assets
Held for Sale and Discontinued Operations” and PAS 36, “Impairment of Asset.” 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” — The improvement 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. It also provided amendment to plans that result in a reduction in benefits related
to future services are accounted for as a curtailment. The improvement further 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. It
also 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. And, it 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” —
The improvement clarifies that 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” — The improvement 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.
*SGVMC211961*
- 23 §
PAS 28, “Investment in Associates” — The improvement clarifies 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 applies. 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” — The improvement 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” — The improvement clarifies 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” — The improvement clarifies 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” — The improvement clarifies that expenditure on advertising and
promotional activities is recognized as an expense when the Group either has the right to
access the goods or has received the services. Advertising and promotional activities now
specifically include mail order catalogues. It also 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” — The improvement
clarifies that 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. It removes the reference to
a “segment” when determining whether an instrument qualifies as a hedge. And it requires the
use of revised effective interest rate (rather than the original effective interest rate) when remeasuring a debt instrument on the cessation of fair value hedge accounting.
§
PAS 40, “Investment Properties” — The improvement 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.
*SGVMC211961*
- 24 §
PAS 41, “Agriculture” — The improvement 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. It further 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.
Effective in 2010
§
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 must be applied prospectively and will affect
future acquisitions and transactions with non-controlling interests. Revised PAS 27 must be
applied retrospectively subject to certain exceptions.
§
Amendment to PAS 39, “Financial Instruments: Recognition and Measurement - Eligible
hedged items” — This 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.
Improvement to PFRS
§
PFRS 5, “Noncurrent Assets Held for Sale and Discontinued Operations” The improvement
clarifies 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.
Effective in 2012
§
Philippine Interpretation IFRIC 15, “Agreement for Construction of Real Estate” (effective for
annual periods beginning on or after January 1, 2012) — 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.
*SGVMC211961*
- 25 -
8. Goodwill
Acquisition of Additional Shares of Innovative
In April 2008, the existing Parent Company’s interest in Innovative increased by 37.38% from
50% in 2007 to 87.38% in 2008. Indirect ownership in TGTI also increased from 40% to 69.90%.
The Parent Company acquired from Intralot additional 574,885 shares of Innovative for a contract
price of P
=4.3 million. The total cost of the acquisition was comprised of a cash outlay amounting
to P
=2.9 million advanced in 2007 and P
=1.4 million paid in 2008.
The provisional values of the identifiable assets and liabilities of Innovative as of the acquisition
and the corresponding carrying amounts immediately before the acquisition were as follows:
Cash
Receivables
Other current assets
Property and equipment
Other noncurrent assets
Accounts payable
Due to related parties
Net assets
Net assets acquired
Provisional goodwill
Total consideration
Previous
Provisional
Value Carrying Value
=383,852
P
=383,852
P
1,214,755
1,214,755
1,109,179
1,109,179
7,092,627
7,092,627
6,407,946
6,407,946
16,208,359
16,208,359
(6,427,048)
(6,427,048)
(67,561,501)
(67,561,501)
(57,780,190)
(57,780,190)
37.38%
37.38%
(21,598,235)
(P
=21,598,235)
25,912,035
=4,313,800
P
The Group recorded its share in the identifiable assets and liabilities of Innovative at provisional
values as of balance sheet date because the Company is still in the process of determining the fair
values of net liabilities acquired and intangible asset that might arise with the ELA with PCSO of
the acquired company.
As permitted by PFRS 3, “Business Combinations” the Company will recognize any adjustment to
those provisional values to goodwill upon determination of final fair values of identifiable assets
and liabilities within 12 months from the date of acquisition. Provisional goodwill is not subjected
to impairment testing.
From the date of acquisition to December 31, 2008, Innovative and TGTI reduced the net income
of the Group by P
=9.3 million. If the business combination had taken place at the beginning of
2008, the net income for the Group would have been P
=135.2 million (reduced by P
=3.6 million).
The goodwill of =
P25.9 million comprises the fair value of the ELA with PCSO of the acquired
company and expected synergies arising from the acquisition.
*SGVMC211961*
- 26 Minority Interest
Minority interest is the 12.62% share of the other venturer in the previous joint venture. Losses
applicable to the minorities in the 2008 consolidated financial statements may exceed the minority
interests in the subsidiary’s equity since the minorities have binding obligation to provide
securities or guarantee of any loan or financing to be obtained on behalf of Innovative
proportionally to its shareholding percentage.
Acquisition of Lucky Circle by LotoPac
LotoPac was incorporated on March 16, 2007, and on August 29, 2007, acquired Lucky Circle, an
authorized agent of PCSO to operate several online lottery betting stations located at branches of
the SM Supermalls nationwide.
The goodwill arising from the acquisition of Lucky Circle in 2007 follows:
Cash
Receivables
Other current assets
Property and equipment
Other noncurrent assets
Accounts payable
Net assets
Goodwill
Total consideration
Previous
Fair Value Carrying Value
=1,690,454
P
=1,690,454
P
4,009,365
4,009,365
5,847,700
5,847,700
1,541,314
1,541,314
2,062,000
2,062,000
15,150,833
15,150,833
(9,052,999)
(9,052,999)
6,097,834
=6,097,834
P
13,506,316
=19,604,150
P
From the date of acquisition (August 29, 2007) to December 31, 2007, Lucky Circle contributed
=1.3 million to the net income of the Group. If the business combination had taken place at the
P
beginning of 2007, the 2007 net income for the Group would have been P
=135.4 million (increased
by P
=0.4 million).
The goodwill of =
P13.5 million comprises the fair value of expected synergies arising from the
acquisition. Based on management’s cash flow projections in 2007, the present value of the
expected cash flows from operations of Lucky Circle is P
=19.5 million; thus, provision for
impairment loss of P
=0.1 million is recognized in the 2007 consolidated statement income.
Key Assumptions on Impairment Testing of Goodwill
The Company performs impairment testing annually or more frequently when there are indications
of impairment for goodwill. The Company performed impairment testing of these assets at
December 31.
Following are the key assumptions on which management has based its cash flow projections to
undertake impairment testing of goodwill:
Gross Revenue. Gross revenue of the subsidiaries over the next five years were projected to grow
in line with the economy or with nominal Gross Domestic Product. This assumes that the market
share of the subsidiaries in their respective industries will be flat on the assumption that the
industries also grow at par with the economy.
*SGVMC211961*
- 27 Operating Expenses. Operating expenses were projected to increase at a single-digit growth rate
and at a slower pace than revenue.
Gross Margins. Increased efficiencies over the next five years are expected to result in margin
improvements.
Discount Rate. The discount rate used to arrive at the present value of future cash flows was the
Weighted Average Cost of Capital (WACC). WACC was based on the appropriate weights of
debt and equity, which were multiplied with the assumed costs of debt and equity.
The movements in goodwill are as follows:
Cost
Balance at beginning of year
Additions (Provisional)
Balance at end of year
Less accumulated impairment loss
Net book value
2008
2007
P
=13,506,316
25,912,035
39,418,351
142,832
P
=39,275,519
=–
P
13,506,316
13,506,316
142,832
=13,363,484
P
9. Segment Information
The primary segment reporting format is presented based on business segments in which the
Group’s risks and rates of return are affected predominantly by differences in the products and
services provided. The operating businesses are organized and managed separately according to
the nature of the products and services provided, with each segment representing a strategic
business unit that offers different products and serves different markets.
The Group is engaged in the businesses of leasing gaming equipment to PCSO (leasing activity)
and sale of lottery, sweepstake and instant scratch tickets (distribution and retail activities), among
others.
Financial information about the Group’s business segments are shown below:
Leasing
Activity
Revenue
Equipment rentals
Commission income
Instant scratch ticket project with PCSO
Maintenance and repair fees
Total Revenue
P
=642,598,196
–
–
9,737,152
P
=652,335,348
2008
Distribution and
Retail Activities
P
=–
65,239,995
92,074,582
–
P
=157,314,577
Eliminations
P
=–
–
–
–
P
=–
Consolidated
P
=642,598,196
65,239,995
92,074,582
9,737,152
P
=809,649,925
*SGVMC211961*
- 28 -
Leasing
Activity
2008
Distribution and
Retail Activities
Eliminations
P
=5,627,019
2,426,472
P
=3,200,547
P
=8,026,574
–
P
=8,026,574
P
=251,785,645
112,363,498
P
=139,422,147
P
=779,829,486
(3,276,796)
P
=776,552,690
Segment Results:
Income before income tax
Provision for income tax
Net income
P
=238,132,052
109,937,026
P
=128,195,026
Segment assets
Deferred tax
Segments assets (excluding deferred tax)
P
=666,673,818
(3,276,796)
P
=663,397,022
P
=119,222,217
–
P
=119,222,217
(P
=6,066,549)
–
(P
=6,066,549)
Segment liabilities
P
=171,000,134
P
=115,665,645
(P
=172,008,374)
P
=87,268,223
26,682,506
73,760,142
P
=–
–
1,873,987
Other Information
Capital expenditures
Capitalized assets
Depreciation and amortization
Leasing
Activity
Revenue
Equipment rentals
Commission income
Instant scratch ticket project with PCSO
Maintenance and repair fees
Total Revenue
Segment assets
Investments and advances
Deferred tax
Segments assets (excluding deferred tax
and investments and advances)
Segment liabilities
Segment Results:
Income (loss) before income tax
Provision for income tax
Net income (loss)
Other Information
Capital expenditures
Capitalized assets
Depreciation and amortization
P
=114,657,405
P
=–
–
–
P
=87,268,223
26,682,506
75,634,129
Eliminations
Consolidated
=–
P
–
–
–
=–
P
=472,368,287
P
13,210,086
21,011,172
7,193,426
=513,782,971
P
=472,368,287
P
–
–
7,193,426
=479,561,713
P
=–
P
13,210,086
21,011,172
–
=34,221,258
P
=724,956,835
P
–
(2,000,616)
=48,983,680
P
–
–
(P
=37,489,728)
–
–
=736,450,787
P
(47,135,294)
(2,000,616)
=722,956,219
P
=48,983,680
P
(P
=37,489,728)
=687,314,877
P
=42,087,261
P
=64,687,408
P
(P
=52,783,650)
=53,991,019
P
(P
=142,831)
–
(P
=142,831)
=214,825,257
P
80,233,488
=134,591,769
P
=215,070,497
P
80,066,921
=135,003,576
P
=48,162,545
P
89,888,207
55,190,762
Leasing
Activity
Revenue
Equipment rentals
Maintenance and repair fees
Total Revenue
2007
Distribution and
Retail Activities
Consolidated
=402,042,400
P
11,591,988
=413,634,388
P
(P
=102,409)
166,567
(P
=268,976)
=4,823,889
P
–
298,301
2006
Distribution and
Retail Activities
=–
P
–
=–
P
=–
P
–
–
Eliminations
=–
P
–
=–
P
=52,986,434
P
89,888,207
55,489,063
Consolidated
=402,042,400
P
11,591,988
=413,634,388
P
*SGVMC211961*
- 29 2006
Distribution and
Retail Activities
=–
P
–
=–
P
Segment assets
Deferred tax
Segments assets (excluding deferred tax)
Leasing
Activity
=394,881,393
P
(3,066,385)
=391,815,008
P
Segment liabilities
=272,904,870
P
=–
P
=–
P
=272,904,870
P
Segment Results:
Income before income tax
Provision for income tax
Net income
=80,575,748
P
30,109,195
=50,466,553
P
=–
P
–
=–
P
=–
P
–
=–
P
=80,575,748
P
30,109,195
=50,466,553
P
Other Information
Capital expenditures
Capitalized assets
Depreciation and amortization
=10,832,069
P
64,806,938
42,788,288
=–
P
–
–
=–
P
=10,832,069
P
64,806,938
42,788,288
Eliminations
=–
P
–
=–
P
–
Consolidated
=394,881,393
P
(3,066,385)
=391,815,008
P
There were no sales and transactions between internal parties.
10. Cash and Cash Equivalents
This account consists of:
Cash on hand and in banks
Cash equivalents
2008
P
=93,005,632
10,419,141
P
=103,424,773
2007
=57,397,448
P
94,019,953
=151,417,401
P
Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are short-term
investments which are made for varying periods within one day to three months depending on the
immediate cash requirements of the Group and earn interest at the respective short-term
investment rates. Interest income from cash and cash equivalents amounted to P
=2.6 million in
2008, P
=3.0 million in 2007 and P
=0.9 million 2006 (see Note 22).
11. Investments Held for Trading
This account consists mainly of investments in quoted shares of stock of Leisure and Resorts
World Corporation, iVantage Corporation, Belle Corporation, Sinophil Corp. and Philippine Long
Distance Telecommunications Company.
*SGVMC211961*
- 30 Movement in investments held for trading related to additions and fair value changes are as
follows:
Carrying value of investments, beginning of year
Additions during the year
Mark-to-market loss
Carrying value of investments, end of year
2008
P
=58,213,480
44,605,291
(48,008,254)
P
=54,810,517
2007
=10,550,400
P
58,841,397
(11,178,317)
=58,213,480
P
The Group determines the cost of investments sold using specific identification method.
12. Trade and Other Receivables
This account consists of:
Trade (see Note 2)
Advances to:
Officers and employees (see Note 19)
Contractors and suppliers
Others
§
§
§
§
2008
P
=38,010,276
2007
=26,436,779
P
28,726,468
21,768,816
28,291,415
P
=116,796,975
7,537,085
27,509,183
6,184,869
=67,667,916
P
Trade receivables are noninterest-bearing and generally collected within a month.
Advances to contractors and suppliers are noninterest-bearing and generally have 30 days
term.
Advances to officers and employees are noninterest-bearing and are normally liquidated
within a year.
Other receivables, which pertain mainly to advances to third party, are noninterest-bearing and
generally have 30-60 days term.
13. Other Current Assets
This account consists of:
Input VAT (net of allowance for probable losses
amounting P
=2.8 million)
Instant scratch ticket supplies
Spare parts and supplies - at cost
Prepaid expenses and others (see Note 16)
2008
2007
P
=23,078,541
21,122,825
2,817,776
5,550,317
P
=52,569,459
=17,790,283
P
10,260,667
1,828,975
13,883,107
=43,763,032
P
*SGVMC211961*
- 31 Input VAT amounting to P
=4.3 million were applied for tax credit and is pending approval from the
Bureau of Internal Revenue (BIR).
On September 1, 2005, the Commissioner of BIR has signed Revenue Regulations (RR)
No. 16-2005, which took effect on November 1, 2005. The RR, among others, introduces the
following changes:
a. The government or any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and/or of services taxed at 12% VAT pursuant to Sections
106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of 5% of the
gross payment thereof.
b. The 5% final VAT withholding rate shall represent the net VAT payable of the seller. The
remaining 7% effectively accounts for the standard input VAT for sales of goods or services to
government or any of its political subdivisions, instrumentalities or agencies including
GOCCs, in lieu of the actual input VAT. Should actual input VAT exceed 7% of gross
payments, the excess may form part of the seller’s expense or cost. On the other hand, if
actual input VAT is less than 7% of gross payment, the difference must be closed to expense
or cost.
Difference between standard input VAT and actual input VAT is presented as “Other charges” in
2008 amounted to P
=4.0 million and “Other income” in 2007 and 2006 amounted to P
=13.5 million
and P
=10.6 million, respectively (see Note 25).
14. Investment and Advances
The details and movement of the Parent Company’s interest in Innovative, a joint venture, and
advances to TGTI, 80%-owned by Innovative as of December 31, 2007, are as follows:
Acquisition cost
Accumulated equity in net losses:
Balance at beginning of year
Equity in net losses for the year
Balance at end of year
Advances to TGTI (see Notes 19 and 28)
=7,689,740
P
21,977,710
5,927,929
27,905,639
(20,215,899)
67,351,193
=47,135,294
P
As discussed in Note 8, Innovative became a subsidiary in 2008. Prior to obtaining control, the
Parent Company accounted for its investment in Innovative using equity method. Given that
Innovative is now classified as a subsidiary, the Group now prepares consolidated financial
statements to include Innovative in its consolidation and accordingly, the related investments and
advances were eliminated.
*SGVMC211961*
- 32 -
15. Property and Equipment
This account consists of:
Cost
Balance at beginning of year
Business combination (see Note 8)
Capital lease during the year
(see Notes 24 and 29)
Additions
Reclassifications/disposals
Balance at end of year
Accumulated Depreciation
and Amortization
Balance at beginning of year
Depreciation and amortization
Disposals
Balance at end of the year
Net Book Value
Cost:
Balance at beginning of year
Business combination (see Note 8)
Capital lease during the year
(see Notes 24 and 29)
Additions
Disposals
Balance at end of year
Accumulated Depreciation and
Amortization
Balance at beginning of year
Depreciation and amortization
Disposals
Balance at end of year
Net Book Value
Lottery
Equipment
Leasehold
Improvements
P
= 394,106,132
3,914,110
P
= 16,439,244
2,221,795
2008
Office
Furniture Transportation
and Fixtures
Equipment
Equipment
Under
Installation
Total
P
= 27,382,603
956,721
P
= 23,918,055
–
P
= 484,454,659
7,092,626
P
= 22,608,625
–
26,682,506
37,948,187
23,918,055
486,568,990
–
33,791,176
(111,295)
52,340,920
–
9,552,655
(600,613)
37,291,366
–
12,594,339
(1,549,200)
33,653,764
93,199,627
63,469,312
–
156,668,939
P
= 329,900,051
16,096,142
1,789,660
(111,295)
17,774,507
P
= 34,566,413
16,936,109
5,452,537
(581,404)
21,807,242
P
= 15,484,124
10,676,610
4,922,620
(1,492,630)
14,106,600
P
= 19,547,164
–
–
–
–
P
=–
136,908,488
75,634,129
(2,185,329)
210,357,288
P
= 399,497,752
2007
Office
Furniture
Transportation
and Fixtures
Equipment
Equipment
Under
Installation
Total
=–
P
–
=341,649,879
P
1,541,314
Lottery
Equipment
Leasehold
Improvements
=290,379,332
P
–
=16,057,639
P
369,101
=19,243,871
P
1,031,884
=15,969,037
P
140,329
–
–
(23,918,055)
–
26,682,506
93,886,357
(2,261,108)
609,855,040
89,888,207
13,853,138
(14,545)
394,106,132
–
12,504
–
16,439,244
–
7,162,757
(55,909)
27,382,603
–
10,366,413
(3,867,154)
22,608,625
–
23,918,055
–
23,918,055
89,888,207
55,312,867
(3,937,608)
484,454,659
43,742,054
49,472,118
(14,545)
93,199,627
=300,906,505
P
16,057,638
38,504
–
16,096,142
=343,102
P
15,044,559
1,947,459
(55,909)
16,936,109
=10,446,494
P
10,512,782
4,030,982
(3,867,154)
10,676,610
=11,932,015
P
–
–
–
–
=23,918,055
P
85,357,033
55,489,063
(3,937,608)
136,908,488
=347,546,171
P
In 2005, the Parent Company acquired certain lottery equipment to replace its existing equipment.
Accordingly, replaced lottery equipment were decommissioned in 2006. The decommissioned
lottery equipment in 2006 and 2005 were disposed in 2006. Loss recognized from the disposal
amounted to P
=36.9 million.
Certain lottery equipment were acquired under finance lease agreements. The carrying amount of
the equipment under finance lease agreements amounted to P
=254.0 million and P
=280.7 million as
of December 31, 2008 and 2007, respectively (see Note 24).
The Parent Company acquired additional transportation equipment amounting to P
=11.5 million in
2008 and P
=10.4 million in 2007. The net carrying value of the transportation equipment amounted
to P
=19.5 million and P
=11.9 million as of December 31, 2008 and 2007, respectively. The related
liability, presented separately as “Installment payable” amounted to P
=6.6 million and =
P2.3 million
as of December 31, 2008 and 2007, respectively.
*SGVMC211961*
- 33 Installment payable arising from the purchase of transportation equipment is subject to interest
ranging from 7.26% to 9.33% in 2008 and 2.0% to 7.3% in 2007. The outstanding balance in
2008 will be fully settled in September 2010.
16. Trade and Other Current Liabilites
This account consists of:
Trade payable
Consultancy and software and license fees
payable (see Note 24)
Accrued expenses:
Management fees (see Note 19)
Communication
Rental and utilities
Others
Others
2008
P
=17,827,803
2007
=9,021,730
P
13,924,658
4,763,614
6,430,542
2,472,465
11,528
20,410,971
10,050,247
P
=71,128,214
2,166,580
–
2,433,933
521,633
1,701,869
=20,609,359
P
Below are the terms and conditions of the above financial liabilities:
§
Trade payable, which are noninterest-bearing and normally settled on 15 to 30 days’ terms,
consists of payable to PCSO for unremitted cash receipts from the sale of lotto tickets
(on-line lottery) and payable to suppliers of sweepstakes and other tickets.
§
Consultancy and software and license fees and other current liabilities are noninterest-bearing
and are normally settled on 15 to 30 days’ terms.
Consultancy and software and license fees payable arose from the following agreements.
a. Consultancy Agreements
Company
Arwen Gaming
Consultancy, Inc.
(AGC)
Blackberry
Gaming and
Leisure
Corporation
(BGLC)
Scope of Service
AGC, a Philippine
company, renders
consultancy services
relative to the
telecommunication
requirements of lottery
operations of PCSO.
BGLC, a Philippine
Company, renders
consultancy services to
the online lottery
venture of the Company
particularly the 2-Digit
Lotto.
Fee
Monthly
commission of
0.5% of the
gross amount of
PCSO's lottery
ticket sales, net
of all taxes
1.5% of the
gross amount of
ticket sales from
PCSO's 2-Digit
Lotto game
Consultancy
Fees
=30.5 million
P
13.4 million
43.9 million
Consultancy
Fees Payable
=2.7 million
P
2008
2007
7.1 million
1.0 million
–
–
2006
–
–
Term
Termination
is upon
mutual
agreement of
both parties
Year
2008
2007
2006
Until the
termination or
expiry of the
ELA
–
4.7 million
*SGVMC211961*
- 34 -
Company
Golden Link
Consultancy
Group, Inc.
(Golden Link)
Scope of Service
Golden Link, a
Philippine company,
renders advice and
consulting services
particularly the 2-Digit
Lotto.
Fee
1.5% of the
gross amount of
ticket sales from
PCSO's 2-Digit
Lotto game
MRS Solutions
Trading, Inc.
(MRS)
MRS, a Philippine
company, renders
comprehensive
consultancy services
involving the
development of new
game variations which
are intended to generate
additional revenues.
STC, a Philippine
company, renders
comprehensive
consultancy services
involving the
development and
approval of game
format variations and
equipment upgrade for
the on-line lottery
operations which are
intended to generate
additional revenues.
1.5% of the
gross amount of
ticket sales from
PCSO’s 3-Digit
Game or
Suertres
Sign of the
Times
Consulting, Inc.
(STC)
Monthly
commission of
1.5% of the
gross amount of
PCSO's lottery
ticket sales
Term
Until the
termination or
expiry of the
ELA or upon
mutual
agreement of
both parties
Until the
termination or
expiry of the
ELA or upon
mutual
agreement of
both parties
Year
2008
2007
2006
Consultancy
Fees
=0.9 million
P
2.5 million
2,121
Consultancy
Fees Payable
2008
2007
2006
–
9.4 million
18.4 million
–
–
Until the
termination or
expiry of the
ELA or upon
mutual
agreement of
both parties
2008
2007
2006
23.5 million
60.6 million
=–
P
0.3 million
1,803
1.5 million
–
–
–
2.3 million
On January 23, 2007, the BOD approved the pre-termination of the consultancy agreements
of the Company with MRS and STC. Termination fees paid amounted to P
=19.6 million and
=7.8 million for MRS and STC, respectively.
P
On January 31, 2008, the Company and Golden Link mutually agreed to the pre-termination
of the consultancy agreement.
Advance payment to AGC amounted to P
=26.0 million and is being amortized over 2 years
based on amended agreement where AGC will continue rendering consultancy services until
2008 only. Unamortized portion amounting to P
=13.4 million was included under “Other
current assets” account in the 2007 consolidated balance sheet.
However, in May 2008, the Company agreed to retain AGC and avail of the latter’s expertise
and services to work out and monitor the necessary technical, operational, business, and legal
arrangements needed in connection with the implementation of lottery draw in the VISMIN
region.
*SGVMC211961*
- 35 b. Scientific Games
On February 15, 2005, the Parent Company entered into a contract with Scientific Games, a
company incorporated under the laws of the Republic of Ireland, for the supply of computer
hardware and operating system software necessary for the operation of a new online lottery
system effective November 20, 2005. Under the terms of the “Contract for the Supply of the
Visayas-Mindanao Online Lottery System,” Scientific Games will provide the Parent
Company with 900 online lottery terminal and terminal software necessary for its operation.
In consideration, the Parent Company shall pay Scientific Games a pre-agreed percentage of
its revenue from the conduct of online lottery games running under the system provided by
Scientific Games. The total number of terminals delivered as of December 31, 2006 was 965.
The additional 65 terminals are intended as replacement for defective terminals.
Software and license fees amounted to P
=10.4 million, P
=1.7 million and P
=0.3 million in 2008,
2007 and 2006, respectively (see Note 20). As of December 31, 2008 and 2007, software and
license fees payable amounted P
=3.6 million and P
=1.4 million, respectively.
c. Intralot
On March 13, 2006, the Parent Company entered into a contract with Intralot, a company
incorporated under the laws of the Greece, for the supply of online lottery system necessary
for the operation of a new online lottery system effective December 8, 2006. Under the terms
of the “Contract for the Supply of the Visayas-Mindanao Online Lottery System,” Intralot will
provide the Parent Company the hardware, operating system software and terminals
(collectively referred to as the System) and the training required to operate the System. Based
on the amended contract signed on July 7, 2006, Intralot will provide the Parent Company
with 600 online lottery terminals. In consideration, the Parent Company shall pay Intralot a
pre-agreed percentage of the revenue generated by the terminals from the conduct of online
lottery games running on the System, including without limitation, the revenue from the ELA
contract or a fixed amount of US$110 per terminal per month, whichever is higher. The
Parent Company received 200 terminals on October 13, 2006. In 2007, the Parent Company
received 487 additional terminals. In 2008, there are 188 additional terminals installed.
On July 10, 2006, Intralot entered into an agreement with its 85% subsidiary, Intralot Inc., a
company domiciled in Atlanta, Georgia, wherein Intralot assigned whole of the contract,
including all its rights and obligations arising from it, to Intralot Inc.
Software and license fees amounted to P
=8.4 million, P
=0.6 million and P
=0.1 million in 2008,
2007 and 2006, respectively (see Note 20). As of December 31, 2008 and 2007, software and
license fees payable amounted to P
=6.6 million and P
=3.1 million, respectively.
d. PMP Management Services Sdn Bhd (PMP) and Pacific Automated Systems Corporation
(PASC)
On April 16, 1996, the Parent Company entered into a Consultancy Agreement with PMP for
the support in the operation and development of the leased online lottery equipment and
accessories and the provision of maintenance and repair services.
*SGVMC211961*
- 36 The Parent Company also entered into Operational Support Services Agreement (OSSA) with
PASC on April 23, 1996. The scope for this agreement is similar to the consultancy
agreement with PMP.
As of December 31, 2005, the recorded liability to PMP and PASC amounted to P
=56.6 million
(US$1.1 million).
In 2006, the Parent Company terminated its agreements with PMP and PASC.
Termination of the said agreements resulted in the recognition of gain on condonation of
liability of P
=39.2 million in the 2006 consolidated statement of income. There is no related
outstanding payable as of December 31, 2008 and 2007.
17. Equity
2007
Amount Number of Shares
2008
Number of Shares
Amount
Capital Stock
Authorized - par value of =
P1/share
500,000,000
P
=500,000,000
500,000,000
=500,000,000
P
Issued and outstanding:
Balance at beginning of period
Issuance during the period
Balance at end of period
199,098,000
617,000
199,715,000
P
=199,098,000
617,000
P
=199,715,000
125,250,000
73,848,000
199,098,000
=125,250,000
P
73,848,000
=199,098,000
P
As discussed in Note 1, on November 11, 2006, the Parent Company’s BOD and stockholders
authorized the Parent Company to conduct an IPO of common shares owned by the selling
shareholders of the Parent Company; and apply for the listing thereof on the PSE. Furthermore,
the BOD approved the following amendments to the Articles of Incorporation: (a) denial of preemptive rights; (b) removal of sub-classifications of the common shares; (c) grant of stock options,
issuances of warrants, etc.; and (d) removal of right of first refusal.
On March 23, 2007, the SEC and PSE approved the Parent Company’s application for public
listing and trading of shares which commenced on April 12, 2007. IPO offer price is at
=8.88. APIC arising from IPO amounted to P
P
=190.4 million (net of stock issuance costs of
=19.3 million).
P
On May 19, 2008, grantees of the stock options exercised 617,000 shares of the Company’s stock
at P
=8.88 per share resulting to APIC amounting to P
=4.9 million.
In 2008, the BOD, upon recommendation of management, declared the following cash dividends:
Date
Approved
May 6, 2008
July 11, 2008
July 11, 2008
Record
May 23, 2008
August 8, 2008
November 17, 2008
Amount
Payment
June 19, 2008
September 3, 2008
December 8, 2008
Per Share
=0.25
P
0.08
0.17
=0.50
P
Total
=49,928,750
P
15,956,880
33,483,030
=99,368,660
P
*SGVMC211961*
- 37 On July 11, 2008, the BOD authorized the Parent Company to buyback up to 2,000,000 shares
from the public as a means of preserving the value of the Company’s shares and maintaining
investor confidence and on another board meeting on October 14, 2008 approved to extend its
share buy back program up to a maximum of 10% of the Company’s outstanding capital stock. As
of December 31, 2008, the Company has acquired and paid 4,414,000 shares of capital stock at a
weighted average price of P
=8.40 for a total of P
=37.1 million.
18. Stock Options Plan
On April 11, 2007, the BOD approved the Parent Company’s Plan which provides an incentive
and mechanism to employees and officers to become stockholders of the Parent Company, as well
as to qualified directors, officers and employees, who are already stockholders, to increase their
equity in the Parent Company and thereby increase their concern for the Parent Company’s wellbeing. All such full-time and regular employees of the Group and its affiliates, their officers and
directors, and such other qualified persons who may be recommended from time to time by the
Executive Committee or the BOD to the Committee as qualified, are eligible to participate in the
Plan.
The Plan is being administered by a Committee organized and appointed by the BOD. The
Committee, in its sole discretion, shall determine from among those recommended by the
Executive Committee or the BOD those to whom options are to be granted, the time or times when
such options shall be granted, the effectivity dates thereof, and the number of shares to be
allocated to each participant at a given time.
Five percent of the Parent Company’s total outstanding common stock is reserved for the Plan.
Any unexercised option lapsed or terminated for any reason shall revert back to the pool of shares
reserved for the whole Plan, and may be offered to other qualified participants.
The shares covered by any one grant shall be offered for subscription over a period of three years
from and after the effectivity date of each grant that may be determined by the Committee. The
participants may exercise their right to subscribe to shares under the Plan in accordance with the
following schedule:
§
§
§
1/3 of total grant immediately after the grant up to and until three years from the effectivity
date of each grant
1/3 of total grant after one year from the effectivity date of each grant up to and until two
years thereafter
1/3 of total grant after two years from the effectivity date of each grant up to and until a year
thereafter
The purchase price of the shares shall not in any case be less than the fair market value of the
Parent Company’s shares at the time of grant, and, in no case, be less than the offer price at which
the Parent Company’s shares are initially offered for sale to the public. Further, the purchase price
shall be subject to adjustment for subsequent stock dividends or splits.
On February 15, 2008, SEC approved the Parent Company’s application requesting that its
proposed issuance on 9,954,900 common shares is exempt from the registration requirements of
the Securities Regulation Code.
*SGVMC211961*
- 38 On May 6, 2008, the BOD approved the Committee’s allocation of 2,174,000 shares to its
executives and employees and to the officers of Lucky Circle under the Plan which is exercisable
over a period of three years from May 6, 2008 until May 6, 2011. The exercise price of the option
was fixed at P
=8.88 per share.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and
movements in share options during the year:
2008
Number
2,174,000
(746,000)
1,428,000
–
Granted during the year
Exercised during the year
Outstanding at end of year
Exercisable at end of year
WAEP
=8.88
P
8.88
8.88
–
The options outstanding at December 31, 2008 had an exercise price of P
=8.88, and a weighted
average remaining contractual life of 1.65 years.
The fair values of the stock options are estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value of stock options granted under the Plan at grant date and the
assumptions used to determine the fair value of the stock options are as follows:
Vesting date
Share price
Exercise price
Vesting period (days)
Expected volatility
Risk-free rate
Dividend yield
Fair value of stock options
May 6, 2008
=9.20
P
=8.88
P
–
42%
7.89%
5%
=2.00
P
May 6, 2009
=9.20
P
=8.88
P
310
42%
7.99%
5%
=2.25
P
May 6, 2010
=9.20
P
=8.88
P
675
42%
7.97%
5%
=2.44
P
The risk-free rate used to get the time value of the option was determined with reference to the
Philippine Dealing Exchange rates as of grant date corresponding to the estimated terms of the
options and adjusted to zero-coupon basis.
The volatility is an assumption regarding the variability of the stock price during the
option period and computed using the the daily volatility of the Company's closing prices and
adjusted to annual basis.
The 5% assumption was based on the projected dividend of P
=0.50 and an average price P
=9.78
(actual average closing price from January 1 to May 6, 2008) for the year.
Share-based compensation expense recognized in 2008 amounted to P
=3.0 million.
*SGVMC211961*
- 39 -
19. Related Party Transactions
Parties are considered to be related if one has the ability, directly or indirectly, to control the other
party or exercise significant influence over the party in making financial and operating decisions.
Parties are also considered to be related if they are subject to common control or common
significant influence.
Outstanding balances as of December 31, 2008 and 2007 are unsecured, interest free and
settlement occurs in cash. There have been no guarantees provided or received for any related
party receivables or payables. For the years ended December 31, 2008 and 2007, the Group has
not made any provision for doubtful accounts relating to amounts owed by related parties. This
assessment is undertaken each financial year through examining the financial position and the
amount and timing of future cash flows of the related parties.
The Parent Company has significant transactions with related parties in the normal course of
business. The amounts included in the financial statements with respect to these transactions are
as follows:
a. AB Gaming manages the day-to-day operations of the Parent Company as provided in a
Management Agreement (MA) entered into on June 10, 2002. Under the terms of the MA, the
Parent Company shall elect the president of AB Gaming as the President, Chief Executive
Officer (CEO) and Administrative Officer of the Parent Company. The MA shall be effective
for five years until June 10, 2007 and shall be automatically renewed for a similar period
unless terminated by either party.
In March 2004, the Parent Company and AB Gaming amended the MA effective February 15,
2004. Under the amended MA, AB Gaming foregoes its entitlement to have its President
designated as President and CEO of the Parent Company although the scope of the services
remains unchanged. Also, the term of the MA shall continue as long as the Parent Company’s
ELA with the PCSO is in effect.
Total management fees amounted to P
=35.2 million, P
=25.6 million and P
=19.2 million in 2008,
2007 and 2006, respectively. Outstanding payable as of December 31, 2008 and 2007
amounted to P
=3.4 million and =
P2.2 million, respectively (see Note 16).
Also, in 2008, the Parent Company entered in management contract with AB Gaming for the
management of the instant scratch ticket project with PCSO.
Management fees for the instant scratch ticket project amounted to P
=5.6 million in 2008
(see Note 21). Outstanding payable as of December 31, 2008 amounted to P
=3.1 million
(see Note 16).
b. The Parent Company granted advances to TGTI which was covered by a Loan Agreement. In
2007 and prior years, the Parent Company has indirect interest in TGTI (see Note 14). Under
the terms of Loan Agreement, the Parent Company shall provide short-term financial
assistance credit of P
=25.0 million to TGTI. Any outstanding loan shall be subject to simple
interest calculated using the applicable short-term placement rate with monthly repricing plus
add-on rate (MART 1) of 0.50% and payable as soon as the increase in capitalization of TGTI
is received or as soon as proper demand is made by the Parent Company’s BOD.
*SGVMC211961*
- 40 As of December 31, 2007, total advances granted to TGTI and unpaid interest (included under
“Investment and advances” account in the consolidated balance sheets) amounted to
=67.4 million. Interest income amounted to P
P
=2.5 million in 2007 and P
=2.3 million in 2006
(see Note 22).
c. The Parent Company granted interest-bearing advances to one of its officers amounting to
=20.0 million which is payable within one year subject to simple interest calculated using the
P
applicable short-term placement rate with monthly repricing plus add-on rate of 0.50%.
Outstanding balance of receivables amounted to P
=19.0 million as of December 31, 2008
(included under “Trade and other receivables” account in the consolidated balance sheet)
(see Note 12).
d. PMP, an affiliate of PASC (a 20% shareholder of the Parent Company) provides consultancy
support in the operation and development of the leased online lottery equipment and
accessories and the provision of maintenance and repair services. No services were rendered
by PMP and PASC starting 2004. Agreements with PMP and PASC were terminated on
March 16, 2006 and April 6, 2006, respectively. As discussed in Note 16, termination of
service agreements resulted in the recognition of gain on condonation of liability of
=39.2 million in the 2006 consolidated statement of income.
P
e. In May 2008, the BOD approved the advances made by the Parent Company to its executives
and employees and to those of Lucky Circle amounting to P
=3.3 million and P
=0.4 million,
respectively, as full payment of shares exercised the Company’s stock option plan.
f.
Compensation and benefits of key management personnel of the Group are as follows:
2007
2008
2006
(In Millions)
Short-term employee benefits
Post-retirement benefits
Share-based payment
=6.4
P
0.6
–
=7.0
P
P
=7.2
0.8
0.9
P
=8.9
=5.7
P
0.5
–
=6.2
P
20. Operating Expenses
This account consists of:
Depreciation and amortization
(see Note 15)
Personnel costs (see Notes 18 and 26)
Travel and accommodation
Communication
2008
2007
2006
P
=75,634,129
71,527,030
65,777,616
42,763,930
=55,489,063
P
35,606,417
16,678,121
40,478,336
=42,788,288
P
23,633,648
17,001,238
47,567,595
(Forward)
*SGVMC211961*
- 41 -
Management fees (see Note 19)
Consultancy fees (see Note 16)
Rent and utilities (see Note 24)
Professional fees
Software and license fees
(see Notes 16 and 24)
Operating supplies
Taxes and licenses
Repairs and maintenance
Entertainment, amusement and recreation
Others
2008
P
=40,709,338
38,521,104
28,570,189
25,178,753
2007
=25,620,349
P
50,637,864
11,856,321
8,257,321
2006
P19,204,440
=
122,917,073
7,321,413
14,866,579
18,788,804
17,677,559
11,476,483
11,031,736
9,947,972
39,795,653
P
=497,400,296
2,298,762
3,794,344
5,618,652
10,551,026
7,391,155
13,394,534
=287,672,265
P
332,092
2,328,736
3,000,423
6,465,408
4,564,604
9,820,767
=321,812,304
P
2008
P
=54,144,913
12,155,313
2,996,004
2,230,800
P
=71,527,030
2007
=26,663,681
P
7,429,595
–
1,513,141
=35,606,417
P
2006
=15,724,872
P
6,358,443
–
1,550,333
=23,633,648
P
Personnel costs consist of:
Salaries and wages
Employee benefits
Share-based compensation (see Note 18)
Retirement expense (see Note 26)
21. Instant Scratch Ticket Project with PCSO
Presented below is the result of instant scratch ticket project with PCSO for the years ended
December 31, 2008 and 2007:
Sales
Direct expenses:
Prizes for winning tickets
Share of PCSO
Costs of printing
Others
Gross income
2008
P
=430,738,446
2007
=176,724,880
P
232,830,177
70,000,000
27,671,260
8,162,427
338,663,864
P
=92,074,582
101,158,400
39,197,978
11,876,560
3,480,770
155,713,708
=21,011,172
P
*SGVMC211961*
- 42 -
22. Interest Income
This account consists of:
Income from bank and short-term
deposits (see Note 10)
Others (see Note 19)
2008
2007
2006
P
=2,560,512
734,455
P
=3,294,967
=2,992,843
P
2,491,600
=5,484,443
P
=917,749
P
2,253,740
=3,171,489
P
23. Income Tax
The components of the Group’s net deferred tax assets follow:
2008
P
=1,414,859
1,592,497
373,691
Defined benefit liability
Accrual of prizes for winning tickets
Share-based payment
Excess of rental under operating lease
on a straight-line basis
Others
3,458
(107,709)
P
=3,276,796
2007
=869,889
P
–
–
129,744
1,000,983
=2,000,616
P
The current provision for income tax represents RCIT in 2008, 2007 and 2006.
A reconciliation of provision for income tax computed at the applicable statutory income tax rate
to provision for income tax shown in the consolidated statements of income is as follows:
Provision for income tax at statutory
income tax rate
Income tax effects of permanent
differences:
Nondeductible expenses
Interest income subjected to final tax
Others
Change in tax rate
2008
2007
2006
P
=88,124,976
=75,188,840
P
=28,201,512
P
23,864,135
(872,852)
(315,945)
1,563,184
P
=112,363,498
6,239,587
(1,031,745)
(163,194)
–
=80,233,488
P
1,907,683
–
–
–
=30,109,195
P
The deferred taxes and the provision for current income tax include the effect of the change in tax
rates. Under Republic Act No. 9337, RCIT rate for domestic corporations and resident and
nonresident foreign corporations is increased to 35% (from 32%) beginning November 1, 2005
and the rate will be reduced to 30% beginning January 1, 2009. The deferred tax assets were
measured using the appropriate corporate income tax rate on the year it is expected to be reversed
or settled.
*SGVMC211961*
- 43 -
24. Lease Commitments
a. Finance Lease
Lottery equipment. The contracts for the supply of online lottery system entered into by the
Parent Company with Scientific Games and Intralot contain a lease which is accounted for as
finance lease. These are included as part of lottery equipment under “Property and
equipment” account in the consolidated balance sheets. The details are as follows:
Property and equipment under finance lease
Less accumulated depreciation
2008
P
=383,357,899
129,405,650
P
=253,952,249
2007
=356,675,393
P
75,991,428
=280,683,965
P
The present value of future annual minimum lease payments under the lease agreements as of
December 31, 2008 and 2007 follows:
Year Ending December 31
Within one year
After one year but not more than five years
Total minimum lease payments
Less amount representing interest
Present value of lease payments
Less current portion of obligations
under finance lease
Noncurrent portion of obligations
under finance lease
2008
P
=86,510,679
229,147,470
315,658,149
56,723,699
258,934,450
2007
P86,324,497
=
273,646,059
359,970,556
75,877,203
284,093,353
62,471,714
55,849,197
P
=196,462,736
=228,244,156
P
The contracts remain effective until March 31, 2013, the expiration date of the ELA. Payment
to Scientific Games is based on a pre-agreed percentage of the Parent Company’s revenue
from the conduct of online lottery games running under the system provided by Scientific
Games. Payment to Intralot is based on a pre-agreed percentage of the revenue generated by
the terminals from the conduct of online lottery games running on the System, including
without limitation, the revenue from the ELA contract or a fixed amount of US$110 per
terminal per month, whichever is higher. Payments to Scientific Games and Intralot include
the non-lease elements which are presented as “Software and license fees” account in the
consolidated statements of income (see Notes 16 and 20).
The Company initially recognized the loans liability based on the fair value of the equipment
or the sales price since the minimum lease payments cannot be established, as the monthly
payment varies depending on the revenue generated by the leased equipment.
*SGVMC211961*
- 44 Transportation Equipment. The Parent Company has finance leases covering its
transportation equipment subject to two-year term (see Note 15). Future minimum lease
payments under these finance leases together with the present value of the minimum lease
payments are as follows:
Within one year
After one year but not more than five years
Total future minimum lease payments
Less amount representing interest
Present value of minimum lease payments
Less current portion
2008
P
=4,683,341
2,577,284
7,260,625
642,491
6,618,134
4,269,134
P
=2,349,000
2007
=2,473,777
P
–
2,473,777
147,344
2,326,433
2,326,433
=–
P
The liability relating to finance leases is shown as “Installment payable” account in the
consolidated balance sheets.
b. Operating Lease
As Lessor
The Parent Company leases to PCSO online lottery equipment and accessories for a period of
eight years until March 31, 2013 as provided in the ELA. Rental payment is based on certain
percentage of gross amount of lotto ticket sales from the operation of all PCSO’s lotto
terminals in VISMIN or a fixed annual rental of P
=35,000 per terminal in commercial
operation, whichever is higher (see Note 2). Rental income amounted to P
=639.4 million in
2008, =
P472.4 million in 2007 and P
=402.0 million in 2006.
Future minimum rental income for the remaining lease terms are as follows:
Year
Within one year
After one year but not more than five years
Amount
P56,000,000
=
182,000,000
TGTI leases to PCSO online KENO games for a period of 10 years from the time the ELA
will run in commercial operations. Rental payment is based on certain percentage of gross
amount of Online KENO games from the operation of all PCSO’s terminals or a fixed annual
rental of P
=40,000 per terminal in commercial operation, whichever is higher (see Note 2).
Rental income amounted to P
=3.2 million in 2008.
Should TGTI meet the 200 terminals as required in the ELA, future minimum rental income
for the remaining lease terms should have been as follow:
Year
Within one year
After one year but not more than five years
Beyond five years
Amount
P8,000,000
=
32,000,000
40,000,000
*SGVMC211961*
- 45 As Lessee
The Parent Company leases certain office spaces for periods of one to five years up to
January 14, 2011. The lease agreements provide for minimum rental commitments with
annual rental escalation rate of 5%. Rent expense charged to operations amounted to
=2.8 million in 2008, P
P
=3.3 million in 2007 and P
=3.9 million in 2006.
Future minimum lease expense under the lease agreements are as follows:
Year
Within one year
After one year but not more than five years
Amount
=2,674,727
P
2,698,814
25. Other Income (Charges)
This account consists of:
2008
Excess (deficiency) input VAT
(see Note 13)
Rental income
Income from winning tickets
Dividend income
Bank charges
Others (see Note 2)
(P
=4,004,125)
1,923,414
1,899,448
903,100
(122,279)
9,889,329
P
=10,488,887
2007
2006
=13,476,718
P
4,280,914
1,989,275
466,268
–
4,042,407
=24,255,582
P
=10,551,603
P
–
–
11,150
–
–
=10,562,753
P
26. Retirement Plan
The Group has a funded, noncontributory defined benefit plan covering substantially all of its
regular employees. Total retirement costs charged to operations amounted to P
=2.2 million in
2008, P
=1.5 million in 2007 and P
=1.6 million in 2006.
The following tables summarize the components of the Group’s retirement expense recognized in
the consolidated statements of income and defined benefit liability recognized in the consolidated
balance sheets.
Retirement Expense (recorded under “Operating Expenses”)
Current service cost
Interest cost
Expected return on plan assets
Amortization for actuarial loss
Retirement expense (see Note 20)
2008
P
=1,432,500
996,400
(248,700)
50,600
P
=2,230,800
2007
=838,307
P
620,408
–
54,426
=1,513,141
P
2006
=1,020,601
P
529,732
–
–
=1,550,333
P
*SGVMC211961*
- 46 Defined Benefit Liability
2008
P
=5,677,700
(4,718,200)
959,500
3,756,698
P
=4,716,198
Present value of defined benefit liability
Fair value of plan assets
Unfunded obligation
Unrecognized actuarial gain (loss)
Defined benefit liability
2007
P9,636,733
=
(4,973,765)
4,662,968
(2,177,570)
=2,485,398
P
Changes in the present value of the defined benefit liability are as follows:
Balance at beginning of year
Current service cost
Interest cost
Actuarial loss (gain) on obligations
Balance at end of year
2008
P
=9,636,733
1,432,500
996,400
(6,387,933)
P
=5,677,700
2007
=7,755,105
P
838,307
620,408
422,913
=9,636,733
P
2008
P
=4,973,765
–
248,700
(504,265)
P
=4,718,200
2007
=–
P
4,755,539
–
218,226
=4,973,765
P
(P
=255,565)
=218,226
P
Movement in the fair value of plan assets
Balance at beginning of year
Contributions
Expected return on plan assets
Actuarial (loss) gain
Balance at end of year
Actual return on plan assets
Movement of Defined Benefit Liability
2008
P
=2,485,398
2,230,800
–
P
=4,716,198
Balance at beginning of year
Retirement expense
Contributions paid
Balance at end of year
2007
=5,727,796
P
1,513,141
(4,755,539)
=2,485,398
P
The principal assumptions used in determining the defined benefit liability of the Group are shown
below:
Discount rate
Future salary increase
Expected rate of return on assets
2008
18.45%
10.00%
5.00%
2007
10.34%
10.00%
5.00%
2006
8.00%
10.00%
5.00%
The overall expected return on plan assets is determined based on market prices prevailing on that
date, applicable to the period over which the obligation is to be settled.
Experience adjustments on benefit obligation amounted to P
=0.6 million in 2008 and P
=0.4 million
in 2007.
*SGVMC211961*
- 47 -
27. EPS
The following table presents information necessary to calculate basic and diluted EPS:
2008
2007
Net income attributable to equity
holders of the Parent
P134,591,769
P
=140,597,374 =
Outstanding capital stock at beginning
of year
125,250,000
199,098,000
Effect of issuance of shares during the year
73,848,000
382,033
Effect of purchase of treasury shares
during the year
(1,098,497)
–
Weighted average number of shares
outstanding during the year
184,941,333
198,381,536
Basic/Diluted EPS
=0.73
P
P
=0.71
2006
=50,466,553
P
125,250,000
–
–
125,250,000
=0.40
P
Basis EPS is calculated by dividing the net income for the period by the weighted average number
of shares outstanding during the period.
Diluted EPS is calculated in the same manner assuming that, at the beginning of the year or at the
time of issuance during the year, all outstanding options are exercised. Outstanding stock options
will have a dilutive effect only when the average market price of the underlying share during the
year exceeds the exercise price of the option.
Option shares totaling to 1,428,000 shares granted in May 6, 2008 were not considered in the
calculation of the diluted EPS because they are anti-dilutive for the year.
28. Financial Instruments
Financial Risk Management Objectives and Policies
The Group’s principal financial instruments are composed of cash and cash equivalents and
obligation under finance lease. The main purpose of these financial instruments is to finance the
Group’s operations. The Group has various other financial assets and liabilities such as trade and
other receivables, trade and other current liabilities and advances to related parties, which arise
directly from its operations.
The main risks arising from the Group’s financial instrument are foreign currency risk, credit risk,
liquidity risk and equity price risk. The Group’s BOD and management review and agree on the
policies for managing each of these risks as summarized below:
Foreign Currency Risk
The Group has transactional currency exposures. Such exposure arises from consultancy payable
with certain suppliers which are denominated in U.S. dollar (US$). The Group’s financial
instrument which is denominated in foreign currency includes cash and cash equivalents and
consultancy and software and license fees payable. The Group maintains a U.S. dollar account to
match its foreign currency requirements.
*SGVMC211961*
- 48 As of December 31, 2008 and 2007, asset and liability denominated in foreign currencies include
cash and cash equivalents amounting to P
=3.3 million ($69,467) and P
=1.0 million ($23,341),
respectively; and consultancy and software and license fees payable amounting to P
=8.7 million
($182,774) and P
=3.1 million ($73,747), respectively.
In translating foreign currency-denominated monetary assets and liabilities into peso amounts, the
exchange rate used were P
=47.52 to US$1.0 and P
=41.28 to US$1.0, the Philippine peso to U.S.
dollar exchange rates as of December 31, 2008 and 2007, respectively.
The following table demonstrates the sensitivity to a reasonably possible change in the Philippine
peso (Php)-US$ exchange rates, with all other variables held constant, of the Group’s consolidated
income before tax. There is no other impact on the Company’s equity other that those already
affecting the consolidated statement of income.
Change in foreign currency rate
Effect on income before income tax
2008
Increase in US$ Decrease in US$
P
=1.98
P
=1.07
(224,349)
121,239
Change in foreign currency rate
Effect on income before income tax
2007
Increase in US$ Decrease in US$
=1.02
P
=0.70
P
(51,666)
3,528
The increase in US$ rate means stronger US$ against peso while the decrease in US$ means
stronger peso against the US$.
Credit Risk
The Group’s trade receivable arises from equipment lease agreement with PCSO, the Company’s
sole customer. Since the Group has significant concentration of credit risk on its receivable with
PCSO, it is the Group‘s policy that all terms specified in the ELA with PCSO are complied with
and ensure payment terms as agreed. With respect to other receivables, the Company manages
credit risk by transacting only with recognized, credit worthy third parties and selected PCSO
provincial district offices on their sale of instant scratch tickets. It is the Company’s policy that
the BOD approves on major transactions with third parties. Receivable balances are monitored on
an ongoing basis with the result that the Group’s exposure to bad debts is not significant.
With respect to credit risk arising from the other financial assets of the Group, which are
composed of cash and cash equivalents and investments in held for trading, the Group’s exposure
to credit risk arises from default of the counterparty, with a maximum exposure equal to the
carrying amount of these instruments.
*SGVMC211961*
- 49 The table below shows the maximum exposure to credit risk for the Group’s financial assets, as of
December 31, 2008 and 2007, without taking account any collateral and other credit
enhancements:
Cash and cash equivalents
Investments held for trading
Trade and other receivables:
Trade receivables
Advances to officers and employees
Advances to contractors and suppliers
Other receivables
Advances to TGTI (included as part of “Investment
and advances” account in the consolidated
balance sheets)
Total credit risk exposure
2008
P
=103,424,773
54,810,517
2007
=151,417,401
P
58,213,480
38,010,276
28,726,468
21,768,816
28,291,415
26,436,779
7,537,085
27,509,183
6,184,869
–
P
=275,032,265
67,351,193
=344,649,990
P
As discussed in Note 8, TGTI became an indirectly owned subsidiary in 2008.
The table below shows aging analysis of receivables as of December 31, 2008 and 2007:
Trade receivables
Advances to officers and employees
Advances to contractors and suppliers
Other receivables
Trade receivables
Advances to officers and employees
Advances to contractors and suppliers
Advances to TGTI
Other receivables
Neither Past
Due nor
Impaired
P
= 38,010,276
1,561,064
15,939,226
20,900,880
P
= 76,411,446
Neither Past
Due nor
Impaired
=26,436,779
P
4,129,280
26,735,237
5,402,299
804,485
=63,508,080
P
2008
Past Due but not Impaired
91–120 Days
P
=–
2,983,081
778,417
380,326
P
= 4,141,824
121–150 Days
P
=–
27,615
603,900
457,638
P
= 1,089,153
151–180 Days
P
=–
31,494
–
150,000
P
= 181,494
Over
180 Days
P
=–
24,123,214
4,447,273
6,402,571
P
= 34,973,058
Subtotal
=–
P
27,165,404
5,829,590
7,390,535
P
= 40,385,529
Total
P
= 38,010,276
28,726,468
21,768,816
28,291,415
P
= 116,796,975
Subtotal
=–
P
3,407,805
773,946
61,948,894
5,380,384
=71,511,029
P
Total
=26,436,779
P
7,537,085
27,509,183
67,351,193
6,184,869
=135,019,109
P
2007
Past Due but not Impaired
91–120 Days
=–
P
2,011
–
2,350,270
66,632
=2,418,913
P
121–150 Days
=–
P
22,729
–
1,241,844
31,489
=1,296,062
P
151–180 Days
=–
P
3,383,065
–
226,413
–
=3,609,478
P
Over
180 Days
=–
P
–
773,946
58,130,367
5,282,263
=64,186,576
P
Receivables that are past due but not impaired are still collectible based on the assessment of
debtor’s ability to pay and collection agreement.
The table below shows the credit quality of the Group’s neither past due nor impaired financial
assets based on their historical experience with the corresponding third parties.
Cash and cash equivalents
Investments held for trading
Receivables:
Trade receivables
Advances to officers and employees
Advances to contractors and
suppliers
Other receivables
Grade A
P
=103,424,773
54,810,517
2008
Grade B
P
=–
–
Grade C
P
=–
–
Total
P
=103,424,773
54,810,517
38,010,276
–
–
–
–
1,561,064
38,010,276
1,561,064
–
–
P
=196,245,566
15,939,226
–
P
=15,939,226
–
20,900,880
P
=22,461,944
15,939,226
20,900,880
P
=234,646,736
*SGVMC211961*
- 50 -
Cash and cash equivalents
Investments held for trading
Receivables:
Trade receivables
Advances to officers
and employees
Advances to contractors
and suppliers
Advances to TGTI
Other receivables
2007
Grade B
=–
P
–
Grade A
=151,417,401
P
58,213,480
Grade C
=–
P
–
Total
=151,417,401
P
58,213,480
26,436,779
–
–
26,436,779
–
–
4,129,280
4,129,280
–
–
–
=236,067,660
P
26,735,237
–
–
=26,735,237
P
–
5,402,299
804,485
=10,336,064
P
26,735,237
5,402,299
804,485
=273,138,961
P
Grade A financial assets pertain to those cash and cash equivalents that are deposited in a
reputable bank, investments with reputable publicly listed companies and receivables from PCSO
which are consistently collected before the maturity date. Grade B includes receivables that are
collected on their due dates even without an effort from the Group to follow them up, while
receivables which are collected on their due dates provided that the Group made a persistent effort
to collect them are included under Grade C receivables.
Liquidity Risk
Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they
fall due under normal and stress circumstances. To limit this risk, the Company closely monitors
its cash flows and ensures that credit facilities are available to meet its obligations as and when
they fall due. The Group also has a committed line of credit that it can access to meet liquidity
needs.
The Group maintains sufficient cash to finance its operations. Any excess cash is invested in
short-term money market placements. These placements are maintained to meet the requirements
for additional capital expenditures, maturing obligations and cash dividends.
The table below summarizes the maturity profile of the Group’s financial liabilities based on
contractual undiscounted payments:
2008
Trade and other current liabilities*
Installment payable (inclusive
of current portion):
Principal
Interest
Obligations under finance lease
Less than
3 Months
P
=71,060,677
3–6 Months
P
=–
6–12 Months
P
=–
More than
12 Months
P
=–
Total
P
=71,060,677
1,117,934
107,230
23,859,868
P
=96,145,709
1,050,400
102,326
21,292,714
P
=22,445,440
2,100,800
204,652
41,358,097
P
=43,663,549
2,349,000
228,284
229,147,470
P
=231,724,754
6,618,134
642,492
315,658,149
P
=393,979,452
* Excluding other current liabilities representing statutory payables and other liabilities to the government.
2007
Trade and other current liabilities*
Installment payable:
Principal
Interest
Obligations under finance lease
Less than
3 Months
=20,579,316
P
3–6 Months
=–
P
6–12 Months
=–
P
More than
12 Months
=–
P
Total
=20,579,316
P
1,470,500
85,183
20,243,021
=42,378,020
P
527,133
38,281
20,062,983
=20,628,397
P
328,800
23,880
46,018,493
=46,371,173
P
–
–
273,646,059
=273,646,059
P
2,326,433
147,344
359,970,556
=383,023,649
P
* Excluding other current liabilities representing statutory payables and other liabilities to the government.
*SGVMC211961*
- 51 Equity Price Risk
Equity price risk is the risk that the fair value of quoted investments held for trading decreases as
the result of changes in the value of individual stocks. The Group’s exposure to equity price risk
relates primarily to the Group’s quoted investments held for trading. The Group monitors the
equity investment based on market expectations. Material investments within the portfolio are
managed on an individual basis and all buy and sell decisions are approved by the BOD.
The following table demonstrates the sensitivity to a reasonably possible change in equity price,
with all other variables held constant, of the Group’s consolidated income before income tax.
There is no other impact on the Group’s equity other than those already affecting the consolidated
statements of income.
2008
Increase (Decrease) in Equity Price
0.34
(0.34)
Effect on Consolidated Net Income
P
=1,194,099
(1,194,099)
2007
Increase (Decrease) in Equity Price
0.28
(0.28)
Effect on Consolidated Net Income
=743,333
P
(743,333)
Capital Management
The primary objective of the Group’s capital management is to safeguard the entity’s ability to
continue as a going concern, so that it can provide returns for shareholders and benefits for others
stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
The Group manages its capital structure and makes adjustments to it, in light of changes in
economic conditions. To maintain or adjust the capital structure, the Group may adjust the
dividend payment to shareholders, return capital to shareholders or issue new shares.
The Group monitors capital on the basis of current ratio and debt-to-equity ratio. Debt-to-equity
ratio is calculated as total liabilities over equity.
The Group’s strategy, which was unchanged from prior year, was to maintain debt-to-equity ratio
and current ratio at manageable levels.
The Group’s current ratio and debt-to-equity ratio as of December 31, 2008 and 2007 are as
follows:
Current Ratio
Current assets
Current liabilities
2008
P
=327,601,724
176,094,056
1.86
2007
=321,061,829
P
109,683,251
2.93
*SGVMC211961*
- 52 Debt-to-Equity Ratio
2008
P
=379,621,990
400,207,496
0.95
Total liabilities
Total equity
2007
=340,412,805
P
396,037,982
0.86
Fair Value of Financial Instruments
Set out below is a comparison by category of carrying values and fair values of all the Group’s
financial instruments as of December 31, 2008 and 2007.
2007
2008
Financial Assets
Loans and receivables Cash and cash equivalents
Trade and other receivables:
Trade receivables
Advances to contractors and suppliers
Advances to officers and employees
Other receivables
Advances (included as part of “Investment
and advances” account in the
consolidated balance sheets)*
Investments held for trading
Financial Liability
Other liabilities Trade and other current liabilities:
Trade
Consultancy and software
and license fees payable
Accrued expenses and others**
Others
Installment payable (inclusive
of current portion)
Obligations under finance lease
(including current portion)
Carrying Value
Fair Value
Carrying Value
Fair Value
P
=103,424,773
P
=103,424,773
=151,417,401
P
=151,417,401
P
38,010,276
21,768,816
28,726,468
28,291,415
38,010,276
21,768,816
28,726,468
28,291,415
26,436,779
27,509,183
7,537,085
6,184,869
26,436,779
27,509,183
7,537,085
6,184,869
–
220,221,748
54,810,517
P
=275,032,265
–
220,221,748
54,810,517
P
=275,032,265
67,351,193
286,436,510
58,213,480
=344,649,990
P
67,351,193
286,436,510
58,213,480
=344,649,990
P
P
=17,827,803
P
=17,827,803
=9,021,730
P
=9,021,730
P
13,924,658
29,257,969
10,050,247
13,924,658
29,257,969
10,050,247
4,763,614
5,092,103
1,701,869
4,763,614
5,092,103
1,701,869
6,618,134
6,577,217
2,326,433
2,326,433
258,934,450
P
=336,613,261
256,766,992
P
=334,404,886
284,093,353
=306,999,102
P
281,892,574
=304,798,323
P
** Advances to a subsidiary in 2007 pertain to advances to a previously held joint venture.
** Excluding other current liabilities representing statutory payables and other liabilities to the government.
The carrying values of cash and cash equivalents, trade and other receivables, and trade and other
current liabilities approximate their fair values due to the short-term nature of the transactions.
The carrying value of interest-bearing advances to related parties approximates fair value due to
recent and regular repricing (i.e., monthly) based on market conditions.
The fair value of investments held for trading is based on quoted prices.
*SGVMC211961*
- 53 The fair value of installment payable and obligations under finance lease with fixed interest rate is
based on the discounted net present value of cash flows using the prevailing MART 1 rates
ranging from 5.64% to 6.81% in 2008 and 4.18% to 6.14% in 2007.
29. Note to Consolidated Statements of Cash Flows
The Group’s noncash investing and financing activities in 2008 and 2007 pertain to the acquisition
of lottery equipment through finance lease amounting to P
=26.7 million and P
=89.9 million in 2008
and 2007, respectively and acquisition of transportation equipment through car loans amounting to
=11.5 million in 2008 and P
P
=10.4 million in 2007 with outstanding “Installment payable”
amounting to P
=6.6 million and P
=2.3 million as of December 31, 2008 and 2007, respectively
(see Note 15).
*SGVMC211961*
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule A. Short-term Cash Investment
For the Year Ended December 31, 2008
Name of Issuing Entity and
Description of each Issue
Union Bank of the Philippines
Number of
Shares or
Principal
Amount of Bonds
and Notes
Amount
Shown in the
Balance Sheet
Value Based
on Market
Quotations at
Balance Sheet
Date
P
10,419,141 P
10,419,141
P
10,419,141 P
10,419,141
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal
Stockholders (Other than Associates)
For the Year Ended December 31, 2008
Beginning
Balance
Name and Designation of Debtor
Advances to officers and employees
TOTAL
Additions
Amount
Collected
Deductions
Amount
Written-off
Ending
Balance
P
7,537,085
P
25,691,199 P
4,501,816
P
P
28,726,468
P
7,537,085
P
25,691,199 P
4,501,816
P
P
28,726,468
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule C. Other Long-term Investments and Other Investments - at Cost
For the year Ended December 31, 2008
BEGINNING BALANCE
Name of Issuing Entity and
Description of Investment
Number
Shares
of Principal
Amount of
Bonds and Notes
ADDITIONS
DEDUCTIONS
Equity in
Earnings (Losses)
of Investees
for the Period
Amount
Pesos
ENDING BALANCE
Distribution of
Earnings by
Investees
Others
Number
Shares
of Principal
Amount of
Bonds and Notes
Others
Dividends
Received
Accured from
Investments
Not Accounted
for by the
Equity Method
Amount
in Pesos
At Cost
P
P
P
P
P
P
NONE
-
-
-
-
Less: Allowance for decline in value of investmnerts
P
-
P
P
-
P
P
-
P
-
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule C. Other Long-Term Investments and Other Investments - at Equity
For the Year Ended December 31, 2008
BEGINNING BALANCE
Name of Issuing Entity and
Description of Investment
At Equity
Innovative Solutions Consultancy Group
Accumulated equity in net losses
Number
Shares
of Principal
Amount of
Bonds and Notes
7,689,740
Amount in
Pesos
ADDITIONS
Equity in
Earnings (Losses)
of Investees
for the Period
DEDUCTIONS
Others
Distribution of
Earnings by
Investees
ENDING BALANCE
Others
Number
Shares
of Principal
Amount of
Bonds and Notes
Amount in
Pesos
7,689,740
(27,905,639)
(20,215,899)
-
(20,215,899)
-
Allowance for impairment in value
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule D. Indebtedness to Unconsolidated Subsidiaries and Associates
December 31, 2008
Beginning
Balance
Name of Affiliate
Ending
Balance
P
P
NONE
P
-
P
-
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule E. Other Assets
For the Year Ended December 31, 2008
Beginning
Balance
Description
P
Refundable deposits
Addition
At Cost
P
Deductions
Charged to
Other
Accounts
Charged to
Costs
and Expenses
P
P
Other Changes
Additions
(Deductions)
P
5,045,793
Others
5,343,393
P
4,834,302
297,600
P
Ending
Balance
-
P
P
P
P
4,834,302 P
9,880,095
297,600
10,177,695
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule F. Long Term Debt
December 31, 2008
Amount
Authorized by
Indenture
Name of Issuer and
Type of Obligation
Peso:
Amount
Shown as
Current
P
P
-
Amount
Shown as
Long-Term
P
66,740,848.00
P
198,811,736.00
P
66,740,848.00
P
198,811,736.00
Remarks
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule G. Indebtedness to Affiliates and Related Parties (Long-term Loans from Related Companies)
December 31, 2008
Beginning
Balance
Name of Affiliate
Ending
Balance
P
P
NONE
P
P
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule H: Guarantees of Securities of Other Issuers
December 31, 2008
Name of Issuing Entity
of Securities Guaranteed
by the Company for which
Statement is Filed
Title of Issue
of Each Class
of Securities
Guaranteed
Amount Owned by
the Company for
which Statement
is Filed
Total Amount
Guaranteed and
Outstanding
P
P
NONE
P
P
Nature of
Guarantee
PACIFIC ONLINE SYSTEMS CORPORATION
Schedule I. Capital Stock
December 31, 2008
Title of Issue
Common Shares
Number of
Shares
Authorized
Number of
Shares Issued
and
Outstanding
Number of
Shares Reserved
for Options,
Warrants,
Conversions and
Other Rights
500,000,000
195,566,000
617,000
500,000,000
195,566,000
617,000
Number of Shares Held By
Affiliates
-
Directors,
Officers and
Employees
Others
16,901,600
178,664,400
16,901,600
178,664,400