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SM INVESTMENTS CORPORATION

(A corporation duly organized and existing under Philippine laws)

P10,000,000,000.00 Fixed Rate


Series C Bonds due 2019
Series D Bonds due 2022
Offer Price of 100% of Face Value
Interest Rate of
6.0000% p.a. for Series C Bonds
6.9442% p.a. for Series D Bonds
SM Investments Corporation (the Issuer or SMIC or the Company) is offering Fixed Rate Bonds (the Bonds) in the
aggregate principal amount of P10,000,000,000.00 comprised of 7-year or Series C Bonds and 10-year or Series D Bonds
due on 2019 and 2022 respectively, with an Over-subscription Option of up to P5,000,000,000.00 (the Offer). Assuming
the Over-subscription Option is fully exercised, up to P15,000,000,000.00 in aggregate principal amount of the Bonds will
be issued by the Company pursuant to the Offer on 16 July 2012 (the Issue Date).
The Series C Bonds shall have a term of seven (7) years from the Issue Date, with a fixed interest rate equivalent to
6.0000% p.a. The Series D Bonds shall have a term of ten (10) years from the Issue Date, with a fixed interest rate
equivalent to 6.9442% p.a. Interest on the Series C Bonds and the Series D Bonds shall be payable semi-annually in arrears
starting on January 16 and July 16 of each year for each Interest Payment Date at which the Series C Bonds and the Series
D Bonds are outstanding, or the subsequent Business Day without adjustment if such Interest Payment Date is not a
Business Day. The Maturity Dates of the Series C Bonds and the Series D Bonds shall be on 16 July 2019 and 16 July 2022,
respectively, which will also be the last Interest Payment Dates for each respective series of the Bonds.
The Bonds shall be offered to the public at Face Value through the Underwriters named herein with the Philippine
Depository & Trust Corp. (PDTC) as the Registrar of the Bonds. It is intended that upon issuance, the Bonds shall be
issued in scripless form, with PDTC maintaining the scripless Register of Bondholders, and, as soon as reasonably
practicable, listed in the Philippine Dealing & Exchange Corp. (PDEx). The Bonds shall be issued in denominations of
P20,000.00 each, as a minimum, and in multiples of P10,000.00 thereafter, and traded in denominations of P10,000.00 in
the secondary market.

Joint Issue Managers and Joint Bookrunners


This Prospectus is dated as of 21 June 2012

Joint Lead Underwriters


BDO CAPITAL & INVESTMENT CORPORATION
BPI CAPITAL CORPORATION
CHINA BANKING CORPORATION
FIRST METRO INVESTMENT CORPORATION
Participating Underwriters
Multinational Investment Bancorporation
Philippine Commercial Capital, Inc.
PNB Capital and Investment Corpoation
RCBC Capital Corporation
Standard Chartered Bank
The Hongkong and Shanghai Banking Corporation Limited
United Coconut Planters Bank

The Bonds will be repaid at 100% of Face Value on the respective Maturity Dates of the Series C and Series D Bonds,
unless otherwise redeemed or purchased prior to the relevant Maturity Date, or as otherwise set out in Description of the
Bonds Redemption and Purchase and Description of the Bonds Payment in the Event of Default sections on pages 58
and 63, respectively, of this Prospectus.
The Bonds have been rated PRS Aaa by Philippine Rating Services Corporation (PhilRatings). A rating of PRS Aaa is
assigned to long-term debt securities with the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and repayment of principal is secured. A rating of PRS Aaa is the highest credit
rating on PhilRatings long-term credit rating scale. A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision, suspension or withdrawal at any time by the assigning rating organization.
The Bonds shall be offered to the public at Face Value through the Underwriters named herein with the Philippine
Depository & Trust Corp. (PDTC) as the Registrar of the Bonds. It is intended that upon issuance, the Bonds shall be
issued in scripless form, with PDTC maintaining the scripless Register of Bondholders, and, as soon as reasonably
practicable, listed in the Philippine Dealing & Exchange Corp. (PDEx). The Bonds shall be issued in denominations of
P20,000.00 each, as a minimum, and in multiples of P10,000.00 thereafter, and traded in denominations of P10,000.00 in
the secondary market.
SMIC expects to raise gross proceeds amounting to at least P10,000,000,000.00, up to a maximum of P15,000,000,000.00
assuming full exercise of the Over-subscription Option. Without such Over-subscription Option being exercised, the net
proceeds are estimated to be at least P9,918,516,375.00 after deducting fees, commissions and expenses relating to the
issuance of the Bonds. Assuming the Over-subscription Option is fully exercised, total net proceeds of the Offer is expected
to amount to approximately P14,883,516,375.00. Proceeds of the Offer shall be used for various project expansions and
general corporate purposes (see Use of Proceeds). The Joint Lead Underwriters shall receive a fee of 0.20% on the total
face value of the Bonds issued. The fee is inclusive of the fee to be ceded to Participating Underwriters.
Upon issuance, the Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligation of SMIC and
shall at all times rank pari passu and rateably without any preference or priority amongst themselves and at least pari
passu with all other present and future unsubordinated and unsecured obligations of SMIC, other than obligations
preferred by law. The Bonds shall effectively be subordinated in right of payment to all of SMICs secured debts, if any, to
the extent of the value of the assets securing such debt and all of its debt that is evidenced by a public instrument under
Article 2244(14) of the Civil Code of the Philippines.
On 18 April 2012, SMIC filed a Registration Statement with the Philippine Securities and Exchange Commission (SEC), in
connection with the offer and sale to the public of debt securities with an aggregate principal amount of up to
P15,000,000,000.00 constituting the Offer (inclusive of the Over-subscription Option). The SEC is expected to issue an
order rendering the Registration Statement effective, and a corresponding permit to offer securities for sale covering the
Offer.
The Company is allowed under Philippine laws to declare dividends, subject to certain requirements. The Companys Board
of Directors is authorized to declare dividends only from its unrestricted retained earnings, except with respect to P75.1
billion, representing accumulated equity in net earnings of subsidiaries. Dividends may be payable in cash, shares or
property, or a combination of the three, as the Board of Directors shall determine. The declaration of stock dividends is
subject to the approval of shareholders holding at least two-thirds of the Companys outstanding capital stock. The
Companys Board of Directors may not declare dividends which will impair its capital.
SMIC confirms that this Prospectus contains all material information relating to the Company, its affiliates and the Bonds
which are in the context of the issue and offering of the Bonds (including all material information required by the applicable
laws of the Republic of the Philippines). There are no other facts the omission of which would make any statement in this
Prospectus misleading in any material respect. SMIC confirms that it has made all reasonable inquiries in respect of the
information, data and analysis provided to it by its advisors and consultants or which is otherwise publicly available for
inclusion into this Prospectus. SMIC, however, has not independently verified any such publicly available information, data
or analysis.
The price of securities can and does fluctuate, and any individual security may experience upward or downward
movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made
as a result of buying and selling securities. An investment in the Bonds described in this Prospectus involves a certain
degree of risk. A prospective purchaser of the Bonds should carefully consider several risk factors inherent to the Company
(detailed in Risk Factors on pages 21 to 46 of this Prospectus), in addition to the other information contained in this
Prospectus, in deciding whether to invest in the Bonds.
This Prospectus contains certain forward-looking statements. These forward-looking statements can generally be
identified by use of statements that include words or phrases such as SMIC or its management believes, expects,
anticipates, intends, plans, projects, foresees, and other words or phrases of similar import. Similarly, statements

iii

plans,andgoalsarealsoforward-looking
statements
are
Allforward-looking
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SMIC's
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bythe
fromthosecontemplated
thatcouldcauseactualresultsto differmaterially
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Nothingin thisProspectus
is or shouldberelieduponasa promise
relevant
forward-looking
statements.
and
included
hereinaremadeonlyas of the dateof this Prospectus,
asto the future.Theforward-looking
statements
publiclyto reflectsubsequent
eventsor
no obligationto updatesuchforward-looking
statements
SMICundertakes
circumstances.
createany
Neitherthedeliveryof thisProspectus
noranysalemadepursuant
to theOffershall,underanycircumstance,
as of anytimesubsequent
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or referredto in thisProspectus
is accurate
implication
that the information
contained
or
expressor implied,as to the accuracy
do not makeany representation
or warranty,
datehereof.The Underwriters
in thisProspectus.
completeness
contained
of the information
or tax advice,Eachprospective
Thecontentsof this Prospectus
are not to be considered
as definitivelegal,business
purchaser
in his
a copyof thisProspectus
acknowledges
that hehasnotreliedon the Underwriters
of theBondsreceiving
purchasers
Prospective
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investigation
of theaccuracy
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owncounsel,
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or to make
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anyrepresentation
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or representation
shouldnot be relieduponashavingbeenauthorized
is at the 10sfloor,OneE-Com
Center,
Its principal
officeaddress
SMICis organized
underthe lawsof the Philippines.
number+6328570100andfax
Drive,Mallof AsiaComplex,
Pasay
withtelephone
Harbor
CBP-IA,
City1300,Philippines,
+6328570132.
number

ALL REGISTRATION
REQUIREMENTS
HAVEBEEN MET AND ALL INFORMATION
CONTAINED
HEREINIS TRUEANDCURRENT.
SM InvestmentsCorporation
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TABLE OF CONTENTS

DEFINITIONS .......................................................................................................................................... 1
SUMMARY ................................................................................................................................................ 8
SUMMARY FINANCIAL INFORMATION .............................................................................................. 15
SUMMARY OF THE OFFERING ............................................................................................................ 18
RISK FACTORS ...................................................................................................................................... 21
USE OF PROCEEDS .............................................................................................................................. 47
DETERMINATION OF THE OFFER PRICE .......................................................................................... 50
PLAN OF DISTRIBUTION ..................................................................................................................... 51
DESCRIPTION OF THE BONDS .......................................................................................................... 55
INTERESTS OF NAMED EXPERTS ...................................................................................................... 71
CAPITALIZATION AND INDEBTEDNESS ............................................................................................ 72
DESCRIPTION OF THE ISSUER AND THE GROUP .......................................................................... 73
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ................................................................................................................................. 159
DESCRIPTION OF PROPERTIES ....................................................................................................... 176
BOARD OF DIRECTORS AND MANAGEMENT OF THE ISSUER ................................................ 181
DESCRIPTION OF DEBT .................................................................................................................... 195
TAXATION ............................................................................................................................................ 196

DEFINITIONS
In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set
out below.
Aggregate Consolidated
Indebtedness

the total of bank loans, current and noncurrent portions of long-term


debt, net of pledged time deposits

ALCO

the Banks asset and liability committee

Alpha Star

Alpha Star Holdings Limited

Anchor Tenant

the primary tenants in any given Mall

Articles of Incorporation

the Articles of Incorporation of SMIC as amended to date

Bank Group

BDO, its subsidiaries and associated companies

BDO or Bank

BDO Unibank, Inc.

BDO Capital

BDO Capital & Investment Corporation, an investment house and a


wholly-owned subsidiary of BDO

BIR

the Bureau of Internal Revenue of the Philippines

Board or Board of Directors

the Board of Directors of SMIC

Bondholder

a person or entity whose name appears, at any time, as a holder of the


Bonds in the Register of Bondholders

Bonds

refers collectively to the Series C and Series D Bonds in the aggregate


principal amount of P10,000,000,000.00, and an Over-subscription Option
of up to P5,000,000,000.00, to be issued by SMIC and which will mature on
2019 and 2022, respectively

BPI Capital

BPI Capital Corporation

BSP

Bangko Sentral ng Pilipinas, the Philippine Central Bank

Business Day

means a day, other than Saturday, Sunday and public holidays, on which
facilities of the Philippine banking system are open and available for
clearing and banks are generally open for the transaction of business in the
cities of Pasay and Makati

By-laws

the By-laws of SMIC as amended to date

CASA

the Banks regular Current Account/Savings Account

China Bank

China Banking Corporation

CDHI

Costa del Hamilo Inc.

Debt-equity ratio

the ratio of Aggregate Consolidated Indebtedness or total equity


(excluding non-controlling interest) compared to the sum of such
Aggregate Consolidated Indebtedness and total equity (excluding
non-controlling interest)

Directors

the directors of SMIC

DOSRI

Directors, officers, stockholders and related interests

EPCIB

Equitable PCI Bank, Inc.

Financial Statements

SMICs audited consolidated financial statements, which comprise the


consolidated balance sheets as at 31 December 2011 and 2010, 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 31 December 2011, and a summary of significant
accounting policies and other explanatory notes

FMIC

First Metro Investment Corporation

GEMB

GE Money Bank

Government

the Government of the Philippines

Grand China

Grand China International Limited

Gross profit margin

sales minus cost of sales

Group

SMIC, its subsidiaries and associated companies

GSIS

Government Service Insurance System

Hedging Transactions

Hedging Transactions means any transaction pursuant to which:


(i) a bank deposit held in a currency other than Pesos; or (ii) securities or
instruments denominated in a currency other than Pesos issued or
guaranteed by (a) the Republic of the Philippines (or any agency,
instrumentality, ministry, department or other authority thereof) or (b)
entities which are rated at least A (long-term) by Standard & Poors
Ratings Services (or any successor) or A2 (long-term foreign currency
senior unsecured debt rating) by Moodys Investors Service Inc. (or any
successor), relating to, or acquired with, the proceeds of non-Peso
denominated indebtedness for borrowed monies, that is pledged for the
purposes of raising an equivalent amount of Peso denominated
indebtedness for borrowed monies, such transaction being for the sole
purpose of limiting the currency exchange risk of such non-Peso
denominated indebtedness for borrowed monies in the ordinary course of
business

HPI

Highlands Prime, Inc.

Home World

Home World Shopping Corporation

Issuer or SMIC

SM Investments Corporation

Joint I ssu e Ma na g er s a n d
J oi n t Bookrunners

BDO Capital and FMIC

Joint Lead Underwriters

BDO Capital, BPI Capital, China Bank and FMIC pursuant to the
Underwriting Agreement

Kultura

Kultura Stores, Inc.

Major Consignors

Hardware Workshop, Home World, Baby Company, Signature Lines,


Supplies Station, Toy World, Watsons, Sports Central and Kultura

Majority Bond Holders

Representing not less than 51% of the outstanding Bonds

Makro

Pilipinas Makro, Inc.

Malls

SM City North EDSA, SM City Sta. Mesa, SM Megamall, SM City Cebu, SM


Southmall, SM City Fairview, SM City Bacoor, SM City Iloilo, SM City
Manila, SM City Pampanga, SM City Davao, SM City Sucat, SM City
Bicutan, SM City Cagayan de Oro, SM City Lucena, SM City Marilao, SM
City Baguio, SM City Dasmarias, SM City Batangas, SM City San Lazaro,
SM Center Valenzuela, SM Center Molino, SM City Sta. Rosa, SM City
Clark, SM Mall of Asia, SM Center Pasig, SM City Lipa, SM City Bacolod, SM
City Taytay, SM Center Muntinlupa, SM City Marikina, SM City Rosales, SM
City Baliwag, SM City Naga, SM Center Las Pias, SM City Rosario, SM City
Tarlac, SM City San Pablo, SM City Calamba, SM City Novaliches, SM City
Masinag and SM City Olongapo (see Description of the Issuer and the
Group Shopping Malls SM Prime Holdings, Inc. The Malls)

Management Companies

companies that manage and operate the Malls, including the provision
of manpower, maintenance and engineering, security and promotional
activities; and are controlled, directly or indirectly, by the Sy Family

Master Certificate of
Indebtedness

the certificate to be issued by the Issuer to the Trustee evidencing and


covering such amount corresponding to the Bonds

Material Subsidiary

SM Prime Holdings, Inc., SM Land, Inc., SM Retail, Inc., SM Mart, Inc., SM


Development Corporation, Supervalue, Inc. and Super Shopping Market,
Inc. and shall include BDO Unibank, Inc., and any subsidiary of the
Issuer

Metro Manila

the metropolitan area comprising the cities of Caloocan, Las Pias,


Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Navotas,
Paraaque, Pasay, Pasig, Quezon, San Juan, Taguig and Valenzuela and
the municipality of Pateros, which together comprise the National
Capital Region and are commonly referred to as Metropolitan Manila

MR

Motion for Reconsideration

MRDC

Multi-Realty Development Corporation

NCCTs

Non-Cooperative Countries and Territories

Offer

the offer of the Bonds to the public by the Issuer under the terms and
conditions as herein contained

Offer Period

the period commencing within two Business Days from the date of the
issuance of the SEC Permit to Sell Securities, during which the Bonds shall
be offered to the public

PAS

Philippine Accounting Standards

Paying Agent

Philippine Depository & Trust Corp., the party which shall receive the funds
from the Issuer for payment of principal, interest and other amounts due
on the Bonds and remit the same to the Bondholders based on the records
3

shown in the Register of Bondholders


Payment Date

each of the dates when payment of principal, interest and other amounts
due on the Bonds are due and payable to the Bondholders; provided that,
in the event any Payment Date falls on a day that is not a Business Day, the
Payment Date shall be automatically extended without adjustment to
interest accrued to the immediately succeeding Business Day

PDEx

Philippine Dealing & Exchange Corp.

PDIC

The Philippine Deposit Insurance Corporation

PDTC

the Philippine Depository & Trust Corp., the central depository and clearing
agency of the Philippines which provides the infrastructure for handling the
lodgment of the scripless Bonds and the electronic book-entry transfers of
the lodged Bonds in accordance with the PDTC Rules, and its
successor-in-interest

PDTC Rules

the SEC-approved rules of the PDTC, including the PDTC Operating


Procedures and PDTC Operating Manual, as may be amended,
supplemented, or modified from time to time

Person

any individual, firm, corporation, partnership, association, joint venture,


tribunal, limited liability company, trust, government or political subdivision
or agency or instrumentality thereof, or any other entity or organization

Pesos or P

the lawful currency of the Philippines

PFRS

Philippine Financial Reporting Standards which includes statements


named PFRS and PAS issued by the Financial Reporting Standards Council
and Philippine Interpretations from International Financial Reporting
Interpretations Committee (IFRIC)

Philippines

the Republic of the Philippines

PSE

the Philippine Stock Exchange, Inc.

Public Debt

means any present or future indebtedness in the form of, or represented


by bonds, notes, debentures, loan stock or other securities that are at the
time, or are of the type customarily quoted, listed or ordinarily dealt in on
any stock exchange, over the counter or other securities market

R.A. No. 8799

Republic Act No. 8799, The Securities Regulation Code of the Philippines

Register of Bondholders

the electronic record of the issuances, sales and transfers of the Bonds to
be maintained by the Registrar pursuant to and under the terms of the
Registry and Paying Agency Agreement

Registrar

the Philippine Depository & Trust Corp., being the registrar appointed by
the Issuer to maintain the Register of Bondholders pursuant to the Registry
and Paying Agency Agreement

Retail Affiliates

retail companies, directly or indirectly, related to SMIC and/or the Sy


Family, via ownership and/or control, including Watsons, Toy World,
Home World, Ace Hardware Phils., Inc., Surplus Marketing Corp., Star
Appliance Center, Inc., Nursery Care Corporation, Supplies Station,
4

Sports Central and Kultura, among others


Retail Subsidiaries

the Groups retail and merchandising business, including SM Department


Stores, SM Supermarkets, SM Hypermarkets and Savemore

ROA

return on assets which measures the ratio of net income attributable to


equity holders of the parent to average total assets

ROE

return on equity which measures the ratio of net income attributable to


equity holders of the parent to average total equity (excluding
non-controlling interest)

ROPA

holdings in real and other properties acquired

Sanford

Sanford Marketing Corporation (formerly Sanford Investments Corp.)

SEC

the Securities and Exchange Commission of the Philippines

SEC Permit

the Permit to Sell Securities issued by the SEC in connection with the Offer

Singapore Stock Exchange

Singapore Exchange Securities Trading Limited

Shares

common shares of the Issuer, which have a par value of =


P10 per share

SM China Companies

SM Shopping Center (Chengdu) Co. Ltd., Xiamen SM City Co. Ltd. and
Xiamen SM Mall Management Co. Ltd. (together, SM Xiamen) and SM
International Square Jinjiang City Fujian (SM Jinjiang)

SM Department Stores

the retail department stores operated by the Group under the SM name
which presently include SM Quiapo, SM Makati, SM Cubao, SM Harrison,
SM North EDSA, SM Sta. Mesa, SM Megamall, SM Cebu, SM Southmall,
SM Bacoor, SM Fairview, SM Mandurriao, SM Manila, SM Pampanga, SM
Davao, SM Cagayan de Oro, SM Bicutan, SM Lucena, SM Baguio, SM
Marilao, SM Dasmarias, SM Batangas, SM Delgado, SM San Lazaro, SM
Sucat, SM Sta. Rosa, SM Clark, SM Mall of Asia, SM Lipa, SM Bacolod, SM
Taytay, SM Marikina, SM Baliwag, SM Naga, SM Rosales, SM Rosario, SM
Tarlac, SM San Pablo, SM Calamba, SM Novaliches, SM Masinag and SM
Olongapo

SM Mart

SM Mart, Inc., a 65.0% owned subsidiary through SM Retail

SMDC

SM Development Corporation

SM Hotels

In March 2010, the SEC approved the change in the name of SM Hotels
and Entertainment Corp. to SM Hotels and Conventions Corp.

SM Land

SM Land, Inc. (formerly Shoemart, Inc.)

SM Malls in China

SM Xiamen, SM Fupu (Jinjiang), SM City Chengdu and SM City Suzhou

SM Network

suppliers, tenants and other merchants that do business with entities


affiliated with SMIC

SM Prime

SM Prime Holdings, Inc.

SM Retail

SM Retail, Inc. and its subsidiaries SM Department Stores, Supervalue,


Inc., Sanford Marketing Corporation and Super Shopping Market, Inc.
5

SME

small and medium enterprise

Sports Central

Sports Central (Manila), Inc.

SSMI

Super Shopping Market, Inc.

SSS

Social Security System, the Philippines state pension fund for retired
private sector employees

Store Consignors

suppliers who are allocated portions of the selling areas within the
relevant departments of SM Department Stores within which to sell their
merchandise. See Description of the Issuer and the Group Retail and
Merchandising SM Department Stores

Subsidiary

at any particular time, any company or other business entity which is then
directly or indirectly controlled, or more than 50%, of whose issued equity
share capital (or equivalent) is then beneficially owned, by the Issuer
and/or one or more of its Subsidiaries. For a company to be controlled by
another means that the other (whether directly or indirectly and whether
by the ownership of share capital, the possession of voting power, contract
or otherwise) has the power to appoint and/or remove all or the majority of
the members of the board of directors or other governing body of that
company or otherwise controls or has a power to control the affairs and
policies of that company and control shall be construed accordingly.

Supplies Station

Supplies Station, Inc.

SVI

Supervalue, Inc.

Sy Family

Mr. Henry Sy, Sr., his wife, Mrs. Felicidad T. Sy, and their children Teresita
T. Sy, Elizabeth T. Sy, Henry T. Sy, Jr., Hans T. Sy, Herbert T. Sy and Harley
T. Sy

Tax Code

the amended Philippine National Internal Revenue Code of 1997 and its
implementing rules and regulations

Total Assets

consolidated total assets of the Issuer and its subsidiaries

Total Liabilities

the aggregate of consolidated total current and consolidated total


noncurrent liabilities of the Issuer as derived from the balance sheet of the
relevant Accounts, excluding (i) any Peso denominated indebtedness for
borrowed monies entered into with respect to any Hedging Transaction
and (ii) non-controlling interests

Total Equity

the total consolidated equity of the Issuer as derived from the balance
sheet of the relevant Accounts

Toy World

International Toy World, Inc.

Trustee

the Philippine National Bank Trust Banking Group, the entity appointed by
the Issuer which shall act as the legal title holder of the Bonds and shall
monitor compliance and observance of all covenants of and performance
by the Issuer of its obligations under the Bonds and enforce all possible
remedies pursuant to such mandate

Underwriters

the entities appointed as the Underwriters for the Bonds pursuant to the
Underwriting Agreement

Watsons

Watsons Personal Care Stores (Philippines), Inc.

SUMMARY
The summary below is only intended to provide a limited overview of information described in more detail
elsewhere in this Prospectus. As it is a summary, it does not contain all of the information that may be
important to investors and terms defined elsewhere in this Prospectus shall have the same meanings when
used in this summary. Prospective investors should therefore read this Prospectus in its entirety.

The Issuer and the Group


Overview
The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The
Issuer was incorporated in the Philippines on 15 January 1960. On 29 April 2009, the Companys
shareholders approved the amendment of SMICs Articles of Incorporation, extending the Companys
corporate life for another 50 years from 15 January 2010. Its registered office is at the 10th Floor, One
E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City, Metro Manila, Philippines. Through
its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses
located in the Philippines.
The Groups business activities and interests are divided into five principal sectors:

retail merchandising through its department store, supermarket, savemore, hypermarket and
wholesale operations (SM Retail);

shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM
Prime);

financial services, through its associate banks that have universal banking licenses in the Philippines
(BDO and China Bank);

real estate development and tourism (SM Land, SMDC, CDHI and HPI); and

hotels and conventions (SM Hotels).

As at 31 December 2011, the Issuer had seven principal consolidated subsidiaries namely SM Prime, SM
Retail, SM Land, SMDC, CDHI, SVI and SSMI and three principal equity-accounted associates, namely BDO,
China Bank and HPI, each of whose shares are listed on the PSE, (except for SM Retail, SM Land, CDHI, SVI
and SSMI), in which the Issuer had effective interests of 49.05%, 100.00%, 66.89%, 43.72%, 94.45%,
100.00%, 100.00%, 46.09%, 20.63%, and 26.77%, respectively.
For the year ended 31 December 2009, 2010 and 2011, the Issuers audited consolidated revenues were
P158,032.5 million, P177,173.0 million and P200,281.8 million, respectively, and its audited consolidated
net income attributable to equity holders of the parent was P16,025.0 million, P18,440.2 million and
P21,224.6 million, respectively.
As at 31 December 2009, 2010 and 2011, the Issuers audited consolidated total assets were P341,644.4
million, P407,383.8 million and P449,062.1 million, respectively, and its audited total equity was P165,725.3
million, P197,817.5 million and P222,286.9 million, respectively.
The principal source of consolidated revenue of the Issuer is from sales of merchandise, primarily from
Retail Subsidiaries, which contributed P123,895.5 million, P135,570.4 million and P148,182.1 million,
respectively, or 78.4%, 76.5% and 74.0%, respectively, of its consolidated revenues for the years ended
31 December 2009, 2010 and 2011. Shopping Malls contributed P17,097.8 million, P19,451.0 million and

P22,212.1 million, or 10.8%, 11.0% and 11.1%, respectively, of the Issuers consolidated revenues for the
years ended 31 December 2009, 2010 and 2011. Shopping Malls and Retail Subsidiaries contributed 61.4%,
57.3% and 54.2%, respectively, of the Issuers consolidated net income attributable to equity holders of
the parent for the years ended 31 December 2009, 2010 and 2011.
History
Mr. Henry Sy, Sr., the founder of the Group, embarked upon his retailing career immediately after the
Second World War when, in 1945, he established a small shoe store in Carriedo, Metro Manila. Having
opened six shoe stores, Mr. Sy diversified the business into clothing and soft goods. In 1958, the first Shoe
Mart store opened in Rizal Avenue, Metro Manila and, following the incorporation of Shoemart in March
1960, additional stores opened in Makati Commercial Center in 1962, in Cebu in 1965 and in Cubao in 1967.
Four department stores were opened during the 1970s and, with the intention that one-stop shopping
convenience be provided to customers, the new stores featured fast food centers and entertainment areas.
Shoemart operated six SM Department Stores until November 2001, when five stores were transferred to
SM Mart. As at December 31, 2008, SM Mart is a 65.0% owned subsidiary through SM Retail, with the
remaining 35.0% held by the Sy Family. Pursuant to a restructuring of the Issuers department store
business in 2002, SM Mart took over most of Shoemarts functions in managing its department store
business, such as merchandising, marketing, advertising and certain other services for the SM Department
Stores as well as for its Retail Affiliates. In addition to the five SM Department Stores that are directly
owned and operated by SM Mart, the Issuer also operates 37 SM Department Stores through 13 other
subsidiaries. The Group acquired its supermarket and hypermarket operations in June 2006. Shoemart has
been renamed SM Land, Inc.
Capitalizing upon the success of the SM Department Stores and as an extension of the concept of one-stop
shopping, the first shopping mall, SM City North EDSA, commenced operations in Quezon City in 1985.
By January 1994, four shopping malls had been opened, including SM Megamall, the largest shopping mall
in the Philippines prior to the opening of SM Mall of Asia in 2006. SM Prime was incorporated in 1994 for the
primary purpose of acquiring from other members of the Group, as well as companies affiliated to the Sy
Family, the shopping malls and land intended for the development of shopping malls and, henceforth, to be
the Group vehicle for commercial center operations. SM Prime undertook its initial public offering on the
PSE in July 1994, raising approximately P6.0 billion. SM Prime currently owns and operates, with the
assistance of certain Management Companies, 42 shopping malls in the Philippines. Three additional Malls
in Rosales, Baliwag and Marikina were opened in 2008, and expansions to SM City Fairview, SM Megamall
and SM City North EDSA were conducted in 2009. In 2010, three additional malls opened in the cities of
Tarlac, San Pablo, Novaliches and Calamba while in 2011, one mall opened in Masinag, Antipolo. In
November 2007, SM Prime approved the acquisition from the Sy Family of three malls in the southern and
western parts of China, namely Xiamen, Jinjiang and Chengdu and completed the acquisition in May 2008.
SM Suzhou opened in September 2011. In China, SM Prime intends to open SM Chongqing in 2012, SM Zibo
in 2013 and SM Tianjin in 2014. See Recent Developments and Prospects.
The Issuers expansion into real estate development commenced in October 1974 with the incorporation of
MRDC. MRDC was formed to develop high-rise condominiums and townhouse units in the prime district of
Makati.
In November 1976, Mr. Henry Sy, Sr. acquired Acme Savings Bank, which was renamed Banco de Oro
Savings and Mortgage Bank in August 1977 and then as Banco de Oro Commercial Bank in December 1994.
The Bank initially provided services predominantly to suppliers of Shoemart, but has subsequently
developed into a full-service commercial bank. In August 1996, the Bank was renamed Banco de Oro
Universal Bank when the BSP granted approval for the Bank to operate as an expanded commercial bank.
Banco De Oro undertook its initial public offering and was listed on the PSE in May 2002, raising P2.1 billion.
In May 2007, the Bank merged with EPCIB and was subsequently renamed Banco De Oro Unibank, Inc. on
9

6 February 2008. On November 4, 2011, the Bank was renamed to BDO Unibank, Inc. as part of the
companys branding initiatives.
In 1986, the Group obtained majority ownership of SM Fund, Inc., a closed-end investment company listed
on the PSE. In May 1996, the SEC approved a change of name of the company to SM Development
Corporation and a change of its purpose to property holding and development. The Group has also
diversified into tourism and entertainment with plans for the development of mixed-use complexes in Cebu,
Tagaytay, Batangas, Baguio and Metro Manila, which include hotels, convention centers, shopping malls
and leisure and entertainment facilities. On 1 August 2007, the Issuer approved to rationalize Shoemart as
the holding entity for the various property projects of the Group. On 8 October 2007, the Issuer and
Shoemart entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965 common shares
in SMDC in exchange for 372,212 common shares in Shoemart based on an independent valuation of the
respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC approved the
valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212 shares.
On 2 April 2008, SM Hotels was incorporated to further focus on and develop the Groups hotel business,
and rationalize the Groups hotel and convention assets under one entity. On 29 March 2010, the SEC
approved the change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and
Conventions Corp.
SMIC was listed on the PSE on 22 March 2005, and as at 21 June 2012, had a market capitalization of
P426,598.4 million, based on a price of P695.00 per common share on such date.
Strategy
The Issuers strategy is focused on growing its commercial center, retail, property and financial services
businesses, and maintaining or attaining market leadership in each of their respective sectors. The Issuer
will continue to target the mass market in the Philippines by offering essential goods and services such as
food, clothing, housing and financial services.
The Issuer is responsible for setting Group policy and strategy. The Issuer establishes the financial and
operating policies for the Group and supervises and monitors the performance of its subsidiaries and
associates.
Key elements of the Issuers strategy are to:

restructure the operating entities in the Groups five principal sectors of business under a
rationalized and streamlined group operating structure headed by four principal holding companies,
each focused on one principal business sector;

maintain its leading market share in the shopping mall sector by continuing to expand the Groups
mall and retail activities into major centers of population in Metro Manila and particularly in the
provinces, where there are opportunities for growth and capture strategic opportunities overseas
particularly China;

continue to capture a significant share of retail spending in the Philippines, including what it
believes is a significant share of approximately US$20.1 billion for 2011 (based on BSP data) in
remittances from overseas Filipino workers by ensuring that the Issuer provides the most attractive
retail and leisure facilities to Philippine mass market consumers;

continue to grow its financial services businesses, including through acquisitions by BDO, and
develop further synergies between financial services and its shopping malls and the Retail
Subsidiaries by encouraging its suppliers and retail customers to take advantage of and utilize the
10

financial services offered by BDO and China Bank;

diversify and expand the businesses of the Group (including through acquisition) by developing
opportunities in the property development, tourism and leisure sectors, where it believes there are
significant opportunities for growth as the Philippines becomes a more attractive tourist destination,
by leveraging the Groups significant and strategically located land bank;

supervise a range of related businesses and investments, providing support, expertise and funding
to its developing businesses and encouraging further growth in its more established businesses;
and

promote the independence of its various businesses in terms of executing set strategies and
encouraging financial independence in terms of external funding.

Strengths
The Issuer believes that the key strengths of the Group are as follows:

a well-established platform providing quality services from retail to real estate development to
financial services to cater for the domestic consumption growth in the Philippines;

its 55 years of retail experience, which has created significant goodwill among its customers and
suppliers, a well-known brand and image and a reputation for providing value for customers;

its leading market share positions in providing one-stop experience through shopping malls,
department stores and supermarkets and the largest bank in the Philippines in terms of assets;

fast growing residential development expertise that is sitting at the sweet spot of the local real
estate markets, well-supported by SM-branded shopping malls nearby;

prudent financial management and a strong balance sheet with stable recurring cash flows through
focusing on diverse businesses which are relatively less cyclical;

its experienced management team, which has consistently focused on related businesses that
promote synergies; and

its overall corporate reputation in the Philippines and abroad, which has brought the Group
numerous awards for corporate excellence, corporate governance and financial management.

Risks of Investing
Before making an investment decision, investors should carefully consider the risks associated with an
investment in the Bonds. These risks include:

Risks Relating to the Company

The Issuer is primarily a holding company and payments under the Bonds are structurally
subordinated to all liabilities of the Issuers subsidiaries and associates

Any restriction or prohibition on the Issuers subsidiaries and associates ability to distribute
dividends would have a negative effect on its financial condition and results of operations

The Issuer is controlled by the Sy Family, whose interests may not be the same as those of other
11

shareholders

The Issuers businesses have significant levels of related party transactions and are interdependent,
and any material adverse change in one member of the Group could adversely affect the results of
operations of other members of the Group, including SMIC

The Issuer depends on members of the Sy Family as regards the management of its business

The Issuer has conducted and may continue to conduct acquisitions, the impact of which could be
less favorable for its activities and results than anticipated, or which could affect its financial
situation

Infringement of the SM intellectual property rights would have a material adverse effect on the
Groups business

The Groups debt leverage will be increased following the issue of the Bonds

Risks Relating to the Malls

SM Primes business focus on Philippine retail malls exposes SM Prime to economic and real estate
conditions in the Philippines

SM Prime may face increased competition from other retail malls for customers

Malls owned by SM Prime may be subject to an increase in operating and other expenses

SM Primes operation in China expose SM Prime to certain local risk

SM Prime may suffer material losses in excess of insurance proceeds

Risks Relating to the Groups Real Estate Business

The Philippine property market is cyclical

The Group faces property development risk

Risks Relating to the Retail Operations

The success of the Retail Subsidiaries and Retail Affiliates will be dependent in part on the Issuers
continued ability to satisfy consumer preferences and spending trends in the markets in which the
Retail Subsidiaries operate

The Retail Subsidiaries depend on their ability to retain existing suppliers and secure new suppliers

Non-renewal of leases or substantial increases in rent for the Issuers retail stores may have a
material adverse effect on the Issuer

The future growth of the Retail Subsidiaries will be largely driven by the effectiveness and success
of their expansion strategy

The Retail Subsidiaries and Retail Affiliates may be subject to increasing competitive pressures

There can be no assurance that the Retail Subsidiaries are fully insured against unexpected losses
12

SM Lands title to the land where the Mall of Asia is located may be challenged

The Retail Subsidiaries business activities are subject to seasonality and timing

The supermarket and hypermarket industry is highly competitive and characterized by narrow
profit margins

As a result of selling food products, the Group faces the risk of exposure to product liability claims
and adverse publicity

Risks Relating to the Bank

The Bank may not be able to successfully sustain its growth strategy

The Bank may face increasing levels of non-performing loans and provision for impairment of
assets

The Banks provisioning policies in respect of non-performing loans require significant subjective
determinations which may increase the variation of application of such policies

The Bank may be unable to recover the assessed value of its collateral when its borrowers default
on their obligations, which may expose the Bank to significant losses

Philippine banks are generally exposed to higher credit risks and greater market volatility than
banks in more developed countries

The Bank has a high exposure to the Philippine property market through its ROPA holdings

The Bank may have to comply with stricter regulations and guidelines issued by regulatory
authorities in the Philippines, including the BSP, the BIR and international bodies, including the
Financial Action Task Force (the FATF)

The results of operations of certain of the Banks businesses may vary significantly from time to
time

The Philippine banking industry is highly competitive and increasing competition may result in
declining margins in the Banks principal businesses

The Banks ability to assess, monitor and manage risks inherent in its business differs from the
standards of its counterparts in more developed countries

The Banks recent and potential acquisitions may represent a risk if not managed effectively

The Bank faces pressure to comply with new capital standards

The Banks results of operations may be adversely affected if the assumptions used to determine
the cost of retirement benefits under the Banks retirement plans change

The Bank is effectively controlled by one shareholder group, with which it has extensive financial
and business connections

13

Risks Relating to the Philippines

Substantially all of the Groups operations and assets are based in the Philippines; a slowdown in
economic growth in the Philippines could materially adversely affect its businesses

Any political instability in the future may have a negative effect on the Groups financial results

An increase in the number of terrorist attacks, or the occurrence of a large-scale terrorist attack, in
the Philippines could negatively affect the Philippine economy and, therefore, the Groups financial
condition and its business

Volatility in the value of the Peso against the U.S. dollar and other currencies could adversely affect
the Groups businesses

Corporate governance and disclosure standards in the Philippines may differ from those in more
developed countries

Risks Relating to the Bonds

The priority of debt evidenced by a public instrument

An active trading market for the Bonds may not develop

The Issuer may be unable to redeem the Bonds

Please refer to the section entitled Risk Factors on page 21 of this Prospectus which, while not intended to
be an exhaustive enumeration of all risks, must be considered in connection with a purchase of the Bonds.

14

SUMMARY FINANCIAL INFORMATION


The following tables set forth the summary consolidated financials of the Issuer as at and for the periods
indicated. The selected financial information presented below as at 31 December 2009, 2010 and 2011
and for each of the three years in the periods ended 31 December 2009, 2010 and 2011 has been derived
from the Issuers consolidated financial statements. The information set out below should be read in
conjunction with, and is qualified in its entirety by reference to, the relevant consolidated financial
statements of the Issuer, including the notes thereto, included elsewhere in this Prospectus. The
Quarterly Report of the Group filed pursuant to Section 17 of the Securities Regulation Code for the first
quarter of 2012 (the 2012 First Quarter Report) is available and is distributed together with the
Prospectus as its Supplement, and forms an integral part hereof. This section should be read in conjuction
with the 2012 First Quarter Report, which contains the unaudited financial report of the Group for the
first quarter of 2012.

As at 31 December

Consolidated Balance Sheets


2009

2010

2011

(in P thousands)
ASSETS
Current Assets
Cash and cash equivalents

43,547,001

Time deposits and short-term investments

66,961,010

56,050,322

10,361,224

876,800

879,410

Investments held for trading and sale

4,790,803

2,007,801

1,939,709

Receivables

8,791,698

9,826,776

11,764,852

Merchandise inventories - at cost

7,760,762

10,485,903

13,436,456

Other current assets

13,226,486

14,133,252

17,189,740

Total Current Assets

88,477,974

104,291,542

101,260,489

7,681,911

11,097,407

12,453,181

57,846,770

70,860,181

88,417,849

Noncurrent Assets
Available-for-sale investments
Investments in shares of stocks of associates
Time deposits

32,237,225

37,419,095

37,416,562

Property and equipment

10,993,206

13,368,539

15,092,354

Investment properties

101,689,860

113,667,244

131,275,911

Land and development

12,370,434

19,703,595

23,012,453

Intangibles

15,343,531

15,354,200

15,354,200

953,999

576,364

694,644

Other noncurrent assets

14,049,511

21,045,636

24,084,415

Total Noncurrent Assets

253,166,447

303,092,261

347,801,569

Total Assets

341,644,421

407,383,803

449,062,058

Deferred tax assets - net

15

As at 31 December

LIABILITIES AND EQUITY


2009

2010

2011

(in P thousands)
Current Liabilities
Bank loans
Accounts payable and other current liabilities
Income tax payable
Current portion of long-term debt
Dividends payable
Total Current Liabilities

4,873,294
33,902,563

20,408,800
39,039,326

25,747,920
44,749,807

1,067,994

1,185,678

1,331,046

920,116

1,766,761

7,920,961

22,251

24,287

25,696

40,786,218

62,424,852

79,775,430

118,251,268

128,600,570

128,464,019

2,198,472
4,346,892

1,351,441
4,636,174

237,980
4,507,979

Noncurrent Liabilities
Long-term debt - net of current portion
Derivative liabilities
Deferred tax liabilities - net
Defined benefit liability

349,251

178,274

76,487

9,987,054

12,375,013

13,713,302

Total Noncurrent Liabilities

135,132,937

147,141,472

146,999,767

Total Liabilities

175,919,155

209,566,324

226,775,197

Capital stock
Additional paid-in capital

6,110,230
35,030,710

6,119,826
35,456,200

6,121,640
35,536,615

Equity adjustments from business combination under common control

Tenants deposits and others

Equity Attributable to Owners of the Parent

(2,332,796)

(2,332,796)

(2,332,796)

Cost of Parent common shares held by subsidiaries

(24,078)

(263,195)

(263,195)

Cumulative translation adjustment of a subsidiary

344,302

289,260

428,058

3,816,597

6,798,095

7,008,067

Net unrealized gain on available-for-sale investments


Retained earnings:
Appropriated
Unappropriated

5,000,000

5,000,000

5,000,000

76,850,367

90,475,674

106,167,942

Total Equity Attributable to Owners of the Parent

124,795,332

141,543,064

157,666,331

Non-controlling Interests
Total Equity

40,929,934
165,725,266

56,274,415
197,817,479

64,620,530
222,286,861

Total Liabilities and Equity

341,644,421

407,383,803

449,062,058

16

Consolidated Statements of Income

For the year ended 31 December


2009

2010

2011

(in P thousands, except per share data)


Revenue
Sales:
Merchandise

123,895,504

135,570,401

6,666,399

10,896,597

17,874,409

15,722,077

17,904,661

20,472,785

Equity in net earnings of associates

3,908,242

5,440,826

6,415,424

Cinema ticket sales, amusement and others

2,838,665

3,722,983

4,138,053

Management and service fees

767,573

807,507

880,679

Gain on sale of available-for-sale investments and fair value changes on


investments held for trading and derivatives - net
Dividend income

769,691

926,799

410,522

Real estate and others


Rent

Others

148,182,071

364,950

303,518

368,919

3,099,413

1,599,684

1,538,940

158,032,514

177,172,976

200,281,802

96,480,309

103,500,345

112,192,756

3,588,302

5,995,214

10,289,007

29,702,814

35,496,334

40,412,750

129,771,425

144,991,893

162,894,513

(6,266,135)

(7,652,557)

(8,836,013)

3,458,066

3,716,452

4,274,640

207,971

1,626,816

2,623,864

Cost and Expenses


Cost of Sales:
Merchandise
Real estate and others
Selling, general and administrative expenses
Other Income (Charges)
Interest expense
Interest income
Gain on disposal of investments and properties
Foreign exchange gain net

223,954

407,208

242,862

(2,376,144)

(1,902,081)

(1,694,647)

25,884,945

30,279,002

35,692,642

4,430,076

5,109,646

5,534,187

347,667

291,407

(39,369)

4,777,743

5,401,053

5,494,818

21,107,202

24,877,949

30,197,824

16,025,038

18,440,169

21,224,592

5,082,164

6,437,780

8,973,232

21,107,202

24,877,949

30,197,824

Basic

26.23

30.17

34.68

Dilutive

26.18

30.17

34.63

Income before income Tax


Provision for (benefit from) income tax
Current
Deferred
Net income
Attributable to:
Owners of the Parent
Non-controlling interests
Earnings per Common Share

17

SUMMARY OF THE OFFERING


The following summary is qualified in its entirety by, and should be read in conjunction with, the more
detailed information appearing elsewhere in this prospectus.
Issuer

SM Investments Corporation

Issue / Issue Size

Fixed rate Bonds in the aggregate principal amount of


P10,000,000,000.00 to be registered with the SEC

Oversubscription Option

In the event of oversubscription, the Joint Issue Managers and


Joint Lead Underwriters, in consultation with the Issuer, reserve
the right to increase the aggregate Issue Size by up to
P5,000,000,000.00

Manner of Offer

Public offering

Use of Proceeds

The net proceeds of the Issue shall be used primarily for various
project expansions and general corporate purposes (see Use of
Proceeds)

Issue Price or Offer Price

100% of the face value of the Bonds

Form and Denomination of the


Bonds

The Bonds shall be issued in scripless form in minimum


denominations of P20,000.00 each, and in multiples of
P10,000.00 thereafter, and traded in denominations of
P10,000.00 in the secondary market

Offer Period

The offer of the Bonds shall commence at 9:00am on 27 June


2012 and end at 12:00pm on 6 July 2012

Issue Date

16 July 2012

Maturity Date

Series C : Seven (7) years from Issue Date;


Series D : Ten (10) years from Issue Date

18

Interest Rate

Series C : 6.0000% per annum


Series D : 6.9442% per annum

Interest Computation &


Payment

Interest on the Bonds shall be calculated on a 30/360 day count


basis commencing on 16 July 2012. Interest on the Series C and
Series D Bonds shall be paid semi-annually in arrears on January
16 and July 16 of each year.

Optional Redemption

Prior to final redemption, the Issuer shall have a one-time option,


but shall not be obligated, to redeem in whole, and not a part
only, each outstanding series of the Bonds on the tenth (10th)
Interest Payment Date of the Series C Bonds and on the
fourteenth (14th) Interest Payment Date of the Series D Bonds,
respectively (each, an Optional Redemption Date).
The Issuer shall give not less than thirty (30) nor more than (60)
calendar days prior written notice of its intention to redeem the
Bonds, which notice shall be irrevocable and binding upon the
Issuer to effect such early redemption of the Bonds at the
Interest Payment Date stated in such notice.
The amount payable to the Bondholders in respect of such
redemption shall be calculated based on the principal amount of
the Bonds being redeemed, as the sum of (i) one hundred two
per cent (102%) of the principal amount; and (ii) accrued
interest on the Bonds on the Optional Redemption Date.

Final Redemption

The Bonds shall be redeemed at 100% of face value on their


respective Maturity Dates.

Trustee

Philippine National Bank Trust Banking Group

Registrar & Paying Agent

Philippine Depository & Trust Corp.

Taxation

Bond Interest
Interest income derived by Philippine citizens or resident foreign
individuals from the Bonds is subject to income tax, which is
withheld at source, at the rate of 20%. Interest on the Bonds
received by non-resident foreign individuals engaged in trade or
business in the Philippines is subject to a 20% final withholding
tax while that received by non-resident foreign individuals not
engaged in trade or business is subject to a 25% final
withholding tax. Interest income received by domestic
corporations and resident foreign corporations is taxed at the
rate of 20%. Interest income received by non-resident foreign
19

corporations is subject to a 30% final withholding tax. The tax


withheld constitutes a final settlement of Philippine income tax
liability with respect to such interest.
Bondholders who are exempt from or are not subject to final
withholding tax on interest income or are covered by a lower
final withholding tax rate by virtue of a tax treaty may claim such
exemption or lower rate, as the case may be, by submitting the
necessary documents as required by the Bureau of Internal
Revenue and the Issuer.
Listing

The Bonds are intended to be listed in Philippine Dealing &


Exchange Corporation

20

RISK FACTORS
Investment in the Bonds involves a number of risks. The price of securities can and does fluctuate, and any
individual security may experience upward or downward movements, and may even become valueless.
There is an inherent risk that losses may be incurred rather than profit made as a result of buying and
selling securities. Past performance is not a guide to future performance. There may be a big difference
between the buying price and the selling price of these securities. An investor deals in a range of
investments, each of which may carry a different level of risk.
Prior to making any investment decision, prospective investors should carefully consider all of the
information in this Prospectus, including the risks and uncertainties described below. The business, financial
condition or results of operations of SMIC could be materially adversely affected by any of these risks.
Additional considerations and uncertainties not presently known to the Issuer or which the Issuer currently
deems immaterial, may also have an adverse effect on an investment in the Bonds.
This risk disclosure does not purport to disclose all the risks and other significant aspects of investing in
these securities. An investor should undertake his or her own research and study on the trading of
securities before commencing any trading activity. He/she may request information on the securities and
issuer thereof from the Commission which are available to the public.
An investor should seek professional advice if he or she is uncertain of, or has not understood any aspect of
the securities to invest in or the nature of risks involved in trading of securities especially those high risk
securities.
This section entitled Risks Factors does not purport to disclose all of the risks and other significant aspects
of investing in these securities.
The risks enumerated hereunder are considered to be each of equal importance.
The means by which the Company plans to address the risks discussed herein are presented in the sections
of this Prospectus entitled Description of the Issuer and the Group Strengths, Description of the Issuer
and the Group Strategies, and Managements Discussion and Analysis of Financial Position and Financial
Performance.

Risks Relating to the Company


The Issuer is primarily a holding company and payments under the Bonds are structurally
subordinated to all liabilities of the Issuers subsidiaries and associates
The Issuer is primarily a holding company and its ability to make payments in respect of the Bonds or to
fund payments by the Issuer depends largely upon the receipt of dividends, distributions, interest payments,
management fees, or advances from its subsidiaries and associates. The ability of such companies to pay
dividends and other amounts to the Issuer may be subject to their profitability and to applicable laws and
restrictions on the payment of dividends and other amounts contained in relevant financing and other
arrangements. Payments under the Bonds are effectively subordinated to all existing and future liabilities
and obligations of each of the Issuers subsidiaries, jointly controlled entities, and associates. Claims of
creditors of such companies will have priority as to the assets of such companies over the Issuer and its
creditors, including holders of the Bonds. As at 31 December 2011, the aggregate outstanding
indebtedness (comprising bank loans, current portion of long-term debt, and long-term debt - net of
current portion) of the Issuers subsidiaries and associates is approximately P79,174.7 million.
The Issuer, as the parent company, is actively involved in the planning and financing activities of its
21

subsidiaries. Also, the Issuer has majority control of these subsidiaries boards of directors, thereby allowing
it to exercise significant influence in the management and policy formulation processes of these subsidiaries
in terms of, among others, business strategy, profit generation and dividend declaration.
Any restriction or prohibition on the Issuers subsidiaries and associates ability to distribute
dividends would have a negative effect on its financial condition and results of operations
The Issuer is a holding company that conducts all of its operations through its subsidiaries and associates.
As a holding company, the Issuers revenues are derived from, among other sources, dividends and
management fees paid to the Issuer by its subsidiaries and associates. The Issuer is reliant on such sources
of funds with respect to its obligations and in order to finance its subsidiaries. The ability of the Issuers
direct and indirect subsidiaries and associates to pay dividends to their shareholders (including the Issuer)
is subject to applicable law and may be subject to restrictions contained in loans and/or debt instruments of
such subsidiaries and may also be subject to the deduction of taxes.
In addition, the declaration of dividends by Philippine banks is subject to approval by the BSP, thereby
affecting the payment of dividends from BDO and China Bank to the Issuer.
Any restriction or prohibition on the ability of some or all of the Issuers subsidiaries or associates to
distribute dividends or make other distributions to the Issuer, either due to regulatory restrictions, debt
covenants, operating difficulties or other limitations, could have a negative effect on the Issuers cash flow
and therefore its financial condition and results of operations.
As aforementioned, the Issuer, as a parent holding company, has majority control in the management and
in the boards of directors of its subsidiaries. The Issuer can thus exert its influence on matters relating to
these subsidiaries respective managements, compliance with applicable regulatory and contractual
restrictions and dividend declaration.
The Issuer is controlled by the Sy Family, whose interests may not be the same as those of
other shareholders
The Sy Family currently, directly or indirectly, controls approximately 61.18% of the outstanding Shares as
at 31 December 2011. Accordingly, the Sy Family is able to elect members of the Board and pass
shareholder resolutions (including special resolutions), both of which under the By-laws generally require a
majority vote by its shareholders (or a two-thirds majority in the case of special resolutions). In addition,
members of the Sy Family hold four out of eight seats on the Board and Mr. Henry Sy, Sr., who is the
Chairman, has a casting vote. Accordingly, the Sy Family exercises control over major policy decisions of the
Issuer, including its overall strategic and investment decisions, dividend plans, issuances of securities,
adjustments to its capital structure, mergers, liquidation or other reorganization and amendments to its
Articles of Incorporation and By-laws. If the interests of the Sy Family conflict with the interests of other
shareholders of the Issuer, there can be no assurance that the Sy Family would not cause the Issuer to take
action in a manner which might differ from the interests of other shareholders.
The Issuer has in place a corporate governance structure which is consistent with requirements set forth by
Philippine regulations. Furthermore, it has three independent directors in its Board who actively participate
in enforcing the governance structures mandate to protect the interests of all shareholders, including the
minorities. The Issuer is also professionally managed by executives and officers with expertise in their
respective fields.

22

The Issuers businesses have significant levels of related party transactions and are
interdependent, and any material adverse change in one member of the Group could
adversely affect the results of operations of other members of the Group, including SMIC
A significant part of the business undertaken by members of the Group is conducted with other members of
the Group, as well as other affiliated companies owned by the Sy Family which are not within the Group,
such as the Management Companies and the Retail Affiliates. The operations of many members of the
Group are interdependent. These transactions include those described under Related Party Transactions
and the notes to the Financial Statements appearing elsewhere in this Prospectus. In addition, the Issuer
expects that in the future, Group companies will continue to enter into transactions with each other as well
as other companies directly or indirectly controlled by or associated with the Sy Family, including the
Management Companies and the Retail Affiliates. These transactions may involve conflicts of interest, which,
although not contrary to law, may be detrimental to the Issuer. Conflicts of interest may also arise between
the Sy Family and the Issuer in a number of other areas relating to the Issuers businesses, including:

major business combinations involving the Group, including transfers of affiliated companies into
the Group (see Related Party Transactions);

plans to develop the respective businesses of the Group and of other entities within the Group; and

business opportunities that may be attractive to both the Sy Family and SMIC.

Such interdependence may mean that any material adverse change in one member of the Group, or
companies which are controlled by the Sy Family, could adversely affect the results of operations of other
members of the Group, including the Issuer.
In addition, certain members of the Group, such as SM Prime, have contractual arrangements with
companies controlled by the Sy Family. The Issuers policy is that transactions between Group companies
and companies which are controlled by the Sy Family are undertaken on an arms length commercial basis.
While there are related party transactions which provide synergy between the various subsidiaries, these
are made on arms length commercial market terms. Each subsidiary is managed and operated
independently in these transactions and each company is responsible for its results of operations.
The Issuer depends on members of the Sy Family as regards the management of its business
Members of the Sy Family currently manage the business operations of various entities within the Group
including its key subsidiaries. In addition, the Sy Family has a wide range of other commercial interests
outside the Group, many of which are affiliated with members of the Group, including the Management
Companies and the Retail Affiliates. There can be no assurance that such other business interests will not
require significant time and commitment from the Sy Family which might reduce their time devoted to their
current roles within the Issuers business. Furthermore, as the businesses of the Group expand, there can
be no assurance that the Sy Family will continue to be able to allocate the same or a similar proportion of
their time or other resources to the management or supervision of such businesses.
The Issuers Chairman, Mr. Henry Sy, Sr., is the founder of the Group. Mr. Sys daughter, Teresita T. Sy, and
son, Henry T. Sy, Jr., have been appointed Vice Chairperson and Vice Chairman, respectively of the Issuer,
and are involved in the strategic planning and management of the Issuers operations. The Issuer does not
hold any key man insurance for its senior executives, nor does it have any employment contracts containing
restrictive covenants with respect to such executives. While Teresita T. Sy, Henry T. Sy, Jr. and other
members of the Sy Family are expected to remain actively involved in the day-to-day operations and
management of the Group, except for a provision in the By-laws indicating that no person shall qualify or be
eligible for nomination or election to the Board if he is engaged in any business which competes with or is
antagonistic to that of the Issuer, there are no legal restrictions nor any contractual commitments that
23

would prevent the Sy Family from competing with the Group or individual businesses within the Group.
There can be no assurance that any potential conflicts of interest would be resolved in the best interests of
SMIC or the Group, and even if they were, the resolution may be less favorable than if SMIC or the Group
were dealing with an independent party.
The unavailability of continuing services from the Sy Family may adversely affect the financial condition and
results of operations of the Group. In addition, as at 31 December 2011, Mr. Henry Sy, Sr. and his wife Mrs.
Felicidad T. Sy held 6.25% and 8.83% of the outstanding issued Shares, respectively, and five of their
children own approximately 8% each. There can be no assurance that there will not be any transfer of
interests between family members or any sale of Shares to third parties that would not alter the balance of
the family holdings, thereby influencing control.
The Group has professional executives and managers in each of the operating subsidiaries. In addition, it
has engaged several consultants in various fields of competency. At the board of directors level, each of the
publicly listed subsidiaries have respected individuals who serve as independent directors and advisors to
these boards of directors.
The Issuer has conducted and may continue to conduct acquisitions, the impact of which
could be less favorable for its activities and results than anticipated, or which could affect its
financial situation
As part of its business strategy, the Issuer has conducted and continues to carry out acquisitions of varying
sizes, some of which are significant at the Group level. These acquisitions involve numerous risks, including
the following: (i) the assumptions used in the underlying business plans may not prove to be accurate, in
particular with respect to synergies and expected commercial demand; (ii) the Issuer may not integrate
acquired businesses, technologies, products, personnel and operations effectively; (iii) the Issuer may fail
to retain key employees, customers and suppliers of the companies acquired; (iv) the Issuer may be
required or wish to terminate pre-existing contractual relationships, which could be costly and/or on
unfavorable terms; and (v) the Issuer may increase its indebtedness to finance these acquisitions. As a
result, it is possible that the expected benefits of completed or future acquisitions may not materialize
within the time periods or to the extent anticipated, or affect the Issuers financial condition.
Prior to pursuing acquisition opportunities, the Issuer undertakes a comprehensive evaluation of these
opportunities fit with the Groups overall business strategy. Part of this process involves, aside from
determining potential synergies, a determination of the appropriate integration strategies and plans to
adopt in order to effectively realize these potential benefits in efficiencies and synergies. It likewise
undertakes a comprehensive due diligence evaluation of potential acquisition or investee companies in
order to determine the necessary governance, strategic and operating plans to adopt in order to mitigate
acquisition risks.
Infringement of the SM intellectual property rights would have a material adverse effect on
the Groups business
The Group relies on trademarks to establish and protect the SM name, logo and other SM in-house brands.
The Group believes that the trademarks and its intellectual property rights are important to its success and
competitive position. There can be no assurance that the actions the Group has taken will be adequate to
prevent brand and product imitation by others or to prevent others from using the SM name as a violation of
its trademarks and other intellectual property rights. In addition, there can be no assurance that others will
not assert rights in, or ownership of, the Groups trademarks and other intellectual property rights. The
Groups business, financial condition and results of operations may be materially and adversely affected by
trademark infringements or trademark disputes with others.
The Group registers all its brands to protect its intellectual property rights and actively monitors the validity
24

of these registrations. While the SM brand has goodwill, the Issuer believes that it is still good management
expertise that determines the success of its business undertakings and the success of these brands.
The Groups debt leverage will be increased following the issue of the Bonds
As at 31 December 2011, the Group had aggregate indebtedness (comprising bank loans, current portion of
long-term debt, and long-term debt - net of current portion) of P162,132.9 million, on a consolidated basis
and total equity (excluding non-controlling interest) of P157,666.3 million, resulting in a debt-equity ratio of
approximately 47:53. Following the issue of the Bonds, the Groups indebtedness on a consolidated basis
will increase to P172,051.4 million, and its debt-equity ratio will increase to approximately 49:51 (see
Capitalization and Indebtedness). The increase in the Groups level of outstanding debt following this
Offer will increase the Groups exposure to a number of risks associated with debt financing, including the
risk that cash flows from the Groups operations will be insufficient to meet required payments of principal,
the risk that the repayment of the Groups foreign currency loans may be adversely affected if the peso
depreciates against the US dollar, the risk that the Group will become more vulnerable to general adverse
economic and industry conditions and the risk that it may not be possible to obtain refinancing on favorable
terms when required or if at all. Although the Group anticipates that it will be able to repay or refinance
existing debt, and any other indebtedness when it matures, there can be no assurance that it will be able to
do so.
The Groups resulting gross debt-equity ratio of 49:51, subsequent to the issue of the Bonds, shall remain
well within its maximum permissible ratio of 70:30 as set out in the Groups debt covenants. On a net debt
basis, the resulting debt-equity ratio is only 31:69.

Risks Relating to the Malls


SM Primes business focus on Philippine retail malls exposes SM Prime to economic and real
estate conditions in the Philippines
SM Primes growth is largely dependent on its ability to continue to construct profitable malls in new
locations in the Philippines. The substantial majority of the aggregate net leasable area of SM Primes Malls
is dedicated to retail use, exposing SM Prime to economic and real estate conditions in the Philippines such
as consumer spending, exchange rates and spending patterns of Philippine overseas foreign workers and
their dependents, Government policy, the supply of, or demand from, tenants and other competing
commercial malls.
Based on the Groups historical experience, SM Malls are the malls of choice of Philippine consumers. During
periods of economic downturns or crisis, Philippine consumers tend to increase their patronage of the
Groups Malls due to their goodwill as quality and value-for-money shopping centers.
Moreover, prior to any purchase of property, the Company makes a demographic study, taking into
consideration: location, accessibility, spending capacity, population, and local government support. In
relation to its exposure to macroeconomic conditions, the Group is confident about the resilience of retail
spending. Its focus on the middle market also allows the Group to tap the upper income market, whose
spending pattern may shift from premium to practical purchases in the event of economic downturns.
SM Prime may face increased competition from other retail malls for customers
SM Primes Malls compete with other similar malls. Increased competition could adversely affect income
from, and the market value of, the Malls. Historical operating results of the Malls may not be indicative of
future operating results and historical market values of the Malls may not be indicative of future market
values of the Malls.
25

The income from, and market values of, the Malls will be largely dependent on the ability of the Malls to
compete against other retail malls in their area in attracting and retaining customers. In addition, retailers
at the Malls face increasing competition from specialty stores, general merchandise stores, discount stores,
warehouse outlets and street markets. Important factors that affect the ability of retail malls to attract or
retain customers include the quality of the buildings existing tenants and the attractiveness of the building
and the surrounding area to customers. Attracting and retaining tenants and customers often involves
refitting, repairing or making improvements to mechanical and electrical systems and outward appearance.
If competing malls of a similar type are built in the areas where the Malls are located or similar malls in the
vicinity of the Malls are substantially updated and refurbished, the value and net income of the Malls could
be reduced.
The performance of the Malls may also be adversely affected by the following factors:

vacancies following expiry or termination of leases that lead to reduced occupancy levels this
reduces rental income and the ability to recover certain operating costs for common areas;

tenants seeking the protection of insolvency or corporate rehabilitation laws which could result in
delays in receipt of rental payments, or which could hinder or delay the sale of a property, or
inability to collect rental payments at all or the termination of the tenants lease;

tenants failing to comply with the terms of their leases or commitments to lease;

the amount of rent and the terms on which lease renewals and new leases are agreed being less
favorable than current leases;

declining sales turnover of tenants;

the oversupply of, or reduced demand for, space;

downturns in the sales of products or services which particular tenants offer; and

changes in laws and governmental regulations relating to real estate including those governing
usage, zoning, taxes and Government charges. Such revisions may lead to an increase in
management expenses or unforeseen capital expenditure to ensure compliance. Rights relating to
the relevant Malls may also be restricted by legislative actions, such as revisions to the building
standards laws or the city planning laws, or the enactment of new laws relating to condemnation
and redevelopment.

SM has become the Philippines retail and mall icon because of its one-stop shopping concept, diversity and
value-for-money proposition. As such, the Group believes that it is well-placed to face increased
competition in the shopping mall industry given the competitive advantages it has, including, among others,
the location of its existing Malls, its existing land bank, its balance sheet strength and low debt-equity ratio,
a proven successful tenant mix and selection criteria, and the presence of the SM Department Stores, SM
Supermarkets, SM Hypermarkets and Retail Affiliates of the Group within each of the Malls.
The Groups experience and understanding of the retail industry has also been a contributing factor to its
competitive advantage in the industry. The Group has introduced a different business format as a way of
further establishing their presence and the SM name as a full service provider to the communities
surrounding its Malls. The Group is constantly expanding and renovating its Malls in line with its growth. In
addition, the Group continues to improve its tenant mix to suit the evolving tastes and preferences of
generations of customers, as well as treats its tenants as partners for growth, focusing on building good
26

relationships with them.


Malls owned by SM Prime may be subject to an increase in operating and other expenses
SM Primes financial condition and results of operations could be adversely affected if operating and other
expenses increase without a corresponding increase in revenues or tenant reimbursements of operating
and other expenses.
Factors which could increase operating and other expenses include:

increases in utility expenses;

increases in payroll expenses;

increases in property taxes and other statutory charges;

increases in the rate of inflation;

changes in the rate and expense of depreciation and amortization;

changes in statutory laws, regulations or Government policy which increase the cost of compliance
with such laws, regulations or policies;

increases in management fees or sub-contracted service costs, such as maintenance and security;

increases in insurance premiums; and

defects affecting the Malls which need to be rectified, leading to unforeseen capital expenditure.

The operating and other expenses of the Malls are comprised of fixed and variable expenses. On a
Group-wide basis, the fixed portions of these expenses are kept constant; only the variable portions
increase as the network of Malls expands. The Groups expansion strategy effectively results in economies
of scale in operating its Malls. Furthermore, once the open access regime is implemented in the electricity
market, as mandated under Republic Act No. 9136 (Electric Power Industry Reform Act of 2001), SM Prime
intends to take advantage of this to further lower its energy consumption expenses. The Group focuses on
ensuring that revenues increase more than its expenses when opening new Malls.
SM Primes operations in China expose SM Prime to certain local risks
Since the acquisitions of SM China Companies and SM Land (China) Limited, and the opening of SM City
Suzhou in 2008, 2009 and 2011 respectively, SM Prime owns and operates four malls in China. As at 31
December 2011, the total revenues and net income of the malls in China represent 7.6% and 9.8%
respectively of the total revenues and net income of SM Prime; as a consequence, SM Prime is exposed to
a series of risks related to the Chinese economy in general and also to the land use rights in China or the
adoption on tightening measures on real estate in China.
SM Prime may suffer material losses in excess of insurance proceeds
The Malls could suffer physical damage caused by fire or other causes, resulting in losses (including loss of
rent) which may not be fully compensated for by insurance. In addition, certain types of risks and insurance
cover (such as war risk and acts of terrorism) may be uninsurable or the cost of insurance may be
prohibitive when compared to the risk. Should an uninsured loss or a loss in excess of insured limits occur,
SM Prime could lose capital invested in the affected Mall as well as any anticipated future revenue from that
27

Mall. SM Prime would also remain liable for any debt or other financial obligation related to that Mall. No
assurance can be given that material losses in excess of insurance proceeds will not occur in the future.
The Group believes that its existing insurance coverage for all of its Malls is adequate to cover possible
losses. Furthermore, its Malls are widely spread out across the Philippines; the probability of total
destruction resulting from disasters, whether from natural or other causes is highly remote.

Risks Relating to the Groups Real Estate Business


The Philippine property market is cyclical
The Group expects to derive a substantial portion of its revenue from its current and future portfolio of
residential, commercial and leisure development projects. Accordingly, the Group is dependent on the state
of the Philippine property market. The Philippine property market has in the past been cyclical and property
values have been affected by supply of and demand for comparable properties, the rate of economic growth
in the Philippines and political and social developments.
Currently, market risk is low due to the unserved demand for residential properties and business process
outsourcing offices, low interest rate outlook, continued deepening of the credit market and positive
economic outlook. Nevertheless, the Group pays particular attention to the location of its projects to ensure
accessibility and thereafter marketability of its projects. Further, the Group strives to balance its portfolio of
residential and commercial properties to maintain a good source of recurring income.
The Group faces property development risk
The property development business involves significant risks distinct from those involved in the ownership
and operation of established properties, including the risks that Government approvals may take more time
and resources to obtain than expected; that construction may not be completed on schedule or budget; and
that the properties may not achieve anticipated sales, rents or occupancy levels.
In addition, development projects typically require substantial capital expenditure during construction and it
may take years before property projects generate cash flows. There is the risk that financing for
development may not be available under favorable terms, or that construction may not be completed on
schedule or within budget. The time and the costs involved in completing construction can be adversely
affected by many factors, including shortages of materials, equipment and labor; adverse weather
conditions; natural disasters; labor disputes with contractors and subcontractors; accidents; changes in
Government priorities; and unforeseen problems or circumstances. The occurrence of any of these factors
could give rise to delays in the completion of a project and result in cost overruns. This may also result in
the profit on development for a particular property not being recognized in the year in which it was
originally anticipated to be recognized, which could adversely affect the Groups profits recognized for that
year. Further, the failure by any Group company to complete construction of a project to its planned
specifications or schedule may result in liabilities, reduced project efficiency and lower returns. No
assurance can be given that such events will not occur in a manner that would adversely affect the results
of operations or financial condition of the Group.
Furthermore, properties presently in the name of the Group or those acquired in the future may be subject
to various lawsuits and/or claims, which, if resolved against the Group, will result in the loss or reduction in
size of the particular property subject of the lawsuit. Currently, certain properties of the Group such as but
not limited to those in Taal Vista Lodge and Baguio City are subject to such lawsuits, pending hearing in
various courts and/or before governmental bodies. See Description of the Issuer and the Group Legal
Proceedings.

28

To mitigate these risks, the Group ensures that its project developments are carefully planned. The
companies rely on the services of reputable, high quality, independent contractors for their projects and
maintains good business relationships with these contractors. The companies adheres to the strategy of
developing each project in phases to minimize exposure to such risks. Further, each company keeps within
a conservative level of leverage. Although the current liquidity and depth of the Philippine credit market
renders funding risk as unlikely, the companies have unutilized credit lines as buffer for unanticipated
requirements. The companies also ensure that all required governmental approvals are obtained and keep
updated on any developments in regulations concerning the real estate industry.
RISKS RELATING TO THE RETAIL OPERATIONS
The success of the Retail Subsidiaries and Retail Affiliates will be dependent in part on the
Issuers continued ability to satisfy consumer preferences and spending trends in the markets
in which the Retail Subsidiaries operate
The success of the Retail Subsidiaries partially depends on their ability to anticipate and respond to
changing consumer preferences in a timely manner. However, it is often difficult to predict changes in
consumer preferences, particularly in the area of apparel where fashion trends can be subject to rapid
change. SM Department Stores carry a wide selection of basic merchandise which may be less subject to
fashion trends. The SM Department Stores believe they lead mass-market fashion trends in the Philippines
by introducing apparel that has proved popular in places such as Hong Kong and Taiwan, as well as the
United States. The SM Department Stores also tend to introduce more mainstream apparel fashion
compared to that introduced by other retailers. Nevertheless, there can be no assurance that consumers in
the Philippines will continue to prefer shopping in department stores over other retail formats such as
specialty stores. Furthermore, the Retail Subsidiaries depend to a significant extent on Philippine spending
trends. The sentiments of the Philippine retail industry, consumer preferences and spending patterns are
influenced by external factors including, among others, the state of the Philippine economy and its political
environment, the disposable income of Philippine consumers and the markets demographic profile. Failure
to accurately predict constantly changing consumer tastes, preferences and spending patterns could
adversely affect the short- and long-term results of the Retail Subsidiaries.
While the Group regularly conducts market research to forecast changes in consumer preferences, and
reviews the performance and viability of its portfolio of brands to ensure continued market acceptance,
there is no assurance that its efforts can prepare it adequately to meet changing consumer preferences or
spending habits. An inaccurate assessment of, or an untimely response to, changing consumer preferences
could have a material adverse effect on the Issuers financial condition and results of operations.
The Group believes that its focus on quality, variety and value-for-money is its main competitive advantage.
It is the objective of the SM Department Stores to maintain its leadership in the marketplace, to be at the
forefront of retail technology, and to grow through effective consumer marketing and product diversification.
The SM Department Stores strategies involve providing value-for-money through their wide variety of
competitively priced quality merchandise, thereby achieving high sales turnover. The Groups supermarkets
carry extensive lines of both local and imported food and household products sourced from a diversified
group of suppliers. Furthermore, the Group continuously upgrades its retail facilities to keep up with the
prevailing trends in the department store business.
The Retail Subsidiaries depend on their ability to retain existing suppliers and secure new
suppliers
The Retail Subsidiaries have developed close relationships with a large number of suppliers in the
Philippines. However, they do not have any long-term supply agreements with any supplier. The Retail
Subsidiaries seek to source their outright merchandise from a broad range of suppliers at competitive prices,
29

and the Issuer continues to source merchandise from new suppliers to cover larger areas within its
department stores and to respond to changes in consumer preference. A significant adverse change in the
relationships and contract arrangements between the Retail Subsidiaries and consignors could also have a
material adverse impact on the Issuers financial condition and results of operations.
The Groups suppliers are treated as partners in business. The Group ensures that its business partners
receivables are settled on time, and strives to continuously maintain good and close relationships with its
suppliers. At the same time, the Retail Subsidiaries are constantly in search for good and reliable suppliers.
Non-renewal of leases or substantial increases in rent for the Issuers retail stores may have a
material adverse effect on the Issuer
Some of the retail space in which the Issuers retail stores are located is leased from independent third
parties. There is no assurance that each of these leases will be renewed upon expiry or on terms and
conditions that are acceptable to the Issuer. If such leases cannot be extended or renewed, the Issuer will
have to find other appropriate premises and this may have a material adverse effect on its business,
financial condition and results of operations if the new premises are not as appropriate to the Issuers needs
as the existing leased premises. Alternatively, if the existing leases can only be renewed on less favorable
terms, this will increase the Issuers operating expenses and thus its business, financial condition and
results of operations may be materially and adversely affected.
The majority of the Groups retail facilities are located in its Malls owned by the Group. Those facilities
located in properties not owned by the Group have renewable long-term lease contracts.
The future growth of the Retail Subsidiaries will be largely driven by the effectiveness and
success of their expansion strategy
The expansion strategy of the Retail Subsidiaries involves opening new stores as well as renovating and
expanding existing stores. The successful implementation of such expansion plans depends upon many
factors, including the Issuers ability to:

identify, negotiate, finance, obtain, lease or refurbish suitable store sites which may also be largely
dependent on the expansion plans of SM Prime;

integrate new stores into existing information systems and operations;

hire, train and retain qualified personnel; and

manage the diversion of resources.

The Issuer cannot guarantee that the Retail Subsidiaries will achieve their targets for opening new stores or
for renovating or expanding existing stores, or that such stores will operate profitably when opened. Failure
by the Retail Subsidiaries to implement their expansion strategy effectively could materially and adversely
affect their business, financial condition and results of operations, and thereby materially and adversely
affect the Issuers financial condition and results of operations.
The Groups expansion strategy involves the identification of strategic locations for the Retail Subsidiaries.
Also, in each Mall owned by the Group, the Retail Subsidiaries are actively involved. In addition, the Groups
strategy requires that the necessary management for expanded operations, as well as viable financing
plans for these expansions, are well in place prior to any store opening.

30

The Retail Subsidiaries and Retail Affiliates may be subject to increasing competitive
pressures
The Retail Subsidiaries are among the leading participants in the Philippine retail industry with a significant
market share in department store and supermarket sales. There are few barriers to prevent new
participants, including major international retailers or wholesalers who are ready to invest the necessary
time and resources, from entering the retail industry. If an existing or new competitor in the market is
successful in developing and marketing a retail concept that is comparable or more acceptable to the
market, the Issuers market share in the relevant market segment will decline and this may result in its
future turnover and profitability being adversely affected.
The Retail Trade Liberalization Act, approved by the Government in March 2000, liberalizes foreign
ownership restrictions in the retail sector and may encourage industry consolidation and greater
competition. Any increase in competition could have an adverse effect on the operations of the Retail
Subsidiaries in future periods, including, for instance, slower growth in their sales, lower margins and
higher expenses as they seek to compete for new business or in new markets. See Description of the
Issuer and the Group - Retailing and Merchandising.
The Group believes that it has a strong franchise in the retail market due to its goodwill, locations, and
strategy of regularly diversifying its product mix, upgrading its stores and facilities, and maintaining a
diversified group of suppliers.
There can be no assurance that the Retail Subsidiaries are fully insured against unexpected
losses
The operations of the Retail Subsidiaries carry an inherent risk of loss caused by fire, resulting water
damage, disruptions to electricity supply, terrorist attacks and other circumstances or events affecting their
stores or the properties where their stores are located. Any such event, if it were to occur, may result in loss
of life or property, loss of revenues or increased costs and could potentially result in significant litigation
against the Retail Subsidiaries. In line with industry practice in the Philippines, the current insurance
coverage does not cover any loss of revenues that the Retail Subsidiaries may suffer as a result of any
disruption to their business. Although the Retail Subsidiaries seek to maintain the most comprehensive
insurance coverage that is available at commercially reasonable rates, there can be no assurance that their
insurance coverage will adequately compensate them for all damage and economic losses resulting from
any of the events noted above or that they will be able to procure adequate insurance coverage at
commercially reasonable rates in the future.
The Groups existing insurance coverage is sufficient to cover for any possible losses in the Retail
Subsidiaries. The Group annually reviews its existing insurance policies to ensure adequacy of coverage.
Furthermore, the locations of the retail stores are widely spread throughout the country.
SM Lands title to the land where the SM Mall of Asia is located may be challenged
In 2002, the Supreme Court of the Philippines promulgated a decision in the case of Francisco I. Chavez v.
Public Estates Authority and Amari Coastal Bay Development Corporation (G.R. No. 133250) (the Amari
Case) and ruled that Government-reclaimed lands form part of the public domain and, consequently,
cannot be acquired by private corporations without violating the Philippine Constitution. SM Land (formerly
Shoemart) owns 60 hectares of reclaimed land along the coast of Manila Bay at the SM Mall of Asia Complex,
which is the site of the SM Mall of Asia, the acquisition of which was upheld in 1995 by the Court of Appeals,
whose decision has long become final and been executed. Title to a great majority of lots comprising the
reclaimed land has since been registered under the name of SM Land (formerly Shoemart). The Issuer
believes Shoe Mart acquired its reclaimed land in good faith and for value. There is, however, no assurance
that the title to the land where the SM Mall of Asia is located will not be challenged and have an adverse
impact on SM Lands title to the reclaimed land.
31

The Retail Subsidiaries business activities are subject to seasonality and timing
The Retail Subsidiaries business experiences seasonal fluctuations in its turnover and operating income and
generally records higher turnover in December, due to traditionally higher consumer spending around the
Christmas season, and May, prior to schools opening in June. As a result of these fluctuations, comparisons
of sales and operating results between different periods within a single financial year, or between different
periods in different financial years, are not necessarily meaningful and cannot be relied on as indicators of
the Issuers financial and operating performance. Any seasonal fluctuations reported in the future may not
match the expectations of investors.
Since the Issuers business operates largely on a seasonal cycle, if the Retail Subsidiaries business is
unsuccessful in selecting the right product mix for a particular season, sales for that entire season could be
significantly affected. In addition, any consequent reputational damage could have a negative impact on
the Retail Subsidiaries business sales in future seasons. The Issuers results of operations may also
fluctuate significantly as a result of a number of other factors, including, but not limited to, the timing of
opening of new stores, merchandise mix and the timing of advertising and promotional campaigns
depending on each season.
The Group believes that seasonality is typical in the retail industry. The Group therefore focuses on
providing the correct product mix and maintaining its leadership in determining consumer preferences and
upcoming product trends.

Risks Relating to Supermarkets, Hypermarkets and SaveMore Stores


The supermarket and hypermarket industry is highly competitive and characterized by
narrow profit margins
The supermarket and hypermarket industry is highly competitive and characterized by narrow profit
margins. The Issuers competitors include national and regional supermarket and hypermarket chains,
independent and specialty grocers, drug and convenience stores, warehouse club stores, deep discount
drug stores and supercenters. Supermarket and hypermarket chains and SaveMore stores generally
compete on the basis of location, quality of products, service, price, product variety and store condition.
The Issuer regularly monitors its competitors prices and adjusts its prices and marketing strategy as
management deems appropriate in light of existing conditions. There can be no assurance that new
competitors will not enter the supermarket and hypermarket industry or that the Issuer can maintain its
current market share. The Issuers profitability could be impacted by the pricing, purchasing, financing,
advertising or promotional decisions made by competitors.
Narrow profit margins are typical in the supermarket and hypermarket industries. Thus, the Group
continuously expands its operations to increase volume turnover and enhance economies of scale, thereby
improving the profitability of its supermarket and hypermarket operations.
As a result of selling food products, the Group faces the risk of exposure to product liability
claims and adverse publicity
The packaging, marketing, distribution and sale of food products purchased from others entail an inherent
risk of product liability, product recall and resultant adverse publicity. Such products may contain
contaminants that may be inadvertently redistributed by SM Supermarkets, SM Hypermarkets and
SaveMore. These contaminants may, in certain cases, result in illness, injury or death if processing at the
foodservice or consumer level does not eliminate the contaminants. Even an inadvertent shipment of
adulterated products is a violation of law and may lead to an increased risk of exposure to product liability
32

claims. There can be no assurance that such claims will not be asserted against the Group or that the Group
will not be obliged to perform such a recall in the future. If a product liability claim is successful, the Groups
insurance may not be adequate to cover all liabilities it may incur, and it may not be able to continue to
maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. If the Group does
not have adequate insurance or contractual indemnification available, product liability claims relating to
defective products could have a material adverse effect on the Groups ability to successfully market its
products and on the Groups business, financial condition and results of operations. In addition, even if a
product liability claim is not successful or is not fully pursued, the negative publicity surrounding any
assertion that the Groups products caused illness or injury could have a material adverse effect on the
Groups reputation with existing and potential customers and on the Groups business, financial condition
and results of operations.
The Groups typical insurance coverage includes potential losses from product liability claims. In addition,
the Group actively selects appropriate suppliers which are carefully evaluated as reliable in providing quality
products.

Risks Relating to the Bank


The Bank may not be able to successfully sustain its growth strategy
Over the past three years, the Bank has experienced substantial growth. The Bank experienced annual
growth rates in its loan portfolio of approximately 20.3%, 14.6% and 23.8% in the years ended 31
December 2009, 2010 and 2011, respectively. Overall, the Banks total assets also reached P1.1 trillion as at
31 December 2011, resulting in the Banks number one ranking in the Philippines in terms of total deposits,
net loans, and total assets. However, the Banks strategy, which includes growing and diversifying its loan
portfolio and expanding its range of products and services to better cater to the needs of its customers, is
also dependent on a number of external factors.
In particular, the Bank may not be successful in relation to the introduction of new services and products. It
is entering into new lines of business in which it is likely to encounter significant competition from other
banks already offering the products and services being introduced. There can be no assurance that the
Bank will be able to compete effectively against such existing banks. Furthermore, there may not be
sufficient demand for such services and products, and they may not generate sufficient revenues relative to
the costs associated with developing and introducing such services and products. Even if the Bank were
able to introduce new products and services successfully, there can be no assurance that the Bank will be
able to achieve its intended return on such investments.
The Bank also faces a number of operational risks in executing its growth strategy. The Bank will have to
train existing employees to properly adhere to new internal controls and risk management procedures.
Failure to properly train and integrate employees, including employees from other banks that are acquired
or merged or who join laterally, may increase employee attrition rates, require additional hiring, erode the
quality of customer service, divert management resources, increase the Banks exposure to high-risk credit
and impose significant costs on the Bank.
From being ranked third after merging with EPCIB in May 2007, the Bank emerged as the countrys largest
bank in terms of assets, loans, deposits and assets under management in 2008. The Bank also garnered the
top spot in the industry in terms of investment banking, private banking, remittances, leasing and finance
assets, cards merchant acquiring, and insurance brokerage. The Bank will leverage on this scale and scope,
complemented by an expanded branch network, to sustain its growth strategy.

33

The Bank may face increasing levels of non-performing loans and provision for impairment of
assets
The Banks results of operations have been, and continue to be, negatively affected by the level of its
non-performing loans. For the years ended 31 December 2010 and 2011, the Banks provisions for
impairment of assets amounted to P6.7 billion and P6.1 billion respectively, which represented 19.6% and
18.2% of net interest income in these periods. However, ongoing volatile economic conditions in the
Philippines may adversely affect the ability of the Banks borrowers to finance their indebtedness and, as a
result, the Bank may experience an increase in non-performing loans and impairment provisions.
Volatile economic conditions in the Philippines, including volatile exchange and interest rates, continue to
adversely affect many of the Banks customers, causing uncertainty regarding their ability to fulfill
obligations under the Banks loans and significantly increasing the Banks exposure to credit risk. These
and other factors could result in an increased number of non-performing loans in the future. While the
Banks non-performing loans decreased by 9.9% to P23 billion as at 31 December 2011 (representing 3.4%
of the Banks total loans net of interbank loans as at that date) from P25.5 billion as at 31 December 2010
(representing 4.7% of the Banks total loans net of interbank loans as at that date), the Bank has
experienced significant growth in its loan portfolio in recent years and the Bank may experience problems in
non-payment arising from these new loans in the future. Any significant increase in the Banks
non-performing loans would have a material adverse effect on its financial condition, capital adequacy and
results of operations.
The Bank significantly brought down its non-performing loan ratio to 3.4% in 2011 from 4.7% in 2010 as
the Bank took proactive steps to improve its asset quality through tightened underwriting criteria,
continuous monitoring of vulnerable industries, and rapid portfolio reviews that made for quick and timely
responses to market shifts.
The Banks provisioning policies in respect of non-performing loans require significant
subjective determinations which may increase the variation of application of such policies
BSP regulations require that Philippine banks classify non-performing loans based on four different
categories corresponding to levels of risk: Loans Especially Mentioned, Substandard, Doubtful and Loss.
Generally, classification depends on a combination of a number of qualitative as well as quantitative factors
such as the number of months payment is in arrears, the type of loan, the terms of the loan, and the level
of collateral coverage. These requirements have in the past, and may in the future, be subject to change by
the BSP. Periodic examination by the BSP of these classifications may also result in changes being made by
the Bank to such classifications and to the factors relevant thereto. In addition, these requirements in
certain circumstances may be less stringent than those applicable to banks in other countries and may
result in particular loans being classified as non-performing later than would be required in such countries
or being classified in a category reflecting a lower degree of risk.
Furthermore, the level of loan loss provisions which the Bank recognizes may increase significantly in the
future due to the introduction of new accounting standards. The level of provisions currently recognized by
the Bank in respect of its loan portfolio depends largely on the quality of the portfolio and estimated value
of the collateral coverage for the portfolio. The level of the Banks provisions may not be adequate to cover
increases in the amount of its non-performing loans, or any deterioration in the overall credit quality of the
Banks loan portfolio, including the value of the underlying collateral. In particular, the amount of the
Banks reported loan losses may increase in the future as a result of factors beyond the Banks control.
Certain accounting standards have been adopted in the Philippines, based on International Accounting
Standards, which require the Banks loan loss provisions to reflect the net present value of the cash flows of
the loan and underlying collateral. These new accounting standards may result in the Bank recognizing
significantly higher provisions for loan loss in the future.
34

While the Bank believes its current level of provisions and collateral position are more than adequate to
cover its non-performing loan exposure, an unexpected or significant increase in non-performing loan levels
may result in the need for higher levels of provisions in the future.
Improving asset quality and proactive measures signify the Banks conscious efforts to guard against
delinquencies. In addition, the Bank takes a conservative stance as it continues to beef up provisioning to
protect its balance sheet. In particular, the Banks stringent policy to test its loan portfolio for impairment on
a quarterly basis ensures adequacy of provisions as needed and in line with changing market conditions.
The Bank may be unable to recover the assessed value of its collateral when its borrowers
default on their obligations, which may expose the Bank to significant losses
The Bank may not be able to recover the value of any collateral or enforce any guarantee due, in part, to
the difficulties and delays involved in enforcing such obligations in the Philippine legal system. In order to
foreclose on collateral or enforce a guarantee, banks in the Philippines are required to follow certain
procedures specified by Philippine law. These procedures are subject to administrative and bankruptcy law
requirements more burdensome than in certain other jurisdictions. The resulting delays can last several
years and lead to deterioration in the physical condition and market value of the collateral, particularly
where the collateral is in the form of inventory or receivables. In addition, such collateral may not be
insured. These factors have exposed, and may continue to expose, the Bank to legal liability while in
possession of the collateral. These difficulties may significantly reduce the Banks ability to realize the value
of its collateral and therefore the effectiveness of taking security for the loans it makes. The Bank carries
the value of the foreclosed properties at the lower of the bid price and the loan balance plus accrued
interest at the time of such foreclosures. While the Bank at each balance sheet date, marks to market its
foreclosed properties in accordance with PFRS and BSP regulations, it may incur further expenses to
maintain such properties. In realizing cash value for such properties, the Bank may incur further expenses
such as legal fees and taxes associated with such realization.
The following are mitigating factors:
1. the Banks valuation policy in lending versus security is fairly conservative;
2. the Bank continues to implement a conservative provisioning policy taking into account the
potential credit defaults assessed in the loan portfolios as well as taking into account the collateral
position as well as the type of security held;
3. the Bank has a centralized legal database of all litigation cases by which the status of the legal
cases is monitored to achieve a shorter recovery time for this type of accounts;
4. the Bank has a matrix of external counsels engaged for various types of litigation for recovery
based on their expertise, cost, and effectiveness; and
5. the Bank has a group of property managers mandated to maintain foreclosed assets to preserve
the assets value, as well as a sales force that ensures maximum recovery of the value of these
properties.
Philippine banks are generally exposed to higher credit risks and greater market volatility
than banks in m ore developed countries
Philippine banks are subject to the credit risk that Philippine borrowers may not make timely payment of
principal and interest on loans and, in particular, that, upon such failure to pay, Philippine banks may not be
able to enforce the security interest they may have. The credit risk of Philippine borrowers is, in many
instances, higher than that of borrowers in more developed countries due to:

the greater uncertainty associated with the Philippine regulatory, political, legal and economic
environment;

35

the vulnerability of the Philippine economy in general to a severe global downturn as it impacts the
export sector, employment in export-oriented industries and OFW remittances;

the large foreign debt of the Government and corporate sector, relative to the gross domestic
product (GDP) of the Philippines; and

the volatility of interest rates and Peso/U.S. dollar exchange rates.

Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine
banks, including the Bank, to more potential losses and higher risks than banks in more developed
countries.
In addition, higher credit risk generally increases the cost of capital for Philippine banks compared to their
international counterparts. Such losses and higher capital costs arising from this higher credit risk may have
a material adverse effect on the Banks financial condition, liquidity and results of operations. Average
non-performing loan ratios in the Philippine banking system (excluding interbank loans) were 3.4%, 3.1%
and 2.2% as at the years ended 31 December 2009, 2010 and 2011, respectively.
The Bank has a high exposure to the Philippine property market through its ROPA holdings
The Bank has significant exposure to the Philippine property market due to the level of its holdings in ROPA.
In financial years 2008, 2009 and 2010, the level of ROPA held by the Bank has not moved significantly,
reflecting the level of non-performing loans during this period. Net ROPA stood at approximately P15.5
billion as at 31 December 2008, P15.6 billion as at 31 December 2009 and P15.3 billion as at 31 December
2010, representing 1.9%, 1.8% and 1.5% respectively, of the Banks total assets. As at 31 December 2011,
net ROPA amounted to P11.8 billion, representing 1.1% of the Banks total assets as of that date. The
Philippine property market is highly cyclical, and property prices in general have been volatile. Property
prices collapsed following the Asian financial crisis but recovered until the global financial crisis in 2008
restrained demand. However, property demand and prices have since recovered on favorable
macroeconomic conditions and strong demand from families of OFWs as well as workers from the
Information and Communication Technology (ICT) and Business Process Outsourcing (BPO) industries.
Property prices are affected by a number of factors, including the supply of and demand for comparable
properties, the rate of economic growth in the Philippines and political and economic developments.
Historically, the Bank has low home loan default rates compared to industry standards.
In 2011, the Bank sold P3.0 billion worth of acquired assets and intends to continue with its strategy of
gradually reducing ROPA levels. To the extent that property values decline in the future, there can be no
assurance that the Bank will be able to sell off and recover the full estimated value of its ROPA. Furthermore,
in an extended downturn in the property market, and given the Banks significant amount of ROPA, it may
take a number of years before the Bank is able to realize a significant part of the value of its ROPA.
Accordingly, an extended downturn in the Philippine property sector could increase the level of the Banks
provisions set against its ROPA holdings, reduce the Banks net income and, consequently, adversely affect
the Banks business, financial condition and results of operations generally.
The Bank may have to comply with stricter regulations and guidelines issued by regulatory
authorities in the Philippines, including the BSP, the BIR and international bodies, including
the Financial Action Task Force (the FATF)
The Bank is regulated principally by, and has reporting obligations to, the BSP. The Bank is also subject to
the banking, corporate, taxation and other laws in effect in the Philippines. The regulatory and legal
framework governing the Bank differs in certain material respects from that in effect in other countries and
may continue to change as the Philippine economy and commercial and financial markets evolve. In recent
years, existing rules and regulations have been modified, new rules and regulations have been enacted and
36

reforms have been implemented which are intended to provide tighter control and more transparency in the
Philippine banking sector. These rules include new guidelines on the monitoring and reporting of suspected
money laundering activities as well as regulations governing the capital adequacy of banks in the
Philippines.
Furthermore, while the Philippines enacted the Anti-Money Laundering Act of 2001 (the Anti-Money
Laundering Act) to introduce more stringent anti-money laundering regulations, these regulations did not
initially comply with the standards set by the FATF. However, following pressure from the FATF, an
amendment to the Anti-Money Laundering Act became effective on 23 March 2003. In January 2005, the
Philippines was removed from the list of NCCTs, confirming that anti-money laundering (AML) measures
to remedy deficiencies that were originally identified by the FATF are in place. AML systems (including strict
customer identification, suspicious transaction reporting, bank examinations, and legal capacities to
investigate and prosecute money laundering) were all identified to be of a satisfactory nature.
The Banks compliance with stricter regulations and guidelines issued by local regulatory authorities
indicates transparency as well as its adherence to good corporate governance. Being compliant with
regulatory requirements reinforces depositor and counterparty confidence in the Bank.
The results of operations of certain of the Banks businesses may vary significantly from time
to time
As a consequence, in part, of the acquisitions the Bank has made over the financial years ended 31
December 2009, 2010 and 2011, and the varying levels of provisions it has made in respect of
non-performing loans, ROPA, pension liabilities, impairment in the value of investments and other
developments, the Banks results of operations have varied from period to period in the past and may
fluctuate significantly in the future due to these and other factors. In addition, the varying gains recognized
by the Bank as a result of its trading of securities have caused the Banks trading income to vary
significantly from period to period. For instance, the Bank experienced a trading loss amounting to P2.9
billion for the year ended 31 December 2008 (which represented 5.1% of total income in that period) and
experienced trading gains of P3.3 billion, P5.6 billion and P3.9 billion for the years ended 31 December 2009,
2010 and 2011, respectively. The trading loss incurred in the year ended 31 December 2008 was
attributable to the volatility in the global financial markets arising from the subprime crisis in the U.S.
However, as global financial markets stabilized, the Bank generated gains from trading activity, with trading
gains representing 7.2%, 10.7% and 7.2% of total income for the years ended 31 December 2009, 2010
and 2011, respectively. Nevertheless, a slowdown in global growth momentum may make it more difficult
for the Bank to generate substantial gains from trading activity.
The foregoing is true across the industry and not unique to the Bank. For its part, the Bank has adopted a
more focused investment strategy that responds to the volatile market environment. Said investment
strategy focuses on generating more stable and recurring income sources through net interest income (bulk
of the Banks investment portfolio is in held-to-maturity and available-for-sale investments) as well as
service-based fee income to mitigate the volatility from trading gains.
The Philippine banking industry is highly competitive and increasing competition may result
in declining margins in the Banks principal businesses
The Bank is subject to significant levels of competition from many other Philippine banks and branches of
international banks, including competitors which in some instances have greater financial and other capital
resources, a greater market share and greater brand name recognition than the Bank. The recent mergers
and consolidations in the banking industry, as well as the liberalization of foreign ownership regulations in
banks, have allowed the emergence of foreign and bigger local banks in the market. This is expected to
increase the level of competition both from Philippine banks and branches of international banks. This may
impact the Philippine banks operating margins, but this would also enhance the industrys overall efficiency,
37

business opportunities and service delivery. As at 31 December 2011, there were a total of 38 domestic and
foreign commercial banks operating in the Philippines.
In the future, the Bank may face increased competition from financial institutions offering a wider range of
commercial banking services and products than the Bank and that have larger lending limits, greater
financial resources and stronger balance sheets than the Bank. Increased competition may arise from:

other large Philippine banking and financial institutions with a significant presence in Metro
Manila and large country-wide branch networks;

foreign banks, due to, among other things, relaxed standards permitting large foreign banks to
open branch offices;

domestic banks entering into strategic alliances with foreign banks with significant financial and
management resources; and

continued consolidation in the banking sector involving domestic and foreign banks, driven in part
by the gradual removal of foreign ownership restrictions.

There can be no assurance that the Bank will be able to compete effectively in the face of such increased
competition. Increased competition may make it difficult for the Bank to continue to increase the size of its
loan portfolio and deposit base, as well as intensify pricing competition, which could have a material
adverse effect on its growth plans, margins, results of operations and financial condition.
The Banks ability to assess, monitor and manage risks inherent in its business differs from
the standards of its counterparts in more developed countries
The Bank is exposed to a variety of risks, including credit risk, market risk, portfolio risk, foreign exchange
risk and operational risk. The effectiveness of the Banks risk management is limited by the quality and
timeliness of available data in the Philippines in relation to factors such as the credit history of proposed
borrowers and the loan exposure borrowers have with other financial institutions. In addition, the
information generated by different groups within the Bank may be incomplete or obsolete. The Bank may
also have developed credit screening standards in response to such inadequacies in quality of credit
information that are different from, or inferior to, the standards used by its international competitors. As a
result, the Banks ability to assess, monitor and manage risks inherent in its business may not meet the
standards of its counterparts in more developed countries. If the Bank is unable to acquire or develop in the
future the technology, skill set and systems available to meet such standards, or if the Banks standards are
not as rigorous as international standards, it could have a material adverse effect on the Banks ability to
manage these risks and on the Banks financial condition, liquidity and results of operations.
The Banks recent and potential acquisitions may represent a risk if not managed effectively
The Bank has received notification from the BSP and PDIC of their conditional approval of the proposed
transaction involving the Banks acquisition of all recorded assets and assumption of all recorded liabilities
of Export and Industry Bank Inc. (EIB). The transaction is still subject to the execution of definitive
agreements and documentation acceptable to the parties and PDIC, the fulfillment of certain conditions, as
well as the final approval of the Monetary Board. There are a number of risks inherent in any
merger/acquisition process. These include risks that:

expected cost savings or revenue enhancing opportunities cannot be realized in the amounts or
within the time frames contemplated;

extraordinary expenses, costs or difficulties relating to the integration of the businesses and
information management systems are greater than expected;
38

existing customer and employee relationships are adversely affected; and

integration difficulties or other factors relating to the rationalization of the business cause
unexpected business interruption.

In addition, on 27 April 2012, the Monetary Board issued a resolution placing EIB under receivership. It
remains unclear what effect EIBs receivership will have on the Banks contemplated acquisition, as well as
the BSP and PDIC approvals received by the Bank in relation to the contemplated transaction.
Accordingly, no assurance can be given that the merger or acquisition will result in the benefits to its
business anticipated by the Bank or that the balance of the integration process will not adversely affect the
Banks existing operations or financial condition.
The Bank faces pressure to comply with new capital standards
The BSP Monetary Board approved major revisions to the countrys risk-based capital adequacy framework
on 1 July 2007, to align the current framework with the Basel II standards as issued by the Basel
Committee on Banking Supervision (BCBS), which is an international committee of banking supervisory
authorities. Basel II standards make regulatory capital requirements more risk sensitive and reflective of all,
or at least most, of the risks financial institutions are exposed to. In terms of minimum capital requirements,
Basel II standards include the addition of specific capital requirements for credit derivatives, securitization
exposures, counterparty risk in the trading book, and operational risk.
Another major change is the imposition of a capital requirement on foreign currency denominated credit
exposures to the Philippine government. In December 2010, a new update to the Basel Accords, known as
Basel III, was issued by the BCBS containing new standards that modify the structure of regulatory capital.
The Basel III regulations include tighter definitions of Tier 1 capital and Tier 2 capital, the introduction of a
leverage ratio, changes in the risk weighting of counterparty credit risk, a framework for counter-cyclical
capital buffers, and short and medium-term quantitative liquidity ratios. The standards divide elements into
(i) Tier 1 capital, which is also referred to as Going-Concern Capital, and is composed of Common Equity
and Additional Going Concern capital; and (ii) Tier 2 capital, which is also referred to as Gone-Concern
capital. Moreover, the standards set forth eligibility criteria for inclusion of capital instruments as Additional
Going Concern capital and Tier 2 capital. To align with the international standards, the BSP has adopted the
BCBS eligibility criteria to determine eligibility of capital instruments to be issued by Philippine banks and
quasi-banks as Hybrid Tier 1 capital and Tier 2 with the issuance of BSP Circular No. 709 effective 1
January 2011.
In January 2012, the BSP announced that the countrys universal and commercial banks, including their
subsidiary banks and quasi-banks, will be required to adopt in full the capital adequacy standards under
Basel III starting 1 January 2014. The BSP released the full details of the capital adequacy guidelines and
held consultative discussions with the Bankers Association of the Philippines in the first quarter of 2012
while the implementing guidelines will be finalized by the third quarter of 2012. This thus allows local banks
one full year for a parallel run of the old and new guidelines prior to the effectiveness of the new standards
in 2014, marking an accelerated implementation compared to the BCBSs staggered timeline that stretches
from January 2013 to January 2017.
The Basel III capital standards set by the BSP are as follows: the Common Equity Tier 1 (CET1) ratio at a
regulatory minimum of 6.0% of risk-weighted assets and the Total Tier 1 ratio at a minimum of 7.5%. Both
ratios are more stringent and higher than the minimum international norms of 4.5% and 6.0%,
respectively. The total Capital Adequacy Requirement remains at 10.0%, which is higher than the
international regulatory minimum of 8.0%. A capital conservation buffer of 2.5% above the regulatory
minimum levels will also be implemented.
39

In addition, the new BSP guidelines eliminate the gradual phase-out of ineligible capital instruments as
regulatory capital instruments rendered ineligible under the minimum conditions of Basel III shall be
allowed to qualify as regulatory capital only until the end of 2013. Meanwhile, other aspects of Basel III
that will be implemented beginning 1 January 2014 include the deductions against CET1; enhancements
on risk measurement related to securitizations and market risk; and use of third party credit assessment
agencies.
As at 31 December 2009, 2010 and 2011, the Bank had a capital adequacy ratio of 12.2%, 13.8% and
15.8%, respectively.
The Banks results of operations may be adversely affected if the assumptions used to
determine the cost of retirement benefits under the Banks retirement plans change
The Bank has a funded non-contributory retirement plan covering substantially all of its qualified employees.
Actuarial valuations are made every two years to update the retirement benefit costs and the amount of
contributions. As at 31 December 2011, the fair value of the retirement plan assets of the Bank was P9.0
billion and the present value of the obligation was at P12.1 billion. After expenses and contributions made
relative to the Banks retirement fund, a retirement benefit asset of P1.5 billion was recognized by the Bank
for the year.
The principal actuarial assumptions used by the Bank to determine the cost of retirement benefits include
an investment earning rate of 5.0% and a salary increase of 10.0% per annum, compounded annually. If
these assumptions prove to be incorrect, the Banks funding obligations in respect of its retirement plans
may be significantly higher than currently anticipated. The Bank plans to reassess these actuarial
assumptions in relation to its retirement plan in the near future. This revaluation may require the Bank to
increase the amount it amortizes each year in respect of its retirement fund liabilities, which would
adversely affect the Banks net income.
The Bank regularly reviews its assumptions and takes appropriate actions to ensure that the retirement
fund meets actuarial requirements.
The Bank is effectively controlled by one shareholder group, with which it has extensive
financial and business connections
The Bank is effectively controlled by the Group, which is comprised of entities affiliated with SMIC, as the
largest shareholder of the Bank. As at 31 December 2011, SMIC directly owned approximately 40.92% of
the Banks common shares, and Multi Realty Development Corporation, Sybase Equity Investments
Corporation and SM Land (formerly Shoemart, Inc.), companies affiliated with SMIC, held 8.81%, 6.83%,
and 2.10%, respectively, of the Banks issued share capital, exclusive of the shares underlying the GDRs.
Through these and other entities, the SM Group owned directly and indirectly 58.66% of the Banks
common shares, thus effectively controlling the Bank and the composition of its Board of Directors. There
can be no assurance that the interests of the SM Group will necessarily coincide with the interests of the
Bank and the Banks other shareholders.
The Bank has historically had close business relationships with the SM Group, and as at 31 December 2011,
the Bank's loans to the SM Group amounted to P42.6 billion, or 6.4% of the Bank's total portfolio. The
Bank's loans to the SM Group are on commercial arms length terms. While the Bank does not rely on the
SM Group for any funding, financial guarantees, or other forms of financial support, any default by the SM
Group on such loans from the Bank, or failure by the SM Group to make timely payments of amounts due
under such loans, could have a material adverse effect on the Bank's financial condition and results of
operation. Furthermore, the Bank benefits from its relationship with the SM Group through certain business
synergies, including access to SM clients and prospective clients, joint product development and branch
40

locations in SM malls. As a result, a deterioration in the financial condition of the SM Group could have a
material adverse effect on the Banks financial condition and business opportunities.
In addition, if there is any public perception in the Philippines that the Bank is reliant on the financial
condition of the SM Group, there could be a loss of confidence in the Bank's solvency among its depositors
or creditors in the event of a deterioration in the financial condition of the SM Group. In particular, this could
result in withdrawals of deposits or a decrease in new deposits beyond levels anticipated by the Bank, or
otherwise have a material adverse effect on the Bank's financial condition and results of operation.
SMIC is a well diversified conglomerate with market leadership in core industries such as retail, mall
operations, and banking, and is a fast emerging player in property development and in hotel and
entertainment. SMIC has a strong balance sheet and is one of the countrys most profitable companies.
While the Bank derives benefits from its affiliation with the SM Group and uses these to its advantage, the
Bank on a stand-alone basis has a strong balance sheet and capital base, with capital adequacy ratio above
regulatory requirements. In addition, the Bank has a solid franchise and its own clientele. Any transaction
with SMIC is done at arms length commercial terms, with the Bank compliant with DOSRI limits.

Risks Relating to the Philippines


Substantially all of the Groups operations and assets are based in the Philippines; a
slowdown in economic growth in the Philippines could materially adversely affect its
businesses
Substantially all of the Groups business operations and assets are based in the Philippines. As a result, the
Groups income, results of operations and the quality and growth of its assets depend, to a large extent, on
the performance of the Philippine economy. In the past, the Philippines has experienced periods of slow or
negative growth, high inflation, significant devaluation of the Philippine currency and the imposition of
exchange controls.
From mid-1997 to 1999, the economic crisis in Asia adversely affected the Philippine economy, causing a
significant depreciation of the Peso, increases in interest rates, increased volatility and the downgrading of
the Philippine local currency rating and the ratings outlook for the Philippine banking sector. These factors
had a material adverse impact on the ability of many Philippine companies to meet their debt-servicing
obligations. In particular, the significant depreciation of the Peso made it difficult for many Philippine
companies with Peso revenue streams and significant US dollar or other foreign currency denominated
loans or costs to meet their repayment obligations. While the Philippine economy registered positive growth
in the period from 1999 to 2001 as it recovered from the Asian economic crisis, it continues to face a
significant budget deficit, limited foreign currency reserves, a volatile Peso exchange rate and a relatively
weak banking sector.
Since the second half of 2008, the global credit markets have experienced, and may continue to
experience, significant dislocations and liquidity disruptions which have originated from the liquidity
disruptions in the United States and the European Union credit and sub-prime residential mortgage
markets. The deterioration of the financial markets contributed to a recession in the United States and
a slowdown in the global economy, which led to significant declines in employment, household wealth,
consumer demand and the announcement of stimulus measures by a number of governments including
quantitative easing. These and other related events, such as the collapse of a number of financial
institutions and other entities; rising government deficits and debt levels together with the
downgrading of the sovereign debt of certain member states of the European Union; the ensuing
bailouts of Ireland, Greece and Portugal; government deficit and other debt reduction measures,
notably in the United States; and the downgrading of the United States sovereign debt, have had, or
41

may have, a significant adverse impact on, among other things, employment rates, household wealth,
consumer demand and lending, which as a result may adversely affect, economic growth in the
Philippines. In addition, the occurrence of accelerated inflation or deflation and increasing oil prices may
affect global market conditions. While the US, China and various European governments have launched
various fiscal stimulus and rescue packages aimed at restoring liquidity, there can be no assurances that
these will result in financial stability. The economic downturn has had widespread global effects and
there can be no assurance that such financial instability can be limited or that economic activity will not
contract worldwide.
These foregoing developments and a slowdown or recession in the US and or other large economies
may adversely affect the Philippine economy.
For the year ended 31 December 2011, the fiscal deficit of the Philippines was P197.8 billion, equal to 2% of
the GDP for that period, according to the Philippine Bureau of Treasury. This was lower than the
programmed fiscal deficit of P300.0 billion for the year, equal to 3.2% of 2011 GDP, due largely to the
Governments more efficient tax collection and its slowdown in spending as part of efforts to curb corruption.
There can be no assurance that the budget deficit will not increase, that measures will be taken to reduce
the current deficit or that, if taken, such measures will be successful.
Any deterioration in economic conditions in the Philippines as a result of these or other factors, including a
significant depreciation of the Peso or increase in interest rates, could materially adversely affect the
consumers, customers and contractual counterparties upon whom the Groups businesses depend. This, in
turn, could materially and adversely affect the Groups financial condition and results of operations,
including its assets and its ability to implement its business strategy.
The Group continuously monitors the countrys key economic indicators in order to formulate appropriate
strategies which address potential adverse developments. For instance, all foreign currency liabilities of the
Group are adequately hedged to mitigate foreign exchange risks. Also, the Group maintains a manageable
debt-equity ratio to mitigate the risk of financial difficulties.
Any political instability in the future may have a negative effect on the Groups financial
results
The Philippines has from time to time experienced political, social and economic instability. In May 2004,
the Philippines held presidential elections as well as elections for the Senate and the House of
Representatives. President Macapagal-Arroyo was elected for a second six-year term. However, certain
opposition candidates questioned the election results, alleging massive fraud and disenfranchisement of
voters. On 25 July 2005, the impeachment complaints that were filed by several citizens and opposition
lawmakers in the House of Representatives against President Arroyo, based on the allegations of culpable
violation of the Constitution, graft and corruption and betrayal of the public trust, were referred by the
speaker of the House to the Committee on Justice. All impeachment complaints previously filed were
ultimately dismissed; however several cases were filed with the Supreme Court questioning the
constitutionality of the decision.
On 24 February 2006, President Arroyo declared a state of emergency after security forces thwarted what
they claimed was a plot to overthrow the President. The purported coup detat coincided with
demonstrations marking the 20th anniversary of the people power revolution that toppled former
President Marcos. The President lifted the state of emergency on 3 March 2006.
In November 2007, a group of military rebels together with a senator walked out of their trial in Makati City
and occupied the second floor of the Manila Peninsula Hotel calling for President Arroyo to resign. They
were soon joined by a few church officials and former Vice President Teofisto Guingona who appealed to the
public for support. After a few hours, the mutinous group agreed to surrender to avoid bloodshed.

42

Since 2007 the Philippine Senate has been conducting inquiries into the allegedly anomalous US$329
million deal to construct the National Broadband Network. In February 2008, former Philippine Forest
Corporation president Rodolfo Noel Lozada Jr. testified in the Senate and accused key allies of President
Arroyo of overpricing the deal and receiving and/or demanding hefty commissions for the implementation
of said deal. The controversy fuelled mass protests by various cause-oriented groups calling for the
President to resign. The implementation of the project, in the meantime, has been suspended.
In 2008, the Philippine Senate resumed its Blue Ribbon Committee inquiry into allegedly anomalous
disbursements of P780 million for the purchase of fertilizers by the Department of Agriculture and alleged
diversion of said funds to finance the 2004 election of President Arroyo.
In May 2010, the Philippines held its very first automated presidential election, as well as elections for
members of the Senate and the Congress. Consequently, Benigno Aquino III was elected as the new
President of the Philippines, with effect on 30 June 2010.
In December 2011, the 23 rd Chief Justice of the Supreme Court of the Philippines, Renato Corona,
was impeached by the House of Representatives. The Senate, convened as an impeachment court,
began the trial in January 2012 and consequently found Corona guilty of Article II of the Articles of
Impeachment filed against him pertaining to his failure to disclose to the public his statement of assets,
liabilities, and net worth.
Although there can be no assurance that President Aquino will continue to implement the economic,
development and regulatory policies favoured by President Arroyos administration, including those
policies that have a direct effect on the Groups assets and operations, President Aquinos administration
has already taken steps towards economic reforms, such as raising government revenues by curbing
tax evasion and other forms of corruption.
No assurance can be given that the future political environment in the Philippines will be stable or that
current or future Governments will adopt economic policies conducive to sustaining economic growth.
Political instability in the Philippines could negatively affect the general economic conditions in the
Philippines which could have a material impact on the financial results of the Group. In addition, such
adverse factors may affect the Philippine tourism industry, which is the focus of one element of the Groups
growth strategy.
Historically, the Group has remained apolitical and cooperates with the countrys duly constituted
government. The Group supports and contributes to nation-building.
An increase in the number of terrorist attacks, or the occurrence of a large-scale terrorist
attack, in the Philippines could negatively affect the Philippine economy and, therefore, the
Groups financial condition and its business
The Philippines has been subject to a number of terrorist attacks in recent years. An increase in the number
of terrorist attacks, or the occurrence of a large-scale terrorist attack, in the Philippines could negatively
affect the Philippine economy and, therefore, the Groups financial condition and its business. The Philippine
army has been in conflict with the Abu Sayyaf organization, which has ties to the al-Qaeda terrorist network
and has been identified as being responsible for kidnapping and terrorist activities in the Philippines. There
has been a series of bombings in the Philippines, mainly in southern cities. Although no one has claimed
responsibility for these attacks, Philippine military officials have stated that the attacks appeared to be the
work of the Abu Sayyaf organization. There has also been a number of violent crimes in the Philippines,
including an isolated incident in August 2010 involving the hijacking of a tour bus carrying 25 Hong
Kong tourists in Manila, which resulted in the deaths of eight tourists and prompted the Hong Kong
government to declare a travel warning on the Philippines. On 25 January 2011, five people were killed
and thirteen were injured when an improvised mortar bomb triggered by a mobile phone exploded on
43

a bus in Makati City. There can be no assurance that the Philippines will not be subject to further, or an
increased number of, acts of terrorism in the future. Terrorist attacks have, in the past, had a material
adverse effect on investment and confidence in, and the performance of, the Philippine economy and, in
turn, the Groups business. Furthermore, there can be no assurance that the Philippines will not suffer a
large-scale terrorist attack which cripples the Philippine economy for a significant period of time.
The Group continuously reviews its security measures and hires necessary security services, as well as
monitors its properties surrounding areas. To mitigate the impact of this risk resulting in possible economic
dislocation, the Group maintains a strong balance sheet, a high level of liquidity, and a low gearing ratio.
Volatility in the value of the Peso against the U.S. dollar and other currencies could adversely
affect the Groups businesses
During the last decade, the Philippine economy has from time to time experienced volatility in the value of
the Peso and limited availability of foreign exchange. In July 1997, the BSP announced that it would allow
market forces to determine the value of the Peso. Since 30 June 1997, the Peso experienced periods of
significant depreciation and declined from approximately P29.00 = U.S.$1.00 in July 1997 to a low of
P49.90 = U.S.$1.00 for the month ended (period average) December 2000. In recent years, the Peso has
generally appreciated and the exchange rate (period average) was P46.15 in 2007, P44.48 in 2008, P47.64
in 2009, P45.11 in 2010 and P43.31 in 2011.
The revenues of the Group are predominantly denominated in Pesos, while certain expenses, including
fixed debt obligations, are denominated in currencies other than Pesos. Certain of the Groups borrowings
are denominated in US dollars and China renminbi and accordingly the Group is exposed to fluctuations in
the Peso to US dollar and other foreign currency exchange rates. A depreciation of the Peso against the US
dollar and other foreign currencies will increase the amount of Peso revenue required to service foreign
currency denominated debt obligations.
There can be no assurance that the Peso will not depreciate further against other currencies and that such
depreciation will not have an adverse effect on the Philippine economy and on the Groups businesses.
In addition, changes in currency exchange rates may result in significantly higher domestic interest rates,
liquidity shortages and capital or exchange controls. This could result in a reduction of economic activity,
economic recession, sovereign or corporate loan defaults, lower deposits and increased cost of funds. The
foregoing consequences, if they occur, would have a material adverse effect on the Groups financial
condition, liquidity and results of operations.
As a policy, the Group does not engage in foreign currency speculation. Furthermore, the Group minimizes
foreign exchange exposure and fully hedges its foreign currency liabilities.
Corporate governance and disclosure standards in the Philippines may differ from those in
more developed countries
While a principal objective of the Philippine securities laws, SEC regulations and PSE disclosure rules is to
promote full and fair disclosure of material corporate information, there may be less publicly available
information about Philippine public companies, such as the Issuer, than is regularly made available by public
companies in the United States and other countries. The Philippines securities market is generally subject to
less strict regulatory oversight than securities markets in more developed countries. Improper trading
activities could affect the value of securities and concerns about inadequate investor protection may limit
participation by foreign investors in the Philippine securities market. Furthermore, although the Issuer
complies with the requirements of the SEC and PSE with respect to corporate governance standards, these
standards may differ from those applicable in other jurisdictions. For example, the Philippine Securities
Regulation Code requires the Issuer to have at least two independent directors or such number of
44

independent directors as is equal to 20% of the Board, whichever is the lower number. The Issuer currently
has three independent directors. Many other jurisdictions require significantly more independent directors.
As a policy, the Group adheres to international standards of corporate governance and disclosure. The
Group has hired a Vice President for Corporate Governance to formulate policies and monitor compliance
thereof, as well as a consultant at the Board level. The Group has received numerous awards for good
corporate governance from international publications.

Risks Relating to the Bonds


The priority of debt evidenced by a public instrument
Under Philippine law, in the event of liquidation of a company, unsecured debt of the company (including
guarantees of debt) which is evidenced by a public instrument as provided in Article 2244 of the Civil Code
of the Philippines will rank ahead of unsecured debt of the company which is not so evidenced. Under
Philippine law, a debt becomes evidenced by a public instrument when it has been acknowledged before a
notary or any person authorized to administer oaths in the Philippines. Although the position is not clear
under Philippine law, it is possible that a jurat (which is a statement of the circumstances in which an
affidavit was made) may be sufficient to constitute a debt evidenced by a public instrument. So far as the
Issuer is aware, none of its debt is evidenced by a public instrument and the Issuer will undertake in the
Terms and Conditions of the Bonds and the Trust Indenture Agreement to use its best endeavors not to
incur such debt. Any such debt evidenced by a public instrument may, by mandatory provision of law, rank
ahead of the Bonds in the event of the liquidation of the Issuer.
As a policy, the Groups borrowings are clean and are not collateralized by its assets, except for debts that
are required by law to be secured.
An active trading market for the Bonds may not develop
The Bonds are a new issue of securities for which there is currently no trading market. Even if the Bonds are
listed on the PDEx, trading in securities such as the Bonds may be subject to extreme volatility at times, in
response to fluctuating interest rates, developments in local and international capital markets and the
overall market for debt securities among other factors. Although the Bonds are intended to be listed on
PDEx as soon as reasonably practicable, no assurance can be given that an active trading market for the
Bonds will develop and, if such a market were to develop the Joint Issue Managers are under no obligations
to maintain such a market. The liquidity and the market prices for the Bonds can be expected to vary with
changes in market and economic conditions, the financial position and prospects of the Company and other
factors that generally influence the market prices of securities.
The Company has no control over this risk as active trading of the Bonds is highly dependent on the
bondholders. The Group actively cooperates in efforts aimed at improving the capital markets in the
Philippines.
The Issuer may be unable to redeem the Bonds
At maturity, the Issuer will be required to redeem all of the Bonds. If such an event were to occur, the Issuer
may not have sufficient cash in hand and may not be able to arrange financing to redeem the Bonds in time,
or on acceptable terms, or at all. The ability to redeem the Bonds in such event may also be limited by the
terms of other debt instruments. Failure to repay, repurchase or redeem tendered Bonds by the Issuer
would constitute an event of default under the Bonds, which may also constitute a default under the terms
of other indebtedness of the Group.

45

The Group has a very strong business franchise in the Philippines. It has a strong recurring cash flow and
maintains a low debt-equity ratio and a high level of liquidity in its balance sheet. The Group believes that it
has sufficient resources which will allow it to service the principal and interest of the Bonds.

46

USE OF PROCEEDS
The net proceeds from the issue of the Bonds, without the Over-subscription Option (after deduction of
commissions and expenses) are approximately P9,918.5 million and are presently intended to be used by
the Issuer for various project expansions and general corporate purposes. Assuming the Over-subscription
Option of up to P5,000,000,000.00 is fully exercised, the Company expects total net proceeds of
approximately P14,883.5 million after fees, commissions and expenses.
Net proceeds from the Offering are estimated to be at least as follows:
For a P10.0 billion Issue Size
Total
P10,000,000,000.00

Estimated proceeds from the sale of Bonds


Less: Estimated expenses
Documentary Stamp Tax
SEC Registration
SEC Registration Fee and Legal Research
SEC Publication Fee
Underwriting and Other Professional Fees
Underwriting and Legal Fee
Rating Fee
Listing Application Fee
Listing Maintenance Fee
Printing Cost
Trustee Fees
Paying Agency and Registry Fees
Miscellaneous fees

50,000,000.00
4,355,625.00
100,000.00
20,500,000.00
4,200,000.00
224,000.00
336,000.00
300,000.00
120,000.00
848,000.00
500,000.00

81,483,625.00
P9,918,516,375.00

Estimated net proceeds for P10.0 billion Issue


For the P5.0 billion Over-Subscription Option
Estimated proceeds from the sale of Bonds
Less: Estimated expenses
Documentary Stamp Tax
Underwriting Fees
Estimated net proceeds for P5.0 billion Over-Subscription
Option

Total
P5,000,000,000.00
25,000,000.00
10,000,000.00

Total Net Proceeds (inclusive of Over-Subscription Option of P5.0 billion)

35,000,000.00
P4,965,000,000.00

---

P14,883,516,375.00

Aside from the foregoing one-time costs, SMIC expects the following annual expenses related to the Bonds:
1.
2.
3.

The Issuer will be charged the first year Annual Maintenance Fee in advance upon the
approval of the Listing;
The Issuer will pay a yearly retainer fee to the Trustee amounting to P120,000.00 per annum;
and,
After the Issue Date, a Paying Agency fee amounting to P100,000.00 is payable every interest
payment date. The Registrar will charge a monthly maintenance fee based on the face value
of the Bonds and the number of Bondholders.

47

The net proceeds of the Issue shall be used primarily to partially finance the Groups capital expenditure
requirements for various project expansions in the next five years, and for general corporate purposes. The
various projects of the Group for which the net proceeds of the Issue will be used for and the corresponding
expected disbursement schedule are set out below.
Amounts in P millions

2012

2013

2014

2015

2016

Total

SMIC projects
SM Arena

400

150

550

Park Inn Davao

643

71

714

Luxury City Hotel

1,530

Luxury Hotel Santelmo

1,530

340

690

690

Park Inn Clark

3,400
153

1,533

321

321

Land acquisitions

2,180

1,505

1,400

200

200

5,485

Subtotal

3,223

3,256

3,620

1,230

674

12,003

1,350

1,350

300

SM Land projects
Three E-com Center
Four E-com Center
BPO buildings

3,000

900

900

900

2,700

1,000

1,000

1,000

1,000

1,000

5,000

Subtotal

2,350

2,350

2,200

1,900

1,900

10,700

Total

5,773

5,606

5,820

3,130

2,575

22,703

SM Arena is a five-storey, first-class multipurpose venue for sporting events, concerts,


entertainment shows, and other similar events. The arena has a seating capacity of
approximately 16,000. It occupies about two hectares of land and has a gross floor a rea of
approximately 64,000 square meters. The official opening date of the SM Arena is in June 2012.
Payments to contractors are based on percentage of completion and after the physical
verification by the engineers. Full payment of the construction cost extends up to the following
year to cover for the 10% retention. The retention will be used to cover any damage and defects
detected during the period.

Park Inn Davao by Radisson will be the very first Park Inn by Radisson in the Asia Pacific region.
The Park Inn brand is one of the hotel brands under Carlson and is the largest mid-market brand
for hotels under development in Europe. The hotel project will approximately have 204 rooms
located in Lanang, Davao City and is set to open in the first quarter of 2013.

Luxury City Hotel will be built in Metro Manila and will have approximately 400 rooms.

Luxury Hotel in Santelmo, Batangas will be a 200 room luxury resort.

48

Park Inn Clark by Radisson will have approximately 200 rooms. This will be the second Park Inn by
Radisson in the Philippines that will cater to mid-market segment.

Land acquisitions pertain to various land banking activities of SMIC.

Three E-Com and Four E-com Center will be the Groups third and fourth major office building
within the SM Mall of Asia Complex, with at least 14-storeys and with gross floor area of
approximately 100,000 sqm each.

BPO buildings are buildings which would cater to the office space requirements of BPO firms with
approximately 30,000 GFA.

Pending the above uses, the Company intends to invest the net proceeds from the Issue in short and
medium-term liquid investments including but not limited to short-term government securities, bank
deposits and money market placements which are expected to earn prevailing market rates
The Company undertakes that it will not use the net proceeds from the Issue for any purpose, other than as
discussed above. However, the Companys plans may change, based on factors including changing
macroeconomic or market conditions, or new information regarding the cost or feasibility of these plans.
The Companys cost estimates may also change as these plans are developed further, and actual costs may
be different from budgeted costs. For these reasons, timing and actual use of the net proceeds may vary
from the foregoing discussion and the Companys management may find it necessary or advisable to
reallocate the net proceeds within the categories described above, or to alter its plans, including modifying
the projects described in the foregoing and/or pursuing different projects. In the event of any substantial
deviation/adjustment in the planned uses of proceeds, the Company shall inform the SEC and the
stockholders within 30 days prior to its implementation.

49

DETERMINATION OF THE OFFER PRICE


The Bonds shall be issued at 100% of principal amount or face value.

50

PLAN OF DISTRIBUTION
BDO Capital, BPI Capital, China Bank and FMIC, pursuant to an Underwriting Agreement with SMIC
executed on 25 June 2012 (the Underwriting Agreement), have agreed to act as the Underwriters for the
Offer and as such, distribute and sell the Bonds at the Offer Price, and have also committed to underwrite
up to P10,000,000,000.00 on a firm basis, in either case subject to the satisfaction of certain conditions and
in consideration for certain fees and expenses, with a P5,000,000,000.00 Over-subscription Option.
Each of the Underwriters has committed to underwrite the Offer on a firm basis up to the amount indicated
below:
Joint Lead Underwriters
BDO Capital & Investment Corporation
BPI Capital Corporation
China Banking Corporation
First Metro Investment Corporation

Amount
P2,500,000,000
P2,500,000,000
P2,500,000,000
P2,500,000,000

The Joint Lead Underwriters shall have exclusive rights and priority to exercise the Over-subscription Option
of up to Five Billion Pesos (P5,000,000,000.00).
There is no arrangement for the Underwriters to return to SMIC any unsold Bonds. The Underwriting
Agreement may be terminated in certain circumstances prior to payment of the net proceeds of the Bonds
being made to SMIC. There is no arrangement as well giving the Underwriters the right to designate or
nominate any member to the Board of SMIC.
SMIC will pay the Joint Lead Underwriters a fee of 0.20% on the final aggregate nominal principal amount
of the Bonds issued, which is inclusive of the fee to be ceded to Participating Underwriters. No fees will be
given to Broker-Dealers selling the Bonds.
The Underwriters are duly licensed by the SEC to engage in underwriting and distribution of securities to
the public. The Underwriters may, from time to time, engage in transactions with and perform services in
the ordinary course of business with SMIC or other members of the Group.
BDO Capital is the wholly-owned investment banking subsidiary of BDO Unibank, Inc., which, in turn, is an
associate of the Group. BDO Capital is a full-service investment house primarily involved in securities
underwriting and trading, loan syndication, financial advisory, private placement of debt and equity, project
finance, and direct equity investment. Incorporated in December 1998, BDO Capital commenced operations
in March 1999.
BPI Capital Corporation is the wholly-owned investment banking subsidiary of the Bank of the Philippine
Islands. BPI Capital is an investment house focused on corporate finance and the securities distribution
business. It began operations as an investment house in December 1994 and has grown to be one of the
biggest investment banks in the country.
China Bank is one of the largest commercial banks in the Philippines in terms of assets and capital.
Commencing operations on August 16, 1920, it is the first privately owned local commercial bank in the
Philippines. It provides a wide range of domestic and international banking services including investment
banking, lending, treasury and foreign exchange trading, trust and investment management, wealth
management, insurance and remittance.
FMIC, incorporated in the Philippines in 1972, is the investment banking arm of the Metrobank Group, one
51

of the largest financial conglomerates in the Philippines. FMIC provides investment banking services
through its four strategic business units: Investment Banking, Treasury, Investment Advisory and Strategic
Finance. FMIC also has a quasi-bank license and is a government securities eligible dealer (GSED) licensed
by the Bureau of the Treasury. On September 13, 2011, FMIC received a Certificate of Authority issued by
the BSP to engage in Trust and Other Fiduciary Business. FMIC is listed in the Philippine Stock Exchange
and is a member of the Investment House Association of the Philippines (IHAP).
Except for BDO Capital and China Bank which are associates of the Issuer, the other Joint Lead Underwriters,
namely BPI Capital and FMIC have no direct relations with SMIC in terms of ownership. The Underwriters
have no right to designate or nominate any member of the Board of SMIC.

Sale and Distribution


The distribution and sale of the Bonds shall be undertaken by the Underwriters who shall sell and distribute
the Bonds to third party buyers/investors. Nothing herein shall limit the rights of the Underwriters from
purchasing the Bonds for their own respective accounts.
There are no persons to whom the Bonds are allocated or designated. The Bonds shall be offered to the
public at large and without preference.
The obligations of each of the Underwriters will be several, and not solidary, and nothing in the
Underwriting Agreement shall be deemed to create a partnership or joint venture between and among any
of the Underwriters. Unless otherwise expressly provided in the Underwriting Agreement, the failure by an
Underwriter to carry out its obligations thereunder shall neither relieve the other Underwriters of their
obligations under the same Underwriting Agreement, nor shall any Underwriter be responsible for the
obligation of another Underwriter.

Offer Period
The Offer Period shall commence at 9:00am of 27 June 2012, and end at 12:00pm of 6 July 2012.

Application to Purchase
Applicants may purchase the Bonds during the Offer Period by submitting to the Underwriters properly
completed Applications to Purchase, together with two signature cards, and the full payment of the
purchase price of the Bonds in the manner provided in the said Application to Purchase.
Corporate and institutional applicants must also submit, in addition to the foregoing, a copy of their SEC
Certificate of Registration of Articles of Incorporation and By-Laws, Articles of Incorporation, By-Laws, and
the appropriate authorization by their respective boards of directors and/or committees or bodies
authorizing the purchase of the Bonds and designating the authorized signatory(ies) thereof.
Individual applicants must also submit, in addition to accomplished Applications to Purchase and its
required attachments, a photocopy of any one of the following valid identification cards (ID), subject to
verification with the original ID: passport, drivers license, postal ID, company ID, SSS/GSIS ID and/or
Senior Citizens ID.
A corporate and institutional investor who is exempt from or is not subject to withholding tax shall be
required to submit the following requirements to the Registrar, subject to acceptance by the Issuer as being
sufficient in form and substance: (i) certified true copy of the tax exemption certificate, ruling or opinion
issued by the Bureau of Internal Revenue; (ii) a duly notarized undertaking, in the prescribed from,
52

declaring and warranting its tax exempt status, undertaking to immediately notify the Issuer of any
suspension or revocation of the duly-accepted tax exemption certificates and agreeing to indemnify and
hold the Issuer free and harmless against any claims, actions, suits, and liabilities resulting from the
non-withholding of the required tax; and (iii) such other documentary requirements as may be required
under the applicable regulations of the relevant taxing or other authorities; provided that, all sums payable
by the Issuer to tax exempt entities shall be paid in full without deductions for taxes, duties, assessments or
government charges subject to the submission by the Bondholder claiming the benefit of any exemption of
reasonable evidence of such exemption to the Registrar.
Completed Applications to Purchase and corresponding payments must reach the Underwriters prior to the
end of the Offer Period, or such earlier date as may be specified by the Underwriters. Acceptance by the
Underwriters of the completed Application to Purchase shall be subject to the availability of the Bonds and
the acceptance by SMIC. In the event that any check payment is returned by the drawee bank for any
reason whatsoever or the nominated bank account to be debited is invalid, the Application to Purchase shall
be automatically canceled and any prior acceptance of the Application to Purchase shall be deemed
revoked.

Minimum Purchase
A minimum purchase of Twenty Thousand Pesos (P20,000.00) for each series of the Bonds shall be
considered for acceptance. Purchases for each series of the Bonds in excess of the minimum shall be in
multiples of Ten Thousand Pesos (P10,000.00) for each series.

Allotment of the Bonds


If the Bonds are insufficient to satisfy all Applications to Purchase, the available Bonds shall be allotted in
accordance with the chronological order of submission of properly completed and appropriately
accomplished Applications to Purchase on a first-come, first-served basis, without prejudice and subject to
SMICs exercise of its right of rejection.

Acceptance of Applications
SMIC and the Joint Lead Underwriters reserve the right to accept or reject applications to purchase the
Bonds, and in case of oversubscription, allocate the Bonds available to the applicants in a manner they
deem appropriate.

Refunds
If any application is rejected or accepted in part only, the application money or the appropriate portion
thereof shall be returned without interest to such applicant through the relevant Underwriter with whom
such application to purchase the Bonds was made.

Payments
The Paying Agent shall open and maintain a Payment Account, which shall be operated solely and
exclusively by the said Paying Agent in accordance with the Paying Agency and Registry Agreement,
provided that beneficial ownership of the Payment Account shall always remain with the Bondholders. The
Payment Account shall be used exclusively for the payment of the relevant interest and principal on each
Payment Date.
53

The Paying Agent shall maintain the Payment Account for six (6) months from Maturity Date or date of early
redemption. Upon closure of the Payment Account, any balance remaining in such Payment Account shall
be returned to the Issuer and shall be held by the Issuer in trust and for the irrevocable benefit of the
Bondholders with unclaimed interest and principal payments.

Purchase and Cancellation


The Issuer may purchase the Bonds at any time in the open market or by tender or by contract at any price
without any obligation to make pro-rata purchases from all Bondholders. Bonds so purchased shall be
redeemed and cancelled and may not be re-issued.

Secondary Market
SMIC intends to list the Bonds in the PDEx. SMIC may purchase the Bonds at any time without any
obligation to make pro-rata purchases of Bonds from all Bondholders.

Registry of Bondholders
The Bonds shall be issued in scripless form. A Master Certificate of Indebtedness representing the Bonds
sold in the Offer shall be issued to and registered in the name of the Trustee, on behalf of the Bondholders.
Legal title to the Bonds shall be shown in the Register of Bondholders to be maintained by the Registrar.
Initial placement of the Bonds and subsequent transfers of interests in the Bonds shall be subject to
applicable prevailing Philippine selling restrictions. The names and addresses of the Bondholders and the
particulars of the Bonds held by them and of all transfers of Bonds shall be entered into the Register of
Bondholders. Transfers of ownership shall be effected through book-entry transfers in the scripless Register
of Bondholders.

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DESCRIPTION OF THE BONDS


The following does not purport to be a complete listing of all the rights, obligations, or privileges of the
Bonds. Some rights, obligations, or privileges may be further limited or restricted by other documents.
Prospective investors are enjoined to carefully review the Articles of Incorporation, By-Laws and resolutions
of the Board of Directors and Shareholders of SMIC, the information contained in this Prospectus, the Trust
Indenture Agreement, Underwriting Agreement, and other agreements relevant to the Offer.
The issue of up to P10,000,000,000.00 aggregate principal amount of 6.0000% per annum Series C Bonds
and 6.9442% per annum Series D Bonds with an oversubscription option of up to P5,000,000,000.00 was
authorized by a resolution of the Board of Directors of SMIC dated 13 April 2012. The Bonds shall be
constituted by a Trust Indenture Agreement executed on 25 June 2012 (the Trust Agreement) entered
into between the Issuer and Philippine National Bank Trust Banking Group (the Trustee), which term shall,
wherever the context permits, include all other persons or companies for the time being acting as trustee or
trustees under the Trust Agreement. The description of the terms and conditions of the Bonds set out below
includes summaries of, and is subject to, the detailed provisions of the Trust Agreement. A registry and
paying agency agreement was executed on 25 June 2012 (the Registry and Paying Agency Agreement) in
relation to the Bonds among the Issuer, Philippine Depository & Trust Corp. as registrar (the Registrar)
and as paying agent (the Paying Agent). The Bonds shall be offered and sold through a general public
offering in the Philippines, and issued and transferable in minimum principal amounts of Twenty Thousand
Pesos (P20,000.00) and in multiples of Ten Thousand Pesos (P10,000.00) thereafter, and traded in
denominations of Ten Thousand Pesos (P10,000.00) in the secondary market. The Bonds will be repaid at
100% of Face Value on the respective Maturity Dates of the Series C and Series D Bonds, unless SMIC
exercises its early redemption option according to the conditions therefore. See Description of the
Bonds Redemption and Purchase.
The Registrar and Paying Agent has no interest in or relation to SMIC which may conflict with its role as
Registrar for the Offer. The Trustee has no interest in or relation to SMIC which may conflict with its role as
Trustee for the Bonds.
Copies of the Trust Agreement and the Registry and Paying Agency Agreement are available for inspection
during normal business hours at the specified offices of the Trustee. The holders of the Bonds (the
Bondholders) are entitled to the benefit of, are bound by, and are deemed to have notice of, all the
provisions of the Trust Agreement and are deemed to have notice of those provisions of the Paying Agency
and Registry Agreement applicable to them.

Form, Denomination and Title


Form and Denomination
The Bonds are in scripless form, and shall be issued in denominations of Twenty Thousand Pesos
(P20,000.00) each as a minimum, in multiples of Ten Thousand Pesos (P10,000.00) thereafter, and traded
in denominations of Ten Thousand Pesos (P10,000.00) in the secondary market.
Title
Legal title to the Bonds shall be shown in the Register of Bondholders maintained by the Registrar. A notice
confirming the principal amount of the Bonds purchased by each applicant in the Offer shall be issued by
the Registrar to all Bondholders following the Issue Date. Upon any assignment, title to the Bonds shall pass
by recording of the transfer from the transferor to the transferee in the electronic Register of Bondholders
maintained by the Registrar. Settlement in respect of such transfer or change of title to the Bonds, including
55

the settlement of any cost arising from such transfers, including, but not limited to, documentary stamps
taxes, if any, arising from subsequent transfers, shall be for the account of the relevant Bondholder.

Bond Rating
The Bonds have been rated PRS Aaa by PhilRatings, having considered SMICs diversified business portfolio,
business plans, growth prospects and cash flows. A rating of PRS Aaa is assigned to long-term debt
securities with the smallest degree of investment risk. Interest payments are protected by a large or by an
exceptionally stable margin and repayment of principal is secured. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. A rating of PRS Aaa is the highest credit rating on PhilRatings long-term credit
rating scale.
The rating was arrived at after considering the following factors: SMICs diversified business portfolio which
includes core companies with strong market positions, sustained earnings, and recurring cash flows; solid
brand equity and experienced management team; strong liquidity; and sound capitalization. The ratings
also consider the continued positive prospects for the Philippine economy in general, and the industries
where the SM Group has primary investments, in particular.
The rating is subject to regular annual reviews, or more frequently as market developments may dictate, for
as long as the Bonds are outstanding. After Issue Date, the Trustee shall monitor the compliance of the
Bonds with the regular annual reviews.

Transfer of Bonds
Register of Bondholders
The Issuer shall cause the Register of Bondholders to be kept by the Registrar, in electronic form. The
names and addresses of the Bondholders and the particulars of the Bonds held by them and of all transfers
of Bonds shall be entered into the Register of Bondholders. As required by Circular No. 428-04 issued by the
BSP, the Registrar shall send each Bondholder a written statement of registry holdings at least quarterly (at
the cost of the Issuer), and a written advice confirming every receipt or transfer of the Bonds that is
effected in the Registrars system (at the cost of the relevant Bondholder). Such statement of registry
holdings shall serve as the confirmation of ownership of the relevant Bondholder as of the date thereof. Any
requests of Bondholders for certifications, reports or other documents from the Registrar, except as
provided herein, shall be for the account of the requesting Bondholder. No transfer of the Bonds may be
made during the period commencing on a Record Date as defined in this Section on Interest Payment
Dates.
Transfers; Tax Status
The Bonds may be transferred upon exchange of confirmation of sale and confirmation of purchase, or by
book entry in recording platforms maintained by approved securities dealers. The Registrar shall ultimately
and conclusively determine all matters regarding the evidence necessary to effect any such transfers.
Settlement in respect of such transfers or change of title to the Bonds, including the settlement of any
documentary stamps taxes, if any, arising from subsequent transfers, shall be settled directly between the
transferee and/or the transferor Bondholders.
Subject to the provisions of the Registry and Paying Agency Agreement, Bondholders may transfer their
Bonds at any time, regardless of tax status of the transferor vis--vis the transferee.

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Should a transfer between Bondholders of different tax status occur on a day, which is not an Interest
Payment Date, tax-exempt entities trading with non tax-exempt entities shall be treated as non tax-exempt
entities for the interest period within which such transfer occurred. A Bondholder claiming tax-exempt
status is required to submit a written notification of the sale or purchase to the Trustee and the Registrar,
including the tax status of the transferor or transferee, as appropriate, together with the supporting
documents specified under the Registry and Paying Agency Agreement within three days from the
settlement date for such transfer. Transfers taking place in the Register of Bondholders after the Bonds are
listed on PDEx shall be allowed between tax-exempt and non tax-exempt entities without restriction and
observing the tax exemption of tax-exempt entities, if and/or when so allowed under and in accordance
with the relevant rules, conventions and guidelines of PDEx and PDTC.
Secondary Trading of the Bonds
The Issuer intends to list the Bonds on PDEx for secondary market trading. The Bonds will be traded in a
minimum board lot size of P20,000.00 as a minimum, and in multiples of P10,000.00 in excess thereof for
so long as any of the Bonds are listed on PDEx. Secondary market trading in PDEx shall follow the applicable
PDEx rules and conventions and guidelines, including rules, conventions and guidelines governing trading
and settlement between Bondholders of different tax status, and shall be subject to the relevant fees of
PDEx and PDTC.

Ranking
The Bonds shall constitute the direct, unconditional, unsubordinated and unsecured obligations of the
Issuer ranking at least pari passu and ratably without any preference or priority among themselves and with
all its other present and future direct, unconditional, unsubordinated and unsecured obligations (other than
subordinated obligations and those preferred by mandatory provisions of law).

Interest
Interest Payment Dates
The Series C Bonds bear interest on its principal amount from and including Issue Date at the rate of
6.0000% p.a., payable semi-annually in arrears starting on 16 January 2013 for the first Interest Payment
Date, and on July 16 and January 16 of each year for each subsequent Interest Payment Date at which the
Bonds are outstanding, or the subsequent Business Day, without adjustment for accrued interest, if such
Interest Payment Date is not a Business Day.
The Series D Bonds bear interest on its principal amount from and including Issue Date at the rate of
6.9442% p.a., payable semi-annually in arrears starting on 16 January 2013 for the first Interest Payment
Date, and on July 16 and January 16 of each year for each subsequent Interest Payment Date at which the
Bonds are outstanding, or the subsequent Business Day, without adjustment for accrued interest, if such
Interest Payment Date is not a Business Day.
The cut-off date in determining the existing Bondholders entitled to receive interest or principal amount due
shall be two (2) Business Days prior to the relevant Interest Payment Dates (the Record Dates), which
shall be the reckoning date in determining the Bondholders entitled to receive interest, principal or any other
amount due under the Bonds. No transfers of the Bonds may be made during this period intervening
between and commencing on the Record Date and the relevant Interest Payment Dates.

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Interest Accrual
Each Bond shall cease to bear interest from and including the Maturity Date, as defined in the discussion on
Final Redemption, below, unless, upon due presentation, payment of the principal in respect of the Bond
then outstanding is not made, is improperly withheld or refused, in which case the Penalty Interest (see
Penalty Interest below) shall apply.
Determination of Interest Amount
The interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and,
in the case of an incomplete month, the number of days elapsed on the basis of a month of 30 days.

Redemption and Purchase


Final Redemption
Unless previously purchased and cancelled, the Bonds shall be redeemed at par or 100% of face value on
their respective Maturity Dates. However, if the Maturity Date is not a Business Day, payment of all amounts
due on such date will be made by the Issuer through the Paying Agent, without adjustment for accrued
interest, on the succeeding Business Day.
Redemption for Taxation Reasons
If payments under the Bonds become subject to additional or increased taxes other than the taxes and
rates of such taxes prevailing on the Issue Date as a result of certain changes in law, rule or regulation, or
in the interpretation thereof, and such additional or increased rate of such tax cannot be avoided by use of
reasonable measures available to the Issuer, the Issuer may redeem the Bonds in whole, but not in part, on
any Interest Payment Date (having given not more than 60 nor less than 30 days notice) at par plus
accrued interest.
Optional Redemption
Prior to final redemption, the Issuer shall have a one-time option, but shall not be obligated, to redeem in
whole, and not a part only, each outstanding series of the Bonds on the tenth (10 th) Interest Payment Date
of the Series C Bonds and on the fourteenth (14th) Interest Payment Date of the Series D Bonds,
respectively (each, an Optional Redemption Date). The Issuer shall give not less than thirty (30) nor more
than sixty (60) calendar days prior written notice of its intention to redeem the Bonds, which notice shall be
irrevocable and binding upon the Issuer to effect such early redemption of the Bonds at the Interest
Payment Date stated in such notice. The amount payable to the Bondholders in respect of such redemption
shall be calculated based on the principal amount of the Bonds being redeemed, as the sum of (i) one
hundred two per cent (102%) of the principal amount; and (ii) accrued interest on the Bonds on the
Optional Redemption Date.
Purchase and Cancellation
The Issuer may at any time purchase any of the Bonds at any price in the open market or by tender or by
contract at any price, without any obligation to purchase Bonds pro-rata from all Bondholders. Any Bonds
so purchased shall be redeemed and cancelled and may not be re-issued.

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Change in Law or Circumstance


The following events shall be considered as changes in law or circumstances as it refers to the obligations of
the Issuer and the rights and interests of the Bondholders under the Trust Indenture Agreement and the
Bonds:
(a) Any government and/or non-government consent, license, authorization, registration or approval
now or hereafter necessary to enable the Issuer to comply with its obligations under the Trust
Agreement or the Bonds shall be modified, withdrawn or withheld in a manner which, in the
reasonable opinion of the Trustee, will materially and adversely affect the ability of the Issuer to
comply with such obligations; or
(b) Any provision of the Trust Indenture Agreement or any of the related documents is or becomes, for
any reason, invalid, illegal or unenforceable to the extent that it becomes for any reason unlawful
for the Issuer to give effect to its rights or obligations thereunder, or to enforce any provisions of
the Trust Indenture Agreement or any of the related documents in whole or in part; or any law is
introduced or any applicable existing law is modified or rendered ineffective or inapplicable to
prevent or restrain the performance by the parties thereto of their obligations under the Trust
Indenture Agreement or any other related documents; or
(c) Any concessions, permits, rights, franchise or privileges required for the conduct of the business
and operations of the Issuer shall be revoked, cancelled or otherwise terminated, or the free and
continued use and exercise thereof shall be curtailed or prevented, in such manner as to materially
and adversely affect the financial condition or operations of the Issuer.
Payments
The principal of, interest on, and all other amounts payable on the Bonds shall be paid to the Bondholders
by crediting of the settlement accounts designated by each of the Bondholders. The principal of, and
interest on, the Bonds shall be payable in Philippine Pesos. SMIC shall ensure that so long as any of the
Bonds remains outstanding, there shall at all times be a Paying Agent for purposes of disbursing payments
on the Bonds. In the event the Paying Agent shall be unable or unwilling to act as such, SMIC shall appoint
a qualified financial institution in the Philippines authorized to act in its place. The Paying Agent may not
resign its duties or be removed without a successor having been appointed.
Payment of Additional Amounts - Taxation
Interest income on the Bonds is subject to a final withholding tax at rates of between 20% and 30%
depending on the tax status of the relevant Bondholder under relevant law, regulation or tax treaty. Except
for such final withholding tax and as otherwise provided, all payments of principal and interest are to be
made free and clear of any deductions or withholding for or on account of any present or future taxes or
duties imposed by or on behalf of Republic of the Philippines, including, but not limited to, issue,
registration or any similar tax or other taxes and duties, including interest and penalties, if any. If such taxes
or duties are imposed, the same shall be for the account of the Issuer; provided however that, the Issuer
shall not be liable for the following:
a) The applicable final withholding tax applicable on interest earned on the Bonds prescribed under
the Tax Code, as amended, and its implementing rules and regulations as may be in effect from
time to time. An investor who is exempt from the aforesaid withholding tax, or is subject to a
preferential withholding tax rate shall be required to submit the following requirements to the
Registrar, subject to acceptance by the Issuer as being sufficient in form and substance:

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(i) certified true copy of the tax exemption certificate, ruling or opinion issued by the
Bureau of Internal Revenue confirming the exemption or preferential rate;
(ii) a duly notarized undertaking, in the prescribed form, declaring and warranting its
tax-exempt status or preferential rate entitlement, undertaking to immediately notify the
Issuer of any suspension or revocation of the tax exemption certificates or preferential rate
entitlement, and agreeing to indemnify and hold the Issuer and the Registrar free and
harmless against any claims, actions, suits, and liabilities resulting from the
non-withholding of the required tax; and
(iii) such other documentary requirements as may be required under the applicable
regulations of the relevant taxing or other authorities which for purposes of claiming tax
treaty withholding rate benefits, shall include evidence of the applicability of a tax treaty
and consularized proof of the Bondholders legal domicile in the relevant treaty state, and
confirmation acceptable to the Issuer that the Bondholder is not doing business in the
Philippines; provided further that, all sums payable by the Issuer to tax exempt entities
shall be paid in full without deductions for taxes, duties, assessments or government
charges subject to the submission by the Bondholder claiming the benefit of any exemption
of reasonable evidence of such exemption to the Registrar;
b) Gross Receipts Tax under Section 121 of the Tax Code;
c) Taxes on the overall income of any securities dealer or Bondholder, whether or not subject to
withholding; and
d) Value Added Tax (VAT) under Sections 106 to 108 of the Tax Code, and as amended by Republic
Act No. 9337.
Documentary stamp tax for the primary issue of the Bonds and the execution of the Bond Agreements, if
any, shall be for the Issuers account.

Financial Ratios
Similar to the covenants contained in other debt agreements of the Issuer, the Issuer shall maintain the
following financial ratios:
a) Current Ratio of not less than 0.5:1; and
b) Debt-Equity Ratio of not more than 75:25.
There are no other regulatory ratios that the Issuer is required to comply with.

Negative Pledge
So long as any Bond or coupon remains outstanding (as defined in the Trust Agreement):
(i)

the Issuer will not create or permit to subsist any lien upon the whole or any part of its
undertaking, assets or revenues present or future to secure any Indebtedness or any guarantee of
or indemnity in respect of any Indebtedness;

(ii)

the Issuer shall procure that its Material Subsidiaries will not create or permit to subsist any lien
upon the whole or any part of any Material Subsidiarys undertaking, assets or revenues present
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or future to secure any Public Debt or any guarantee of or indemnity in respect of any Public Debt;
and
(iii) the Issuer will procure that no other Person creates or permits to subsist any lien or gives any
guarantee of, or indemnity upon the whole or any part of the undertaking, assets or revenues
present or future of that other Person to secure any Public Debt of the Issuer, or any Material
Subsidiary or to secure any guarantee of or indemnity in respect of the Public Debt of the Issuer or
any Material Subsidiary unless, at the same time or prior thereto, the Issuers obligations under
the Bonds and the Trust Indenture Agreement, (a) are secured equally and rateably therewith or
benefit from a guarantee or indemnity in substantially identical terms thereto, as the case may be,
or (b) have the benefit of such other security, guarantee, indemnity or other arrangement as the
Trustee in its absolute discretion shall deem to be not materially less beneficial to the Bondholders
or as shall be approved by Extraordinary Resolution of the Bondholders
provided that this paragraph shall not apply to liens (aa) arising by operation of law; or (bb) created in
respect of Indebtedness (for the avoidance of doubt, including Indebtedness in respect of which there is a
preference or priority under Article 2244 of the Civil Code of the Philippines as the same may be amended
from time to time) in aggregate principal amount not exceeding 15% of Total Consolidated Assets as
determined in the Issuer's latest audited consolidated financial statements; or (cc) created in respect of
Hedging Transactions; and unless, at the same time or prior thereto, the Issuers obligations under the
Bonds, the Coupons and the Trust Agreement, (x) are secured equally and rateably therewith or benefit
from a guarantee or indemnity in substantially identical terms thereto, as the case may be, in each case to
the satisfaction of the Trustee, or (y) have the benefit of such other security, guarantee, indemnity or other
arrangement as the Trustee in its absolute discretion shall deem to be not materially less beneficial to the
Bondholders or as shall be approved by Extraordinary Resolution (as defined in the Trust Agreement) of the
Bondholders.

Events and Consequences of Default


If any of the following events occurs (the Events of Default) and is continuing, the Trustee at its discretion
may give notice to the Issuer that the Bonds are, and they shall immediately become, due and payable at
their principal amount together with accrued interest:
(a) Payment Default: there is failure to pay the interest on any of the Bonds within 14 days from the
due date for payment; or
(b) Breach of Other Obligations: the Issuer defaults in the performance or observance of, or
compliance with, any one or more of its other obligations set out in the Bonds or the Trust
Agreement and (except where the Trustee considers, and so notifies in writing to the Issuer, that
such default is not capable of remedy, when no such notice or grace period as mentioned below
shall be required) such default continues for a period of 30 days after notice of such default shall
have been given to the Issuer by the Trustee; or
(c) Cross-Default: (i) any other present or future Indebtedness of the Issuer or any of its Material
Subsidiaries or Subsidiaries for or in respect of moneys borrowed or raised becomes (or becomes
capable of being declared) due and payable prior to its stated maturity by reason of any actual or
potential default, event of default or the like (howsoever described), or (ii) any such Indebtedness
is not paid when due or, as the case may be, within any applicable grace period, or (iii) the Issuer or
any of its Material Subsidiaries or Subsidiaries fails to pay when due any amount payable by it under
any present or future guarantee for, or indemnity in respect of, any moneys borrowed or raised
provided that the aggregate amount of the relevant Indebtedness, guarantees and indemnities in
respect of which one or more of the events mentioned above in this paragraph (c) have occurred
equals or exceeds P2,000,000,000; or
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(d) Judgement, Decree or Order: a final judgment, decree or order has been entered against the
Issuer or any Material Subsidiary by a court of competent jurisdiction from which no appeal may be
made or is taken for the payment of money in excess of P2,000,000,000 and any relevant period
specified for payment of such judgment, decree or order shall have expired without it being
satisfied, discharged or stayed; or
(e) Enforcement Proceedings: a distress, attachment, execution or other legal process is levied,
enforced or sued out on or against (in the opinion of the Trustee) any material part of the property,
assets or revenues of the Issuer or any Material Subsidiary and is not discharged or stayed within
60 days (or such longer period as the Issuer satisfies the Trustee is appropriate in relation to the
jurisdiction concerned) of having been so levied, enforced or sued unless and for so long as the
Trustee is satisfied that it is being contested in good faith and diligently; or
(f) Security Enforced: any lien, present or future, created or assumed by the Issuer or any Material
Subsidiary becomes enforceable and any step is taken to enforce it (including the taking of
possession or the appointment of a receiver, administrative receiver, manager or other similar
person) and the Indebtedness secured by the lien is not discharged or such steps stayed within 60
days (or such longer period as the Issuer satisfies the Trustee is appropriate in relation to the
jurisdiction concerned) of such steps being so taken unless and for so long as the Trustee is
satisfied that it is being contested in good faith and diligently or
(g) Insolvency: the Issuer or any Material Subsidiary (i) is (or is, or could be, deemed by law or a
court to be) insolvent or bankrupt or unable to pay its debts, (ii) stops, suspends or threatens to
stop or suspend payment of all or a material part of (or of a particular type of) its debts, (iii)
proposes or makes any agreement for the deferral, rescheduling or other readjustment of all of (or
all of a particular type of) its debts (or of any part which it will or might otherwise be unable to pay
when due), (iv) proposes or makes a general assignment or an arrangement or composition with or
for the benefit of the relevant creditors in respect of any of such debts, or (v) a moratorium is
agreed or declared in respect of or affecting all or any part of (or of a particular type of) the debts
of the Issuer or any Material Subsidiary; or
(h) Winding-up: an order of a court of competent jurisdiction is made or an effective resolution
passed for the winding-up or dissolution or administration of the Issuer or any Material Subsidiary,
or the Issuer or any Material Subsidiary ceases or threatens to cease to carry on all or substantially
all of its business or operations, except for the purpose of and followed by a reconstruction,
amalgamation, reorganization, merger or consolidation (i) on terms approved by the Trustee or by
a resolution of the Bondholders, or (ii) in the case of a Material Subsidiary, whereby the
undertaking and assets of the Material Subsidiary are transferred to or otherwise vested in the
Issuer or another Material Subsidiary pursuant to a merger of the Material Subsidiary with the
Issuer or such other Material Subsidiary or by way of a voluntary winding-up or dissolution where
there are surplus assets in such Material Subsidiary and such surplus assets attributable to the
Issuer and/or any other Material Subsidiary are distributed to the Issuer and/or any such other
Material Subsidiary; or
(i) Bankruptcy Proceedings: proceedings shall have been initiated against the Issuer or any
Material Subsidiary under any applicable bankruptcy, insolvency or reorganization law and such
proceedings shall not have been discharged or stayed within a period of 60 days (or such longer
period as the Issuer satisfies the Trustee is appropriate in relation to the jurisdiction concerned)
unless and for so long as it is being contested in good faith and diligently; or
(j) Validity: the Issuer shall contest in writing the validity or enforceability of the Trust Agreement or
the Bonds or shall deny generally in writing the liability of the Issuer, under the Trust Agreement or
the Bonds; or
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(k) Expropriation: any step is taken by any person with a view to the seizure, compulsory acquisition,
or expropriation of all or a material part of the assets of the Issuer or any of its Material Subsidiaries;
or
(l) Illegality: it is or will become unlawful for the Issuer to perform or comply with any one or more of
its obligations under any of the Bonds or the Trust Agreement; or
(m) Analogous Events: any event occurs which under the laws of any relevant jurisdiction has an
analogous effect to any of the events referred to in any of the foregoing paragraphs provided that
in the case of paragraph (c), (h) and (i) in relation to a Subsidiary or the Material Subsidiary (as the
case may be), the Trustee shall have certified that in its opinion such event is materially prejudicial
to the interests of the Bondholders.
Notice of Default
The Trustee shall, within five (5) days after the occurrence of any Event of Default, give to the Bondholders
written notice of such default known to it, unless the same shall have been cured before the giving of such
notice; provided that, in the case of payment default, as described in Payment Default above, the Trustee
shall immediately notify the Bondholders upon the occurrence of such payment default. The existence of a
written notice required to be given to the Bondholders hereunder shall be published in a newspaper of
general circulation in the Philippines for two consecutive days, further indicating in the published notice that
the Bondholders or their duly authorized representatives may obtain an important notice regarding the
Bonds at the principal office of the Trustee upon presentment of sufficient and acceptable identification.
Penalty Interest
In case any amount payable by the Issuer under the Bonds, whether for principal, interest, fees due to
Trustee or Registrar or otherwise, is not paid on due date, the Issuer shall, without prejudice to its
obligations to pay the said principal, interest and other amounts, pay penalty interest on the defaulted
amount(s) at the rate of 2% p.a. (the Penalty Interest) from the time the amount falls due until it is fully
paid.
Payment in the Event of Default
The Issuer covenants that upon the occurrence of any Event of Default, the Issuer shall pay to the
Bondholders, through the Paying Agent, the whole amount which shall then have become due and payable
on all such outstanding Bonds with interest at the rate borne by the Bonds on the overdue principal and
with Penalty Interest as described above, and in addition thereto, the Issuer shall pay to the Trustee such
further amounts as shall be determined by the Trustee to be sufficient to cover the cost and expenses of
collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any
reasonable expenses or liabilities incurred without negligence or bad faith by the Trustee hereunder.
Application of Payments
Any money collected or delivered to the Paying Agent, and any other funds held by it, subject to any other
provision of the Trust Agreement and the Paying Agency and Registry Agreement relating to the disposition
of such money and funds, shall be applied by the Paying Agent in the order of preference as follows: first, to
the payment to the Trustee, the Paying Agent and the Registrar, of the costs, expenses, fees and other
charges of collection, including reasonable compensation to them, their agents, attorneys and counsel, and
all reasonable expenses and liabilities incurred or disbursements made by them, without negligence or bad
faith; second, to the payment of the interest in default, in the order of the maturity of such interest with
Penalty Interest; third, to the payment of the whole amount then due and unpaid upon the Bonds for
principal, and interest, with Penalty Interest; and fourth, the remainder, if any shall be paid to the Issuer, its
63

successors or assigns, or to whoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct. Except for any interest and principal payments, all disbursements of the
Paying Agent in relation to the Bonds shall require the conformity of the Trustee. The Paying Agent shall
render a monthly account of such funds under its control.
Prescription
Claims in respect of principal and interest or other sums payable hereunder shall prescribe unless made
within ten (10) years (in the case of principal or other sums) or five (5) years (in the case of interest) from
the date on which payment becomes due.
Remedies
All remedies conferred by the Trust Agreement to the Trustee and the Bondholders shall be cumulative and
not exclusive and shall not be so construed as to deprive the Trustee or the Bondholders of any legal
remedy by judicial or extra judicial proceedings appropriate to enforce the conditions and covenants of the
Trust Agreement, subject to the discussion below on Ability to File Suit.
No delay or omission by the Trustee or the Bondholders to exercise any right or power arising from or on
account of any default hereunder shall impair any such right or power, or shall be construed to be a waiver
of any such default or an acquiescence thereto; and every power and remedy given by the Trust Agreement
to the Trustee or the Bondholders may be exercised from time to time and as often as may be necessary or
expedient.
Ability to File Suit
No Bondholder shall have any right by virtue of or by availing of any provision of the Trust Agreement to
institute any suit, action or proceeding for the collection of any sum due from the Issuer hereunder on
account of principal, interest and other charges, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless (i) such Bondholder previously shall have given to the Trustee written
notice of an Event of Default and of the continuance thereof and the related request for the Trustee to
convene a meeting of the Bondholders to take up matters related to their rights and interests under the
Bonds; (ii) the Majority Bondholders shall have decided and made the written request upon the Trustee to
institute such action, suit or proceeding in the latters name; (iii) the Trustee for 60 days after the receipt of
such notice and request shall have neglected or refused to institute any such action, suit or proceeding; and
(iv) no directions inconsistent with such written request shall have been given under a waiver of default by
the Bondholders, it being understood and intended, and being expressly covenanted by every Bondholder
with every other Bondholder and the Trustee, that no one or more Bondholders shall have any right in any
manner whatever by virtue of or by availing of any provision of the Trust Agreement to affect, disturb or
prejudice the rights of the holders of any other such Bonds or to obtain or seek to obtain priority over or
preference to any other such holder or to enforce any right under the Trust Agreement, except in the
manner herein provided and for the equal, ratable and common benefit of all the Bondholders.
Waiver of Default by the Bondholders
The Majority Bondholders may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, or the Majority
Bondholders may decide for and in behalf of the Bondholders to waive any past default, except the events
of default defined as a payment default, breach of representation or warranty default, expropriation default,
insolvency default, or closure default, and its consequences. In case of any such waiver, the Issuer, the
Trustee and the Bondholders shall be restored to their former positions and rights hereunder; provided
however that, no such waiver shall extend to any subsequent or other default or impair any right
consequent thereto. Any such waiver by the Majority Bondholders shall be conclusive and binding upon all
Bondholders and upon all future holders and owners thereof, irrespective of whether or not any notation of
64

such waiver is made upon the certificate representing the Bonds.

Substitution
Substitution of the Bonds is not comtemplated.

Trustee; Notices
Notice to the Trustee
All documents required to be submitted to the Trustee pursuant to the Trust Agreement and this Prospectus
and all correspondence addressed to the Trustee shall be delivered to:
To the Trustee:
Attention:
Subject:
Facsimile:

Philippine National Bank Trust Banking Group


Rafael G. Ayuste, Jr.
First Senior Vice President and Trust Officer
SMIC Bonds due 2019 and 2022
Address: 3rd Floor, PNB Financial Center
D. Macapagal Boulevard, Pasay City
+63 2 526 3412, +63 2 526 3379

All documents and correspondence not sent to the above-mentioned address shall be considered as not to
have been sent at all.
Notice to the Bondholders
The Trustee shall send all notices to Bondholders to their mailing address as set forth in the Register of
Bondholders. Except where a specific mode of notification is provided for herein, notices to Bondholders
shall be sufficient when made in writing and transmitted in any one of the following modes: (i) registered
mail; (ii) surface mail; (iii) by one-time publication in a newspaper of general circulation in the Philippines;
or (iv) personal delivery to the address of record in the Register of Bondholders. The Trustee shall rely on
the Register of Bondholders in determining the Bondholders entitled to notice. All notices shall be deemed
to have been received (i) ten (10) days from posting if transmitted by registered mail; (ii) fifteen (15) days
from mailing if transmitted by surface mail; (iii) on date of publication, or; (iv) on date of delivery, for
personal delivery.
Binding and Conclusive Nature
Except as provided in the Trust Agreement, all notifications, opinions, determinations, certificates,
calculations, quotations and decisions given, expressed, made or obtained by the Trustee for the purposes
of the provisions of the Trust Agreement, shall (in the absence of willful default, bad faith or manifest error)
be binding on the Issuer, and all Bondholders and (in the absence as referred to above) no liability to the
Issuer, the Paying Agent or the Bondholders shall attach to the Trustee in connection with the exercise or
non-exercise by it of its powers, duties and discretions under the Trust Agreement.
Duties and Responsibilities of the Trustee
(a)

The Trustee is appointed as trustee for and on behalf of the Bondholders and accordingly shall
perform such duties and shall have such responsibilities as provided in the Trust Agreement. The
Trustee shall, in accordance with the terms and conditions of the Trust Agreement, monitor the
compliance or non-compliance by the Issuer with all its representations and warranties, and the
65

observance by the Issuer of all its covenants and performance of all its obligations, under and
pursuant to the Trust Agreement. The Trustee shall observe due diligence in the performance of its
duties and obligations under the Trust Agreement. For the avoidance of doubt, notwithstanding any
actions that the Trustee may take, the Trustee shall remain to be the party responsible to the
Bondholders, and to whom the Bondholders shall communicate with in respect to any matters that
must be taken up with the Issuer.
(a)

The Trustee shall, prior to the occurrence of an Event of Default or after the curing of all such
defaults which may have occurred, perform only such duties as are specifically set forth in the Trust
Agreement. In case of default, the Trustee shall exercise such rights and powers vested in it by the
Trust Agreement, and use such judgment and care under the circumstances then prevailing that
individuals of prudence, discretion and intelligence, and familiar with such matters exercise in the
management of their own affairs.

(b)

None of the provisions contained in the Trust Agreement or Prospectus shall require or be
interpreted to require the Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the exercise of any of its rights or
powers.

Resignation and Change of Trustee


(a)

The Trustee may at any time resign by giving ninety (90) days prior written notice to the Issuer and
to the Bondholders of such resignation.

(b)

Upon receiving such notice of resignation of the Trustee, the Issuer shall immediately appoint a
successor trustee by written instrument in duplicate, executed by its authorized officers, one (1)
copy of which instrument shall be delivered to the resigning Trustee and one (1) copy to the
successor trustee. If no successor shall have been so appointed and have accepted appointment
within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor, or any Bondholder
who has been a bona fide holder for at least six months (the bona fide Bondholder) may, for and
in behalf of the Bondholders, petition any such court for the appointment of a successor. Such court
may thereupon after notice, if any, as it may deem proper, appoint a successor trustee.

(c)

A successor trustee should possess all the qualifications required under pertinent laws, otherwise,
the incumbent trustee shall continue to act as such.

(d)

In case at any time the Trustee shall become incapable of acting, or has acquired conflicting
interest, or shall be adjudged as bankrupt or insolvent, or a receiver for the Trustee or of its
property shall be appointed, or any public officer shall take charge or control of the Trustee or of its
properties or affairs for the purpose of rehabilitation, conservation or liquidation, then the Issuer
may within thirty (30) days from there remove the Trustee concerned, and appoint a successor
trustee, by written instrument in duplicate, executed by its authorized officers, one (1) copy of
which instrument shall be delivered to the Trustee so removed and one (1) copy to the successor
trustee. If the Issuer fails to remove the Trustee concerned and appoint a successor trustee, any
Bona Fide Bondholder may petition any court of competent jurisdiction for the removal of the
Trustee concerned and the appointment of a successor trustee. Such court may thereupon after
such notice, if any, as it may deem proper, remove the Trustee and appoint a successor trustee.

(e)

The Majority Bondholders may at any time remove the Trustee for cause, and appoint a successor
trustee, by the delivery to the Trustee so removed, to the successor trustee and to the Issuer of the
required evidence of the action in that regard taken by the Majority Bondholders.

66

(f)

Any resignation or removal of the Trustee and the appointment of a successor trustee pursuant to
any of the provisions of this Subsection shall become effective upon the earlier of: (i) acceptance of
appointment by the successor trustee as provided in the Trust Agreement; or (ii) the effectivity of
the resignation notice sent by the Trustee under the Trust Agreement (a) (the Resignation
Effective Date) provided, however, that after the Resignation Effective Date and, as relevant, until
such successor trustee is qualified and appointed (the Holdover Period), the resigning Trustee
shall discharge duties and responsibilities solely as a custodian of records for turnover to the
successor Trustee promptly upon the appointment thereof by SMIC.

Successor Trustee
(a)

Any successor trustee appointed shall execute, acknowledge and deliver to the Issuer and to its
predecessor Trustee an instrument accepting such appointment, and thereupon the resignation or
removal of the predecessor Trustee shall become effective and such successor trustee, without
further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and
obligations of its predecessor in the trusteeship with like effect as if originally named as trustee in
the Trust Agreement. The foregoing notwithstanding, on the written request of the Issuer or of the
successor trustee, the Trustee ceasing to act as such shall execute and deliver an instrument
transferring to the successor trustee, all the rights, powers and duties of the Trustee so ceasing to
act as such. Upon request of any such successor trustee, the Issuer shall execute any and all
instruments in writing as may be necessary to fully vest in and confer to such successor trustee all
such rights, powers and duties.

(b)

Upon acceptance of the appointment by a successor trustee, the Issuer shall notify the
Bondholders in writing of the succession of such trustee to the trusteeship. If the Issuer fails to
notify the Bondholders within 10 days after the acceptance of appointment by the trustee, the
latter shall cause the Bondholders to be notified at the expense of the Issuer.

Reports to the Bondholders


The Trustee shall submit to the Bondholders on or before February 28 of each year from the relevant Issue
Date, until full payment of the Bonds, a brief report dated December 31 of the immediately preceding year
with respect to:
(i)

The funds, if any, physically in the possession of the Paying Agent held in trust for the Bondholders
on the date of such report; and

(ii)

Any action taken by the Trustee in the performance of its duties under the Trust Agreement which
it has not previously reported and which in its opinion materially affects the Bonds, except action in
respect of a default, notice of which has been or is to be withheld by it.

The Trustee shall submit to the Bondholders a brief report within 90 days from the making of any advance
for the reimbursement of which it claims or may claim a lien or charge which is prior to that of the
Bondholders on the property or funds held or collected by the Paying Agent with respect to the character,
amount and the circumstances surrounding the making of such advance; provided that, such advance
remaining unpaid amounts to at least ten percent (10%) of the aggregate outstanding principal amount of
the Bonds at such time.
Inspection of Documents
The following pertinent documents may be inspected during regular business hours on any Business Day at
the principal office of the Trustee:
1. Trust Indenture Agreement
67

2. Paying Agency and Registry Agreement


3. Articles of Incorporation and By-Laws of the Company
4. Registration Statement of the Company with respect to the Bonds

Meetings of the Bondholders


A meeting of the Bondholders may be called at any time for the purpose of taking any actions authorized to
be taken by or in behalf of the Bondholders of any specified aggregate principal amount of Bonds under any
other provisions of the Trust Indenture Agreement or under the law and such other matters related to the
rights and interests of the Bondholders under the Bonds.
Notice of Meetings
The Trustee may at any time call a meeting of the Bondholders, or the holders of at least twenty-five
percent (25%) of the aggregate outstanding principal amount of Bonds may direct in writing the Trustee to
call a meeting of the Bondholders, to take up any allowed action, to be held at such time and at such place
as the Trustee shall determine. Notice of every meeting of the Bondholders, setting forth the time and the
place of such meeting and the purpose of such meeting in reasonable detail, shall be sent by the Trustee to
the Issuer and to each of the registered Bondholders not earlier than forty five (45) days nor later than
fifteen (15) days prior to the date fixed for the meeting. However, the Trustee shall send notices in respect
of any meeting called by SMIC to obtain consent of the Bondholders to an amendment of the Intercreditor
Agreement in the following manner: a notice shall be sent to Bondholders detailing the amendments
proposed and consents requested by SMIC not earlier than sixty (60) days nor later than forty five (45) days
prior to the date fixed for the meeting, if the Bondholder fails to respond as required by such notice, the
Trustee shall send a second notice to such Bondholder not later than fifteen (15) days prior to the date fixed
for the meeting. Each of such notices shall be published in a newspaper of general circulation as provided in
the Trust Indenture Agreement. All reasonable costs and expenses incurred by the Trustee for the proper
dissemination of the requested meeting shall be reimbursed by the Issuer within ten (10) days from receipt
of the duly supported billing statement.
Failure of the Trustee to Call a Meeting
In case at any time the Issuer, pursuant to a resolution of its board of directors or executive committee, or
the holders of at least twenty five percent (25%) of the aggregate outstanding principal amount of the
Bonds shall have requested the Trustee to call a meeting of the Bondholders by written request setting forth
in reasonable detail the purpose of the meeting, and the Trustee shall not have mailed and published, in
accordance with the notice requirements, the notice of such meeting, then the Issuer or the Bondholders in
the amount above specified may determine the time and place for such meeting and may call such meeting
by mailing and publishing notice thereof.
Quorum
The Trustee shall determine and record the presence of the Majority Bondholders, personally or by proxy.
The presence of the Majority Bondholders shall be necessary to constitute a quorum to do business at any
meeting of the Bondholders except for any meeting called by SMIC solely for the purpose of obtaining the
consent of the Bondholders to an amendment of the Intercreditor Agreement, where the failure of any
Bondholder to transmit an objection to such proposal of SMIC after at least two (2) notices to such
Bondholder have been sent by the Trustee, will be considered by the Trustee as an affirmative vote (and
such Bondholder will be considered present for quorum purposes by the Trustee) for the proposal of SMIC.

68

Procedure for Meetings


(a)

The Trustee shall preside at all the meetings of the Bondholders, unless the meeting shall have
been called by the Issuer or by the Bondholders, in which case the Issuer or the Bondholders
calling the meeting, as the case may be, shall in like manner move for the election of the chairman
and secretary of the meeting.

(b)

Any meeting of the Bondholders duly called may be adjourned for a period or periods not to exceed
in the aggregate of one (1) year from the date for which the meeting shall originally have been
called and the meeting as so adjourned may be held without further notice. Any such adjournment
may be ordered by persons representing a majority of the aggregate principal amount of the Bonds
represented at the meeting and entitled to vote, whether or not a quorum shall be present at the
meeting.

Voting Rights
To be entitled to vote at any meeting of the Bondholders, a person shall be a registered holder of one (1) or
more Bonds or a person appointed by an instrument in writing as proxy by any such holder as of the date of
the said meeting. Bondholders shall be entitled to one vote for every Ten Thousand Pesos (P10,000.00)
interest. The only persons who shall be entitled to be present or to speak at any meeting of the
Bondholders shall be the persons entitled to vote at such meeting and any representatives of the Issuer and
its legal counsel.
Voting Requirement
All matters presented for resolution by the Bondholders in a meeting duly called for the purpose shall be
decided or approved by the affirmative vote of the Majority Bondholders present or represented in a
meeting at which there is a quorum except as otherwise provided in the Trust Agreement (please refer to
the discussion on Quorum). Any resolution of the Bondholders which has been duly approved with the
required number of votes of the Bondholders as herein provided shall be binding upon all the Bondholders
and the Issuer as if the votes were unanimous.
Role of the Trustee in Meetings of the Bondholders
Notwithstanding any other provisions of the Trust Indenture Agreement, the Trustee may make such
reasonable regulations as it may deem advisable for any meeting of the Bondholders, in regard to proof of
ownership of the Bonds, the appointment of proxies by registered holders of the Bonds, the election of the
chairman and the secretary, the appointment and duties of inspectors of votes, the submission and
examination of proxies, certificates and other evidences of the right to vote and such other matters
concerning the conduct of the meeting as it shall deem fit.
Amendments
SMIC and the Trustee may amend these Terms and Conditions or the Bonds without notice to any
Bondholder but with the written consent of the Majority Bondholders (including consents obtained in
connection with a tender offer or exchange offer for the Bonds). However, without the consent of each
Bondholder affected thereby, an amendment may not:
(1) reduce the amount of Bondholder that must consent to an amendment or waiver;
(2) reduce the rate of or extend the time for payment of interest on any Bond;
(3) reduce the principal of or extend the Maturity Date of any Bond;

69

(4) impair the right of any Bondholder to receive payment of principal of and interest on such
Holders Bonds on or after the due dates therefore or to institute suit for the enforcement of
any payment on or with respect to such Bondholders;
(5) reduce the amount payable upon the redemption or repurchase of any Bond under the Terms
and Conditions or change the time at which any Bond may be redeemed;
(6) make any Bond payable in money other than that stated in the Bond;
(7) subordinate the Bonds to any other obligation of SMIC;
(8) release any Bond interest that may have been granted in favor of the Holders;
(9) amend or modify the Payment of Additional Amounts, Taxation, the Events of Default of the
Terms and Conditions or the Waiver of Default by the Bondholders; or
(10) make any change or waiver of this Condition.
It shall not be necessary for the consent of the Bondholders under this Condition to approve the particular
form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof.
After an amendment under this Condition becomes effective, SMIC shall send a notice briefly describing
such amendment to the Bondholders in the manner provided in the section entitled Notices.
Evidence Supporting the Action of the Bondholders
Wherever in the Trust Indenture Agreement it is provided that the holders of a specified percentage of the
aggregate outstanding principal amount of the Bonds may take any action (including the making of any
demand or requests and the giving of any notice or consent or the taking of any other action), the fact that
at the time of taking any such action the holders of such specified percentage have joined therein may be
evidenced by: (i) any instrument executed by the Bondholders in person or by the agent or proxy appointed
in writing or (ii) the duly authenticated record of voting in favor thereof at the meeting of the Bondholders
duly called and held in accordance herewith or (iii) a combination of such instrument and any such record of
meeting of the Bondholders.
Non-Reliance
Each Bondholder also represents and warrants to the Trustee that it has independently and, without
reliance on the Trustee, made its own credit investigation and appraisal of the financial condition and affairs
of the Issuer on the basis of such documents and information as it has deemed appropriate and that he has
subscribed to the Issue on the basis of such independent appraisal, and each Bondholder represents and
warrants that it shall continue to make its own credit appraisal without reliance on the Trustee. The
Bondholders agree to indemnify and hold the Trustee harmless from and against any and all liabilities,
damages, penalties, judgments, suits, expenses and other costs of any kind or nature against the Trustee in
respect of its obligations hereunder, except for its gross negligence or wilful misconduct.
Governing Law
The Bond Agreements are governed by and are construed in accordance with Philippine law.

70

INTERESTS OF NAMED EXPERTS


All legal opinion/matters in connection with the issuance of the Bonds which are subject of this Offer shall
be passed upon by Pacis & Reyes Law Offices (Pacis & Reyes Law), for the Joint Issue Managers and Joint
Lead Underwriters, and SMICs Legal Division for the Company. Pacis & Reyes Law has no direct and indirect
interest in SMIC. Pacis & Reyes Law may, from time to time, be engaged by SMIC to advise in its
transactions and perform legal services on the same basis that Pacis & Reyes Law provides such services to
its other clients.

Independent Auditors
The Companys results of operations and financial position have been and will be affected by certain
changes to Philippine Financial Reporting Standard (PFRS), which are intended to further align PFRS with
International Financial Reporting Standards.
The Financial Statements of SMIC appearing in this Prospectus have been audited by SyCip Gorres Velayo
and Co. (SGV & Co.), independent auditors, as set forth in their report thereon appearing elsewhere in this
Prospectus.
The Companys Audit and Risk Management Committee reviews and approves the scope of audit work of
the independent auditor and the amount of audit fees for a given year. The amount will then be presented
for approval by the stockholders in the annual meeting. As regards to services rendered by the external
auditor other than the audit of financial statements, the scope of and amount for the same are subject to
review and approval by the Audit and Risk Management Committee.
SMICs aggregate audit fees for each of the last two fiscal years for professional services rendered by the
external auditor were P1,500,000.00 and P1,650,000.00 for 2010 and 2011, respectively.
Except for the members of SMICs Legal Affairs Division, there is no arrangement that experts shall receive
a direct or indirect interest in SMIC or was a promoter, underwriter, voting trustee, director, officer, or
employee of SMIC.

71

CAPITALIZATION AND INDEBTEDNESS


As at 31 December 2011, the authorized capital stock of the Issuer was P7.0 billion divided into 690 million
common shares and 10 million non-voting cumulative and redeemable preferred shares each with P10 par
value per share and its issued capital stock was P6,121.6 billion consisting of 612.2 million common shares
of P10 par value each.
The following table sets forth the consolidated capitalization and indebtedness of the Group as at 31
December 2011 and as adjusted to give effect to the issue of the Bonds (assuming the Oversubscription
Option is not exercised). This table should be read in conjunction with the Issuers audited consolidated
financial statements as at and for the year ended 31 December 2011 and the notes thereto, included
elsewhere in this Prospectus.
As at 31 December
Actual
Adjusted

(in P millions)
Short-term debt
Bank loans
Current portion of long-term debt
Total short-term debt
Long-term debt - net of current portion
Banks and other financial institutions
The Bonds to be issued
Total long-term debt - net of current portion
Equity
Equity Attributable to Equity Holders of the Parent:
Capital Stock
Additional paid-in capital
Equity adjustment from business combination
Cost of common shares held by subsidiaries
Cumulative translation adjustment of a subsidiary
Net unrealized gain on available for sale investments
Retained earnings
Appropriated
Unappropriated
Total Equity Attributable to Equity Holders of the Parent
Non-controlling interests
Total Equity
Total capitalization

25,748
7,921
33,669

25,748
7,921
33,669

128,464
128,464

128,464
9,919
138,383

6,122
35,537
(2,333)
(263)
428
7,008

6,122
35,537
(2,333)
(263)
428
7,008

5,000
106,168
157,666
64,620
222,287
350,751

5,000
106,168
157,666
64,620
222,287
360,670

Notes:
(1) Adjusted amount as at 31 December 2011 includes P10,000,000,000 principal amount of the Bonds
offered hereunder.
(2) Total capitalization is the sum of long-term debt and equity.

On 15 February 2012, SMIC issued US$250 million convertible bonds. Aside from this issuance, there are no
other material changes in the capitalization of the Group since 31 December 2011.

72

DESCRIPTION OF THE ISSUER AND THE GROUP


Overview
The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The
Issuer was incorporated in the Philippines on 15 January 1960. On 29 April 2009, the Companys
shareholders approved the amendment of SMICs Articles of Incorporation, extending the Companys
corporate life for another 50 years from 15 January 2010. Its registered office is at the 10th Floor, One
E-Com Center, Harbor Drive, Mall of Asia Complex CBP-1A, Pasay City, Metro Manila, Philippines. Through
its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses
located in the Philippines.
The Groups business activities and interests are divided into five principal sectors:

retail merchandising through its department store, supermarket, SaveMore, hypermarket and
wholesale operations (SM Retail);

shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM
Prime);

financial services, through its associate banks that have universal banking licenses in the
Philippines (BDO and China Bank);

real estate development and tourism (SM Land, SMDC, CDHI and HPI); and

hotels and conventions (SM Hotels).

As at 31 December 2011, the Issuer has seven principal consolidated subsidiaries namely SM Prime, SM
Retail, SM Land, SMDC, CDHI, SVI and SSMI and three principal equity-accounted associates, namely BDO,
China Bank and HPI, each of whose shares are listed on the PSE, (except for SM Retail, SM Land, CDHI, SVI
and SSMI ), in which the Issuer had effective interests of 49.05%, 100.00%, 66.89%, 43.72%, 94.45%,
100.00%, 100.00%, 46.09%, 20.63% and 26.77%,respectively.
For the year ended 31 December 2009, 2010 and 2011, the Issuers audited consolidated revenues were
P158,032.5 million, P177,173.0 million and P200,281.8 million, respectively, and its audited consolidated
net income attributable to equity holders of the parent were P16,025.0 million, P18,440.2 million and
P21,224.6 million, respectively.
As at 31 December 2009, 2010 and 2011, the Issuers audited consolidated total assets were P341,644.4
million, P407,383.8 million and P449,062.1 million, respectively, and its audited total equity was P165,725.3
million, P197,817.5 million and P222,286.9 million, respectively.
The principal source of consolidated revenue of the Issuer is from sales of merchandise, primarily from
Retail Subsidiaries, which contributed P123,895.5 million, P135,570.4 million and P148,182.1 million,
respectively, or 78.4%, 76.5% and 74.0%, respectively, of its consolidated revenues for the years ended 31
December 2009, 2010 and 2011. Shopping malls contributed P17,097.8 million, P19,451.0 million and
P22,212.1 million, or 10.8%, 11.0% and 11.1%, respectively, of the Issuers consolidated revenues for the
years ended 31 December 2009, 2010 and 2011. Shopping mall developments and Retail Subsidiaries
contributed 61.4%, 57.3% and 54.2%, respectively, of the Issuers consolidated net income attributable to
equity holders of the parent for the years ended 31 December 2009, 2010 and 2011.

73

History
Mr. Henry Sy, Sr., the founder of the Group, embarked upon his retailing career immediately after the
Second World War when, in 1945, he established a small shoe store in Carriedo, Metro Manila. Having
opened six shoe stores, Mr. Sy diversified the business into clothing and soft goods. In 1958, the first
Shoemart store opened in Rizal Avenue, Metro Manila and, following the incorporation of Shoemart in
March 1960, additional stores opened in Makati Commercial Centre in 1962, in Cebu in 1965 and in Cubao
in 1967. Four department stores were opened during the 1970s and, with the intention that one-stop
shopping convenience be provided to customers, the new stores featured fast food centers and
entertainment areas.
Shoemart operated six SM Department Stores until November 2001, when five stores were transferred to
SM Mart, a 65.0% owned subsidiary through SM Retail with the remaining 35.0% held by the Sy Family.
Pursuant to a restructuring of the Issuers department store business in 2002, SM Mart took over most of
Shoemarts functions in managing its department store business, such as merchandising, marketing,
advertising and certain other services for the SM Department Stores as well as for its Retail Affiliates. In
addition to the five SM Department Stores that are directly owned and operated by SM Mart, the Issuer also
operates 37 SM Department Stores through 12 other subsidiaries. The Group acquired its supermarket and
hypermarket operations in June 2006, and its wholesale operations in October 2007. In October 2008, SM
Retail was designated as the holding company for the Groups retail and merchandising operations and the
Issuer rationalized its retail and merchandising assets under it.
The Issuers expansion into real estate development commenced in October 1974 with the incorporation of
MRDC. MRDC was formed to develop high-rise condominiums and townhouse units in the prime district of
Makati.
In November 1976, Mr. Henry Sy, Sr. acquired Acme Savings Bank, which was renamed Banco De Oro
Savings and Mortgage Bank in August 1977 and then as Banco De Oro Commercial Bank in December 1994.
The Bank initially provided services predominantly to suppliers of Shoemart, but has subsequently
developed into a full-service commercial bank. In August 1996, the Bank was renamed Banco De Oro
Universal Bank when the BSP granted approval for the Bank to operate as an expanded commercial bank.
BDO undertook its initial public offering and was listed on the PSE in May 2002, raising P2.1 billion. In May
2007, the Bank merged with EPCIB and was subsequently renamed Banco De Oro Unibank, Inc. on 6
February 2008. On November 4, 2011, the Bank was renamed to BDO Unibank, Inc. as part of the
companys branding initiatives.
Capitalizing upon the success of the SM Department Stores and as an extension of the concept of one-stop
shopping, the first shopping mall, SM City North EDSA, commenced operations in Quezon City in 1985.
By January 1994, four shopping malls had been opened, including SM Megamall, the largest shopping mall
in the Philippines prior to the opening of SM Mall of Asia in 2006. SM Prime was incorporated in 1994 for the
primary purpose of acquiring from other members of the Group, as well as companies affiliated with the Sy
Family, the shopping malls and land intended for the development of shopping malls and, henceforth, to be
the Groups designated vehicle for shopping mall operations. SM Prime undertook its initial public offering
on the PSE in July 1994, raising approximately P6 billion. SM Prime currently owns and operates, with the
assistance of certain Management Companies, 42 shopping malls, strategically located nationwide with a
total gross floor area of 5.1 million square meters and an average occupancy rate of 97% as at 31 March
2012 with over 13,800 tenants. In May 2008, SM Prime acquired three malls from the Sy Family in the
southern and western parts of China, namely Xiamen, Jinjiang and Chengdu. On 30 November 2008, SM
Prime completed the acquisition of 100% ownership in SM Land (China) Limited from Grand China. In 2009,
SM Prime opened three new malls, namely SM City Naga, SM Center Las Pias and SM City Rosario, and
undertook three expansion projects, SM City Rosales, The Sky Garden at SM North Edsa and SM City
Fairview. The Sky Garden made SM City North Edsa the countrys largest mall and the worlds third largest
mall. On 3 September 2009, SM Land (China) Limited further completed the acquisition of 100% ownership
74

of Alpha Star from Grand China. SM Prime began operations of SM City Tarlac in April 2010. SM City San
Pablo, SM City Novaliches and SM City Calamba opened in October 2010 and SM City Masinag opened in
May 2011 in the Philippines. SM Suzhou in China opened in September 2011. In China, SM Prime intends to
open SM Chongqing in 2012 and SM Zibo in 2013 and SM Tianjin in 2014.
In 1986, the Group obtained majority ownership of SM Fund, Inc., a closed-end investment company listed
on the PSE. In May 1996, the SEC approved a change of name of the company to SM Development
Corporation and a change of its purpose to property holding and development. The Group has also
diversified into tourism and entertainment with plans for the development of mixed-use complexes in Cebu,
Tagaytay, Batangas, Baguio and Metro Manila, which include hotels, convention centers, shopping malls
and leisure and entertainment facilities. On 1 August 2007, the Issuer approved the rationalization of
Shoemart as the holding entity for the real estate and tourism operations of the Group. On 8 October 2007,
the Issuer and Shoemart entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965
common shares in SMDC in exchange for 372,212 common shares in Shoemart based on an independent
valuation of the respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC
approved the valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212
shares. The share swap resulted in an increase of the Issuers ownership in Shoemart from 64.9% to 66.9%
while the effective ownership in SMDC was reduced to 43.6% from 59.4%. The shares swap also resulted in
SMDC becoming a 65.0%-owned subsidiary of Shoemart. On 3 October 2008, the SEC approved the change
in name of Shoemart, Inc. to SM Land, Inc.
On 2 April 2008, SM Hotels was incorporated to further focus on and develop the Groups hotel business,
and rationalize the Groups hotel and convention assets under one entity. On 29 March 2010, the SEC
approved the change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and
Conventions Corp.
SMIC was listed on the PSE on 22 March 2005 and as at 21 June 2012 had a market capitalization of
P426,598.4 million based on a share price of P695.00 on such date.
Strategy
The Issuers strategy is focused on growing its commercial center, retail, property and financial services
businesses, and maintaining or attaining market leadership in each of their respective sectors. The Issuer
will continue to target the mass market in the Philippines by offering essential goods and services such as
food, clothing, housing and financial services.
The Issuer is responsible for setting Group policy and strategy. The Issuer establishes the financial and
operating policies for the Group and supervises and monitors the performance of its subsidiaries and
associates.
Key elements of the Issuers strategy are to:

restructure the operating entities in the Groups five principal sectors of business under a
rationalized and streamlined group operating structure headed by four principal holding companies,
each focused on one principal business sector;

maintain its leading market share in the shopping mall sector by continuing to expand the Groups
mall and retail activities into major centers of population in Metro Manila and particularly in the
provinces, where there are opportunities for growth and capture strategic opportunities overseas
particularly China;

continue to capture a significant share of retail spending in the Philippines, including what it
believes is a significant share of approximately US$20.1 billion for 2011 (based on BSP data) in
75

remittances from overseas Filipino workers by ensuring that the Issuer provides the most attractive
retail and leisure facilities to Philippine mass market consumers;

continue to grow its financial services businesses, including through acquisitions by BDO, and
develop further synergies between financial services and its shopping malls and the Retail
Subsidiaries by encouraging its suppliers and retail customers to take advantage of and utilize the
financial services offered by BDO and China Bank; and

diversify and expand the businesses of the Group (including through acquisition) by developing
opportunities in the real estate development, tourism and leisure, hotel and convention sectors,
where it believes there are significant opportunities for growth as the Philippines becomes a more
attractive tourist destination, by leveraging the Groups significant and strategically located land
bank.

supervise a range of related businesses and investments, providing support, expertise and funding
to its developing businesses and encouraging further growth in its more established businesses;

promote the independence of its various businesses in terms of executing set strategies and
encouraging financial independence in terms of external funding;

Strengths
The Issuer believes that the key strengths of the Group and its associates are as follows:

a well-established platform providing quality services from retail to real estate development to
financial services to cater for the domestic consumption growth in the Philippines;

its 55 years of retail experience, which has created significant goodwill among its customers and
suppliers, a well-known brand and image and a reputation for providing value for customers;

its leading market share positions in providing one-stop experience through shopping malls,
department stores and supermarkets and the largest bank in the Philippines in terms of assets;

fast growing residential development expertise that is sitting at the sweet spot of the local real
estate markets, well-supported by SM-branded shopping malls nearby;

prudent financial management and a strong balance sheet with stable recurring cash flows through
focusing on diverse businesses which are relatively less cyclical;

its experienced management team with a proven track record in the Philippines and abroad, which
has consistently focused on related businesses that promote synergies; and

its overall corporate reputation in the Philippines and abroad, which has brought the Group
numerous awards for corporate excellence, corporate governance and financial management.

76

Ownership and Corporate Structure


As at the date of this Prospectus, the Sy Family holds 61.18% of the outstanding issued and paid-up share
capital of the Issuer.
The chart in the following page sets forth the Issuers simplified corporate structure, organized by business
sector, including its principal subsidiaries and associates and the direct ownership of each as at 31
December 2011.

77

The following table sets forth a breakdown on a consolidated basis of the Groups principal businesses in
terms of total revenues, total net income attributable to equity holders of the Parent, total assets and total
liabilities for the years ended 31 December 2009, 2010 and 2011, save as stated otherwise:
As at and for the year ended December 31
2009
2010
2011
(in P millions, except percentages)

Revenues
Shopping Mall Development (1)
Retail Merchandising (2)
Real Estate Development and Tourism
Others (4)
Total

(3)

Net Income Attributable to Equity


Holders of the Parent
Shopping Mall Development (1)
Retail Merchandising (2)
Real Estate Development and Tourism (3)
Others (4)
Total
Assets (excluding deferred tax)
Shopping Mall Development
Retail Merchandising (1)
Real Estate Development and Tourism
Others (3)
Total (4)
Liabilities (excluding deferred tax)
Shopping Mall Development (1)
Retail Merchandising (2)
Real Estate Development and Tourism
Others (4)
Total

(2)

(3)

17,097.8
128,543.6
8,150.5
4,240.6
158,032.5

4,185.3
5,647.4
1,768.2
4,424.1
16,025.0

11%
19,451.0
81% 138,955.6
5%
12,802.9
3%
5,963.5
100% 177,173.0

11%
22,212.1
79% 151,666.9
7%
19,267.1
3%
7,135.7
100% 200,281.8

11%
76%
10%
3%
100%

26%
35%
11%
28%
100%

23%
34%
13%
30%
100%

5,031.2
6,465.9
3,266.8
6,460.7
21,224.6

24%
31%
15%
30%
100%

4,266.0
6,298.5
2,344.7
5,531.0
18,440.2

100,377.3
51,073.4
41,794.4
147,445.3
340,690.4

30% 118,787.7
15%
55,686.6
12%
72,827.2
43% 159,505.9
100% 406,807.4

29% 130,638.5
14%
60,961.5
18%
86,240.4
39% 170,527.0
100% 448,367.4

29%
14%
19%
38%
100%

45,739.8
23,091.3
12,851.1
89,890.1
171,572.3

27%
55,121.5
13%
24,886.4
8%
22,492.2
52% 102,430.1
100% 204,930.2

27%
12%
11%
50%
100%

28%
13%
11%
48%
100%

61,960.2
27,963.5
24,732.5
107,611.0
222,267.2

Notes:
(1)

Shopping mall development includes the relevant financial information of SM Prime.

(2)

Retail merchandising includes the relevant financial information of SM Retail, the Department Stores Companies, SVI,
Sanford, SSMI, Makro and Service Companies as at 31 December 2009, 2010 and 2011. Makro was consolidated in SMIC
starting October 2007 and SM Retail was consolidated starting January 2008.

(3)

Real estate development and tourism includes the relevant financial information of SMDC, Bellevue Properties, Inc.
and Intercontinental Development Corporation. This also includes the relevant financial information of SM Land (formerly
Shoemart) as at 31 December 2009, 2010 and 2011.

(4)

Others relates to the relevant financial information of SMIC, with respect to revenues, includes primarily the equity
in net earnings of BDO, China Bank and HPI, dividend income from San Miguel and Ayala Corporation and management
fees. Others also includes the relevant information of Primebridge Holdings, Inc. a nd MR DC as at 31 December 2009,
2010 and 2011. Others also includes the relevant information of SM Hotels as at and for the years ended 31 December
2009, 2010 and 2011 since the contribution of SM Hotels to the Group is insignificant as of today. SM Hotels was
consolidated in SMIC starting October 2008.

78

The following table sets forth a breakdown of the dividend income from the Issuers principal subsidiaries
and associates for the periods indicated. Under PFRS, dividend income from the Issuers subsidiaries and
associates is eliminated at consolidated level.
As at and for the year ended December 31
2009
2010
2011
(in P millions)

Company
Retail Subsidiaries
SM Prime
SM Land (formerly Shoemart)
China Bank
BDO
SMDC
HPI
Primebridge
Others
Total

1,014.7
661.9
802.7
183.9
273.1
0.1
10.8
524.8
2.6
3,474.6

4,188.5
689.4
202.4
863.7
0.6
273.6
4.8
6,223.0

5,222.1
812.5
802.7
222.6
990.5
0.9
440.0
25.7
8,517.0

Shopping Malls
SM Prime Holdings, Inc.

Introduction
SM Prime was incorporated on 6 January 1994 to develop, operate and maintain the business of modern
commercial shopping malls and all related businesses, such as the operation and maintenance of shopping
spaces for rent, amusement centers and cinema theatres within the compound of the shopping malls. With
42 Malls covering a total gross floor area of approximately 5.1 million square meters located across the
Philippine archipelago, SM Prime is the leading owner and operator of shopping malls in the Philippines.
Four additional malls in the cities of Lanang in Davao, General Santos, Consolacion in Cebu, and San
Fernando in Pampanga, with a total floor area of approximately 350,356 square meters are scheduled to
open for the rest of 2012. SM Prime plans to continue to expand existing malls and develop approximately
three to four malls in the Philippines each year for the next few years, subject to market conditions.
SM Prime has also begun to expand its shopping mall operations outside of the Philippines. SM Prime owns
four malls located in the cities of Xiamen and Jinjiang in Southern China, Chengdu in Central China, and
Suzhou in Eastern China with a total gross floor area of 0.6 million square metres. SM Prime is targeting the
acquisition of additional properties in China in the future as it gears up for expansion. See SM Malls in
China.
As at 31 December 2011, SMIC and SM Land (formerly Shoemart) directly owned 21.65% and 40.96%,
respectively, of the issued share capital of SM Prime. SM Prime is listed on the PSE and had a market
capitalization of P232,807.3 million as at 21 April 2012.
For the years ended 31 December 2009, 2010 and 2011, SM Prime contributed approximately 11%
(P17.10 billion), 11% (P19.45 billion) and 11% (P22.21 billion) of the Issuers consolidated revenues,
approximately 26% (P4.18 billion), 23% (P4.27 billion) and 24% (P5.03 billion) of its consolidated net
income attributable to equity holders of the parent, and comprised approximately 29% (P100.38 billion),
79

29% (P118.79 billion) and 29% (P130.64 billion) of the Issuers consolidated total assets (excluding
deferred tax) as at 31 December 2009, 2010 and 2011, respectively.
The principal sources of revenue for SM Prime comprise rental income payable by tenants (including the
Retail Subsidiaries) within the Malls, ticket sales derived from the operations of cinemas, and fees payable
for the use of SM Primes parking facilities, bowling, ice skating and other leisure facilities. Approximately
50% of SM Primes gross leasable space is leased by members of the Group or companies which are
affiliated to the Sy Family. Such tenants contributed approximately 28% (P6.66 billion) and 27% (P 7.28
billion), respectively, of SM Primes non-consolidated total revenues (P23.72 billion and P26.90 billion,
respectively) for the years ended 31 December 2010 and 2011.

Selected Financial Information


The following table sets forth selected consolidated financial information of SM Prime as at and for the
periods indicated. SM Primes fiscal year end is 31 December.
Income statement data

For the years ended 31 December


2009
2010
2011

(in P millions)
Revenues
Operating expenses
Interest expense
Income before income tax and non-controlling interest
Non-controlling interest
Net income attributable to Equity Holders of the Parent

20,497
9,746
1,417
9,646
253
7,023

Balance sheet data


2009

(in P millions)

23,716
11,271
1,746
10,797
284
7,856

As at 31 December
2010

26,897
12,277
1,948
12,220
326
9,056

2011

Assets
Cash and cash equivalents
Short-term investments
Investments held for trading
Available-for-sale investments
Receivables
Prepaid expenses and other current assets
Total Current Assets

3,786
924
389
1,000
3,665
809
10,573

9,720
877
500
1,104
4,190
1,104
17,495

8,290
877
813
1,000
4,940
1,276
17,196

Investment properties
Other noncurrent assets
Total Noncurrent Assets

83,935
3,352
87.287

93,940
4,908
98,848

107,836
3,524
111,360

Total Assets

97,860

116,343

128,556

1,421

767

799

7,178

7,968

11,572

32,035
5,709
42,652

38,077
6,466
49,425

40,094
7,467
52,637

Liabilities
Current portion of long-term debt and loans
payable
Total Current Liabilities
Long-term debt
Tenants deposits
Total Noncurrent Liabilities

80

Balance sheet data


2009

(in P millions)

Total Liabilities

As at 31 December
2010

2011

49,830

57,393

64,209

Stockholders Equity
Total Equity Attributable to Equity Holders of the
Parent
Non-controlling interests
Total Stockholders Equity

47,349

58,191

63,774

681
48,030

759
58,950

573
64,347

Total Liabilities and Stockholders Equity

97,860

116,343

128,556

The following table sets forth a breakdown of sources of revenue of SM Prime for the periods indicated:

2009

For the years ended 31 December


2010
2011

(in P millions, except percentages)

Rental revenues(1)
Cinema ticket sales(2)
Others(3)
Total revenues
Notes:
(1)
(2)
(3)

17,659
2,098
740
20,497

86%
10%
4%
100%

19,993
2,765
958
23,716

84%
12%
4%
100%

22,759
3,052
1,086
26,897

85%
11%
4%
100%

Includes rent from food courts and trade halls within the Malls and parking fees.
Principally cinema ticket sales net of amusement tax.
Income from ice skating, bowling centers and amusement centers, snack bar income and advertising revenues.

SM Primes revenues have averaged an annual increase of 13% to 16% for the last three years ended 31
December 2011, reflecting increases in revenue from existing Malls and revenues derived from the opening
of new Malls.

The Malls
SM Primes business development group (the BDG) is responsible for identifying viable sites for the
construction of new malls. The BDG determines the viability of a potential plot of land for a new mall site
based on the demographics of the area, including the size of the population, its income levels, local
government and the local infrastructure, particularly accessibility by public transport. Once a suitable site is
selected, based on the factors described above, the BDG then determines the size of the mall to be
constructed by SM Prime, which typically may range from a gross area of 30,000 to 150,000 square metres.
The construction and development of each mall is overseen by a third party project management company
appointed by SM Prime. The average time for the construction of each mall ranges from 12 to 24 months,
depending on the size of the mall. SM Prime believes it benefits from its significant development experience
and focus on immediately developable sites in its mall construction activities. SM Prime has generally
financed land purchases and the construction of its malls from internal funds and borrowings.
SM Prime has in the past concentrated on the development and construction of Malls in the Metro Manila
area, where it currently operates 16 Malls. In addition, SM Prime plans to develop four plots of land of which
two are owned and two are leased. As the Metro Manila area becomes increasingly well served by shopping
malls, SM Primes strategy is to expand its activities in the provinces, where it currently operates 26 Malls,
with an additional ten plots of land available for development, of which all are owned. SM Prime plans to
continue to expand existing malls and develop approximately three to four malls each year in the
Philippines for the next few years, subject to market conditions.
81

SM Prime has also begun to expand its shopping mall operations outside of the Philippines. SM Prime owns
four malls located in the cities of Xiamen and Jinjiang in Southern China, Chengdu in Central China, and
Suzhou in Eastern China with a total gross floor area of 0.6 million square meters. See SM Malls in
China.
SM Prime retains ownership of all of the sites on which the SM Prime Malls are built, with the exception of
SM City Manila, SM City Bacoor, SM City Baguio, SM Center Valenzuela, SM Center Molino, SM City Clark, SM
Mall of Asia, SM Center Pasig, SM City Taytay, SM Center Muntinlupa, SM City Naga, SM City San Pablo and
SM City Calamba, which are held under long-term leases. SM Megamall is owned by First Asia Realty
Development Corporation, a 74.2% owned subsidiary of SM Prime, with the remaining interest being held
by an unconnected third party. In addition, the lands where the SM Mall of Asia and SM City Baguio are built
are owned by SM Land and SMIC, respectively. The land where SM City San Lazaro is located is owned by
San Lazaro Holdings Corporation, a wholly owned subsidiary.
The following table sets forth certain information regarding the Malls as at 31 December 2011:
Name / Year Opened
SM City North EDSA (1985)
SM City Sta. Mesa (1990)
SM Megamall (1991)
SM City Cebu (1993)
SM Southmall (1995)
SM City Fairview (1997)
SM City Bacoor (1997)
SM City Iloilo (1999)
SM City Manila (2000)
SM City Pampanga (2000)
SM City Davao (2001)
SM City Sucat (2001)
SM City Bicutan (2002)
SM City Cagayan de Oro (2002)
SM City Lucena (2003)
SM City Marilao (2003)
SM City Baguio (2003)
SM City Dasmarinas (2004)
SM City Batangas (2004)
SM City San Lazaro (2005)
SM Center Valenzuela (2005)
SM Center Molino (2005)
SM City Sta. Rosa (2006)
SM City Clark (2006)
SM Mall of Asia (2006)
SM Center Pasig (2006)
SM City Lipa (2006)
SM City Bacolod (2007)
SM City Taytay (2007)
SM Center Muntinlupa (2007)
SM City Marikina (2008)
SM City Rosales (2008)
SM City Baliwag (2008)
SM City Naga (2009)
SM Center Las Pias (2009)
SM City Rosario (2009)
SM City Tarlac (2010)
SM City San Pablo (2010)
SM City Calamba (2010)
SM City Novaliches (2010)
SM City Masinag (2011)
SM City Olongapo (2012)
TOTAL

Gross Area(1)
(sq. meters)
424,691
133,327
346,789
274,236
205,120
188,681
120,202
105,953
167,812
132,484
78,735
98,106
113,671
87,940
78,655
93,910
107,950
94,285
80,350
178,516
70,681
52,061
86,463
101,840
406,961
29,602
77,301
71,752
98,928
54,292
178,485
63,330
61,262
74,275
40,267
59,326
101,629
59,643
67,384
60,560
90,261
47,426
5,065,142

Tenant Leasable Area(2)


(sq. meters)
198,858
67,207
169,681
123,135
94,157
122,809
83,620
72,090
71,332
83,128
51,538
54,705
48,926
38,909
50,662
55,903
46,842
54,889
53,250
75,322
29,148
25,952
54,191
65,825
151,462
14,109
53,308
43,840
42,953
26,337
57,359
43,720
40,586
31,956
16,026
39,093
39,366
33,621
41,219
41,284
48,629
22,894
2,579,841

82

Tenant Leasable Area


Rented
Leisure Area(3) (sq.
(%)
meters)
99
18,288
97
8,250
99
11,614
99
17,099
93
18,573
97
15,811
97
7,715
100
9,757
93
11,791
97
4,404
99
4,115
95
3,000
99
2,474
97
3,083
95
3,552
97
3,137
99
3,741
98
3,247
99
3,177
96
6,601
95
3,950
99
3,635
99
3,313
100
5,355
98
21,872
94

99
3,381
100
3,207
99
2,404
95
2,641
95
6,041
98
3,468
99
2,526
100
3,194
95
40
89
3,165
98
3,506
100
2,971
98
2,998
88
3,169
80
2,624
93
2,530
97
245,419

Notes:
(1)
(2)
(3)

Gross Area means the gross floor area of a Mall, including common areas and car parks.
Tenant Leasable Area means the total area in a Mall available for leasing by tenants, excluding the Leisure Area and car parks.
Leisure Area means the aggregate area in a Mall which is occupied by cinema complexes, ice skating rinks, bowling centers
and indoor theme parks.

The following table sets forth SM Primes current planned new Mall developments through 31 December
2012:
Name of Proposed Mall and
Expansions
SM
SM
SM
SM

City
City
City
City

Lanang
General Santos
Consolacion
San Fernando

Location

Proposed date for


completion

Davao City
South Cotabato
Cebu
Pampanga

2H
2H
1H
1H

2012
2012
2012
2012

Estimated gross floor area


(square meters)
145,824
88,106
73,801
42,625

The following table sets forth SM Primes existing land bank owned or available on long-term lease for
development of new Malls as at 31 December 2011:
Location
Owned
Cebu SRP
Pangasinan (Urdaneta)
Pangasinan (Dagupan)
Cavite (Trece Martires)
Paraaque City (San Dionisio)
Cabanatuan (Concepcion)
Isabela (Cuayan)
Palawan (Puerto Princesa)
Quezon City / Caloocan
Agusan del Norte (Butuan)
Tuguegarao City
Rizal (Angono)
Leased
Taguig
Commonwealth
Total

Acquisition Date / Lease Date

Gross Area (square meters)

January 2010
March 2001
March 2005
October 2010
October 2009
November 2009
July 2011
June 2011
April 2010
December 2011
January 2010
December 2011

304,100
161,960
147,699
49,498
48,117
43,909
39,364
30,919
30,073
27,233
16,181
12,573

August 2008
November 2008

33,975
20,230
965,831

Principal Tenants
SM Prime enjoys a competitive advantage due to its long-standing retail experience in establishing an
appropriate mix of tenants including its associated Anchor Tenants. SM Prime controls the tenant mix of
each of its Malls, which has contributed to the profitability of the Malls. The principal Anchor Tenants in the
Malls include SM Department Stores, SM Supermarkets and SM Hypermarkets. Other significant tenants
include National Bookstore, KFC, Jollibee, McDonalds, Chowking, Pizza Hut, Goldilocks, Bench, Maxs
Restaurant and Greenwich.
As at 31 March 2012, the SM Department Stores occupied in aggregate a gross area of approximately
777,343 square meters within the Malls. SVI and SSMI operate the SM Supermarkets and SM Hypermarkets
in all of the Malls and occupied in aggregate a gross area of approximately 400,124 square meters as at 31
March 2012. See Description of the Issuer and the Group Retail and Merchandising.

83

In addition to the Anchor Tenants associated with SM Prime, other retail operations controlled by or in
which the Sy Family has a significant interest, such as Ace Hardware, SM Appliance Center, Surplus Shop,
Home World, Toy Kingdom, Kultura and Watsons, are also tenants in most of the Malls. During the year
ended 31 December 2010 and 2011, approximately 33% and 32%, respectively, of the aggregate rental
revenue received by SM Prime in respect of the Malls was from members of the Group and companies
affiliated to the Sy Family. Out of the total increase in rental revenue of 13% for the year ended 31
December 2011, same store sales contributed 7% while new Malls and expansion of existing Malls
contributed 8%.
The Issuer believes that all the leases entered into between SM Prime and the Group or companies affiliated
to the Sy Family have been entered into on an arms length basis and on commercial terms.
The SM Mall of Asia also hosts some premier tenants, which specialize in higher-end merchandise, such as
Mango, Zara, Marks & Spencer, Topshop and Muji.

Leasing Policies
The leasing policy of SM Prime in relation to each of the Malls is to screen applicants carefully and to secure
an appropriate mix of tenants, both in terms of the nature of their businesses and their size. For the year
ended 31 December 2011, an average of less than 3% of tenants per Mall did not renew their leases upon
expiry or had their leases terminated early. The high demand for tenancies within the Malls means that SM
Prime generally has a waiting list sufficient to cover any vacancies that may arise in the Malls.
It is the policy of SM Prime that all leases, whether with members of the Group, companies affiliated to the
Sy Family or unrelated third parties, should be entered into on commercial terms and SM Prime considers
that the current rentals payable by tenants of the Malls that are operational at present reflect prevailing
market rents.
SM Primes tenancies are generally granted for a term of one year, with the exception of some of the larger
tenants operating nationally which are granted initial lease terms of two to five years, renewable on an
annual basis thereafter. Sixty days notice is required of SM Primes tenants for termination of their leases
and a six-month deposit is paid at the commencement of the lease. Upon expiry of a lease, the rental rates
are adjusted to reflect the prevailing market rent.

Management of the Malls


Management and operation of the Malls, including the provision of manpower, maintenance and
engineering and security and promotional activities, are assumed by management companies owned or
controlled, directly or indirectly, by members of the Sy Family (the Management Companies). In addition,
one Management Company negotiates and handles major tenant issues for the Malls, while reporting to and
under the direction of SM Prime. Each of the Management Companies performs specific functions in relation
to each of the Malls. All operating expenses relating to the Malls are charged directly to SM Prime by the
Management Companies. As consideration for the services provided by the Management Companies under
each of the management contracts, the Management Companies are entitled to receive an annual fee which
is equivalent to a percentage of the annual operating income of each Mall before income tax, financial
charges and interest expense. The aggregate amount of such management fees for year ended 31
December 2011 was P795 million.

Entertainment and Leisure


The entertainment and leisure facilities within the Malls, including cinemas, bowling centers and ice skating
rinks, are owned by SM Prime and operated by the Management Companies.

84

Competition
SM Primes Malls compete with other shopping malls in the geographic areas in which they operate. The
other major shopping mall operators in the Philippines are Robinsons and Ayala Land. The Issuer believes
that SM Prime is well placed to face increased competition in the shopping mall industry given the
competitive advantages it has, including, among others, the location of its existing Malls, SM Primes
existing land bank, its balance sheet strength, a proven successful tenant mix and selection criteria, and the
presence of the SM Department Stores, SM Supermarkets, SM Hypermarkets and Retail Affiliates of the
Group within each of the Malls. SM Primes experience and understanding of the retail industry has also
been a contributing factor to its competitive advantage in the industry.

Subsidiaries
SM Prime has five wholly-owned Philippine subsidiaries, namely, Premier Central, Inc., Premier Southern
Corp., Consolidated Prime Development Corp., San Lazaro Holdings Corporation, and Southernpoint
Properties Corporation. SM Prime holds its interest in SM City Batangas and SM City Lipa, and SM City
Dasmarias and SM City Clark through Premier Southern Corp., Consolidated Prime Dev. Corp. and Premier
Central, Inc., respectively. First Asia Realty Development Corporation is a 74.2% owned subsidiary of SM
Prime, through which SM Prime holds its interest in SM Megamall. First Leisure Ventures Group, Inc. is a
50.0% owned subsidiary of SM Prime, through which SM Prime holds its interest in SM by the Bay.

SM Malls in China
On 20 May 2008, the SEC approved SM Primes acquisition of the 100% ownership of the SM China
Companies through share swap agreements with Grand China and Oriental Land Development Limited.
On 30 November 2008, SM Prime likewise completed the acquisition of 100% ownership of SM Land (China)
Limited from Grand China.
On 3 September 2009, SM Land (China) Limited further completed the acquisition of 100% ownership of
Alpha Star from Grand China. The following table sets forth certain information regarding the SM Malls in
China as at 31 March 2012:
Name and date of opening

SM Xiamen (December 2001)


SM Fupu (Jinjiang) (November 2005)
SM City Chengdu (October 2006)
SM City Suzhou (September 2010)
Total

Gross Area
(square meters)

Tenant Leasable Area


(square meters)

Occupancy Rate
(%)

238,125
167,830
166,665
72,552
645,172

127,753
125,031
91,274
54,589
398,647

97
94
97
86
95

The following table sets forth certain information regarding planned development projects of other malls in
China:

Location / Name
Chongqing
Zibo
Tianjin

Expected Opening Time


2012
2013
2014

85

Gross Floor Area


(square meters)
150,000
154,000
540,000

The following table sets forth certain information regarding the contribution of the SM Malls in China to the
Groups total revenues and net income for the period stated:
For the year ended 31 December
2009
% of the
Groups Total

(in P millions)

Revenue
Net income

2010

2011

% of the
Groups Total

% of the
Groups
Total

1,037.5

0.7%

1,412.3

0.8%

2,046.6

1.0%

273.5

1.3%

428.5

1.7%

889.1

2.9%

The SM Malls in China have a similar look and layout to the Malls in the Philippines. Among the anchor
tenants of the four malls are Wal-Mart and SM-Laiya Department Store, Cybermart and Wanda Cinema.
Junior anchor tenants include Watsons, McDonalds, KFC, Giordano, Pizza Hut and a number of China-based
outlets and stores.
SM Prime believes that the four malls will provide an existing platform for it to expand in the China market.
It intends to continue to develop the SM Malls in China through synergies with its existing mall operations
and other management expertise. Although SM Prime is still developing its expansion plans in China,
subject to the availability of suitable locations, SM Prime may initially build one new mall each year over the
next five years in China and will likely position its expansion in emerging cities in China.

Capital Expenditure
SM Prime expects to incur capital expenditure (excluding China operations) of approximately =
P14.0
billion in 2012 related to construction of shopping malls and land banking activities.

Retailing and Merchandising


SM Retail, Inc. (SM Retail) was incorporated in June 2002 and started operations in January 2008 and is
designated as the holding company for the Groups retail and merchandising operations.
On 31 July 2008, the SEC approved the increase in authorized capital stock of SM Retail from P0.1 million to
P1,500.0 million. The increase was necessary to provide adequate capital to absorb the transfer of the retail
merchandising operations to SM Retail. On 30 September 2008, the respective board of directors of SM
Retail and the Issuer entered into an agreement pursuant to which SM Retail issued 12,836,170 shares with
par value of P100 per share, in exchange for the ownership interest of SMIC over SVI, SSMI, Marketwatch,
MH Holdings, Sanford, Henfels, HMS, Romer and SM Mart. This resulted in the increase in ownership
interest of the Issuer over SM Retail from 99% to 100%.
SM Retail organizes its retail and merchandising operations broadly into two categories: non-food retail
operations and food retail operations. Non-food retail operations consist of the business of SM Department
Stores conducted through the Department Store Companies (as defined below) and SM Mart. Food retail
operations comprise the supermarkets, savemore, hypermarkets and wholesale businesses conducted
through SVI, Sanford, SSMI and Makro, respectively.
SM Retail currently has a total of 174 stores consisting of 42 SM Department Stores, 33 supermarkets, 69
savemore stores and 30 SM Hypermarkets as at 31 March 2012.
86

For the years ended 31 December 2009, 2010 and 2011, SM Retail (through its subsidiaries) contributed
approximately 81.3%, 78.4% and 75.7%, of the Issuers consolidated revenues and approximately 35.2%,
34.2% and 30.5%, respectively, of its consolidated net income. SM Retail (through its subsidiaries)
comprised approximately 15.0%, 13.7% and 13.6%, respectively, of the Issuers consolidated total assets
and approximately 13.5%, 12.1% and 12.6%, respectively, of its consolidated total liabilities as at 31
December 2009, 2010 and 2011, respectively.

Non-food Retail Operations


SM Department Stores

Introduction
The Groups retailing business began in 1945 when Mr. Henry Sy, Sr., the founder of the Group, first
established a small shoe store in Carriedo, Metro Manila. The original Shoemart, incorporated in March 1960,
was the Sy Familys first major step into the retailing business.
In 2001, five of the Group Stores were transferred to a subsidiary, SM Mart. Pursuant to a restructuring of
the Issuers department store business in 2002, SM Mart took over most of Shoemarts functions in
managing the SM Department Stores, such as merchandising, marketing, advertising and certain other
services for the SM Department Stores and the Groups Retail Affiliates. These support services together
with all in-house products such as SM Card, gift card, and gift check were later transferred to a new
subsidiary, SM Retail in January 2008. Shoemarts remaining operations have been to hold certain portion of
the Groups real property investments, such as the SM Mall of Asia Complex and the Makati building. In
August 2007, the Issuer approved to rationalize Shoemart as the holding entity for the various property
projects of the Group and steps have been taken towards the transfer of such property projects, including
the incorporation of SM Hotels for the rationalization of the Groups hotel assets. In addition to the five SM
Department Stores that are directly owned and operated by SM Mart, the Issuer also operates 37 SM
Department Stores through 13 other subsidiaries (the Department Stores Companies), with plans to open
three to four additional SM Department Stores for each year, subject to market conditions.
As at 31 December 2011, the Issuer, through SM Retail, owned 65% of SM Marts issued share capital while
the Sy Family owns the remaining 35%.
For the years ended 31 December 2009, 2010 and 2011, the Department Store Companies and SM Mart
contributed approximately 34.2%, 32.7% and 31.7%, respectively, of the Issuers consolidated revenues
and approximately 8.4%, 7.9% and 6.4%, respectively, of its consolidated net income attributable to equity
holders of the parent. The Department Store Companies and SM Mart comprised approximately 3.5%,
3.7% and 3.4%, respectively, of the Issuers consolidated total assets (excluding deferred tax) and
approximately 6.0%, 5.9% and 5.6%, respectively, of its consolidated total liabilities (excluding deferred
tax) as at 31 December 2009, 2010 and 2011, respectively.

Selected Financial Information


The following table sets out combined selected non-consolidated financial information for the Department
Stores Companies and SM Mart as at and for the years indicated (1):

87

As at and for the years ended December 31


2009
2010
2011
(in P millions)

Revenue
Net Sales
Other Income
Cost and Expenses
Cost of Sales
Operating Expenses
Net Income

53,766
203

57,459
389

63,192
244

40,381
11,717
1,341

43,586
12,704
1,455

47,353
14,135
1,354

Assets
Liabilities
Stockholders Equity

12,100
10,252
1,848

15,147
12,185
2,962

15,441
12,475
2,966

Notes:
(1) The financial information presented above includes the financial condition and results of operations of the five SM Department
Stores directly operated by SM Mart.

SM Department Stores
For 50 years, the SM Department Stores have provided quality products and services at competitive prices
and the Issuer believes that it has led mass-market fashion trends to meet the ever-changing needs of the
Philippine public. It is the objective of the SM Department Stores to maintain their leadership in the
marketplace, to be at the forefront of retail technology and to grow through consumer marketing and
product diversification. The SM Department Stores strategies involve providing value for money through
the wide variety of quality merchandise sold at reasonable prices in order to achieve a high sales turnover.
Sales in the SM Department Stores are cyclical and driven by seasonality. Historically, sales have peaked
during the Christmas period each year, with sales in the month of December comprising approximately 18%
of sales for the entire year, and in May, prior to the opening of school in June.
The following table sets forth certain information regarding each of the SM Department Stores, including
total net retail sales area, total net sales and its contribution to the total net sales of SM Department Stores
for the year ended 31 December 2009, 2010 and 2011:
For the year ended 31 December
2010

2009
Branch Name

Location

Date
Opened

Net Selling
Area
(in square
meters)

Net Sales
(in P millions)

% of total
Net Sales

Net Sales
(in P millions)

% of total
Net Sales

2011
Net Sales
(in P millions)

% of total
Net Sales

SM Quiapo

Quiapo,
Metro Manila

Nov. 1972

3,541.86

549.33

1.04

561.89

0.98

589.45

0.94

SM Makati

Makati City,
Metro Manila

Sept. 1975

21,780.86

3,335.51

6.29

3,514.81

6.12

3,550.45

5.68

SM Cubao

Quezon City,
Metro Manila

Oct. 1980

14,072.04

1,763.92

3.32

1,976.22

3.44

2,114.24

3.38

SM Harrison

Malate, Metro
Manila

Oct. 1984

10,044.49

1,008.92

1.90

968.25

1.69

994.84

1.59

SM North EDSA

Quezon City,
Metro Manila

Nov. 1985

21,173.66

5,010.45

9.44

5,131.81

8.93

5,352.20

8.57

SM Sta. Mesa

Quezon City,
Metro Manila

Sept. 1990

11,487.37

1,454.32

2.74

1,432.02

2.49

1,409.14

2.26

SM Ortigas

Mandaluyong
City, Metro

Jun. 1991

20,981.81

4,381.01

8.26

4,715.38

8.21

5,000.01

8.00

88

For the year ended 31 December


2010

2009
Branch Name

Location

Date
Opened

Net Selling
Area
(in square
meters)

Net Sales
(in P millions)

% of total
Net Sales

Net Sales
(in P millions)

% of total
Net Sales

2011
Net Sales
(in P millions)

% of total
Net Sales

Manila
SM Cebu

Cebu City,
Cebu

Nov. 1993

14,942.70

2,723.57

5.13

2,892.24

5.03

3,100.13

4.96

SM Las Pias

Las PIas
City, Metro
Manila

Apr. 1995

17,012.60

2,198.13

4.14

1,965.72

3.42

2,022.90

3.24

SM Bacoor

Bacoor,
Cavite

Jul. 1997

10,364.64

1,687.67

3.18

1,657.14

2.88

1,729.54

2.77

SM Fairview

Quezon City,
Metro Manila

Oct. 1997

14,313.32

2,044.34

3.85

2,069.25

3.60

2,262.97

3.59

SM Mandurriao

Iloilo City,
Iloilo

Jun. 1999

10,876.08

1,337.65

2.52

1,362.49

2.37

1,543.98

2.47

SM Manila

Manila City,
Metro Manila

Apr. 2000

11,793.06

1,624.37

3.06

1,628.39

2.83

1,671.25

2.68

SM Pampanga

Mexico,
Pampanga

Nov. 2000

9,979.16

1,771.52

3.34

1,816.30

3.16

1,933.70

3.10

SM Davao

Davao City,
Davao

Nov. 2001

10,157.41

1,375.42

2.59

1,495.51

2.60

1,450.91

2.32

SM Cagayan de
Oro

Cagayan de
Oro City,
Misamis
Oriental

Nov. 2002

5,975.00

711.07

1.34

804.68

1.40

825.74

1.32

SM Bicutan

Paraaque
City, Metro
Manila

Nov. 2002

7,440.65

907.33

1.71

961.44

1.67

1,026.10

1.64

SM Lucena

Lucena City,
Quezon

Oct. 2003

8,485.44

799.10

1.51

865.20

1.51

901.00

1.43

SM Baguio

Baguio City,
Benguet

Nov. 2003

6,510.12

1,358.72

2.56

1,420.53

2.47

1,541.78

2.47

SM Marilao

Marilao,
Bulacan

Nov. 2003

8,453.21

934.46

1.76

966.91

1.68

1,012.15

1.62

SM Dasmarias

Dasmarinas,
Cavite

May 2004

7,124.79

1,448.37

2.73

1,493.62

2.60

1,610.52

2.58

SM Batangas

Batangas
City,
Batangas

Nov. 2004

9,052.14

939.02

1.77

943.81

1.64

1,020.21

1.63

SM Delgado

Iloilo City,
Iloilo

Dec. 2004

5,341.71

701.83

1.32

746.36

1.30

775.45

1.24

SM San Lazaro

Sta. Cruz,
Manila

Jul. 2005

10,661.77

1,516.67

2.86

1,621.19

2.82

1,717.19

2.75

SM Sucat

San Dionisio
Paraaque
City

Nov. 2005

6,415.97

518.88

0.98

572.23

1.00

679.19

1.07

SM Sta Rosa

Sta. Rosa
City, Laguna

Feb. 2006

9,826.43

1,545.27

2.91

1,575.98

2.74

1,497.45

2.40

SM Clark

Clark,
Pampanga

May 2006

11,052.89

1,297.66

2.45

1,262.98

2.20

1,357.42

2.17

SM Mall of Asia

Bay City,
Pasay City

May 2006

13,520.41

2,775.42

5.23

3,102.70

5.40

3,293.30

5.27

SM Lipa

Ayala
Highway, Lipa
City

Sept. 2006

9,572.86

1,093.34

2.06

1,183.96

2.06

1,161.69

1.86

SM Bacolod

Bacolod City,
Negros
Occidental

Mar. 2007

6,622.18

897.04

1.69

1,022.00

1.78

1,150.55

1.84

SM Taytay

Taytay, Rizal

Nov. 2007

7,708.47

750.67

1.41

825.31

1.44

914.31

1.46

SM Marikina

Calumpang
Marikina, City

Sept. 2008

10,622.08

969.79

1.83

1,053.94

1.83

1,048.00

1.68

SM Baliwag

Baliwag,

Dec. 2008

8,948.92

641.89

1.21

706.95

1.23

760.20

1.22

89

For the year ended 31 December


2010

2009
Branch Name

Location

Date
Opened

Net Selling
Area
(in square
meters)

Net Sales
(in P millions)

% of total
Net Sales

Net Sales
(in P millions)

% of total
Net Sales

2011
Net Sales
(in P millions)

% of total
Net Sales

Bulacan
SM Naga

Triangulo,
Naga City

Apr. 2009

4,785.62

494.11

0.93

747.78

1.30

821.66

1.32

SM Rosales

Rosales,
Panagasinan

May 2009

6,985.23

361.14

0.68

647.01

1.13

711.88

1.14

SM Rosario

Rosario,
Cavite

Nov. 2009

6,437.95

125.03

0.24

545.52

0.95

621.38

0.99

SM Tarlac

Tarlac, Tarlac

Apr. 2010

5,935.48

539.11

0.94

790.15

1.26

SM San Pablo

San Pablo,
Laguna

Sept. 2010

6,547.94

233.44

0.41

625.58

1.00

SM Calamba

Calamba,
Laguna

Oct. 2010

6,658.00

323.04

0.56

1,128.77

1.79

SM Novaliches

Novaliches

Oct. 2010

7,150.89

323.15

0.18

414.54

0.66

SM Masinag

Masinag

May 2011

5,578.07

394.35

0.63

SM Olongapo

Zambales

Feb. 2012

11,364.00

417,299.28

53,052.96

100.00

41,530.54

100.00

62,476.65

100

Total

Sixteen SM Department Stores are located in Metro Manila and 26 are located in the provinces. Five SM
Department Stores are stand-alone stores (SM Quiapo, SM Cubao, SM Makati, SM Harrison and SM Delgado)
and 37 SM Department Stores are based in the Malls. The land for the three SM Department Stores
operated by the Issuer (SM Makati, SM Cubao and SM Delgado) is subleased from third parties through SM
Land (formerly Shoemart), with the SM Quiapo and SM Harrison buildings also being leased. The shortest of
these long-term leases expires in 2021. The remaining 37 SM Department Stores are leased from SM Prime
pursuant to annual leases, apart from the SM North EDSA lease which is a 25-year term expiring in 2019.
Since the opening of SM North EDSA in 1985, and partly because mall-based department stores tend to
enjoy higher customer traffic than stand-alone SM Department Stores, it has been the policy of the Group
to establish an SM Department Store as an Anchor Tenant in every new Mall where there is sufficient floor
space.
The Issuers policy is to construct department stores in prime locations. It has opened one new SM
Department Store in 2011 and, as of the date of this Offering Circular, one new SM Department Store in
2012. The Issuer plans to open four more SM Department Stores in 2012 and approximately average of four
new SM Department Stores opening annually thereafter for the next few years, subject to market
conditions.
A periodic review of sales per store is conducted regularly and, if needed, a reduction of the selling area of
a store is implemented to improve sales productivity. Each SM Department Store is renovated approximately
once every seven years.

Credit Card Sales


As part of SM Department Stores efforts to promote the SM brand and provide its customers with
additional shopping convenience, the SM Department Stores offer an SM In-house Card, a credit card for
SM Department Store customers and all Retail Affiliates. The SM In-house Cards are marketed by third
parties who are required to fully guarantee the obligations of the cardholders with real estate or money
market placements as collateral. SM Retail is responsible for administering this credit card programme. In
addition, BDO also offers its customers a similar SM In-house Card. Credit card sales attributable to the
SM In-house Card and other major credit cards accounted for approximately 39% of SM Department
90

Stores total sales for the year ended 31 December 2011.

Operational and Management Support


Since the reorganization of the SM Department Stores in 2002, SM Mart and, subsequently, SM Retail have
provided operational support to all of the SM Department Stores, as well as to other retail stores affiliated
with the Sy Family, such as Home World, Supplies Station, Inc., Baby Company, Ace Hardware, Watsons,
Sports Central, Toy World, Signature Lines and Kultura. Such support includes merchandising, marketing
and advertising, information technology, controllership, operations and human resource services. SM Retail
levies a management fee for the provision of such services. In addition, each SM Department Store pays the
Issuer a management fee for advisory and consultancy services, including legal, tax and treasury services.

Merchandising
SM Retail undertakes the merchandising for all the SM Department Stores and the Groups Retail Affiliates,
as well as managing third party store consignors (Store Consignors). Each SM Department Store adopts a
localization strategy based on demographic model and operates between 25 to 35 departments from
apparel, shoes, accessories, home furnishings, hardware, stationery supplies, music, cosmetics to native
handicrafts.
Part of the merchandise sold by each department is sourced by SM Retail from its pool of suppliers internally
categorized as preferred, secondary and seasonal and purchased outright for SM Department Stores.
Outright inventory is owned by the SM Department Stores. The SM Department Stores outright
merchandise includes in-house private label brands such as SM Exclusive for Men, SM Basics and SM Smart
Buys for basic staple items, Coco Cabana for Women, Gigi Amore Ladies Intimates, Salvatore Mann and
Parisian for Mens and Ladies Shoes, respectively. These private label brands provide customers of the SM
Department Stores with comparable quality as moderately priced alternatives to the higher priced branded
items sold by Store Consignors and Major Consignors, as described below.
Store Consignors are basically distributors or licensees of national and global brands manufactured or
distributed by the consignors. Store Consignors are allocated selling space based on their sales per square
meter productivity. The Store Consignors own the inventory and the SM Department Stores obligation to
pay for the inventory arises only on sale of the goods. As at 31 March 2012, there were over 1,300 Store
Consignors operating in the SM Department Stores. Some of the main Store Consignors include globally
known brands such as Guess, Wrangler, Lee, Arrow, Triumph, Wacoal, Jockey, Nike, Adidas, Candies,
Rayban, Victorinox, Samsonite, Disney and others.
In addition, SM Department Stores have areas which are operated and run by Major Consignors which are
affiliated to the Group. Major Consignor merchandise within the SM Department Stores consists of
merchandise that is sold by the Major Consignors under their respective brand names within SM
Department Stores. The Major Consignors are allocated designated areas within the SM Department Stores
and essentially operate and manage their respective speciality departments within the department store.
SM Retail seeks to maintain a good merchandise mix of sales made in the SM Department Stores on an
outright basis, or via Store Consignors and Major Consignors to meet customers needs and wants in terms
of style, quality and price.
The SM Department Stores generate gross margins based on net sales from their Store Consignors and
Major Consignors. The Issuer believes that the margins charged to the Store Consignors and Major
Consignors are at levels comparable to others in the retailing industry taking into account volumes
achievable in the stores. In addition, Store Consignors and Major Consignors are charged store
reimbursable for operational facilities provided by the SM Department Stores.

91

In each billing cycle, Store Consignors are paid monthly, and Major Consignors are paid semi-monthly. The
SM Department Stores indirectly recognizes the net sales and cost of sales of both the Store Consignors and
the Major Consignors in its Financial Statements.
Store Consignors and Major Consignors constitute an important part of SM Department Stores, contributing
more than 50% of sales realized by the SM Department Stores as at 31 March 2012.

Marketing
The Issuer believes that the SM Department Stores corporate slogan of Weve got it all for you has
become identifiable to consumers of all ages in the Philippines. The Issuer believes that the SM Department
Stores are recognized as the leading retailer in the Philippines that provide a wide assortment of quality
merchandise at affordable prices and offer great customer service and an enjoyable shopping experience.
In an effort to upgrade SM to a fashion store and to increase productivity of fashion brands in outright,
Store Consignors and Major Consignors areas, SM Department Stores began renovations starting in 2010.
SM Retails primary support to SM Department Stores covers a wide range of marketing and communication
services. SM Retail uses both traditional and non-traditional approaches for its marketing efforts, aggressive
print campaigns in daily broadsheets and leading magazines, radio and TV support, various in-store
collaterals, billboards, website and events such as fashion shows. Sales promotions such as departmental
and storewide events are held throughout the year like the 3-Day Sale and joint promotion with all major
credit card companies.
SM Department Stores regularly roll-out fashion collection highlights, seasonal campaigns such as summer,
back-to-school, and Christmas, and fashion brand image campaigns.
SM Retail also continues to explore and implement new marketing efforts. The SM Advantage Card is the
largest loyalty program in the Philippines with 350 partner establishments nationwide and an active
cardholder base of 6 million as at 31 March 2012. In 2005, the Group launched a program to provide
discounts to shoppers using certain major credit cards at the SM Department Stores and 450 Petron outlets
and currently has a strategic alliance with MasterCard. In 2007, SM Retail, in coordination with all major
credit card companies, launched installment program for qualified purchases by the cardholders.

Suppliers
SM Retail coordinates and manages the sourcing of merchandise for the SM Department Stores and the
Groups Retail Affiliates. The majority of the products carried by the SM Department Stores are made in the
Philippines. The outright merchandise sold by SM Department Stores are directly sourced from local
importers, distributors and manufacturers. Accordingly, the SM Department Stores are not directly exposed
to foreign exchange risks on purchases of merchandise.
The SM Department Stores source their outright merchandise from over 3,000 active suppliers. SM Retail,
through its merchandising team, has over the years developed close partnership with a large number of
suppliers in the Philippines. However, SM has opened its doors for new potential suppliers. For the year
ended 31 December 2011, SM Retail sourced approximately 80% of its merchandise by value from 20% of
its suppliers. SM Retail does not rely on one supplier or a small group of suppliers and, for the year ended
31 December 2011, no single supplier supplied more than 2% of SM Retails purchase orders by value.
For the year ended 31 December 2011, approximately 60% of SM Department Stores outright purchases
were made on credit with an average credit period of 60 days following delivery, with the balance
comprising purchases made on a cash-on-delivery basis (which entitles the SM Department Stores to a
minimum of a 5% reduction in the purchase price) or a credit period of between 15 to 45 days from the
date of delivery with a 2% to 5% discount. Upon the issuance of the relevant purchase order, SM Retails
92

suppliers generally deliver the ordered products within 30 to 45 days for new and repeat order products
that need to be manufactured, and within five days for ready-made products in stock. The SM Department
Stores reserve the right to return defective goods subject to an agreed minimum return amount. For the
year ended 31 December 2011, less than 1% of SM Department Stores outright purchases by value were
returned. SM Department Stores generally will give written notice to the relevant supplier to collect the
defective item and payment for the defective item is automatically deducted by SM Department Stores
when they pay for that order or their next order with the supplier, depending on when the defect is
detected.

Competition
The retailing industry, in general, and the department store business, in particular, is highly competitive. In
addition, such competition may increase with the entry of foreign retailers into the market, following the
liberalization of foreign ownership restrictions on retailing. SM Department Stores compete with other
department stores in the geographic areas in which they operate, as well as with numerous other types of
retail outlets, including speciality stores, general merchandise stores, discount stores, warehouse outlets
and street markets. The other major competitors in the department store industry are Rustans, Robinsons,
Landmark and the Gaisano Group in the Southern Philippines.
The Issuer believes that factors such as the SM Department Stores innovative retail strategy in new store
design and layout, new merchandising concept and good customer service enable the SM Department
Stores to maintain their competitive advantage. As such, the SM Department Stores has been the recipient
of the Gold Award for being the Philippines Top Retailer, as well as the Best of the Best Award, having
bested 14 other Gold Awardees in 14 countries in South East Asia for 5 consecutive years. In October 2011,
the SM Department Stores was elevated to the Hall of Fame during the 2011 Retail Asia Top 500 Awards
held in Singapore.

Food Retail Operations


SM Supermarkets

Introduction
SVI was established in 1985. SVI was previously a Retail Affiliate of the Issuer, but was acquired by the
Issuer from the Sy Family and a non-controlling partner with effect from June 2006 through a share-swap
agreement.
SVI currently operates 33 SM Supermarkets and three distribution centers. It opened its first supermarket in
Ayala Center, Makati and has since expanded nationwide, with 13 branches in Metro Manila. The Issuer
plans to open an additional 6 supermarkets in 2012, with plans to open at least six to eight additional
supermarkets for each of the next few years thereafter, subject to market conditions. On 1 January 2010,
SVI sold the 20 SaveMore Market stores to an affiliate, Sanford.
The Issuer, through SM Retail, owns 100% in SVIs issued share capital.
For the year ended 31 December 2011, SVIs revenues (comprising sales and other income) increased by
5.3% to P40,045 million (P38,019 million for the same period in 2010) mainly due to the opening of three
additional stores. As at 31 December 2011, SVI had 10 million authorized and outstanding shares at a par
value of P100 per share. In 2011, SEC approved the P500 million increase in authorized capital stock
through the issuance of stock dividend.

93

Selected Financial Information


The following table sets forth selected financial information of SVI as at and for the periods indicated:
As at and for the years ended 31 December
2009
2010
2011
(in P millions)

Sales
Cost of sales
Gross profit
Selling and administrative expenses
Other Operating expenses
Other income
Income before income tax
Net income

41,493
33,236
8,257
6,715
173
1,392
2,761
2,006

36,862
29,107
7,755
5,951
112
1,157
2,849
2,122

38,666
30,093
8,573
6,607
152
1,378
3,192
2,413

Assets
Liabilities
Equity

12,566
7,015
5,551

11,429
7,734
3,695

11,754
9,222
2,532

As at the date of this Prospectus, SVI has no outstanding bank debt and its operations and expansion plans
to date have been primarily supported through internally generated funds.

Operations
The supermarkets carry an extensive line of food and household products, with over 60,000 stock-keeping
units (SKU) on hand. Additionally, all supermarkets host other product ranges such as pharmacies,
bakeries, photo shops, wine and liquor stores, Chinese delicatessens, snack and ice cream kiosks. Certain
shops also carry furniture, apparel, shoes, books and a home center. As with SM Department Stores, sales
in the SM Supermarkets are cyclical and driven by seasonality.
SVIs 33 SM Supermarket stores are located within SM Malls. The following table sets forth certain
information regarding each of the SM Supermarkets, including total net sales and its contribution to the
total net sales for the years ended 31 December 2009, 2010 and 2011:
For the year ended 31 December
2010

2009
Branch Name

North EDSA 1
Sta. Mesa
Megamall B

Southmall
Bacoor

Fairview

Location

SM City, North Ave,


cor EDSA, Pagasa 1,
Quezon City
SM Centerpoint,
Aurora Blvd., Doa
Imelda, Quezon City
SM Megamall Bldg.
B. Julia Vargas St.
Wack Wack,
Mandaluyong City
SM Southmall,
Almanza, Las Pias
City
SM City Bacoor,
Aguinaldo Hi-way
Habay II, Bacoor
Cavite
SM City Fairview
Quirino Hi-way Cor
Regalado Pasong
Putik Novaliches,

Date
Opened

2011

Total Net
Sales
(in P millions)

% of total
Net Sales

Total Net
Sales
(in P millions)

% of total
Net Sales

Total Net
Sales
(in P millions)

% of total
Net Sales

Dec.
1985

1,371.89

4.06

1,300.19

3.63

1,273.73

3.30

Sept.
1990

983.65

2.91

1,060.75

2.96

1,085.35

2.81

July
1991

2,224.27

6.58

2,074.30

5.78

1,868.75

4.84

Apr 1995

1,833.97

5.42

1,721.73

4.80

1,861.37

4.82

Apr 1997

1,810.31

5.35

1,697.94

4.74

1,637.08

4.24

Oct.
1997

2,491.04

7.37

2,124.47

5.92

2,124.11

5.50

94

For the year ended 31 December


2010

2009
Branch Name

North Reclamation
Mandurriao
Manila

San Fernando

Davao

Cagayan de Oro
Lucena

Baguio

San Lorenzo

Dasmarias

Batangas

Delgado
San Lazaro

Sta. Rosa

Lipa
Bacolod

Marikina 2
Cubao
Naga

Rosario

Tarlac
San Pablo
Calamba

Location

Quezon City
SM City Cebu, North
Reclamation Area,
Mabolo, Cebu City
SM City Iloilo,
Benigno Ave., Iloilo
City
SM City Manila,
Concepcion Cor
Arroceros & San
Marcelino, Ermita,
Manila
SM City Pampanga,
San Jose San
Fernando,
Pampanga
SM City Davao,
Quimpo Blvd,
Ecoland Subd.,
Matina, Davao City
SM City Cagayan,
Upper Carmen,
Cagayan de Oro City
SM City Lucena,
Dalahican Road Cor.
Maharlika Hi-way,
Brgy. Ibabang
Dupay, Lucena
SM City Baguio,
Luneta Hill, Upper
Session Road,
Baguio
East Drive, SM
Makati Bldg. Ayala
Center, San
Lorenzo, Makati City
SM City Dasmarias,
Governors Drive,
Brgy. Sampalok 1,
Dasmarias Cavite
SM City Batangas,
Pastor Village Brgy.
Pallocan Kanluran,
Batangas City
Cor. Valeria-Delgado
Sts., Iloilo City
SM City San Lazaro,
F. Huertas Cor. A H
Lacson Street Sta.
Cruz, Manila
SM City Sta Rosa,
National Hi-way
Tagapo Sta. Rosa
City
SM City Lipa, Ayala
Hi-way, Brgy.
Maraouy, Lipa City
SM City Bacolod,
Reclaimed Area,
Brgy. Poblacion,
Bacolod City
Marcos Highway
Kalumpang Marikina
City
SM Cubao Bldg.
Socorro Cubao
Quezon City
Central Business
District II, Bgy.
Triabngulo, Naga
City
SM City Rosario
Gen. Trias Dr. Bgy.
TejeroRosario,
Cavite
SM City Tarlac Mc
Arthur Highway, San
Roque, Tarlac City
National Highway
Bgy San Rafael, San
Pablo City, Laguna
SM City Calamba

Date
Opened

2011

Total Net
Sales
(in P millions)

% of total
Net Sales

Total Net
Sales
(in P millions)

% of total
Net Sales

Total Net
Sales
(in P millions)

% of total
Net Sales

Aug.
1998

1,439.59

4.26

1,463.76

4.08

1,471.28

3.81

June
1999

1,299.25

3.84

1,346.07

3.75

1,392.70

3.59

Apr.
2000

1,318.94

3.90

1,239.93

3.46

1,207.25

3.13

Nov.
2000

1,613.58

4.77

1,673.05

4.67

1,628.80

4.22

Nov.
2001

1,205.60

3.57

1,296.97

3.62

1,340.73

3.47

Nov.
2002

881.26

2.61

996.01

2.78

997.10

2.58

Oct.
2003

815.76

2.41

857.58

2.39

865.71

2.24

Nov.
2003

1,479.72

4.38

1,515.28

4.22

1,559.75

4.04

Feb.
2004

2,068.60

6.12

1,950.14

5.44

1,902.87

4.93

May
2004

1,415.62

4.19

1,407.12

3.92

1,447.31

3.75

Nov.
2004

984.17

2.91

1,004.27

2.80

1,044.58

2.70

Dec.
2004
July
2005

785.61

2.32

809.44

2.26

792.21

2.05

1,853.24

5.48

1,859.21

5.19

1,902.87

4.92

Feb.
2006

1.264.62

3.74

1,307.18

3.65

1,204.76

3.12

Sept.
2006

1,119.23

3.31

1,307.92

3.65

1,302.25

3.37

Mar.
2007

1,127.86

3.34

1,151.94

3.21

1,243.95

3.22

Sept.
2008

878.06

2.60

949.30

2.65

870.09

2.25

Dec.
2008

897.42

2.65

1,060.32

2.96

1,083.25

2.80

May
2009

543.44

1.61

917.81

2.56

1,000.24

2.59

Nov.
2009

109.06

0.32

756.07

2.11

850.36

2.20

Apr.
2010

435.06

1.21

659.11

1.70

Sept.
2010

171.89

0.48

505.56

1.31

Oct.

251.45

0.70

1,030.08

2.67

95

For the year ended 31 December


2010

2009
Branch Name

Novaliches 2

Megamall A

Masinag

Olongapo

Location

National Roa, Bgy.


Real Calamba City,
Laguna
SM City Novaliches
Quirino Highway,
Bgy. San Bartolome,
Novaliches, Quezon
City
SM City Megamall
Bldg. A, Edsa, Bgy.
Wack-Wack,
Mandaluyong City
SM City Masinag
Marcos Highwa,
Bgy. Mayamot,
Antipolo City
SM City Olongapo,
Magsaysay Drive,
Olongo City,
Zambales

Date
Opened

2011

Total Net
Sales
(in P millions)

% of total
Net Sales

Total Net
Sales
(in P millions)

% of total
Net Sales

Total Net
Sales
(in P millions)

% of total
Net Sales

Oct.
2010

147.03

0.41

692.06

1.79

May
2011

354.33

0.92

May
2011

384.53

1.00

Dec.
2011

45.71

0.12

33,815.76

100%

35,854.19

100%

38,629.83

100.%

2010

The product mix in the supermarkets is a combination of local and imported goods. However, as the
majority of imported goods are purchased locally in the Philippines, there is no foreign exchange risk.
Furthermore, all purchases are Peso-denominated. SVI has approximately 1,714 active suppliers.
SVI opened its 33rd supermarket (Olongapo) on 15 December 2011. The Issuer plans to open six SM
supermarkets in 2012, with approximately six to eight new supermarkets opening annually thereafter for
the next few years, subject to market conditions. The following table sets forth the SM Supermarkets that
the Issuer plans to open, their location and projected date of opening:
Location of SM Supermarkets
San Fernando, Pampanga
Consolacion, Cebu
General Santos City
Lanang, Davao
Novaliches, Quezon City
Sucat, President Avenue

Location
Within SM Mall
Within SM Mall
Within SM Mall
Within SM Mall
Within SM Mall
Within SM Mall

Projected Date of Opening


2nd Quarter of 2012
2nd Quarter of 2012
2nd Quarter of 2012
3rd Quarter of 2012
4th Quarter of 2012
4th Quarter of 2012

Operational and Management Support


SVI relies on an experienced management team to keep its advantage over its competitors. Members of
senior management have combined retail experience of more than 30 years.
Each supermarket is handled by a store manager who supervises a maximum of three stores. Day-to-day
operations are handled directly by an assistant store manager and officer-in-charge. The store managers
report directly to the operations managers who also serve as the link to the national head office support
department and services. There are currently four operations managers who are assigned to specific areas
in the Philippines and report directly to the Vice President of Operations. Assisting the Vice President of
Operations is one Assistant Vice President.

Merchandising
SVI undertakes the merchandising and approves the merchandise sold by third party store consignors
(Supermarket Consignors). The majority of the merchandise carried by each department is sourced by
SVI and purchased outright from distributors and manufacturers. The SM Supermarkets outright
merchandise includes in-house brands such as SM Bonus. These in-house brand products provide
96

customers of the SM Supermarkets with quality, moderately priced alternatives to the more expensive
branded items sold by Supermarket Consignors. Approximately 2% of SM Supermarkets sales are from
these in-house products.
SM Supermarkets product mix is generally categorized as follows:
Product
Fresh
Food
Dry goods
Total

As a Percentage of Total Products Sold in SM Markets


29%
66%
5%
100%

Supermarket Consignor merchandise consists of branded merchandise manufactured or distributed by


Supermarket Consignors. Supermarket Consignors are allocated a portion of the selling area within the
relevant departments of the SM Supermarket to sell their merchandise. Supermarket Consignors are
responsible for their own inventory at the store and SVIs obligation is to pay for the portion of inventory
already sold. As at 31 March 2012, there were 820 Supermarket Consignors operating in the SM
Supermarkets.
SVI seeks to maintain a balanced mix of sales made in the SM Supermarkets on an outright basis, or via
Supermarket Consignors. One of the main considerations for SVI when approving Supermarket Consignors
items for sale in the SM Supermarkets is the products salability, handling and merchandising. This is to
ensure that such items meet SMs standards in terms of pricing, design and quality.
SVI charges its Supermarket Consignors a margin based on net sales. Such margin is determined according
to the categories of products being sold. SVI indirectly recognizes the net sales and cost of sales of the
Supermarket Consignors in its financial statements.
Supermarket Consignors constitute an important part of the business of SM Supermarkets; the percentage
of outright sales and consignments sales is approximately 65% against 35% of SM Supermarkets net sales
for the year ended 31 December 2011.

Suppliers
The SM Supermarkets source their outright merchandise from over 1,000 suppliers. Although SVI, through
its merchandising managers, has, over the years, developed close relationships with a large number of
suppliers in the Philippines, it does not have any long-term supply agreements with any supplier. This policy
is to ensure that SVI is able to source merchandise from a broad range of suppliers at competitive prices. All
products supplied by such suppliers are purchased by SVI pursuant to the terms of the relevant purchase
order. During the year ended 31 December 2011, SVI sourced approximately 32% of its merchandise by
value from its top 10 suppliers. SVI does not rely on one supplier or a small group of suppliers and, for the
year ended 31 December 2011, no single supplier supplied more than 8% of SVIs purchase orders by
value.
For the year ended 31 December 2010 and 2011, all of SVIs outright purchases were made on credit with
an average credit period of 30 days following delivery. SVI offers a credit period ranging from one to seven
days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of delivery with
no discount. Upon the issuance of the relevant purchase order, SVIs suppliers generally deliver the ordered
products within 15 to 30 days. SVI retains the right to return defective goods subject to an agreed minimum
return price. All fresh produce is delivered to the relevant SM Supermarkets by the suppliers directly.

97

Centralized Services and Distribution


Centralized services include planning and forecasting, budgeting, internal audit, site development, policy
and procedures formulation, training and development, staffing and capital expenditures, technology
development, risk management, central approval of purchases and disbursements and processing of store
set-ups.
SVI has a national distribution center network with the main center located in Sucat, Paranaque and two
regional centers that service Iloilo and Cebu. The main center, which was established in 2002 at an
estimated cost of P500 million, was able to address the supermarkets stock-out problem and has increased
sales. This current distribution network can handle up to 100 supermarket and hypermarket sites.
In 2000, SVI implemented a SAP system that enabled it to increase efficiency and reduce costs by reducing
manpower and stock levels. It also enabled SVI to decrease its store opening time frame from six months to
one month due to the implementation of a standard store set-up plan and better data evaluation and
prompt implementation of strategies.

Marketing
SM Supermarkets had regular as well as seasonal promotions to increase sales and provide additional
shopping incentives. The initiatives include the yellow tag special, total lower cost, bag-a-bonus, three-day
sale and launch pad among others.

Competition
SM Supermarkets competitors include national and regional supermarket chains, independent and
specialty grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and
supercenters. Supermarket chains generally compete on the basis of location, quality of products, service,
price, product variety and store condition. SM Supermarkets regularly monitors its competitors prices and
adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions.
The other major players in the industry include Puregold, Robinsons Supermarket, Shopwise and Gaisano
Supermarkets and SaveMore Markets.

SaveMore Markets
Introduction
Sanford, formerly Sanford Investments Corp., a holding company, was registered with the SEC on
September 2000. In November 2009, Sanford Investments amended its corporate name, primary purpose,
articles of incorporation and principal place of business to fit its purpose to operate SaveMore Markets, a
modernised neighbourhood or community store.
As at 31 December 2011, Sanford operated 64 SaveMore Markets. It opened its first SaveMore Market in
Taft Ave. cor. T.M. Kalaw St., Ermita in October 2009. On 1 January 2010, 20 SaveMore Markets that were
previously owned by SVI, a related party, were sold to Sanford. In 2011, Sanford opened 25 SaveMore
Markets, bringing the total to 64 stores. On 26 January 2012, 9 February 2012, 29 February 2012, 15 March
2012 and 29 March 2012, SaveMore stores in Legaspi City, Mandaue, Cebu City, Novaliches City, Davao City
and Sorsogon, respectively, were opened. The Issuer also plans to open an additional 16 SaveMore Markets
in 2012, with plans to open 10 - 12 additional SaveMore Markets for each of the next few years thereafter,
subject to market conditions.
98

The Issuer, through SM Retail, owns 100% in Sanfords issued share capital.
For the year ended 31 December 2011, Sanfords issued share capital amounted to P500 million. For the
year ended 31 December 2011, Sanfords revenues (comprising sales and other income) for the 64
SaveMore Markets amounted to P16,728 million. As at 31 December 2011, Sanford had 5,000,000
authorized and outstanding shares at a par value of P100 per share.

Selected Financial Information


The following tables set forth selected consolidated financial information of Sanford as at and for the
periods indicated:
2009

As at and for the year ended


2010

2011

(in P millions)

Sales
Cost of Sales
Gross profit
Selling and administration
expenses
Other operating expenses
Other Income (dividend
income)
Income before income tax
Net income
Assets
Liabilities
Stockholders Equity

247
201
46
45

11,805
8,344
3,461
2,601

16,444
11,731
4,713
3,925

4
206

212

203
203

1,072
752

1,038
727

775
503
272

4,366
3,318
1,048

7,688
5,414
2,274

283

As at 31 December 2011, Sanford has outstanding bank debt of P1.9 billion.

Operations
The SaveMore Markets carry an extensive line of food and household products, with a low of 15,000 SKU on
hand for small stores to a high of 45,000 SKU on hand for big stores. Additionally, all SaveMore Markets host
other product ranges such as pharmacies, bakeries, photo shops, wine and liquor stores, Chinese
delicatessens, snack and ice-cream kiosks. Certain shops also carry appliances, furniture, apparel, shoes,
magazines and a home centre. SaveMore Markets also offer services such as foreign exchange and bills
payment. As with SM Department Stores, sales in the SaveMore Markets are cyclical and driven by
seasonality.
Out of Sanfords 64 SaveMore Markets, 39 are mall-based (located within malls), 2 are condo-based and the
remaining 23 are stand-alone as at 31 December 2011.
The following table sets forth certain information regarding each of the SaveMore Markets, including total
net sales and its contribution to the total net sales of Sanfords SaveMore Markets for the year ended 31
December 2011 with comparative figures from SVI on certain stores for the years ended 31 December 2009
and 2010:

99

December 31, 2009


Name of Branch

Location

Marikina* (mall-based)

Riverbank Mall, A. Bonifacio Ave., Barangka,


Marikina City Metro Manila

Jaro* (mall-based)

Cor. El 98 Libertad St. Jaro, Iloilo City

Mactan* (mall-based)

Bldg. D Mactan Marina Mall MEZI, Lapu-Lapu


City

Elizabeth Mall* (mall-based)

Date Opened

For the year ended


December 31, 2010

December 31, 2011

Total Net
Sales

% of
Total Net
Sales

Total Net
Sales

% of
Total Net
Sales

Total Net
Sales

% of
Total Net
Sales

April 1999

697.80

8.95%

662.24

5.61%

626.75

3.81%

October 1998

405.90

5.21%

419.79

3.56%

414.88

2.52%

June 2002

559.97

7.18%

496.96

4.21%

528.87

3.22%

Elizabeth Mall, cor. Leon Kilat-N. Bacalso Ave.,


Cebu City

December 2003

728.60

9.35%

709.10

6.01%

749.00

4.55%

Festival Mall* (mall-based)

Ground Floor, Anchor A Festival Mall, Alabang,


Muntinlupa Ciy

February 2004

856.37

10.99%

856.43

7.25%

776.31

4.72%

Jaro 2* (mall-based)

Jaro Town Square, Quintin Salas Cor. Tacas


Road, Jaro, Iloilo City

August 2006

240.08

3.08%

247.28

2.09%

262.48

1.60%

Angono* (mall-based)

Angono Binangonan Central Mall, M. L. Quezon


Ave., Brgy. San Pedro, Angono Rizal

November 2006

482.25

6.19%

545.02

4.62%

597.18

3.63%

Morong* (mall-based)

Tomas Claudio St., Brgy. San Juan, Morong,


Rizal

December 2007

311.68

4.00%

343.56

2.91%

359.93

2.19%

Savers Square Center*

EDSA Extension, Pasay City

February 2008

271.15

3.48%

242.37

2.05%

228.56

1.39%

Parkmall* (mall-based)

Ouano Ave, Mandaue Redemption Area,


Mandaue City

May 2008

615.43

7.90%

726.08

6.15%

794.94

4.83%

Nagtahan* (mall-based)

Ramon Magsaysay Blvd. Cor. Nagtahan Road,


Bgy 634 Sampaloc, Manila City

August 2008

542.17

6.96%

510.49

4.32%

508.41

3.09%

Tanay* (mall-based)

Tanay Town Center, FT Catapusan St., cor


Sampaloc Road, Bgy Plaza Aldea, Tanay, Rizal

October 2008

369.14

4.74%

478.72

4.06%

547.48

3.33%

North Edsa 2* (mall-based)

SM City North Edsa Annex Bldg, EDSA, Quezon


City

December 2008

265.79

3.41%

271.91

2.30%

235.23

1.43%

Mezza* (condo-based)

Mezza Residences, Aurora Blvd cor Araneta


Avenue, Quezon City

March 2009

347.23

4.45%

382.49

3.24%

381.15

2.32%

Laong-laan*

Cor Blumentritt and Laonglaan Sts., Sampaloc,


Manila

April 2009

214.52

2.75%

302.69

2.56%

301.15

1.83%

P. Tuazon*

Cor P. Tuazon and A. De Legaspi and Magat


Salamat Sts., Bgy Marilag, Quirino District,
Quezon City

May 2009

124.88

1.60%

179.07

1.52%

189.58

1.15%

Del Monte*

G. Araneta cor Del Monte Avenue, Bgy Sienna,


Quezon City

May 2009

175.08

2.25%

282.53

2.39%

280.81

1.71%

Mega Center* (mall-based)

Gen. Tinio & Melencio St., Cabanatuan City

July 2009

174.62

2.24%

368.45

3.12%

374.03

2.27%

Amigo*

Burgos Ave. & Melencio St., Cabanatuan City

July 2009

111.33

1.43%

254.97

2.16%

279.76

1.70%

Taft (mall-based)

Taft Ave. cor Kalaw St , Ermita, Manila

October 2009

39.05

0.50%

132.84

1.13%

143.15

0.87%

Broadway* (mall-based)

East Gate Arcade, Broadway Centrum, Aurora


Blvd. Cor Dona Juana Rodriguez Ave. Q.C.

October 2009

53.68

0.69%

275.84

2.34%

309.70

1.88%

Anonas

Maamo St. , Road Lot 30 V. Luna and Anonas


Extension,Sikatuna Q.C.

November 2009

48.74

0.62%

452.94

3.84%

508.79

3.09%

Libertad

Mabini St. cor Amelia St., Bacolod City

November 2009

36.52

0.47%

304.97

2.58%

367.36

2.23%

Novaliches (mall-based)

General Luis St. Novaliches District, Q.C.

December 2009

64.33

0.82%

582.35

4.93%

635.82

3.87%

Visayas

Tandang Sora Ave.cor Visayas Ave. Q. C.

December 2009

26.47

0.34%

253.75

2.15%

304.76

1.85%

Solano

Solano National Highway, Solano Nueva


Viscaya

December 2009

32.17

0.41%

277.38

2.35%

317.26

1.93%

Nepa Q

EDSA & K-G St. West Kamias, QC

February 2010

138.15

1.17%

166.01

1.01%

Mendez (mall-based)

Mendez Crossing West City, Cavite

March 2010

234.14

1.98%

374.46

2.28%

MET Legazpi (mall-based)

Metro Hub Legaspi City, Albay

May 2010

163.75

1.39%

271.97

1.65%

Pasong Tamo

Chino Roces Ave. Ext. EDSA Bgy. Magallanes

June 2010

57.54

0.49%

109.80

0.67%

Baliwag (mall-based)

A. Luna Cor. Plaza Naning Poblacion Baliwag,


Bulacan

June 2010

99.39

0.84%

162.51

0.99%

Amang Rodriguez

G/F GBU Bldg. Amang Rodriquez Ave. Cor.


Evangelista St. Santolan, Pasig City

July 2010

165.47

1.40%

398.38

2.42%

Malabon (mall-based)

MGC Veranda 31 Gov. Pascual Ave. Tinajeros


Malabon City

September 2010

47.81

0.40%

131.76

0.80%

Bacolod East (mall-based)

Cor of Circumferential Road and Burgos St.,


Bacolod City East

September 2010

78.03

0.66%

275.65

1.68%

Agora (mall-based)

Market City and Integrated Bus Terminal Agora


Lapasan Cagayan De Oro City

October 2010

68.20

0.58%

323.02

1.96%

Zapote (mall-based)

FRC Supermall Talaba, Zapote, Bacoor Cavite

October 2010

36.47

0.31/%

179.29

1.09%

Cartimar (mall-based)

G/F Shoppers Acade Cartimar Shpg Ctr Pasay

October 2010

36.61

0.31/%

194.67

1.18%

100

For the year ended


December 31, 2010

December 31, 2011

Total Net
Sales

% of
Total Net
Sales

Total Net
Sales

% of
Total Net
Sales

October 2010

31.21

0.26%

134.66

0.82%

December 31, 2009


Name of Branch

Location

Date Opened

Total Net
Sales

% of
Total Net
Sales

City
Berkeley (condo-based)

Berkely Residences, Katipunan Cor. Escaler St.,


Loyola Heights Avenue, Q.C.

Ilagan (mall-based)

Northstar Mall Maharlika Highway Alibagu


Ilagan

November 2010

78.98

0.67%

405.76

2.47%

Angeles

5/F SPC Building, Miranda Extension, Angeles


City

December 2010

9.10

0.08%

53.92

0.33%

Muntinlupa (mall-based)

4/F Elizabeth Center Building, Muntinlupa, Back


of National Road, Putatan, Muntinlupa City

January 2011

211.44

1.29%

Jackman (mall-based)

Jackman Plaza, EDSA, Muoz, Quezon City

January 2011

125.49

0.76%

Capistrano

Savemore Market Capistrano St., Cagayan de


Oro City

March 2011

247.77

1.51%

Bayambang (mall-based)

Royal Mall, Poblacion Sur, Bayambang,


Pangasinan

April 2011

52.25

0.32%

Malhacan (mall-based)

Meycauayan Supima Commercial Complex


Fronting Malhacan Rd. NLEX Meycauayan City

May 2011

192.96

1.17%

Kauswagan

Kauswagan Iligan Highway cor. Pelaez St.


Kauswagan, Cagayan de Oro

May 2011

370.74

2.25%

Araneta

Gen. Romulo St. Araneta Center, Cubao,


Quezon City

June 2011

66.86

0.41%

Sta. Ana (mall-based)

Sta. Ana, P. Gil St. cor. Calle Mart St. Zone 096
Brgy. 876, Sta. Ana, Manila

July 2011

131.61

0.80%

Apalit (mall-based)

McArthur Highway Brgy. San Vicente, Apalit,


Pampanga.

August 2011

95.75

0.58%

Sta. Maria

Galeria Alejandra Bldg. C. De Guzman St.,


Poblacion Sta. Maria, Bulacan

August 2011

47.92

0.29%

Bian (mall-based)

Ground Floor City Market Mall, San Vicente


Bian Laguna

September 2011

113.42

0.69%

Tuguegarao (mall-based)

Low Level of Cagayan Valley Mall, Tuguegarao


City

174.76

1.06%

Halang

Along National Highway, Barangay Halang,


Calamba City

September 2011

25.01

0.15%

Shoe Ave

306 Shoe Avenue Sto. Nio, Marikina City

September 2011

87.23

0.53%

Balibago

Savers Mall MC Arthur Highway Balibago,


Angeles City

October 2011

24.80

0.15%

Canduman

H. Abella St. Basak, Manduae City

November 2011

20.72

0.13%

November 2011

24.84

0.15%

Maguikay

M. L. Quezon St. Maguikay, Manduae City

Pedro Gil

Pedro Gil Cor. Singalong St., Manila

November 2011

25.60

0.16%

Iba

Zambales Pangasinan Road . Brgy, Sagapan,


Iba, Zambales

November 2011

53.49

0.33%

Kanlaon

November 2011

13.35

0.08%

Ilagan 2

National Highway, Baligatan, Ilagan, Isabela

54 Kanlaon St., Quezon City

December 2011

17.33

0.11%

A. Venue

Antel Lifestyle City 7829 Makati Ave. Poblacion


Makati City

December 2011

14.86

0.09%

Laoag 1

Isabel Bldg., 5 Sisters Mini Mall, JP Rizal Corner


Nolasco St., Laoag City

December 2011

40.74

0.25%

Das Salitran

Aguinaldo Highway Corner Salitran Road


Dasmarias, Cavite

December 2011

27.16

0.17%

Blumentritt

1360 Blumentritt St. Cor. Laong Laan & Halcon


Sts., Quezon City

December 2011

23.00

0.14%

16,444.62

100.00%

Total

7,794.95

100.00%

11,805.04

100.00%

Note: Distributing Center Asinan


* These are stores sold from SVI. For comparative purposes, 2009 data for these stores were taken from SVIs accounting
information.

The product mix in the SaveMore Markets is a combination of local and imported goods. However, as the
majority of imported goods are purchased locally in the Philippines, there is no foreign exchange risk.
Furthermore, all purchases are Peso-denominated. Sanford has approximately 1,700 active suppliers.
Sanford opened 11 stores in the 4th quarter of 2011, one store in January, and two stores each for February
101

and March 2012. The Issuer plans to open an additional 16 SaveMore Markets in 2012, with approximately
10 to 12 new stores opening annually thereafter for the next few years, subject to market conditions. The
following table sets forth the SaveMore Markets that the Issuer plans to open, their location and projected
date of opening:
Location of SaveMore Market

Location

Projected Date of Opening

Along KM7 Mc Arthur Highway, Bangkal, Davao City

stand alone

1st Quarter of 2012

Sorsogon Shopping Center, Magsaysay St., Sorsogon City

within mall

1st Quarter of 2012

Novaliches Plaza Mall, Quirino Highway cor. Ramirez St.,


Brgy. Novaliches Proper, Quezon City

within mall

1st Quarter of 2012

Felisa Building, KM14 Mc-Arthur Highway corner Gov. I.,


Santiago St., Malinta, Valenzuela City

within mall

2nd Quarter of 2012

Daang Maharlika Brgy. Rueda Sr., San Jose City, Nueva Ecija

stand alone

2nd Quarter of 2012

Camarin, Caloocan City

within mall

2nd Quarter of 2012

Berma (Baclaran)

stand alone

2nd Quarter of 2012

M.H. Dela Fuente St. corner Espaa Blvd. and corner Ma.
Christina St., Manila

stand alone

2nd Quarter of 2012

Parian, Calamba

within mall

2nd Quarter of 2012

40 Pio Valenzuela St., Marulas Valenzuela City

stand alone

3rd Quarter of 2012

Acacia Town Centre, Taguig

within mall

3rd Quarter of 2012

ARDI III Complex Cainta

within mall

4th Quarter of 2012

Jenet & Lord Theather, Binondo

stand alone

4th Quarter of 2012

Los Baos Centro, Laguna

within mall

4th Quarter of 2012

Commercial Building located at Maribago, Lapu-Lapu City

stand alone

4th Quarter of 2012

Barangay Balantang, Tagbac Jaro, Iloilo City

within mall

4th Quarter of 2012

Garden Villas, Sta Rosa Laguna

stand alone

4th Quarter of 2012

Bajada Plaza, Davao

stand alone

4th Quarter of 2012

Santiago City, Isabela

stand alone

4th Quarter of 2012

Operational and Management Support


Sanford relies on an experienced management team (from SVI) to maintain its market position. Members of
senior management have combined retail experience of more than 30 years. Each SaveMore Markets is
handled by a store manager who supervises a maximum of three stores. Day-to-day operations are handled
directly by an assistant store manager and officer-in-charge. The store managers report directly to the
operations managers who also serve as the link to the national head office support department and services.
There are currently six operations managers who are assigned to specific areas in the Philippines and report
102

directly to the Vice President of Operations. Assisting the Vice President of Operations is one Assistant Vice
President.

Merchandising
Sanford undertakes the merchandising and approves the merchandise sold by third-party store consignors
(SaveMore Consignors). The majority of the merchandise carried by each department is sourced by
Sanford and purchased outright from distributors and manufacturers. The SaveMore Markets outright
merchandise includes in-house brands such as SM Bonus. These in-house brand products provide
customers of the SaveMore Markets with quality as moderately priced alternatives to the more expensive
branded items sold by SaveMore Consignors. Approximately 2.77% of SaveMore Markets sales are of these
in-house products.
Sanfords product mix is generally categorized as follows:
Product

As a Percentage of Total Products Sold in SaveMore Markets

Fresh

30.90%

Food

64.98%

Dry goods

4.12%

Total

100.00%

SaveMore Consignor merchandise consists of branded merchandise manufactured or distributed by


SaveMore Consignors. SaveMore Consignors are allocated a portion of the selling area within the relevant
departments of the SaveMore Market to sell their merchandise. SaveMore Consignors are responsible for
their own inventory at the store and Sanfords obligation is to pay for the portion of inventory already sold.
As at 31 December 2011, there were over 689 SaveMore Consignors operating in the SaveMore Markets.
Sanford seeks to maintain a balanced mix of sales made in the SaveMore Markets on an outright basis, or
via SaveMore Consignors. One of the main considerations for Sanford when approving SaveMore
Consignors items for sale is the products saleability, handling and merchandising. This is to ensure that
such items meet SMs standards in terms of pricing, design and quality.
Sanford charges its SaveMore Consignors a margin based on net sales. Such margin is determined
according to the categories of products being sold. Sanford indirectly recognises the net sales and cost of
sales of the SaveMore Consignors in its financial statements.
SaveMore Consignors constitute an important part of the business of SaveMore Markets; the percentage of
outright sales and consignments sales is approximately 66% against 34% of SaveMore Markets net sales
for year ended 31 December 2011.

Suppliers
The SaveMore Markets source their outright merchandise from over 1,045 suppliers. Although Sanford,
through SVIs merchandising managers, has, over the years, developed close relationships with a large
number of suppliers in the Philippines, it does not have any long-term supply agreements with any supplier.
This policy is to ensure that Sanford is able to source merchandise from a broad range of suppliers at
competitive prices. All products supplied by such suppliers are purchased by Sanford pursuant to the terms
of the relevant purchase order. During the year ended 31 December 2011, Sanford sourced approximately
46% of its merchandise by value from its top 10 suppliers. Sanford does not rely on one supplier or a small
group of suppliers and, for the year ended 31 December 2011, no single supplier supplied more than 13%
of Sanfords purchase orders by value.

103

For the year ended 31 December 2010 and 2011, all of Sanfords outright purchases were made on credit
with an average credit period of 30 days following delivery. Sanford offers a credit period ranging from one
to seven days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of
delivery with no discount. Upon the issuance of the relevant purchase order, Sanfords suppliers generally
deliver the ordered products within 15 to 30 days. Sanford retains the right to return defective goods
subject to an agreed minimum return price. All fresh produce is delivered to the relevant SaveMore Markets
by the suppliers directly.

Centralized Services and Distribution


Centralized services include planning and forecasting, budgeting, internal audit, site development, policy
and procedures formulation, training and development, staffing and capital expenditures, technology
development, risk management, central approval of purchases and disbursements and processing of store
set-ups.
Sanford shares a national distribution centre network with SVI with the main centre located in Sucat,
Paraaque and two regional centres that service Iloilo and Cebu. The current distribution network can
handle up to 100 supermarket and hypermarket sites.

Marketing
SaveMore Markets have regular as well as seasonal promotions to increase sales and provide additional
shopping incentives. The initiatives include the yellow tag special, bag-a-bonus, three-day sale and special
display sections known as launch pads, among others.

Competition
SaveMore Markets competitors include national and regional supermarket chains, independent and
speciality grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and
super centers. Supermarket chains generally compete on the basis of location, quality of products, service,
price, product variety and store condition. SaveMore Markets regularly monitors its competitors prices and
adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions.
The other major players in the industry include Puregold, Robinsons Supermarket, Shopwise, Gaisano
Supermarkets and SM Supermarkets.

SM Hypermarkets
Introduction
SSMI was established in 2001. SSMI was previously a Retail Affiliate of the Issuer but was acquired by the
Issuer with effect from 6 June 2006 through a share-swap agreement.
SSMI operates its hypermarkets under the brand SM Hypermarket. It opened its first hypermarket in SM
City Sucat in 2001. The newest SM Hypermarket stores which opened in March 2012 were located in
Alabang Zapote Road, Las Pinas and East Service Road, Muntinlupa. These two stores were formerly
Makro stores.
As at 31 December 2011, the Issuer directly owns 99.99% in SSMIs issued share capital through SM Retail.
For the year ended 31 December 2011, SSMIs revenues (comprising sales and other income) increased by
12.5% to P27.12 billion (P24.11 billion for the same period in 2010). Net income increased from P987.33
104

million for the year ended 31 December 2010 to P1,057.07 million for the year ended 31 December 2011,
representing an increase of 7.1%.
As at 31 December 2011, SSMI had an authorized capital stock of 5 million shares, with 5 million shares
issued and outstanding. The par value is P100 per share.

Selected Financial Information


The following table sets forth selected financial information of SSMI as at and for the periods indicated:

As at and for the years ended 31 December


2009
2010
2011
(in P millions)

Sales
Cost of sales
Gross profit
Selling and administrative expenses
Other Income
Income before income tax
Net Income
Assets
Liabilities
Equity

20,221
15,880
4,341
3,908
740
1,173
842

23,766
17,749
6,017
4,975
347
1,389
987

26,725
19,937
6,788
5,674
380
1,494
1,057

5,856
3,806
2,050

6,637
4,850
1,787

8,124
7,430
694

SSMIs initial capital investment was P100 million. The company as at 31 December 2011 has an external
bank loan of P1.35 billion and all future site openings are expected to be funded using internally generated
funds and external borrowings.

Operations
SM Hypermarkets provide one-stop shopping convenience specially designed to meet the growing needs of
the shoppers. The hypermarkets offer a wide range of products covering groceries, health and beauty
products, shoes, ready-to-wear apparel, furniture, appliances, hardware, kitchenware, toys, office supplies,
bakery products, wine and liquor. They also offer services such as foreign exchange and bills payment. As
with SM Department Stores, sales in the SM Hypermarkets are cyclical and driven by seasonality.
All SM Hypermarkets have modern, spacious facilities, customer friendly display racks and more than 40
check-out lanes each. What makes SM Hypermarkets distinctive for consumers is that they sell food, fresh
and frozen items such as those found in a conventional supermarket, as well as general merchandise
products found in conventional department stores.
SM Hypermarkets also offer services such as delivery services and price verifier kiosks. The following table
sets forth certain information regarding each of the SM Hypermarkets, including total net sales and its
contribution to the total net sales of the 30 SM Hypermarkets (25 in 2010) operated by SSMI for the years
ended 31 December 2010 and 2011:

105

For the year ended 31 December


2010
2011
Name of Branch

Location

Date
opened

Total net
sales

% of total
revenues

Total net
sales

% of total
revenues

(in P millions)
Sucat

SM City Sucat, Dr. A. Santos Avenue, Brgy.


San Dionisio Paraaque City

May-01

1,855

8%

1,857

7%

Bicutan

UGF Bldg. B, SM City Bicutan, Dona Soledad


Avenue, Don Bosco, Paraaque City

Nov-02

1,851

8%

1,850

7%

Marilao

SM City Marilao, McArthur Highway, Brgy.


Ibayo Marilao, Bulacan

Nov-03

1,532

6%

1,503

6%

Valenzuela

SM Supercenter Valenzuela, McArthur


Highway, Brgy Karuhatan Valenzuela

Oct-05

1,066

4%

1,088

4%

Molino

SM Supercenter Molino, Brgy. Molino IV


Bacoor, Cavite

Nov-05

1,489

6%

1,541

6%

Clark

SM City Clark, M.A. Roxas Highway, Clark


Special Economic Zone Clarkfield,
Pampanga

May-06

1,481

6%

1,605

6%

SM Mall of Asia

SM Mall of Asia, SM Central Business Park,


Bay City, Pasay City

May-06

2,216

9%

2,276

9%

North Edsa

SM City North Edsa corner North Avenue


Quezon City

Jun-06

1,620

7%

1,555

6%

Pasig

SM Supercenter Pasig, Frontera Verde, C-5


Ugong Pasig City

Aug-06

1,635

7%

1,603

6%

Taytay

SM City Taytay, Manila East Road, Brgy.


Dolores, Taytay, Rizal

Nov-07

1,056

4%

1,138

4%

Muntinlupa

SM Supercenter Muntinlupa, National Road,


Brgy. Tunasan, Muntinlupa City

Nov-07

923

4%

853

3%

Rosales

SM City Rosales, Brgy. Carmen East


Rosales, Pangasinan

Nov-08

854

4%

951

4%

Baliwag

SM City Baliwag, Doa Remedios Trinidad


Highway, Brgy. Pagala, Baliwag, Bulacan

Dec-08

730

3%

773

3%

Mandaluyong

SM Hypermarket Mandaluyong, Shaw Blvd.


corner E.Magalona St., Bagong Silang,
Mandaluyong City

May-09

580

2%

646

2%

Fairview

SM City Fairview Annex, Quirino Highway


corner Regalado Avenue, Brgy Greater
Lagro, Novaliches, Quezon City

Jun-09

1,332

6%

1,450

5%

Makati

SM Hypermarket Makati South


Superhighway cor. Finlandia, Brgy San
Isidro, Makati City

Sep-09

551

2%

588

2%

Las Pias

SM Center Las Pias, Alabang Zapote Road,


Brgy. Talon Dos, Las Pias City

Oct-09

1,092

5%

1,214

5%

Novaliches

SM Hypermarket 402 Quirino Highway, Brgy


Talipapa, Novaliches, Quezon City

Nov-09

688

3%

707

3%

ETON

SM Hypermarket Eton, EDSA cor Quezon


Avenue, Brgy Pinyahan, Quezon City

Nov-09

391

2%

486

2%

North Harbor

SM Hypermarket North Harbor, Lot 11,


Manila North Habor Center, Brgy 128, Zone
10, Tondo, Manila

May-10

248

1%

354

2%

Adriatico

SM Hypermarket Adriatico, M. H. Del Pilar,


Adriatico Malate, Manila

Jul-10

187

1%

359

1%

Cubao

SM Hypermarket Cubao, Main Avenue, Cor.


EDSA, Quezon City

Sep-10

176

1%

522

2%

Iloilo

SM Hypermarket Ilolilo Comm. Civil Cor.

Oct-10

89

1%

431

2%

106

For the year ended 31 December


2010
2011
Name of Branch

Location

Date
opened

Total net
sales

% of total
revenues

Total net
sales

% of total
revenues

(in P millions)
Jalandoni Sts., Jaro, Iloilo City 5000
Batangas

SM Hypermarket Batangas Along National


Highway, Brgy. Balagtas, Batangas City,
Batangas 4200

Dec-10

68

0%

417

2%

Pampanga

SM Hypermarket Pampanga, Mc Arthur


Hiway, Camachile, Mabalacat, Pampanga
2010

Dec-10

56

0%

375

1%

Cebu

SM Hypermarket Cebu Logarta Avenue


Subangdaku Mandaue City 6014

May-11

310

0%

JMall

SM Hypermarket Jmall Centre, AS Fortuna


Cor. V. Albano St., Bakilid Extension,
Mandaue City

Sep-11

76

0%

Imus

SM Hypermarket Imus, Gen. Aguinaldo


Highway Anabu I, Imus, Cavite 4103

Nov-11

105

0%

Marketmall

SM Marketmall Dasmarinas Area B Burol 1


Congressional Road 4115 Dasmarinas City,
Cavite

Dec-11

56

0%

Sucat-Lopez

SM Hypermarket Sucat-Lopez Dr. A.


Santos Ave. Barangay San Isidro Paranaque
City, Metro Manila 1700

Dec-11

36

0%

23,766

100%

26,725

Total

100 %

The Issuer plans to open more SM Hypermarkets both within Malls and on a stand-alone basis. After
opening five SM Hypermarkets in 2011, it currently plans to open five SM Hypermarkets in 2012. Two of the
5 new SM Hypermarkets in 2011 have been converted from Makro stores. It intends to open at least five to
six new SM Hypermarkets annually thereafter for the next few years, subject to market conditions. The
following table sets forth the SM Hypermarkets that the Issuer plans to open, their location and projected
date of opening:
Location of SM Hypermarket
Monumento
Cainta
Antipolo
Laoag

Location
Metro Manila
Rizal
Rizal
Ilocos Norte

Projected date of Opening


April 2012
May 2012
June 2012
September 2012

Operational and Management Support


The management team of SSMI has significant local and international work experience in the hypermarkets
business. In addition, SMIC and SSMI entered into an agreement whereby SMIC provides various services
of the key management personnel to SSMI for which SMIC receives a management fee equivalent to a
certain percentage of SSMIs net sales.

Merchandising
SM Hypermarkets merchandise is a mix between local and imported goods, with over 30,000 SKUs. SSMI
undertakes the merchandising and also approves the merchandise sold by third-party store consignors
(Hypermarket Consignors). Part of the merchandise carried by each department is sourced by SSMI and
purchased outright by the SM Hypermarkets. SM Hypermarkets outright merchandise includes in-house
brands such as SM Bonus. These in-house products provide customers of the SM Hypermarkets with
107

quality, moderately priced alternatives to the more expensive branded items sold by Hypermarket
Consignors. Approximately 5% of SM Hypermarkets sales is of these in-house products.
SM Hypermarkets product mix is generally categorized as follows:
Product
Fresh and Frozen
Food
Non-Food
Total

As a Percentage of Total Products Sold in SM Hypermarkets


27%
56%
17%
100%

Hypermarket Consignor merchandise consists of branded merchandise manufactured or distributed by


Hypermarket Consignors. Hypermarket Consignors are allocated a portion of the selling area within the
relevant departments of the SM Hypermarkets to sell their merchandise. Hypermarket Consignors are
responsible for their own inventory and the SSMIs obligation is to pay for the portion of inventory already
sold. As at 31 December 2011, there were over 600 Hypermarket Consignors operating in the SM
Hypermarkets.
SSMI seeks to maintain a balanced mix of sales made in the SM Hypermarkets on an outright basis, or via
Hypermarket Consignors. One of the main considerations for SSMI when approving the Hypermarket
Consignors items for sale in the SM Hypermarkets is the products salability, handling and merchandising.
This is to ensure that such items meet SSMIs standards in terms of pricing, design and quality.
SSMI charges its Hypermarket Consignors a margin based on net sales. Such margin is determined
according to the categories of products being sold. SSMI indirectly recognizes the net sales and cost of sales
of the Hypermarket Consignors in its financial statements.
Hypermarket Consignors constitute an important part of the business of SM Hypermarkets; the percentage
of outright sales and consignments sales is approximately 60% against 40% of SM Hypermarkets net sales
as at 31 December 2011.

Suppliers
The SM Hypermarkets source their outright merchandise from approximately 800 suppliers. Although SSMI,
through its merchandising managers, has, over the years, developed close relationships with a large
number of suppliers in the Philippines, it does not have any long-term supply arrangements with any
supplier. This policy is to ensure that SSMI is able to source merchandise from a broad range of suppliers at
competitive prices. All products supplied by such suppliers are purchased by SSMI pursuant to the terms of
the relevant purchase order. For the year ended 31 December 2010 and 2011, SSMI sourced approximately
80% of its merchandise by value from 18% of its suppliers. SSMI does not rely on one supplier or a small
group of suppliers and, for the year ended 31 December 2011, no single supplier supplied more than 10%
of SSMIs purchase orders by value.
For the year ended 31 December 2010 and 2011, approximately 75% of SSMIs outright purchases were
made on credit with an average credit period of 30 days following delivery, with the balance comprising
purchases made on a cash-on-delivery basis, a self-remittance term (SRT) basis, for a period of up to
three days, a credit period of up to seven days, or a statement based billing system (SBBS) basis for a
period of up to 30 days, from the date of delivery with a 3% to 4% discount. Upon the issuance of the
relevant purchase order, SSMIs suppliers generally deliver the ordered products within 15 to 30 days. SSMI
retains the right to return defective goods subject to an agreed minimum return amount. All fresh produce
is delivered to the relevant SM Hypermarket by the suppliers directly.

108

Centralized Services and Distribution


Centralized services include planning and forecasting, budgeting, internal audit, site development, policy
and procedures formulation, training and development, staffing and capital expenditures, technology
development, risk management, central approval of purchases and disbursements and processing of store
set-ups.
SSMI started its crossdocking services with SVI during the fourth quarter of 2007 to serve its suppliers
better through centralized receiving and distribution of merchandise. The crossdocking services are located
in an offsite warehouse located in Sucat, Paraaque which it leases from SVI. The gross area leased is
11,763 square meters.
In addition, SSMI also leases a warehouse near its crossdocking facilities from SVI for the purpose of storing
its value pack items. The gross area leased is 804 square meters.
In October 2007, SSMI implemented a SAP system that enabled it to increase efficiency and reduce costs by
reducing manpower and stock levels. It also enabled SSMI to decrease its store opening time frame from six
months to one month due to the implementation of a standard store set-up plan and better data evaluation
and prompt implementation of strategies. In addition, the SAP system facilitated faster collection of
receivables.

Marketing
SM Hypermarkets have regular as well as seasonal promotions to increase sales and provide additional
shopping incentives. The initiatives include the mailer items, Shop N Win, value packs, Scratch & Win,
and three-day sales among others. SSMI also has a loyalty program (via the SM Advantage Card) as well as
various other promotions to boost sales.

Competition
SM Hypermarkets competitors include national and regional supermarket chains, independent and
speciality grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and
supercentres. Hypermarket chains generally compete on the basis of location, quality of products, service,
price, product variety and store condition. SM Hypermarkets regularly monitor their competitors prices and
adjust their prices and marketing strategy as management deems appropriate in light of existing conditions.
Other local players in the hypermarket format include Makro, Puregold, Robinsons, Shopwise and S&R.
The Issuer believes that future competition from the major foreign competitors is not likely given that the
Philippine market may not be large enough for these companies to achieve economies of scale. However,
one potential source of foreign competition may be from secondary players in China, which may decide to
enter the Philippine market given the high level of competition in the China domestic market.
Pilipinas Makro, Inc.
Pilipinas Makro, Inc. (Makro) was established on 25 May 1995 and is an unlisted company engaged in
buying and selling of food and non-food items to customers registered with it at wholesale and/or retail
under a warehouse club format.
On 3 October 2007, Forsyth sold its 40% equity holdings in Rappel Holdings Inc. (Rappel) to the Issuer,
which increased the Issuers direct ownership in Rappel from 40% to 80%. In May 2009, Value Plus, Inc.
sold its 20% equity holdings in Rappel to the Issuer and, as a result, Rappel became a wholly-owned
subsidiary of the Issuer. Rappel is an unlisted company engaged in the business of investing, purchasing,
109

acquiring and owning real or personal property, including shares of stock, bonds and other forms of
securities and directly owns 50% of the shares in Makro. The Issuer, through its subsidiary, Prime Central
Inc., purchased the remaining 40% non-controlling shares of Makro. The Issuer now directly owns 10% of
the shares in Makro and currently controls an effective 100% interest in Makro.
Makro opened its first wholesale store in Cainta, Rizal, on 7 March 1996. At the time of acquisition by the
Issuer, Makro operated 15 wholesale stores but it currently only operates nine wholesale stores. The
operations of the original six wholesale stores at Mandaluyong, Makati, Novaliches, Cubao, Iloilo, and North
Harbor were acquired by SSMI, converted and rebranded as SM Hypermarkets as at 31 March 2012.
For the years ended 31 December 2009, 2010 and 2011, Makros revenue was P8,881.0 million, P6,196.1
million and P2,798.7 million, respectively. For the years ended 31 December 2009, 2010 and 2011, Makro
had a net income of P382.9 million, P319.3 million and P117.6 million, respectively.

Financial Services
BDO Unibank, Inc.

Overview
The Bank provides a wide range of corporate, commercial and retail banking services. These services
include traditional loan and deposit products, as well as treasury, trust banking, investment banking, cash
management, leasing and finance, remittance, insurance, retail cash cards and credit card services.
The Banks strategic focus is to enhance its position as a leading full-service bank in the Philippines. The
Banks principal markets are currently the top-tier corporate market, the middle-market banking segment
(consisting of medium-sized corporations and SMEs) and the retail/consumer market. The Banks customers
are based primarily in the Philippines, and include large multinational corporations with local operations.
The Bank has experienced significant growth over the last few years arising from offering new products and
services and as a result of the recent mergers and acquisitions. As at 31 December 2011, the Bank ranked
as the number one bank in the Philippines in terms of total deposits, net loans and total assets, according to
published statements of condition. The Banks consolidated total assets were P1.0 trillion and P1.1 trillion as
at 31 December 2010 and 2011, respectively, while total capital funds stood at P88.7 billion and P97.0
billion, respectively.
As at 31 December 2011, the Bank had a network of 743 domestic branches and one foreign branch (in
Hong Kong), with one more branch license for deployment. Its network includes 19 remittance offices and
1,596 ATMs.
The Bank successfully raised Tier 2 capital of P10 billion in November 2007, P10 billion in May 2008, P3
billion in March 2009, P8.5 billion in June 2011 and P6.5 billion in October 2011 to support the Banks
expansion plans. The Bank also completed a U.S.$250 million equity-raising program in April 2010 with the
International Finance Corporation (IFC), IFC Capitalization (Equity) Fund, L.P., and foreign institutional
investors to support the Banks medium-term growth objectives and build a buffer for anticipated Basel III
requirements. As at 31 December 2011, the Group was the Banks largest shareholder group, with an
effective equity interest of 58.8% of the Banks issued share capital.
As at 21 April 2012, the Bank had a market capitalization on the PSE of P226,311.3 million. The Banks Tier
I capital adequacy ratio, tangible equity-to-assets ratio and total capital adequacy ratio stood at 10.2%,
8.8% and 15.8%, respectively, as at 31 December 2011.

110

History
The Bank, formerly known as Acme Savings Bank, was acquired by the Group in August 1976. The Group is
one of the largest conglomerates in the Philippines, with substantial interests in financial services, real
estate development, and tourism and entertainment, founded around its core business in commercial
centres and retailing.
Until it was granted full universal bank status on 5 August 1996, the Banks main business was providing
traditional loan and deposit banking services to the middle-market segment, including corporate suppliers
of ShoeMart, Inc., a large department store chain operated by the Group. Since then, the Bank has shifted
its focus from servicing the SM Network to expanding and diversifying its client base by offering a full range
of commercial banking products and services. At the same time, the Bank believes that its relationship with
the Group has been, and will continue to be, a valuable resource in expanding its customer base to large
corporate clients and retail customers.

Mergers and Acquisitions


The Bank has grown through a series of mergers and acquisitions as follows:

On 15 June 2001, the Bank merged with Dao Heng Bank Philippines, Inc. (DHBI) and acquired
DHBIs existing customers and 15 branch licenses.

In October 2002, the Bank assumed 1st e-Bank Corporations (1st e-Bank) P10 billion of deposits
and other liabilities in exchange for certain assets including 60 branch licenses.

On 29 August 2003, the Bank acquired Banco Santander Philippines, Inc. (BSPI) while BDO
Capital acquired Santander Investment Securities Philippines, Inc. from Santander Central Hispano,
S.A. BSPI was renamed BDO Private Bank, Inc. (BDO Private Bank) and provided the Bank an
immediate presence in the private banking sector.

On 19 December 2005, the Bank acquired United Overseas Bank Philippines (UOBP) branch
banking business and obtained 66 branch licenses.

On 31 May 2007, the Bank merged with EPCIB with the Bank as the surviving entity. The merged
bank was renamed Banco de Oro EPCI, Inc. and on 6 February 2008, the SEC approved the
change of name to Banco De Oro Unibank, Inc.

On 30 October 2007, the Bank acquired American Express Bank Philippines, Inc. (AEBP), gaining
access to American Express Philippines U.S. dollar and Peso credit card portfolios as well as the
consumer banking services of American Express.

On 24 August 2009, the Bank purchased 98.81% of the issued and outstanding common shares
and 100% of the preferred capital stock of GEMB, thereby consolidating GEMBs business including
31 branch licenses into the Bank. GEMB was retained as a separate legal entity and adopted the
name BDO Elite Savings Bank, Inc. when it amended its Articles of Incorporation with the SEC on
12 August 2010.

Subsequent Events
Merger of subsidiaries
The Bank has completed an exercise involving the merger of BDO Strategic Holdings, Inc. (BDOSHI),
Equitable Card Network, Inc., EBC Strategic Holdings Corporation, BDO Technology Center, Inc. and
Strategic Property Holdings, Inc., each a wholly-owned subsidiary of the Bank prior to the merger, with
111

BDOSHI remaining as the surviving entity following the merger. The merger was undertaken as part of the
streamlining of the Bank Groups organizational structure. The Banks investment in its subsidiaries did not
increase as a result of this exercise.

Recent Offers/Capital Raising Transactions


Issuance of global depositary receipts
On various dates in 2006, Primebridge Holdings, Inc., a stockholder owning 22.1% of the Banks total
outstanding shares as at 31 December 2005, offered and sold in aggregate 9,399,700 Global Depositary
Receipts (GDR) with each GDR representing 20 shares of the Banks common stock. The GDRs constitute
an offering in the United States only to qualified institutional buyers in reliance on Rule 144A under the US
Securities Act of 1993 (the Securities Act) and an offering outside the United States in reliance on
Regulations under the Securities Act. The offered price for each GDR was U.S.$12.70 on 25 January 2006
and 14 February 2006; and U.S.$14.55 on 15 May 2006. The GDRs are listed and are being traded at the
London Stock Exchange. As part of the offering, Primebridge, while remaining as the registered holder of
the Bank shares underlying the GDRs, transferred all rights and interests in the Banks shares underlying the
GDRs to the depository on behalf of the holders of the GDRs and the latter are entitled to receive dividends
paid on the shares. However, GDR holders have no voting rights or other direct rights of a shareholder with
respect to the Banks shares.
As at 31 December 2006, 4,724,214 GDRs issued, covering shares originally held by Primebridge, were
converted into 94,484,280 shares of the Bank. As at 31 December 2011, 9,600 GDRs equivalent to 192,000
shares of the Bank remain unconverted.

Long term negotiable certificates of deposit


Pursuant to a BSP approval dated 5 January 2005, the Bank issued on 1 June 2005 a total of P2.1 billion
worth of Floating Rate Long-term Negotiable Certificates of Deposit which matured on 2 June 2010. The
Bank was among the first, if not the first, domestic bank to offer this product. Subsequently, on 23
November 2005, the Bank offered to the public P2.9 billion worth of Fixed Rate Long-term Negotiable
Certificates of Deposit which matured on 24 November 2010. Furthermore, another tranche of Long-Term
Negotiable Certificates of Deposit were issued by the Bank in October 2006. The Certificates of Deposit
amounted to P5 billion and matured in November 2011.

Unsecured subordinated notes eligible as Lower Tier 2 Capital


On 21 November 2007, the Bank issued P10 billion unsecured subordinated notes eligible as Lower Tier 2
Capital due in 2017, callable with step-up in 2012 pursuant to the authority granted by the BSP to the Bank
on 8 October 2007 and BSP Circular No. 280 Series of 2001, as amended. The issuance was approved by
the Board in its special meeting held on 1 June 2007.
On 20 May 2008, the Bank issued another tranche of P10 billion unsecured subordinated notes eligible as
Lower Tier 2 Capital due in 2018, callable with step-up in 2013 pursuant to the authority granted by the BSP
to the Bank on 3 April 2008 and BSP Circular No. 280 Series of 2001, as amended. This issuance was
approved by the Board in its special meeting held on 23 February 2008.
On 20 March 2009, the Bank issued the third tranche of unsecured subordinated notes with a face value of
P3.0 billion qualifying as Lower Tier 2 Capital due in 2019, callable with step-up in 2014 pursuant to the
authority granted by the BSP to the Bank on 3 April 2008 and BSP Circular No. 280 Series of 2001, as
amended. This issuance was approved by the Board in its special meeting held on 31 January 2009.
On 27 June 2011, the Bank issued the fourth tranche of unsecured subordinated notes with a face value of
112

P8.5 billion qualifying as Tier 2 Capital due in 2021, callable but with no step-up in 2016 pursuant to the
authority granted by the BSP to the Bank on 7 April 2011 and BSP Circular No. 280 Series of 2001, as
amended. The Tier 2 Notes were priced at 6.50% p.a. and will mature on 27 September 2021. Subject to
certain conditions and approvals, the Bank may redeem the Tier 2 Notes in whole on the optional
redemption date which is on 28 June 2016.
On 7 October 2011, the Bank issued the fifth tranche of unsecured subordinated notes with a face value of
P6.5 billion qualifying as Tier 2 Capital due in 2022, callable but with no step-up in 2016 pursuant to the
same authority granted by the BSP on 7 April 2011 and BSP Circular No. 280 Series of 2001, as amended.
The fifth tranche was priced at 6.375% p.a. and will mature on 7 January 2022. Subject to certain
conditions and approvals, the Bank may redeem the notes in whole on the optional redemption date which
is on 8 October 2016. This issuance completed the Banks P15 billion Tier 2 Capital programme approved by
the BSP.

Dollar-denominated senior note issuance


On 22 October 2010, the Bank issued Senior Notes with a face value of U.S.$300 million at a price of
99.632%. The Senior Notes, which will mature on 22 April 2016, bear a fixed interest rate of 3.875% per
annum, with an effective rate of 3.95% per annum, and will be payable semi-annually every 22 April and 22
October starting in 2011. The net proceeds from the issuance are intended to support business expansion
plans, and general banking and relending activities.
On 16 February 2012, the Bank issued Senior Notes with a face value of US$300 million at a price of 99.448.
The Senior Notes will mature on 16 February 2017 and bear a fixed interest rate of 4.50% per annum, with
an effective rate of 4.625% per annum. The Senior Notes will be payable semi-annually every August 16
and February 16 starting in August 2012. The net proceeds from the issuance are intended for general
funding and relending purposes.

Capital-raising program
The Bank also completed a U.S.$250 million equity capital-raising program in April 2010 with the IFC, IFC
Capitalization (Equity) Fund, L.P. and foreign institutional investors to support the Banks medium-term
growth objectives and build a buffer for anticipated Basel III requirements.

Strategy
The Bank continues to build on its strong business franchise to maintain leadership positions across most
business lines, as well as further strengthen its capabilities to support future growth and actively respond to
strategic opportunities and market challenges. Over the long-term, the Bank aims to be the preferred bank
in every market it serves and create shareholder value through superior returns. The key elements of the
Banks strategy are as follows:

Diversified and Sustainable Earnings Stream


The Bank employs a strategy that creates a diversified and sustainable earnings stream generated from its
core lending and deposit-generating activities, accrual and trading income from its investment portfolio and
fee income from service-based businesses.
The Bank will continue to pursue focused loan growth to achieve a diversified market mix, including
targeting potential clients in the consumer and middle-market segments that do not currently utilise
banking services, and complement this with branch expansion to generate low-cost deposits. This benefits
the Bank in terms of reduced concentration risk and higher net interest income. To minimise the volatility of
the Banks income sources, the Bank has gradually built its non-interest earnings by generating fee-based
113

service income from its wide array of services covering, among others, asset/wealth management,
payments/electronic banking, trusts, treasury, brokerage, insurance, credit cards and investment banking.
The securities portfolio, managed on the basis of liquidity needs and spread management, will contribute
both accrual and trading income.

Operating Leverage
The Bank has made investments in productive capacity to build a strong operating infrastructure that will
accommodate future growth, ensure business continuity, and enhance efficiency. These cover the areas of
network expansion, Information Technology, operations, and risk management.
The Bank has also employed a strong branding campaign to create customer awareness and market
visibility, thus enhancing the potential of its extensive distribution platform. Accordingly, branch renovations
and upgrades in corporate offices to modern state have been executed in a way that is consistent with the
Banks enhanced image.
As part of its branding campaign, the Bank changed its name from Banco De Oro Unibank, Inc. to BDO
Unibank, Inc. in November 2011.

Prudent balance sheet management


The Bank has adopted a conservative provisioning strategy, even as its asset quality has remained stable
and despite above-average loan growth. This is meant to create a strong buffer in anticipation of the next
cycle downturn. As well, the Bank intends to actively reduce its non-performing assets through various
modes that include retail sales and joint property development, a strong broker/employee network, and
attractive payment and pricing terms.
To support its future growth, the Bank will maintain an adequate capital position taking into account the
optimal mix between core and supplementary capital.

Organic growth and mergers/acquisitions


The Bank plans to focus on leveraging its existing industry-leading scale, built through previous mergers
and acquisitions and aggressive growth, to achieve strong organic growth. At the same time, to
complement its organic growth, the Bank will consider opportunities for mergers and acquisitions as they
arise to further expand its market coverage, increase branch licenses and tap emerging and potential
businesses.

114

Organizational Structure
The following chart sets forth the Banks simplified corporate structure, organized by its principal activities
as at 31 December 2011:

Board of Directors / Chairman

Corporate Secretary

Audit Committee

Corporate Governance
Committee

Internal Audit

Risk Management
Committee

Executive
Committee

Nomination
Committee

Trust
Committee

Risk Management

Trust and Investment

Compliance
President

Central Legal

Relationship
Management Groups

Product
Management Groups

Institutional Banking

Consumer Lending

Branch Banking

Transaction Banking

Private Banking
(subsidiary)

Leasing and Finance


(subsidiary)

Support and Delivery


Management Groups

Asset Management

Treasury

Investment Banking
(subsidiary)

Insurance
(subsidiary)

115

Information
Technology

Comptrollership

Human Resources

Marketing
Communications

Corporate Planning /
Investor Relations

Central Operations

Compensation
Commitee

Selected Financial Information


The following table sets forth selected consolidated financial information and financial ratios of the Bank as
at and for the periods indicated:
For the year ended December 31

Consolidated Statements of Income


2009

2010

2011

33,560.7

35,922.9

37,354.5

(in P millions)

Interest income on
Loans and other receivables
Investment and trading securities

11,345.3

10,202.9

10,588.2

Due from other banks

2,530.8

2,739.1

2,049.3

Other

1,373.4

1,064.6

475.5

48,810.2

49,929.5

50,467.5

14,734.8

12,645.4

13,006.0

3,516.5

3,126.4

3,682.1

18,251.3

15,771.8

16,688.1

30,558.9

34,157.7

33,779.4

6,153.2

6,698.0

6,144.2

24,405.7

27,459.7

27,635.2

Trading gain (loss)

3,340.2

5,585.1

3,906.9

Service charges and fees

8,351.0

8,929.6

10,528.3

Miscellaneous

3,791.8

3,326.4

6,463.5

15,483.0

17,841.1

20,898.7

12,398.8

13,618.8

14,002.6

4,334.1

4,467.0

4,365.1

Interest expense on
Deposit liabilities
Bills payable and other borrowings

Net interest income


Impairment losses

Net interest income after impairment losses


Other income

Other expenses
Employee benefits
Occupancy
Taxes and licenses

3,424.0

3,509.9

3,661.6

11,972.0

13,192.8

14,286.6

32,128.9

34,788.5

36,315.9

Income before tax

7,759.8

10,512.3

12,218.0

Income tax expense

1,658.7

1,630.9

1,629.6

Net income after tax

6,101.1

8,881.4

10,588.4

Other operating expenses

116

As at 31 December

Consolidated Statements of Condition


2009

2010

2011

Cash and other cash i t ems


Due from the Bangko Sentral ng Pilipinas

30,544.1
64,833.4

26,672.9
138,482.1

33,129.4
124,893.9

Due from other banks

16,731.8

21,776.5

24,719.4

(in P millions)

Investment and trading securities

171,712.0

197,286.5

188,417.8

Loans and other receivables

524,901.3

566,021.0

673,927.0

Office premises, furniture, fixtures and equipment

14,732.3

15,057.4

15,689.7

Investment properties

13,833.9

11,978.7

10,137.3

Equity investments

1,709.8

3,387.6

4,186.9

Deferred Tax Assets

5,686.0

5,583.6

5,484.5

17,364.4

14,622.9

16,762.8

862,049.0

1,000,869.2

1,097,348.7

Savings
Time

42,691.8
354,406.6
297,579.6

45,445.5
426,022.8
311,166.4

48,498.6
482,517.1
327,553.4

Total Deposit Liabilities

Other resources net


Total resources
Deposit liabilities
Demand

694,678.0

782,634.7

858,569.1

Bills payable

31,414.8

65,861.2

59,473.7

Subordinated Notes Payable

23,152.2

23,152.2

38,254.7

Other liabilities

44,916.6

40,489.0

44,089.3

794,161.5

912,137.1

1,000,386.8

67,887.5

88,732.1

96,961.9

862,049.0

1,000,869.2

1,097,348.7

Total liabilities
Equity
Total liabilities and equity

117

Selected Financial Ratios

For the year ended 31 December


2009

2010

2011

(in percentages except Earnings per Share)

Return on assets (1)

0.7

1.0

1.0

9.7
10.4
4.1
69.8
65.3
8.3
12.2
7.9

11.3
11.7
4.1
66.9
66.2
10.0
13.8
8.9

11.4
11.7
3.5
66.4
75.2
10.2
15.8
8.8

5.0

4.7

3.4

4.7
4.0

4.5
4.3

3.4
3.6

Allowances for probable loan losses to total


non-performing loans (13)

79.8

92.1

106.0

Earnings per share (P)(14)

2.57

3.37

3.91

Return on shareholders equity (2)


Return on average common equity (3)
Net interest margin(4)
Cost-income ratio (5)
Loans to deposits (6)
Tier I capital adequacy ratio (7)
Total capital adequacy ratio (8)
Total equity to total assets (9)
Total non-performing loans to total loans
excluding interbank loans (10)
Total non-performing loans to total loans
including interbank loans (11)
Allowances for probable loan losses to total loans (12)

Notes:
(1)

Net income divided by average total resources for the period indicated.

(2)

Net income divided by average total capital funds for the period indicated.

(3)

Net income attributable to shareholders of the parent bank divided by average common equity for the period
indicated.

(4)

Net interest income divided by average interest-earning assets.

(5)

Total operating expenses divided by the sum of net interest income and other income.

(6)

Net receivables from customers divided by total deposits.

(7)

Tier 1 capital divided by total risk-weighted assets.

(8)

Total capital divided by total risk-weighted assets.

(9)

Total capital funds divided by total resources.

(10) Total non-performing loans divided by total loans excluding interbank loans.
(11) Total non-performing loans divided by total loans including interbank loans.
(12) Total allowance for probable loan losses divided by total loans.
(13) Total allowance for probable loan losses divided by total non-performing loans.
(14) Net income divided by total number of outstanding shares.

Business of the Bank


The Bank is organized into three groups: Relationship Management, Product Management, and Support
and Delivery Management.
Relationship Management is responsible for managing client relationships and expanding clients businesses
with the Bank. Included in this group are Institutional Banking, covering large corporations, financial
institutions, middle-market, small business accounts and Structured Trade Finance; Branch Banking,
covering the branch network and Hong Kong branch operations; and Private Banking through BDO Private
Bank.
118

Product Management, meanwhile, is responsible for managing the different product businesses offered to
clients. Product Management is composed of Consumer Lending, which is responsible for consumer
products and services including the Banks credit card business; Transaction Banking, covering cash
management, electronic payments and settlements, and remittances; Treasury; Trust Banking; Insurance;
Investment Banking; Asset Management (Properties) and Leasing and Finance.
Support and Delivery Management ensures that the Banks operational needs are efficiently met and its
vision and corporate strategies realized. It is composed of the following: Information Technology,
Controllership, Human Resources, Marketing Communications, Corporate Planning and Investor Relations
and Central Operations.
Members of each business group work together to provide the Banks customers with a full suite of services.
The Bank believes that giving its larger customers multiple points of contact within the Bank enhances its
ability to respond promptly and appropriately to its customer demands and also allows the Bank to
institutionalize its more important customer relationships. The following is a description of each of the
Banks business groups and their respective services.

Institutional Banking Group


The Banks principal lending business activities are undertaken through the Institutional Banking Group,
which is responsible for managing relationships with clients and servicing their loans and other banking
requirements. The Institutional Banking Group has the primary responsibility for managing the corporate
loan portfolio of the Bank, which accounts for approximately 75.7% of the total loan book, amounting to
P408.5 billion and P507.7 billion as at 31 December 2010 and 2011, respectively.
A wide range of loan products and services are available to institutional customers, including term loans,
revolving credit lines and foreign currency loans (denominated primarily in U.S. dollars). The Bank also
offers trade finance-related products and services which include letters of credit, export advances,
commercial bill discounting, advising exporters on documentary credits, negotiating bills under
documentary credits, trust receipts, inventory financing and bills collection. Institutional Banking also
provides omnibus credit lines for its most significant corporate customers, allowing the customer to draw on
such credit lines in the form of short-term loans or to utilize such credit lines for trade financing or other
forms of credit.
In addition to corporate and trade-related loans, Institutional Banking also offers other products and
services such as investment banking, trust and cash management solutions. It also handles sovereign and
specialized lending, which includes developmental funds from international credit agencies such as the
World Bank that are channeled to borrowers through Government financing initiatives.
Institutional Banking Group is composed of Corporate Banking (Corbank), Commercial Banking
(Combank), Financial Institutions and Wholesale Lending and International Desks (WLID).

Corporate Banking
Corbank services approximately 1,500 of the largest corporate and financial institutions in the Philippines as
at 31 December 2011. Most of Corbanks corporate clients are based in the Philippines and are engaged in
the manufacturing, financial services, wholesale and retail trade or real estate sectors, and include several
large multinational corporate clients.
As at 31 December 2009 and 2010, accounts of large corporate customers represented approximately
49.1% and 45.6%, respectively, of the Banks total loan portfolio. As at 31 December 2011, corporate loans
grew by 30.3% year-on-year to P322.0 billion, contributing 48.0% to the Banks total loan portfolio
119

amounting to P670.1 billion. Almost all of Corbanks corporate lending is for projects in the Philippines and
most Corebanks corporate lending is undertaken on a non-syndicated basis.

Commercial Banking
Combank primarily serves the middle-market companies that belong to the next 5,000 largest in the
Philippines in terms of revenues, as well as SMEs. Most of the Banks commercial customers are engaged in
the manufacturing, retail and trade sectors.
As at 31 December 2009 and 2010, Combanks lending to the middle-market segment accounted for
approximately 28.8% and 29.8%, respectively, of the Banks total loan portfolio. As at 31 December 2011,
commercial loans grew by 15.1% year-on-year to P185.7 billion for a 27.7% share of the Banks total loan
portfolio during the period.

Financial Institutions
Through Financial Institutions, the Bank offers correspondent banking services to its financial institutions
clients through a network of over 500 international correspondent banks. These correspondent banking
functions include facilitating documentary credits, offering inter-bank credit facilities and managing
Philippine funds transfers processes. Corbanks correspondent banking unit is also able to undertake credit
evaluation of proposed counterparties, market the Banks products to financial institution clients and assess
the benefits of various product proposals from correspondent providers.

Wholesale Lending and International Desks


The Banks WLID business was organized to capitalize on opportunities present in the growing regional and
global financing arena. It develops relationships with Japanese, Mainland Chinese, Taiwanese, Singaporean,
Korean and other Asian companies, as well as North American and European commercial interests in the
Philippines. Services include project and trade finance, factoring, leasing, cash management, trust,
investment advisory, foreign exchange, insurance and other ancillary services.
WLID provides cross-border finance supported by export credit agencies, rated export-import banks and
other foreign banks from member countries of the Organization for Economic Development and
Cooperation (OECD), and multilateral organizations. WLID provides its eligible clientele wholesale funds
available from Government Financial Institutions for specialized financing purposes.

Consumer Lending
The Bank offers an expanded range of consumer finance products, including residential mortgages, auto
loans, credit card services and personal loans. As at 31 December 2009 and 2010, consumer-related
loans comprised approximately 18.0% and 20.0%, respectively, of the Banks total loans. As at 31
December 2011, the Banks consumer loans increased by 23.8% to P134.2 billion, contributing 20.0% to
the Banks total loan portfolio.

Real Estate Mortgages


The Bank offers home mortgage loans to individuals for home acquisition, construction, improvement
and refinancing of their property. Consumer lending tailors loan terms, which offer customers
competitive rates and more flexibility regarding their repayments. Home mortgage loans are typically
for amounts between =
P1.0 million and =
P5.0 million, with maturities of up to 25 years. These are
typically payable in monthly amortizations with interest rates that are repriced periodically based on
prevailing market rates, although borrowers also have fixed rate options.
End-buyer tie-ups with reputable real estate developers largely contributed to the Banks total home
120

mortgage loan portfolio of =P53.5 billion and =


P69.7 billion, respectively, as at 31 December 2010 and
2011. This Contract to Sell (CTS) Receivables Financing Program extends indirect financing to
homebuyers via purchase of their Contract to Sell installment receivables from property developers. The
program enables the Bank to acquire wholesale real estate portfolios from accredited real estate
developers with the end view of converting seasoned CTS accounts to individual home loans in the
future.

Credit Cards
The Bank initially operated its credit card business through a subsidiary, BDO Card Corporation. During
the merger with EPCIB in 2007, BDO also acquired Equitable Card Network (ECN), which was EPCIBs
vehicle for its card business. The acquisition of the ECN portfolio added strategic value to the Banks
existing credit card business. Aside from its significant number of cardholders, the ECN portfolio
provided an extensive merchant base as the largest credit card merchant acquirer in the Philippines.
The acquisition of the American Express Bank Philippines, Inc.s U.S. dollar and Peso card portfolios in
2007 further strengthened its position in the credit card market. The consolidation of these businesses
has led to enhanced efficiency, substantial synergies and cost savings and has contributed significantly
to the Banks strategic goal of expanding its share of the consumer lending market.
The Banks credit card business remains the industrys leading card issuer and largest merchant acquirer.
As at 31 December 2010 and 2011, the Bank had combined cards-in-force of 1,153,334 and 1,211,831,
respectively, and had a receivable portfolio of =
P27.6 billion and =
P30.0 billion, respectively.

Auto Loans
The Bank provides auto financing to individuals for the acquisition of mainly new cars, buses and other
types of vehicles. The Banks retail auto loans are typically between =
P700,000.00 and =
P1 million and for
12- to 60-month terms, with the average tenor being three years. The applicable interest rate is
generally fixed with amortizing repayment schedules over the term of the loan.
Continued strategic partnerships with auto dealers remain a competitive advantage of the Bank. As at
31 December 2010 and 2011, the Banks auto loan portfolio stood at =
P23.4 billion and =
P28.7 billion,
respectively.
The Bank aims to deliver to prospective auto and home buyers fast processing times, competitive rates,
flexible payment terms and innovative loan products. The Banks nationwide branch footprint enables it
to efficiently serve its customers.

Personal Loans
The Bank offers unsecured personal loans in amounts from =
P10,000.00 to =
P500,000.00, although the
current average is at =
P140,000.00. Payment is through a salary deduction for loans to employees of
certain corporate customers and post-dated checks for all other customers.
The Bank offers two products: SuperLite Installment and salary loans. Introduced in April 2005, the
SuperLite Installment is offered to prospective customers who apply on an individual basis, while the
Bank offers salary loans through the employees respective companies. As at 31 December 2010 and
2011, the personal loan portfolio stood at =
P916 million and =
P912 million, respectively.

121

Treasury
Treasury has the primary responsibility of managing the Banks sources of funding, and is tasked with
ensuring that the Bank has adequate liquidity at all times. As part of this function, Treasury manages
the Banks domestic and foreign currency denominated investment instruments. Treasury actively
engages in securities dealership, foreign exchange trading and derivatives transactions for its own
account, as well as for the accounts of individual and institutional investors. Client requirements are
serviced through the Treasury Marketing unit and the Banks branch network.

Trading and Investment Securities


Treasury manages the securities trading and investment portfolios of the Bank. As an Accredited
Government Securities Dealer, the Bank has been an active participant in the primary and secondary
trading of Government Securities. The Bank, as one of the largest participants in the Philippine foreign
exchange market, is a fixing bank in the Philippine Dealing System.
The Banks net trading and investment securities increased by 14.9% from =
P171.7 billion in the year
ended 31 December 2009 to =
P197.3 billion in 2010 and accounted for 19.9% and 19.7%, respectively
of the Banks total resources. As at 31 December 2011, net trading and investment securities amounted
to =
P188.4 billion and accounted for 17.2% of the Banks total resources. The Banks gross revenues from
its investment securities decreased from =
P11.3 billion in the year ended 31 December 2009 to =
P10.2
billion in 2010, and increased to =
P10.6 billion in the year ended 2011. As at 31 December 2010 and 2011,
these interest income levels represented 15.1% and 14.8%, respectively, of the Banks total income
during said periods. As at 31 December 2010 and 2011, approximately 71.1% and 72.7%, respectively,
of the Banks trading and investment securities portfolio were in government securities while the
balance was in corporate issue bonds.
The following table sets out, as of the dates indicated, information relating to the Banks total
investment portfolio:
Investment Portfolio

As at 31 December
2009

2010

2011

(in P millions)

Government bonds
Other debt securities

135,931.4

144,734.4

139,455.5

31,453.5

45,398.2

40,661.8

Total debt securities

167,384.9

190,132.6

180,117.3

Non-debt securities

6,029.3

8,308.1

7,923.4

Derivative financial assets

5,561.5

5,109.7

3,738.8

178,975.7

203,550.4

191,779.5

Total

(1)

Note:
(1)

Gross of allowance.

The Banks investment portfolio is mainly sovereign and quasi-sovereign issuers mostly in Asia. In
particular, the Bank does not have any direct exposure to European sovereign instruments.

Derivatives
The Banks derivatives license allows it to act as an end-user and as a dealer/broker of specific derivative
instruments such as swaps, forwards and options. The Banks current derivative activities include
122

dealings in interest rate swaps, credit default swaps and options, which comprise a very small portion of
its investment portfolio.

Investment Banking
The Bank provides investment banking services to its corporate clients through its wholly-owned
subsidiary BDO Capital. BDO Capital was established to address the capital raising needs of the Banks
larger corporate and institutional accounts, Government-owned and controlled corporations and match
these with the investment requirements of the more sophisticated investors including high net worth
individuals, fund managers and other institutions. BDO Capital is involved in loan syndication, the
underwriting and placing of securities, financial advisory services, project finance services and
securities trading.
BDO Capitals underwriting and distribution activities cover both equity and debt securities. BDO Capital
has been involved in major fundraising exercises for the Government (via Retail Treasury Bond issues)
and private issuers such as Metro Pacific Group (Maynilad Water Services Inc. and Manila North Tollways
Corp.), San Miguel Group (San Miguel Purefoods Inc. and San Miguel Corp.), Ayala Corporation, DMCI
Homes Inc., Aboitiz Transport System Corp., Negros Navigation Co. Inc., Belle Corporation, Rustans
Supercenters, Inc., Private Infrastructure Development Corp., City Savings Bank, Megawide
Construction Corp., First Gen Corporation, Atlas Consolidated Mining and Development Corp., Phoenix
Petroleum Corp., and SM Investments Corp., among others.
BDO Capital has received several awards from prestigious international publications over the last six
years recognizing its position as one of the leading investment banks in the Philippine equity and debt
capital markets.

Trust and Investments Group


The Bank provides investment management and wealth advisory services through its Trust and
Investments Group (BDO Trust). For corporate accounts, BDO Trust offers a wide range of products,
including employee benefit plans, investment management and advisory services, escrow arrangements,
registry/transfer agency services, paying/collection and other collateral agency services. For corporate
accounts, BDO Trust provides access to customized portfolios via living trust and investment
management accounts.
For retail customers, BDO Trust offers investment opportunities through a wide selection of Peso and U.S.
dollar-denominated Unit Investment Trust Funds (UITFs). UITFs are ready-made investment products
that seek to offer returns comparable to those of larger investors. These funds are professionally
managed according to specific investment objectives and invested accordingly in diversified portfolios.
BDO Trust also offers the Easy Investment Plan (EIP), a wealth build-up scheme that enables
individuals to attain their financial goals through the twin habits of regularly saving and investing. Both
the UITFs and the EIP are distributed through BDOs branch network.
In accordance with regulations governing the conduct of trust business by banks, BDO Trust reports
directly to the Banks Trust Committee which approves all of its investment decisions.
BDOs consolidated assets under management as at 31 December 2011 reached =
P711.4 billion, up by
24.8% from =
P570.0 billion as at 31 December 2010. With this performance, BDO maintained its lead in
the industry with a 25.2% market share as at 31 December 2011.
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BDO Trust again emerged as one of the top-ranked Investment Managers in the country based on
Towers Watsons 107th Survey on Investment Performance of Retirement Funds for the quarter ending
30 September 2011. Particularly, BDO Trust gave the best returns over the last three years under the All
Trusteed Funds Category for investment managers handling at least five funds in the survey, indicating
that it has consistently performed in the field of fund management. In addition, the investment journal,
The Asset, named BDO as Best in Corporate Trust in the Philippines in the recent The Asset Triple A
Awards for securities and Fund Services.

Transaction Banking
The Bank also provides a wide range of transaction-based services for both corporate and retail
customers through Transaction Banking.
The Banks goal is for Transaction Banking to build long-term value and consistent earnings growth
through multi-product relationships with customers. The Bank expects this will translate into a low-cost
and stable source of funds for the Bank that will improve the overall risk-revenue ratio of the Banks
portfolio.
Transaction Banking is divided into corporate and retail market teams to provide a focused market
approach in terms of coverage, customized product offerings and service delivery.

Cash Management Services and Electronic Banking Services. The Bank offers high value-added
cash management solutions to various market segments, namely: large corporations, financial
institutions (including Government financial institutions and Government-owned and controlled
corporations) and small to medium industries. The cash management services offered by the Bank to
these institutions include collections, disbursements, liquidity management, account services,
electronic banking services and retail payment services. The Bank also offers factoring services for the
receivables of select corporate customers. From an initial base of 77 corporate transactional banking
customers in 2002, Transaction Banking has expanded to over 9,000 corporate customers as at 31
December 2011.
On the other hand, cash management services offered to retail customers include pre-paid debit cards,
merchant acquisition services and ATM services.
BDO received the Balikat ng Bayan award from the Social Security System for being the Best Collecting
Bank in 2007 and 2008. The Banks Cash Management Services has also been recognised with other
awards, namely, Best Local Currency Cash Management Services in the Philippines by Asiamoney
(2008), Best Cash Management Bank in the Philippines by Alpha Southeast Asia (2008, 2009), Rising
Star Cash Management Bank by The Asset (2009, 2010, 2011), and Best Domestic Cash Management
Bank in the Philippines by Asian Banker Achievement Award (2010, 2011).

BDO Cash Card. On 20 November 2002, the Bank launched a retail pre-paid, re-loadable,
multi-purpose card called the BDO Cash Card, which holders can use to make payments and which
also functions as an ATM card. The Bank charges a fee for issuing the BDO Cash Card and may also
require the corporate customer to place amounts on deposit with the Bank. The Bank currently has over
2,000 BDO Cash Card corporate customers with a cardholder base of over 3.9 million, and is issuing
approximately 60,000 additional BDO Cash Cards per month.

Smart Money Card. The Smart Money Card is a Mastercard electronic product issued by the Bank and
with a co-branding tie-up with Smart Communications, Inc., one of the leading telecommunications
124

companies in the Philippines. In 2010, the Smart Money Card generated a total of over 48.4 million
financial transactions worth P1.5 billion. The Bank currently has a Smart Money virtual account and a
cardholder base of over 6.8 million and is issuing approximately 60,000 cards/virtual accounts per
month.

Merchant Acquisition for Debit Cards. Transaction Banking started its merchant acquisition
services in February 2004, primarily to merchants located in Group malls and other SM Network
members. Merchant acquisition services enable the Bank to process both Bank issued debit card and
cash card transactions and those issued by other banks (Express Net, Bancnet and Megalink) originated
at participating merchants, and realize a fee from the merchant for processing each transaction. The
Bank provides merchant acquisition services to more than 21,000 merchants and it intends to expand its
network aggressively in order to be able to process on-us and off-us debit and prepaid cards.

Cirrus and VISAPlus Network. One of the Banks ATMs functionalities allows MasterCard and VISA
cardholders to use the Banks ATMs deployed at strategic locations nationwide. The Banks ATMs are now
part of the network of over 1.6 million Mastercard/Maestro/Cirrus ATMs and of over a million VISAPlus
ATMs worldwide, allowing international credit cardholders to perform cash advances and debit
cardholders to make withdrawals and balance enquiries at any of the Banks ATMs. The Bank earns
revenues from fees charged on each transaction at its ATMs.

BDO ATM Debit Card. The Bank offers an ATM Debit Card which allows cardholders international ATM
and point-of-sale (POS) access. The BDO ATM Debit Mastercard allows Bank clients to access their
accounts at over 1.6 million MasterCard/Maestro/Cirrus ATMs in over 210 countries and make purchases
in more than 30.2 million establishments worldwide where MasterCard is accepted. In September 2006,
the Bank launched an additional feature, which enables cardholders to simply tap and go for a faster,
secure way of paying. Called Mastercard PayPass, this is a contactless payment feature that provides
cardholders with a simpler way to pay, by tapping the card on a POS terminal rather than swiping and
entering a personal identification number. This can even be used abroad where there is a PayPass
terminal. All other product services and channels available for BDO International ATM Card are the same
as for the BDO Mastercard PayPass. The Bank also offers the BDO ATM Debit VISA Card, which allows
cardholders to pay at establishments that accept VISA worldwide and access their account at over
a million VISAPlus ATMs around the world.
In the Philippines, the card can be used at the Banks 1,5 96 ATMs as well as a t Bancnet, Expressnet
and Megalink networks ATMs, and in over 30,000 POS terminals.

Branch Banking
The Banks branch network is the primary means of offering deposit services to customers, including
CASA and time deposits in Pesos, U.S. dollars and other foreign currencies. The Banks principal
depositors are individuals in the Philippines. As at 31 December 2010 a n d 2011, total deposits were
=
P782.6 billion and =
P858.6 billion, respectively, and approximately 72.3% and 7 5 . 9 %, respectively,
of the Banks deposits were denominated in Pesos and the remainder denominated in foreign currencies,
principally U.S. dollars. The Bank currently has approximately 5.7 million accounts.
As at 31 December 2011, the Banks branch network comprised of 743 domestic branches and one
foreign branch, with one more branch license available for redeployment. Each of the Banks branches
is connected and networked to the Banks IT systems and infrastructure. Expansion of the Banks branch
network is dependent on its ability to obtain branch licenses, the allocation process for which is subject
to restrictions imposed by the BSP (see Banking Regulation and Supervision Regulations

125

Restrictions on branch opening). Alternatively, the Bank may obtain branch licenses indirectly, through
the acquisition of banks with existing branch licenses.
The Bank provides 24-hour banking services through its 1,596 ATM facilities, which are located in
branches and at off-site locations, such as shopping malls. Customers are given access to the ATM
facilities through BDO International ATM cards, which are issued to check and savings account holders.
The Bank is a member of the Expressnet and Megalink ATM consortia, allowing customers to use ATM
terminals operated by other banks in the consortium. Clients can also use ATM terminals worldwide
that are part of the Cirrus-Maestro network.
Branch Banking manages the entire branch network of the Bank. Branch Banking monitors each branchs
profitability, and each branch accounts for its own expenses and revenues. Each branch is subject to
monthly spot audits, as well as a more comprehensive annual audit. Each of the Banks branches has
electronic security systems and armed guards. All of these services are provided by independent
contractors. The Bank also ensures that the amount of cash held in the vaults of its branches is
maintained within authorized limits. The Bank continues to maintain adequate insurance coverage for
loss and theft.

Alternative Delivery Channels


The Bank offers its customers remote access to banking services through internet banking, phone
banking and the Banks Customer Contact Center.

Internet banking. Transaction Banking offers internet banking to both individual and corporate clients.
Using industry-standard security measures, BDOs Internet Banking allows clients to perform their
banking transactions at their own convenience by allowing access to their accounts.
Retail customers can view their account balance, credit card statements, and other accounts such as
trust investments. They can also pay bills, transfer funds to their own or other enrolled accounts, reload
a BDO Cash Card, buy load for their prepaid mobile phone account, order checkbooks, execute wire
transfers and issue stop payment orders. With mobile internet banking, customers can also access BDO
Internet Banking in their mobile phones web browser for more banking convenience.
Corporate customers can transfer funds and make bulk payments, as well as retail payments through
cash card and corporate checks via Corporate Internet Banking. It also provides consolidated
information to facilitate liquidation management. An internet facility is also available to process
warehouse payable and credit suppliers accounts upon maturity.

Phone banking. The Bank utilizes interactive voice response service technology to provide retail
customers access to their accounts, and make banking transactions such as balance inquiries, bill
payments, fund transfers, BDO Cash Card reload, prepaid mobile phone reload and checkbook reorder
via a touchtone phone.

Mobile banking. Retail customers can manage their money while on-the-go using mobile banking
which allows account inquiry, funds transfer, prepaid mobile phone reload, and reload to an enrolled
SMART Money account.

Customer Contact Center. BDO Customer Contact Center was established in June 2001 to provide
customer service assistance to the Banks retail customers, specializing in deposits, consumer loans,
credit cards, remittance and other retail products. The Center also supports the Banks acquiring
business and its electronic banking services.
126

The Center operates 24 hours a day, seven days a week, with 543 personnel who are equipped with a
customer relationship management system which allows them to deliver personalized customer service
and conduct precise cross-selling initiatives. It also enables customer service officers to build customer
contact data, which helps them manage and respond to customers needs more effectively and
efficiently. Recently, the Center opened its second site in Makati, to serve as its hot site for disaster
recovery.
BDO Customer Contact Centers average monthly volume from January to December 2011 was 526,411
for calls and 21,375 for e-mails and fax correspondence from BDO customers and the general public.

Remittances
The remittance function involves purchasing foreign exchange for the remittance transactions and
delivering remittance payments through the Banks branch network, SM Forex counters, partner rural
banks and courier services. The Bank has a wide remittance network consisting of 19 remittance offices
worldwide complemented by relationships with at least 309 remittance/money transfer tie-ups and 603
accredited foreign and local correspondent banks and at least 114 designated agents.
For the year ended 31 December 2010 and 2011, the Banks volume of OFW remittances amounted
to U.S.$5.8 billion and U.S.$7.4 billion, respectively, representing an 18.3% and 29.0% increase
year-on-year, respectively.
The Bank was awarded by BSP as Top Commercial Bank in Generating Remittance from Overseas
Filipinos for years 2008, 2009 and 2010 and was given the 2010 Hall of Fame Award. As at 31 December
2011, the Bank had a 36.9% market share of total remittance volume, with an increasing proportion
comprising remittances from high income OFWs.

Hong Kong Branch Operations


The Bank has a full service branch in Hong Kong that caters to the needs of the overseas Filipinos and
the local community. It currently offers trade-related services for Philippine companies doing business
with Hong Kong- and mainland China-based companies. The branch plans to expand its services by
providing private banking services to Filipino high net worth individuals, cross-border retail services to
Philippine executives in Hong Kong and servicing the deposit needs of the Fujian community. In early
2008, the branch was moved to a street-level location to enhance visibility and improve accessibility.

Asset Management (Properties)


Asset Management (Properties) is tasked to manage the Banks acquired assets portfolio. It is
responsible for identifying the best use, ideal disposition and developing disposal strategies including
outright sale, property auctions or joint venture arrangements with real estate companies.

Funding
Sources of Funding
Deposits, bills payable and capital are the main fund sources of the Bank. The following table sets forth
an analysis of the Banks principal funding sources and the average cost of each funding source:

127

2009

2010

Amount

Ave. cost

Demand

42,692

Savings

354,407

Time

2011

Amount

Ave. cost

Amount

Ave. cost

0.3

45,445

0.8

426,024

0.3

48,499

0.2

0.6

482,517

297,579

4.1

0.6

311,166

3.5

327,553

3.4

694,678

2.3

782,635

1.8

858,569

1.6

Philippine Peso
Foreign currency

505,690

2.3

565,586

1.7

651,951

1.6

188,988

2.2

217,049

2.0

206,618

Total deposits

1.8

694,678

2.3

782,635

1.8

858,569

1.6

50,973

5.0

49,188

3.6

53,164

4.6

3,594

2.0

39,825

3.6

44,565

3.1

54,567

4.7

89,013

3.6

97,729

4.2

749,245

2.4

871,648

1.9

956,298

1.9

(in P millions, except Average Cost in percentage terms)


Deposits
By type

By currency

Borrowings
Philippine Peso
Foreign currency
Total borrowings
Total

Notes:
(1)

Average cost of funding represents total interest expense for the period, divided by the average daily liability for the
respective period, expressed as a percentage.

(2)

For the purposes of this table, borrowings consists of bills payable and subordinated notes payable.

Deposits continue to be the Banks main funding source, accounting for 92.7% and 89.8% of total
funding sources as at 31 December 2009 and 2010, respectively, and 89.8% of total funding sources as
at 31 December 2011. The Banks deposits grew at an annual compounded average rate of 16.4%
from 31 December 2005 to 31 December 2010, reaching =
P782.6 billion as at 31 December 2010. This
historical growth was driven by increased marketing efforts by the Banks branches and the Banks
mergers and acquisitions. As at 31 December 2011, total deposits increased to =
P858.6 billion,
approximately 75.9% of which were denominated in Pesos and mostly in tenors of less than one year,
while approximately 24.1% were denominated in foreign currencies, predominantly U.S. dollars. The
Banks foreign currency deposits and funding are primarily handled through its FCDU operation, which
is permitted to accept deposits and extend credit in foreign currencies. As at 31 December 2010 and
31 December 2011, the Banks foreign currency deposits made up 27.7% and 2 4. 1 %, respectively, of
its total deposits.
As at 31 December 2010 and 2011, approximately 60.2% and 61.8%, respectively, of the Banks
outstanding deposits were in the form of demand and savings deposits. The Bank also sources funds
through borrowings from local and foreign banks, deposit substitutes and rediscounting facilities booked
under bills payable. Bills payable also includes funding from specialized lending programs amounting to
=
P2.9 billion and =
P1.7 billion, as at 31 December 2010 and 2011, respectively.
As at 31 December 2010 and 2011, the Banks total bills payable amounted to =
P65.9 billion and =
P59.5
billion, respectively. Approximately 39.5% and 25.1%, of bills payable were denominated in Pesos as

128

at 31 December 2010 and 2011, respectively.


The Bank also maintains credit lines with domestic commercial banks and financial institutions in the
interbank market primarily for liquidity management purposes. Interbank borrowings are typically of
short-term duration of between one day and a few weeks and have historically accounted for a
r elatively minor portion of the Banks total funding requirements. The Bank is generally a net lender in
the interbank call loan market and funds sourced from net interbank borrowings are minimal and
generally of short duration.
The Banks subordinated notes payable amounted to =
P23.2 billion and =
P38.3 billion as at 31 December
2010 and 2011, respectively, which were issued in November 2007, May 2008, March 2009, June 2011
and October 2011.
The BSP is a lender of last resort to the Philippine banking industry. The Bank has not had to resort
to this facility but has managed its liquidity by participation in the interbank market in the Philippines.
The Bank is a member of the PDIC, which insures all deposit accounts by a depositor maintained in the
same right and capacity for up to a maximum of =P500,000.00 per depositor. The PDIC is funded by
semi-annual assessment fees at a prescribed percentage of the Banks deposit liabilities less certain
exclusions.

Liquidity
Pursuant to regulations of the BSP, commercial banks are required to maintain a statutory legal reserve
of 10% of Peso deposits and deposit substitutes and a liquidity reserve of 11% of the same base starting
5 August 2011. Statutory legal reserves may be in the form of cash in vault or deposits with the BSP.
Liquidity reserves may be placed in special deposit accounts with the BSP. On the FCDU side, the Bank is
required to maintain at least 30% of deposit liabilities in liquid assets. The Bank has complied with the
legal and liquidity reserve requirements for both the Peso and FCDU books.
As at 31 December 2010 and 2011, the Banks liquid assets amounted to =
P426.7 billion and =
P391.9 billion,
equal to 42.6% and 35.7%, respectively, of the Banks total assets. Liquid assets include cash and other
cash items, due from BSP, due from other banks, interbank loan receivables and investment securities.
The following table sets forth information with respect to the Banks liquidity position as at the dates
indicated:

2009

As at 31 December
2010

2011

348,336

426,668

391,926

Financial Ratios
Liquid Assets-to-Total Assets

40.4

42.6

35.7

Liquid Assets-to-Total Deposits

50.1

54.5

45.7

Net Loans-to-Total Deposits

65.3

66.2

75.2

(in P millions, except ratios in percentages)

Liquidity Position
Liquid Assets

129

Lending
As at 31 December 2009 and 2010, the Banks total gross loan portfolio on a consolidated basis
amounted to =
P472.7 billion and =
P541.5 billion, respectively, representing approximately 54.8% and
54.1%, respectively, of its total assets as at that date. As at 31 December 2011, the Banks total gross
loan portfolio, on a consolidated basis, amounted to =
P670.1 billion, representing approximately 61.1%
of its total assets as at that date. The Banks gross loan portfolio grew at a compounded annual growth
rate of 21.7% from 31 December 2006 to 31 December 2011, primarily as a result of acquisitions and
mergers and the Banks efforts to expand its client base and encourage loan utilization of existing clients
while managing credit quality, minimizing funding risk and maintaining an appropriate asset mix.
Industry Concentration
The manufacturing, financial intermediaries, wholesale and retail trade, and real estate sectors
represent the largest sectors of the Banks loan portfolio, representing 16.7%, 14.6%, 14.1% and
10.3%, respectively, of the Banks loan portfolio as at 31 December 2010 and 15.1%, 12.6%, 15.8%
and 11.6%, respectively, of the Banks loan portfolio as at 31 December 2011.
Under guidelines established by the BSP, the BSP considers that concentration of credit exists when the
total loan exposure to a particular industry exceeds 30% of the total loan portfolio. BSP regulations
require banks to allocate 25% of their loanable funds for agricultural credit in general, of which at least
10% shall be made available for agrarian reform credit. In the absence of qualified borrowers, a bank
may temporarily meet all or a portion of its agrarian reform and agricultural lending requirements by
investing in eligible government securities under certain conditions. As with most banks in the
Philippines, the Bank is not in strict compliance with this standard.
The Bank maintains a flexible policy towards its exposure to various industries, in principle avoiding
exposure of more than 20% to a particular industrial sub-sector of the economy, and 30% in the case
of the manufacturing sub-sector. The distribution of the Banks loan portfolio by industry is also subject
to seasonal fluctuations.

Maturity:
The following table sets forth an analysis of the Banks loans by maturity:
As at 31 December
2009
Amount

2010
%

Amount

2011
%

Amount

(in P millions, except percentages)


Due within one year

190,636

40.3

211,321

39.0

237,812

35.5

74,168

15.7

87,847

16.2

100,943

15.0

Due beyond five years

207,880

44.0

242,344

44.8

331,391

49.5

Total

472,684

100.0

541,512

100.0

670,146

100.0

Due within one to five years

Loan Currencies:
As at 31 December 2010 and 2011, 82.4% and 83.5%, respectively, of the Banks loan portfolio were
denominated in Pesos and 17.6% and 16.5%, respectively, were denominated in foreign currency, a
130

substantial proportion of which was comprised of U.S. dollars.

Interest Rates:
As at 31 December 2011, a substantial portion of the Banks total loan portfolio was on a floating interest
basis. Loan pricing is set by the Banks asset and liability committee on a weekly basis, and is driven by
market factors, the Banks funding position and the credit risk associated with the relevant borrower. The
Bank sets interest rates for Peso-denominated loans based on the Philippine Dealing System Treasury
Fixing (PDSTF) rate and, from time to time, the higher of the PDSTF and the BSPs Special Deposit
Account rate. Interest rates for U.S. dollar-denominated loans are based on the U.S. dollar London
Interbank Offer Rate. The margins on these interest rates, which range from 1% to 5%, are determined
by reference to the credit risk of the relevant borrower.
The Banks pricing policy with respect to its interest-bearing liabilities is also handled by ALCO during its
weekly meetings. CASA deposits typically pay no interest for deposits falling below a minimum
maintaining balance. The basic rate of regular Peso savings account deposits that are above the
minimum threshold is 0.375% per annum.
The Bank actively manages interest rate risk by monitoring current market interest rates and assessing
the impact of changes in interest rates on the Banks net interest income. See Risk Management
Interest rate risk management below.

Size and Concentration of Loans:


The BSP imposes a limit on the size of a banks financial exposure to any single person or group of
connected persons to 25% of the banks total unimpaired paid-in capital, including paid-in surplus,
retained earnings and undivided profit, net of valuation reserves and other adjustments as may be
required by the BSP (the Single Borrowers Limit or SBL). This limit does not apply to the following
loans: (a) those secured by obligations of the BSP or of the Government; (b) those fully guaranteed
by the Government as to the payment of principal and interest; (c) those secured by U.S. treasury notes
and other securities issued by central governments and central banks of foreign countries with the
highest credit quality given by any two internationally accepted credit rating agencies; (d) those to the
extent covered by the hold-out or assignment of deposits maintained in the lending bank and held in the
Philippines; (e) those under letters of credit to the extent covered by margin deposits; and (f) those
which the Monetary Board may, from time to time, specify as non-risk items. As at 31 December 2011,
the Banks SBL was =
P19.6 billion. The Bank has complied with this SBL for all of its loans.
As at 31 December 2010 and 2011, the Banks ten largest borrowers accounted for =
P104.9 billion and
=
P123.6 billion, respectively, or 19.4% and 18.4% of the Banks outstanding loan portfolio of =P541.5
billion and =
P670.1 billion (excluding interbank loans).

Secured and Unsecured Loans:


The Bank principally focuses on cash flows in assessing the creditworthiness of borrowers. However, it
will secondarily seek to minimize credit risk with respect to a loan by requiring borrowers to pledge or
mortgage collateral to secure the payment of loans. Where it has determined that collateralization of a
loan is desirable, the Banks policy is to secure the full amount of the loan. As at 31 December 2010
and 2011, approximately 44.4% and 4 6 . 9 %, respectively, of total loans were extended on a secured
basis. Approximately 39.0% and 3 6 . 8 %, respectively, of these secured loans are backed by real estate
mortgages for each period.

131

The Banks general policy with respect to securing loans is to oversecure. With respect to loans secured
by real estate mortgages, in accordance with BSP guidelines, the Banks policy is that the maximum value
of such loans should not be in excess of 80% of the assessed value of the property provided as security
for such loans. The Bank appraises real estate collateral using internal appraisers, but utilizes external
appraisers for loans that are syndicated or involve sharing of collateral among lenders.

Credit Rating/Scoring System:


The Bank has credit rating/scoring systems in place to assess the credit risk associated with a
prospective or existing loan account for both the corporate and consumer lending business. The Banks
credit rating system uses a combination of quantitative and qualitative factors, which generally assess
the financial position of the borrower.
For all loans of =
P50.0 million or more for corporate borrowers and loans of =
P35.0 million or more for
the Banks middle-market borrowers, the Risk Management Group (RMG) will conduct the credit risk
review directly. For those not within their coverage, the credit rating is conducted by the assigned
Institutional Banking Group account officer. The Bank updates the rating of an existing loan account at
least once a year, which is normally the credit renewal date. However, the Bank may adjust the credit
rating within a shorter period if there are identified factors which could affect the borrowers credit
quality, or the Bank becomes aware of any adverse development with respect to the borrower or
secured collateral.
For the small and medium enterprise borrowers with loan facilities of =
P10.0 million and below, a Credit
Scoring System is used to evaluate creditworthiness. It consists of factors related to both customer and
collateral.
On the other hand, Application and Behavior scoring models are adopted for the consumer loans
unsecured portfolio, namely Credit Card and Personal Loans. The scoring models are used for
adjudication of new loan applications as well as in account management such as credit line increases
and renewal. Pre-qualification scorecards are likewise used to mine the existing Bank depositors and SM
Advantage customers for credit card issuance.

Credit Approval Process:


Before the Bank approves any extension of credit, the Bank first identifies the needs of the prospective
borrower, analyses the appropriateness of the exposure and evaluates any inherent risks. The Bank
assigns an account officer to every prospective borrower to start the credit approval process. The
account officer identifies the borrowing requirements of the client and assists in the preparation of the
loan application together with the required documentary support. The account officer further
determines whether a property appraisal is warranted and, if so, is involved in overseeing the appraisal
process. The account officer also conducts bank checking and credit reviews of the prospective borrower
with the assistance of the credit support units. For borrowers from the middle-market segments, the
account officer will pay particular attention to validating the borrowers financial position from different
information sources. For transactional lending, the account officer may focus more on the size and
quality of cash flows from the transaction, and less on the financial position of the borrower itself.
The Executive Committee, which includes the Banks Chairman, Vice Chairman, the President, a Bank
Director and the head of RMG, undertakes the analysis and evaluation of the credit proposal based on
the recommendations of the senior credit officers. The Executive Committee deliberates on the viability
of the credit proposal in general, but, more particularly, on the appropriateness of the credit extension
132

and risks involved.

Credit Monitoring and Review Process:


Pursuant to the BSPs Manual of Regulations for Banks (the Manual), the Bank is required to establish
a system of identifying and monitoring existing or potential problem loans and other risk assets and of
evaluating credit policies with regard to prevailing circumstances and emerging portfolio trends. In
compliance with this requirement, the Bank has established credit support units under the RMG to review
and monitor individual accounts within a particular portfolio to identify existing and potential areas of
deterioration and assess the risks involved. In addition, the credit support units evaluate the degree to
which a particular lending unit is complying with existing credit management policies.
The evaluation of the individual loan accounts culminates in the classification of the account. The
classification indicates the degree or gravity of the perceived problems of the account reviewed. The
reviewed loan accounts are classified in accordance with the standard classifications set forth in the
Manual.
The review and recommended classification of a loan account are sent for comments to the assigned
account officer and thereafter forwarded to the applicable unit head and respective heads of Corbank
and Combank for further review. Either the Banks President, Vice Chairman or RMG head may give final
approval of a loan accounts classification.
The Bank and its subsidiaries will, from time to time and in the ordinary course of business, enter into
loans with DOSRI. All such loans are on commercial, arms length terms. The General Banking Law
(Republic Act No. 8791) and BSP regulations require that the total outstanding loans, other credit
accommodations and guarantees to DOSRI shall not exceed 100% of the Banks net worth or 15%
of the Banks total loan portfolio, whichever is lower. The amount of any loan to a DOSRI of the Bank,
of which 70% must be secured, may not exceed the aggregate amount of their unencumbered deposits
with the Bank and the book value of their paid-in capital investments in the Bank. The Bank is required
to report the level of DOSRI loans to the BSP on a weekly basis.
As at 31 December 2010 and 2011, DOSRI loans accounted for =
P35.5 billion and =
P42.8 billion,
respectively, or approximately 6.6% and 6.4%, respectively, of the Banks total loans. Of those amounts,
=
P35.3 billion and =
P42.6 billion (which includes secured non-risk loans not subject to SBL ceiling), were
accounted for by t h e Group as at 31 December 2010 and 2011, respectively.

Loan Loss Provisioning:


The Bank classifies loans as non-performing in accordance with the guidelines of the BSP, which require
banks to classify their loan portfolios based on perceived levels of risk to encourage timely and adequate
management action to maintain the quality of their loan portfolios. These classifications are then used
to determine the minimum levels of allowances for loan losses which banks are required to maintain.
For corporate and commercial loans, the Bank classifies non-performing loans based on four different
categories established by the BSP, which correspond to levels of risk:

Loans especially mentioned are loans which the Bank believes have potential weaknesses that
deserve managements close attention, and which deficiencies, if left uncorrected, could affect
repayment;

133

Substandard loans are those which the Bank believes involve a substantial and unreasonable
degree of risk to the Bank;

Doubtful loans are those for which the Bank believes collection in full, either according to their
terms or through liquidation, is highly improbable, and substantial loss is probable; and

Loss loans are those which the Bank believes are impossible to collect or are worthless.

The appropriate classification is generally made once payments on a loan are in arrears for more than
90 days, but may be made earlier when the loan is not yet past due under certain circumstances,
including where there is defective documentation with respect to the loan. Once interest on a loan is
past due for 90 days, the Bank will create a provision in respect of the interest accrued during the 90-day
period and classify the entire principal outstanding under such loan as past due, and it may initiate
calling on all loans outstanding to that borrower as due and demandable.
The RMG monitors compliance with BSP regulations with regard to loan loss provisioning. The Bank
reviews its risk assets on a portfolio basis at least annually and, since June 2004, by account on a monthly
basis in accordance with prescribed policy guidelines and the relevant BSP categorization.
The following is a summary of the risk classification of the parent banks aggregate loan portfolio (as a
percentage of total outstanding loans):
As at 31 December
2009

(in P millions, except percentages)

Amount

2010
%

Amount

2011
%

Amount

Classified
Especially mentioned

4,416

1.0

4,836

0.9

14,455

2.2

Substandard

7,926

1.7

8,999

1.7

5,567

0.8

Doubtful

3,152

0.7

2,893

0.6

5,335

0.8

12,686

2.8

15,554

2.9

13,755

2.1

Loss

28,180

6.2

32,282

6.1

39,112

5.9

Unclassified

428,861

93.8

498,396

93.9

621,579

94.1

Total

457,041

100.0

530,678

100.0

660,691

100.0

Total classified

The Banks allowance for loan impairments is made of a specific component and a general unallocated
component. For corporate loans, the specific component is based on the Banks classification of
individual loans as described above. The general component represents a blanket reserve required by
the BSP, equivalent to 1% of the outstanding balance of unclassified loans other than restructured loans
less non-risk loans, and 5% of the outstanding balance of unclassified restructured loans less the
outstanding balance of restructured non-risk loans.
The Board has discretion as to how frequently it writes off its classified loans, provided that these are
made against provisions for probable losses or against current operations. Prior BSP approval is required
to write off a DOSRI loan account.
Past-due accounts of both Corbank and Combank are initially placed on a watch list for closer
monitoring and supervision. Past-due loans are then referred to the Banks Remedial Management Unit
if the Bank has determined (i) such loans to be uncollectible, (ii) to terminate its relationship with the
borrower or (iii) recovery of such loans will require special management.
134

Remedial Management:
The Remedial Management Unit directly supervises the management of past due loans that are referred
to it. For problem loans management, the Bank has two specialized remedial management units to
handle corporate/commercial loans and consumer loans. A problem account is assigned to an account
officer who evaluates, determines and proposes the appropriate remedial recourse available to the Bank.
Commercial solutions instituted include restructuring, payment arrangements, reduction of loan to
serviceable level via sale of collateral and/or unencumbered assets or dacion en pago (payment in kind).
In case a commercial solution ceases to be feasible, the Bank undertakes legal action, through its legal
department, for either foreclosure of loan collateral or criminal/civil collection suits.
Foreclosed assets and assets conveyed to the Bank via dacion en pago goes to the Banks ROPA
Management Team which monitors redemption, possession and consolidation of acquired properties.
From past due loans, acquired assets are classified as ROPA. Eventually, an acquired property goes
up for sale signaling end of the remedial process.
Taking into account cash or non-cash payments that can be derived from the borrower, account officers
review and continually assess impaired values of each problem account. Furthermore, they compute for
the present value of an accounts expected/potential collection to determine any impairment in value.
The impaired value is then compared with the credit classification and booked provision. Any
adjustment, if necessary, is made accordingly.
All remedial actions require approval of the Banks Management Credit Committee or Executive
Committee depending on the amount of obligation and/or complexity of remedial action. Disposition of
the Banks acquired assets, likewise requires approval of the Executive Committee.

Non-Performing Loans:
The table below sets forth details of the Banks non-performing loans, non-accruing loans, ROPA,
non-performing assets (as described below), restructured loans and write-offs for loan losses for the
specified periods:

As at 31 December
2009

2010

2011

(in P millions, except percentages)

Non-performing loans

23,766

25,513

22,979

472,684
5.0

541,512
4.7

670,146
3.4

4.7

4.5

3.4

15,573

15,305

11,771

Non-performing assets
Non-performing assets as percentage of total resources (%)

41,066

43,419

37,598

4.8

4.3

3.4

Allowance for impairment of assets

20,695

26,107

27,206

Allowance for loan impairments

18,968

23,507

24,358

Allowance for ROPA impairments

1,727

2,600

2,848

79.8

92.1

106.0

Total loans
Total non-performing loans to total loans excluding interbank loans (%)
Total non-performing loan to total loans including interbank loans (%)
ROPA net

(1)

(2)

(3)

Allowances for loan impairments as a percentage of total non-performing loans


(%)
Allowances for impairment of assets as a percentage of non-

135

performing assets (%)

50.4

60.1

72.4

Total restructured loans

5,519

5,132

4,156

Current

533

168

48

4,480

4,706

3,854

506

258

254

Restructured loans as percentage of total loans (%)

1.2

0.9

0.6

Loans written off

968

26

3,974

Past due
In litigation

Notes:
(1) Total non-performing loans divided by total loans excluding interbank loans.
(2) Total non-performing loans divided by total loans including interbank loans.
(3) Non-performing assets comprise of ROPA (gross) and non-performing loans.

The Bank classifies loans as past due upon the occurrence of certain non-payment events, and then
reclassifies such loans as non-accruing or non-performing upon continuing non-payment or
payment default, in accordance with BSP guidelines. In the case of loans requiring repayment of
principal at maturity or scheduled payment of principal or interest due quarterly (or longer), failure to
make such payment on the due date triggers non-performing classification. In the case of loans
requiring payment of principal or interest on a monthly basis, continued failure to make payment for
three months from the due date triggers non-performing classification.
Loans that are subsequently foreclosed or transferred to the Banks ROPA account are removed from
the non-performing category. Accrued interest arising from a loan account is classified according to
the classification of the corresponding loan account. In accordance with BSP guidelines, loans and other
assets in litigation are classified as non-performing assets. The Banks non-performing assets principally
comprise ROPA and non-performing loans.

Foreclosure and Disposal of Assets


The Banks preferred strategy for managing its exposure to non-performing loans that are secured is to
restructure the payment terms of such loans. The Bank will only foreclose on a non-performing loan if
restructuring is not feasible or practical, or if the borrower cannot or will not repay the loan on acceptable
terms. In the case of larger loans, the Bank may also consider accepting a dacion en pago arrangement.
In 2011, the Bank sold =
P3.0 billion of acquired assets in ROPA. The Bank had a net ROPA of =
P15.6 billion
and =
P15.3 billion, as at 31 December 2009 and 2010, respectively, consisting of various real estate
properties and shares of stock in several companies. As at 31 December 2011, the Banks net ROPA
amounted to =
P11.8 billion, or 2 3 . 1 % lower than the =
P15.3 billion as at 31 December 2010.
Under the current regulations, the Bank is required to conduct impairment testing on its acquired assets,
which becomes the basis for the provisioning levels. The Banks valuation reserves on ROPA amounted
to =
P1.7 billion, =P2.6 billion and =
P2.8 billion as at 31 December 2009, 2010 and 2011, respectively.

Risk Management
To manage the financial risks of holding financial assets and liabilities, the Bank operates an integrated
risk management system to address the risks it faces in its banking activities, including liquidity, interest
rate, credit and market risks. The Banks risk management objective is to adequately and consistently
evaluate, manage, control, and monitor the risk profile of the Banks statements of financial position to
optimize the risk-reward balance and maximize return on the Banks capital. The Banks Risk
Management Committee (RMC) has overall responsibility for the Banks risk management systems and
136

sets risks management policies across the full range of risks to which the Bank is exposed. Specifically,
the Banks RMC places trading limits on the level of exposure that can be taken in relation to both
overnight and intra-day market positions. With the exception of specific hedging arrangements, foreign
exchange and interest rate exposures associated with these derivatives are normally offset by entering
into counterbalancing positions, thereby controlling the variability in the net cash amounts required to
liquidate market positions. Within the Banks overall risk management system, the ALCO is responsible
for managing the Banks statement of financial position, including its liquidity, interest rate and foreign
exchange related risks. In addition, ALCO formulates investment and financial policies by determining
the asset allocation and funding mix strategies that are likely to yield the targeted financial results.
Separately, the RMG is mandated to adequately and consistently evaluate, manage, control, and monitor
the overall risk profile of the Banks activities across the different risk areas (i.e., credit, market, liquidity,
and operational) to optimize the risk-reward balance and maximize return on capital. The RMG has
responsibility for the setting of risk policies across the full range of risks to which the Bank is exposed.
In the performance of its function, the RMG observes the following framework:

It is responsible for policy formulation in coordination with the relevant businesses/functions


and ensures that proper approval for the manuals/policies is obtained from the appropriate
body.

It then disseminates down the approved policies to the relevant businesses/functions after
which, pertinent authorities are delegated down to the businesses/functions to guide them in
the conduct of their businesses/functions. The RMG then performs compliance monitoring and
review to ensure approved policies are adhered to.

It is responsible for clarifying interpretations of risk policies/guidelines raised by the Business


Heads/Units.

When adverse trends are observed in the account/portfolio, the RMG is responsible for flagging
these trends and ensuring relevant policies for problem accounts/portfolio management are
properly applied.

The RMG is responsible for the direct management of accounts in the Banks non-performing
loans/property-related items in litigations portfolio and ensures that appropriate strategies are
formulated to maximize collection and/or recovery of these assets.

It is also responsible for regular review and monitoring of accounts under its supervision and
ensuring that the accounts loan classification is assessed timely and accurately.

Liquidity Risk Management


Liquidity risk is the risk that there could be insufficient funds available to meet the credit demands of the
Banks customers adequately and repay deposits on maturity. The Bank manages liquidity risk by holding
sufficient liquid assets of appropriate quality to ensure short-term funding requirements are met and by
maintaining a balanced loan portfolio which is repriced on a regular basis. In addition, the Bank seeks
to maintain sufficient liquidity to take advantage of interest rate and exchange rate opportunities when
they arise.
The Banks principal source of liquidity is comprised of =
P33.1 billion of cash and =
P255.8 billion of
short-term deposits with maturities of less than one year as at 31 December 2011. In addition to
regulatory reserves, the Bank maintains what it believes to be a sufficient level of secondary reserves
in the form of liquid assets such as short-term trading and investment securities that can be converted
to cash quickly. Of a net portfolio of trading and investment securities of =
P197.3 billion and =
P188.4 billion,
respectively, as at 31 December 2010 and 2011, =
P25.9 billion and =
P15.8 billion, respectively, comprised
137

trading and investment securities with remaining maturities of one year or less. The Bank also uses the
interbank market as a means of maintaining a sufficient level of liquid assets. It had interbank loan
receivables of =
P26.2 billion and =
P7.3 billion as at 31 December 2010 and 2011, respectively. In addition,
the Bank manages liquidity by maintaining a loan portfolio with a sufficient proportion of short-term
loans. As at 31 December 2011, =P275.7 billion, or 40.9%, of the Banks loans and other receivables
comprised loans with remaining maturities of less than one year, including past-due loans.

Interest Rate Risk Management


A critical element of the Banks risk management program consists of measuring and monitoring the risks
associated with fluctuations in market interest rates on the Banks net interest income. The Bank
prepares gap analysis to measure the sensitivity of its resources, liabilities and off-book items to interest
rate fluctuations. The focus of analysis is the impact of changes in interest rates on accrual or reported
earnings. This analysis would give management a glimpse of maturity and repricing profile of its interest
sensitive resources and liabilities. An interest rate gap report is prepared by classifying all assets and
liabilities into various time buckets according to contracted maturities or anticipated repricing dates, and
other applicable behavioral assumptions. The difference in the amount of resources and liabilities
maturing or being repriced in any time period category would then give the Bank an indication of the
extent to which it is exposed to the risk of potential changes in net interest income.

Credit Risk Management


Credit risk is the risk that the counterparty in a transaction may default and arises from lending, trade
finance, treasury, derivatives and other activities undertaken by the Bank. The Bank manages its credit
risk and loan portfolio through the RMG, which undertakes several functions with respect to credit risk
management.
The RMG undertakes credit analysis and review to ensure consistency in the Banks risk assessment
process. The RMG performs risk ratings for corporate accounts and assists the design and development
of scorecards for consumer accounts. It also ensures that the Banks credit policies and procedures are
adequate to meet the demands of the business. The RMG is also responsible for developing procedures
to streamline and expedite the processing of credit applications.
The RMG also undertakes portfolio management by reviewing the Banks loan portfolio, including the
portfolio risks associated with particular industry sectors, loan size and maturity, and development of a
strategy for the Bank to achieve its desired portfolio mix and risk profile.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted
in relation to one borrower, or groups of borrowers, and to industry segments. Such risks are monitored
on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by
product and industry sector are approved quarterly by the RMC. Exposure to credit risk is managed
through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital
repayment obligations and by changing these lending limits when appropriate. Exposure to credit risk is
also managed in part by obtaining collateral and corporate and personal guarantees.
The RMG reviews the Banks loan portfolio in line with the Banks policy of not having significant
unwarranted concentrations of exposure to individual counterparties, in accordance with the BSPs
prohibitions on maintaining a financial exposure to any single person or group of connected persons in
excess of 25% of its net worth.

138

Market Risk Management


The Banks exposure to market risk, the risk of future loss from changes in the price of a financial
instrument, relates primarily to its holdings in foreign exchange instruments, debt securities and
derivatives. The Bank manages its risk by identifying, analyzing and measuring re levant or likely market
risks. Market Risk Management recommends market risk limits based on relevant activity indicators for
approval by the Banks RMC and Board of Directors.
The Banks market risk management limits are generally categorized as limits o n:

Value-at-risk The RMG computes the value-at-risk benchmarked at a level which is a


percentage of projected earnings. The Bank uses the value at risk (VaR) model to estimate the
daily potential loss that the Bank can incur from its trading book, based on a number of
assumptions with a confidence level of 99%. The measurement is designed such that exceptions
over dealing limits should only arise in very exceptional circumstances.

Stop loss The RMG sets the amount of each risk-bearing activity at a percentage of the
budgeted annual income for such activity.

Nominal position The RMG sets the nominal amount to prevent over-trading, excessive
concentration, and to limit financial loss supplementing other already established limits.

Trading volume The RMG sets the volume of transactions that any employee may execute at
various levels based on the rank of the personnel making the risk-bearing decision.

Earnings-at-risk The RMG computes the earnings-at-risk based on a percentage of projected


annual net interest income.

The Bank uses the VaR model to estimate the daily potential loss that the Bank can incur from its trading
book. VaR is one of the key measures in the Banks management of market risk. VaR is defined as a
statistical estimate of the maximum possible loss on a given position during a time horizon within a given
confidence interval. The Bank uses a 99% confidence level and a 260-day observation period in VaR
calculation. The Banks VaR limit is established as a percentage of projected earnings and is used to alert
senior management whenever the potential losses in the Banks portfolios exceed tolerable levels.
Because the VaR measure is tied to market volatility, it therefore allows management to react quickly
and adjust its portfolio strategies in different market conditions in accordance with its risk philosophy
and appetite. The VaR model is validated through back-testing.
Although VaR is an important tool for measuring market risk, the assumptions on which the model is
based do give rise to some limitations, including the following:

A 1-day holding period assumes that it is possible to hedge or dispose of positions within that
period. This is considered to be a realistic assumption in almost all cases but may not be the case
in situations in which there is severe market illiquidity for a prolonged period.

A 99% confidence level does not reflect losses that may occur beyond this level. Even within the
model used, there is a one% probability that losses could exceed the VaR.

VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on
positions during the trading day.

The use of historical data as a basis for determining the possible range of future outcomes may
139

not always cover all possible scenarios, especially those of an exceptional nature.

The VaR measure is dependent upon the Banks position and the volatility of market prices. The
VaR of an unchanged position reduces if the market price volatility declines and vice versa.

The limitations of the VaR methodology are recognized by supplementing VaR limits with other position
and sensitivity limit structures, including limits to address potential concentration risks within each
trading portfolio. In addition, the Bank uses a wide range of stress tests to model the financial impact of
a variety of exceptional market scenarios on individual trading portfolios and the Banks overall position.
Stress VaR is also performed on all portfolios as a complementary measure of risk. While VaR deal s with
risk during times of normality, stress testing is used to measure the potential effect of a crisis or low
probability event.

Foreign Exchange Risk Management


The Bank manages its exposure to foreign exchange risk by maintaining foreign currency exposure
within existing regulatory guidelines and at a level that it believes to be relatively conservative for a
financial institution engaged in that type of business.
The Banks net foreign exchange exposure is computed as its foreign currency assets less foreign
currency liabilities. BSP regulations impose a cap of 20% of unimpaired capital, or U.S.$50 million,
whichever is lower, on the consolidated excess foreign exchange holding of banks in the Philippines. In
the case of the Bank, its foreign exchange exposure is primarily limited to the day-to-day,
over-the-counter buying and selling of foreign exchange in the Banks branches as well as foreign
exchange trading with corporate accounts and other financial institutions. The Bank, being a major
market participant in the Philippine Dealing System, may engage in proprietary trading to take
advantage of foreign exchange fluctuations.
The Banks foreign exchange exposure during the day is guided by the limits set forth in the Banks
Risk Management Manual. These limits are within the prescribed ceilings mandated by the BSP. At the
end of each day, the Bank reports to the BSP on its compliance with the mandated foreign currency
exposure limits. In addition, it also reports to the BSP on the respective foreign currency positions of its
subsidiaries.
As at 31 December 2011, the Banks net foreign exchange exposure was a negative U.S.$11.5 million
inclusive of the foreign exchange position of the Banks subsidiaries.

The China Banking Corporation


China Bank was incorporated on 20 July 1920 and commenced business on 16 August of the same year
as the first privately owned local commercial bank in the Philippines. It resumed operations after World
War II on 23 July 1945 and played a key role in the post-war reconstruction and economic recovery by
providing financial services to businesses and entrepreneurs. China Bank was listed on the local stock
exchange in 1947 and acquired its universal banking license in 1991. It was also the first Philippine bank
to offer telephone banking and joined seven other banks in setting up BancNet, the countrys largest
ATM network in 1988. In 2005, China Bank launched China Bank Online e-banking portal for retail and
corporate customers. The following year, China Bank completed its first international secondary share
offering. China Bank acquired Manila Bank with 75 branch licences and launched its bancassurance joint
venture with Manulife Phils. through a 5% equity stake in Manulife China Bank Life Assurance Corp.
(MCB Life) in 2007. In 2008, China Bank successfully issued its maiden offering of five-year long-term

140

negotiable certificate of deposit (LTNCD) and relaunched the former Manila Banking Corporation main
office in Ayala Avenue as the China Bank Savings headquarters; its branch network exceeded the 200
mark. In 2009, China Bank was cited as one of the 11 Philippine companies and one of two Philippine
banks which outperformed their peers of Top 100 publicly-listed ASEAN companies in creating wealth for
shareholders, based on the study by Stern Stewart & Co. In 2011, China Bank was awarded Best Wealth
Management House in the Philippines China Banks Private Banking Group (PBG) and was also cited as
a rising star an emerging private banking powerhouse in the country at The Asset Triple A
Investment Awards. China Bank received Straight Through Processing (STP) award for being a top
Commercial Payment Bank in the Philippines. China Bank was also recognized by Bank of America Merrill
Lynch for achieving an exceptionally high straight through processing rate for commercial payments in
2010.
As at 31 December 2011, China Bank was the fifth largest commercial bank in the country in terms of
market value and the tenth largest in terms of assets.
China Bank provides a wide range of domestic and international banking services catering to the
corporate, middle-market and consumer sectors. Its core banking franchise stems mainly from its
90-year history in the Philippines, a factor that has enabled it to become deeply entrenched within the
socioeconomic fabric of the Chinese-Filipino community.
As a full universal bank, its core activities include deposit taking, corporate and SME lending, retail loans
including mortgage and auto loans, treasury and foreign exchange trading, and trust and investment
management, internet and mobile banking services and remittances. It also provides insurance
products through its subsidiary Chinabank Insurance Brokers, Inc. and its bancassurance joint venture
MCB Life. Through MCB Life, China Bank clients have access to an array of life insurance and investment
products offered through the entire China Bank branch network by trained financial advisers. China
Banks remittance business has continued to expand through tie-ups with remittance companies and
exchange houses in the Middle East, Asia and major US cities.
As at 31 December 2011, China Banks Tier 1 capital adequacy ratio and total capital adequacy ratio were
1 6. 9 8% and 1 7. 8 0%, respectively.
China Bank reported net income of =
P5.01 billion for the year ended 31 December 2011, with an ROE
of 1 3 .7 2 % and ROA of 2. 0 4%. China Banks branch expansion plan will result in a combined branch
network of 400 by 2014. In 2011, China Bank opened 15 China Bank branches and 9 China Bank Savings
branches, bringing its total branch network to 293 branches and 475 ATMs nationwide. China Banks
293-strong branch network currently offers a wider suite of services such as wealth management,
bancassurance, non-life insurance, remittances and cash flow management. Complementing this
network is its thrift bank subsidiary CBC Savings Inc., which will market innovatively designed products
to new small and medium enterprises, retail and individual customers.
On China Banks 91st year, Fitch Ratings affirmed its credit ratings (individual rating of C/D) and the
national rating of AA- which is one notch below the top bank rating in the country. Capital Intelligence
rating agency also affirmed its credit rating on China Bank (Financial Strength BBB-) but recently
upgraded its Foreign Currency Long-Term rating to BB from BB- following the upgrade in the Philippines
sovereign rating.
China Bank has consistently proven its excellence in governance by being awarded the Gold award
(only bank among the gold awardee companies) by the Institute of Corporate Directors (ICD) in its
2010 Corporate Governance Scorecard (score of 95% above), recognizing its performance in protecting
the rights and equitable treatment of its shareholders, role of stakeholders, disclosure and transparency,
141

and Board responsibilities.


China Banks expansion plans will continue for the next three years as it goes full swing to reach its
goal of 400 branches by 2014. China Bank will continue to invest heavily in expanding its branch and
ATM networks and strengthen its technological capabilities. The hiring of key people and fresh talent is
a major priority area needed to strengthen and energize the organization, support the rapid expansion
of the branch network and the growth in new businesses.
For 2012, China Bank will continue to carry out its core strategies which include strengthening revenue
growth from its core businesses particularly on lending and treasury products, diversify its revenue
sources and maximize synergy with its new businesses such as wealth management, remittances,
bancassurance, cash management and its savings bank. China Bank will continue to strengthen its
ability to compete through improved customer focus, strong business & entrepreneurial spirit,
organizational transformation and operational efficiency.

Real Estate and Tourism


Introduction
On 1 August 2007, the Issuer approved to rationalize SM Land (formerly Shoemart) as the holding
entity for the real estate and tourism operations of the Group. On 8 October 2007, the Issuer and SM
Land entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965 common shares
in SMDC in exchange for 372,212 common shares in SM Land based on an independent valuation of the
respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC approved
the valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212 shares.
The share swap resulted in an increase of the Issuers ownership in SM Land from 64.9% to 66.9% while
the effective ownership in SMDC was reduced to 43.6% from 59.4% The share swap also resulted in
SMDC becoming a 65.0% owned subsidiary of SM Land.
The Groups residential real estate development, commercial real estate development and tourism
projects are expected to become a more important contributor to profit growth in the next few years.
The Group is using its land bank to lay the groundwork for various residential and commercial real estate
development projects in strategic locations, primarily targeting a wide range of Philippine consumers.
Part of the strategy is to develop the Groups land bank close to its malls.
In addition, the Group seeks to take advantage of the growing Philippine tourism sector. The Philippine
tourism sector is gaining particular attention from the Government as a focus area of investment and
growth for the country. In addition to residential projects, the Group has three principal property
projects, namely, Hamilo Coast, Tagaytay Highlands (developed by HPI) and SM Mall of Asia Complex,
all of which have a strong leisure and tourism theme. Hamilo Coast is a premium leisure residential
resort development along a 25-kilometre coastline in Nasugbu, Batangas. Tagaytay Highlands is a
mountain resort destination, while the SM Mall of Asia Complex is being developed as an alternative
central business district in Metro Manila.
The Groups experience spans across a wide range of property development projects, including
condominiums, housing and leisure properties. The Issuer believes the Groups leading position in
shopping mall development also assists the Group in identifying and managing property projects.
On 12 December 2008, the Group was granted one of four provisional licenses to operate gaming and

142

tourism facilities by Philippine Amusement and Gaming Corporation (PAGCOR) under the proposed
Bagong Nayong Filipino Entertainment City at Manila Bay, and, as a condition imposed by PAGCOR for
the grant of the license, the Group has committed to infuse US$1.0 billion in building the entertainment
and resort facilities in Manila Bay. The Group does not currently intend to manage the proposed gaming
facilities and will instead outsource such operations to an established international third-party gaming
operator.
For the years ended 31 December 2009, 2010 and 2011, SM Land and other real estate subsidiaries of
the Issuer contributed approximately 5%, 7%, and 10%, respectively, of the Issuers consolidated
revenues and approximately 11%, 13% and 15%, respectively, of its consolidated net income
attributable to equity holders of the parent. SM Land and other real estate subsidiaries of the Issuer
comprised approximately 12%, 18% and 19%, respectively, of the Issuers consolidated total assets
(excluding deferred tax) and approximately 7%, 11%, and 11%, respectively, of its consolidated total
liabilities (excluding deferred tax) as at 31 December 2009, 2010 and 2011, respectively.
Tourism Development
Manila Southcoast Development Corporation (Southcoast) is a 94.4% owned subsidiary of the Issuer.
Southcoast owns a 6,287-hectare property in Nasugbu Batangas, south of Manila. The property is
subdivided into 21 land parcels with titles registered in the name of Southcoast. Part of the property is
the 1,800-hectare designated Hamilo Coast project, which comprises 25 kilometres of coastline that
includes 13 beach coves.
The property will be linked to Ternate, Cavite, through a priority national public works project known as
the Nasugbu-Ternate Tourism Highway. It is currently reachable from Tagaytay and Nasugbu by means of
the same highway which has been completed up to the northern section of the property. Once the
Government completes construction of this highway linked to Metro Manila (currently expected to be
within year), it will be accessible by car within approximately 1.5 hours. A private two-kilometre access
road connects the beach area in Pico de Loro to the highway. The Issuer has also established a fast-ferry
service (the SM Ferry) to Hamilo Coast from SM Mall of Asia Complex which provides an alternative
means of transport to Hamilo Coast since end 2011.
Hamilo Coast consists of undeveloped hills overlooking the West Philippine Sea and connected
beachfront property. CDHI, a subsidiary of Southcoast, is developing the initial phase covering an area
of approximately 40 hectares and comprising of four condominium clusters with a total of 988 units, the
beach & country club and a resort hotel built around a four-hectare sea water lagoon. The project is
a complex of residential and leisure condominiums that offers spectacular views of the ocean, the cove,
and the surrounding hillside. In 2007, construction began on the beach club, as well as the Jacana
Condominium Project which have been completed in March 2009 and January 2010, respectively. In 2008,
construction began on the country club, as well as the Myna Condominium Project which have been
completed in July 2010 and June 2010, respectively. In 2009, construction for the Carola and Miranda
clusters began, and both are substantially completed and ready for turnover beginning second quarter
of 2012. Construction of the Pico de Loro Cove will require approximately =
P3 billion in funding over the
next three years.
Residential Development
SMDC. SMDC is the property arm of the Group, focusing on mid-market residential development projects.
SMDC also holds shares in certain group of companies.
SMDC is incorporated in the Philippines and wholly owns SM Synergy Properties Holdings, Corp., SM
Residences Corp, Landfactors Incorporated and Vancouver Lands, Inc. SMDC is listed in the PSE and as
143

at 31 December 2011 was 43.60% indirectly owned by the Issuer through its 65.18% ownership of
SM Land (formerly Shoemart) with an additional 4% owned by the Sy Family. SMDC had a market
capitalisation of =
P58.1 billion as at 16 April 2012.
For the year ended 31 December 2011, sales of real estate was at =
P16,184 million, a 77% increase over
=
P9,118 million sales during the same period in 2010, and total revenue was =
P16,880 million. Gross profit
margin was at 40% from 45% in 2010. As at 31 December 2010 and 31 December 2011, SMDCs total
assets stood at =
P43.70 billion and =P53.92 billion, total liabilities were at =
P18.04 billion and =
P18.52 billion,
with debt- equity ratio (being the ratio of Aggregate Consolidated Indebtedness over equity) of 39% and
31%, respectively.
The following table sets out the consolidated revenues and net income for SMDC for the years ended
31 December 2009, 2010 and 2011:
For the year ended 31 December
(in P millions)

2009

Revenue
Net income

2010

2011

5,262

9,118

16,184

1,861

3,022

4,175

The following table sets out the selected consolidated financial information for SMDC as at 31 December
2009, 2010 and 2011:
As at 31 December
(in P millions)

2009

2010

2011

Cash and cash equivalents

716

8,734

5,913

Investments held for trading

334

381

384

Available-for-sale investments

2,828

3,933

4,727

Land and development

7,866

16,680

19,801

Condominium units for sale

1,017

802

572

20,654

43,700

53,925

Total Assets

SMDCs performance for the year ended 31 December 2010 and 2011 was derived largely from the sale
of condominium units which generated gross profits from real estate of =
P4.08 billion and =
P6.51 billion,
respectively. In addition to its real estate operation, SMDC booked gains from sale of marketable
s ecurities amounting to =
P349.43 million and =
P101.33 million while income from interest and dividends
stood at =
P341.9 million and =
P452.4 million for the year ended 31 December 2010 and 2011, respectively.
SMDC currently has 17 ongoing residential property development projects:

Chateau Elysee . SMDC is developing Chateau Elysee, a six-cluster, six-storey residential condominium

project in a 4.7 hectare lot in Paraaque City, Metro Manila. This project offers one-bedroom and
two-bedroom units. Cluster one, comprising 384 units, was launched in the third quarter of 2003 and
completed in December 2004. Construction of cluster two with 384 units was completed in May 2006.
Construction of cluster three with 400 units was completed in May 2007. Construction of cluster six with
504 units was completed in December 2008. Construction of cluster five, with 560 units was completed
in November 2009. Construction of Cluster four with 588 units started in February 2010 and was
completed in June 2011. The Chateau Elysee project will have a total of approximately 2,820 units.

Mezza Residences . SMDCs first high-rise project is the Mezza Residences (Mezza), which is a =P3.2
144

billion mixed-use development project with 38-storey four-tower condominiums and commercial retail
area located across SM City Sta. Mesa, Manila. Each tower has 400 to 800 residential units comprised
of one-, two- and three- bedroom configurations, with floor areas ranging from 21 to 67 square metres.
Mezza consists of 2,332 saleable residential units, each priced between =
P1.7 million to just under =
P6.7
million, and 18 commercial units for lease with Savemore store as the anchor tenant. As at 31 December
2010, construction of Mezza towers one to four was 100% complete. SMDC had sold 98% of the units
in Mezza as at 31 December 2011.

Grass Residences . Grass Residences was launched in March 2008, a =P6.0 billion three-tower 40-storey

high-rise condominium project located behind SM City North EDSA, Manila. Tower 1 of Grass Residences
is comprised of 1,988 units, of which 9 4 % were sold as at 31 December 2011, and was completed in
December 2011. Tower 2 is comprised of 2,022 units, of which 8 2 % were sold as at 31 December
2011 and is expected to be completed in 4th quarter of 2013. Tower 3 is comprised of 1,987 units, of which
98% were sold. Construction of Tower 3 of Grass Residences commenced in May 2010 and is expected
to be completed in the 1st quarter of 2013.

Berkeley Residences . Berkeley Residences is a =P1.6 billion 35-storey high-rise condominium project

located at the university belt area of Quezon City. Berkeley Residences comprises 1,276 units, of which
9 8 % . were sold as at 31 December 2011, and construction was completed in June 2011.

Sea Residences . Sea Residences is a =P4.6 billion 15-storey residential and commercial condominium

project comprised of six buildings with 2,899 residential units and 21 commercial units, which is located
at Mall of Asia Complex Pasay City. Phase One of Sea Residences comprises of 1,191 units of which 9 7 %
were sold as at 31 December 2011. Phase Two comprises 904 units of which 9 8 % were sold as at 31
December 2011 and construction started in December 2009 and is expected to be completed in the first
quarter of 2012. Phase Three of Sea Residences comprises 804 units of which 9 9 % were sold as at 31
December 2011 and construction started in March 2010 and is expected to be completed in 2012.

Field Residences . Field Residences is a =P3.7 billion residential condominium project comprised of ten

buildings located behind SM Sucat, Paraaque. Buildings 1, 2, 3, 7 and 8 of Field Residences are
comprised of 1,974 units of which 7 4 % were sold as at 31 December 2011. Construction of buildings 1,
2 and 8 were completed in April 2010, May 2011 and November 2011, respectively. Buildings 3 and 7 are
expected to be completed in September 2012 and March 2013, respectively. Construction of the other
buildings of Field Residences had not yet started as at 31 December 2011.

Princeton Residences . Princeton Residences is a =P1.4 billion 38-storey high rise condominium project

located along Aurora Blvd., Quezon City. Princeton Residences comprises 1,096 units of which 6 3 % were
sold as at 31 December 2011, and is expected to be completed in August 2012.

Sun Residences. Sun Residences is a =P4.7 billion two 35-storey towers located along Espaa Blvd.,

Quezon City near Welcome Rotonda. Sun Residences Tower 1 comprises 2,057 units of which 8 4 % were
sold as at 31 December 2011. Tower 2 comprises 1,982 units of which 2 6 % were sold as at 31 December
2011. Construction of Tower 1 started in April 2010 and is expected to be completed in June 2013, Tower
2 is expected to be completed in December 2013.

Jazz Residences . Jazz Residences is a =P7.2 billion mixed use development project comprising of two
40-storey towers and two 50-storey towers located at N. Garcia corner Jupiter, Makati City. Towers A,
C & D of the project with 3,615 units were 7 9 % sold as at 31 December 2011. Construction of Tower
A started in April 2010 and is expected to be completed in March 2013 while construction of Tower
C started in October 2010 and is expected to be completed in the 1st quarter of 2014. Tower D and Tower
B are expected to be completed in 4th quarter of 2014 and March 2015, respectively.

Light Residences . Light Residences is a =P6.8 billion mixed use development project with three 42-storey
145

towers located along EDSA, Mandaluyong City. Construction of Phase 1 which consists of the podium
and Tower 1 started in March 2010 and is expected to be completed in May 2013. Construction of Phase
2 (Tower 3) started in June 2011. Construction of Phase 3 (Tower 2) started last quarter of 2011.

Wind Residences . Wind Residences is a =P15.4 billion residential condominium development with ten
20-storey towers located along Emilio Aguinaldo Highway, Tagaytay City. Construction of Tower 2 started
in September 2010 and is expected to be completed in May 2013. Towers 1 and 3 are expected to be
completed in July 2013 and March 2014, respectively. Construction of the other seven towers had not
started as at 31 December 2011.

M place @ South Triangle . Tower A started construction on January 2011 and is expected to be
completed in the 3rd quarter of 2013. Tower A comprises of 827 units of which 8 4 % were sold as
at 31 December 2011. Tower B started construction in July 2011 and is expected to be completed in the
1st quarter of 2014. Tower B comprises 912 units of which 7 6 % were sold as at 31 December 2011.
Tower C comprises of 912 units of which 4 2 % were sold as at 31 December 2011 and it will start
construction on January 2012 and is expected to be completed in the 3rd quarter of 2014. Estimated
cost to complete these towers is =
P3.5 billion.

Blue Residences . Blue Residences is a =P2.4 billion residential condominium with 40-storey tower
situated across Ateneo De Manila University in Quezon City. Construction of Blue Residences started on
October 2010. It comprises of 1,591 units of which 5 3 % were sold as at 31 December 2011 and is
expected to be completed in October 2013.

Mezza II Residences . Mezza II Residences is a =P2.0 billion residential condominium with 40-storey tower
and is located just beside the first Mezza Residences in Quezon City. Construction of Mezza II started on
December 2010. It comprises of 1,324 units of which 2 9 % were sold as at 31 December 2011 and is
expected to be completed in September 2014.

M Place @ Ortigas. M Place @ Ortigas is a =P1.2 billion residential condominium with 25-storey tower in
Pasig City. Construction of M Place @ Ortigas started on September 2011. It comprises of 1,172 units
of which 3 5 % were sold as at 31 December 2011 and is expected to be completed in the 1st quarter
of 2014.

Green Residences. Green Residences is a =P1.2 billion residential condominium with 50-storey tower
located in Taft Avenue, Manila. Construction of Green Residences started on August 2011. It comprises
of 3,378 units of which 2 6 % were sold as at 31 December 2011 and is expected to be completed in
the 1st half of 2016.

Shell Residences. Shell Residences is a =P5.6 billion residential condominium project located at Mall of
Asia Complex Pasay City. It comprises of four buildings with 3,130 residential units of which 2 3 % were
sold as at 31 December 2011. Construction started in last quarter of 2011 and is expected to be
completed in the second half of 2015.
SMDCs overall strategy is to progressively establish the building blocks of the companys real estate
operations to meet market demand and further strengthen the base building process while maximizing
returns from divestment on investments.
Although SMDC has changed its primary business function to property development, its asset portfolio
as at 31 December 2011 still consisted of approximately 9 % in equity investments and 9 1 % in real
estate assets. The bulk of SMDCs income is derived from property development. SMDCs property
development operations first generated revenue with the Chateau Elysee development in 2004. SMDC
146

continues to finance its property projects through internally generated funds, installment payments
from buyers and sale of receivables.
SMDC completed its stock rights offering last May 2011 for which 1.8 billion shares of stock were issued
at =
P6.38 per share. Net proceeds received amounted to =
P11.6 billion which yielded additional paid in
capital proceeds of =
P9.8 billion from the Rights Issue.
On 1 June 2010, SMDC issued 3-year 6.8% and 5-year 7.7% Fixed Rate Corporate Notes amounting
to =
P10 billion to not more than 19 institutional creditors.
HPI. HPI is a publicly listed high-end property development company which is 24% directly owned by
SMIC, 17.3% owned by SMDC and 17.4% owned by the Sy Family. It is planning, developing and selling
more projects in the Tagaytay Highlands mountain resort community which is an hour south of the
Makati central business district.
HPIs current projects are, as at 31 December 2011:

The Woodridge Place Phase I at Tagaytay Highlands The construction of the seven buildings
of The Woodridge Place was completed and turned over to unit owners in December 2010. HPI
generated approximately =P1.1 billion in revenue from the sale of the 71 units. All of the units
from the first phase have been sold.

The Hillside at Tagaytay Highlands Site development started in the fourth quarter of 2007 and
P803 million in
was completed in December 2009. HPI expects to generate approximately =
revenue from the sale of 156 lots when completed and fully sold. Approximately 9 2 % of the
units from lots had been sold as at 31 December 2011.

The Woodlands Point at Tagaytay Highlands HPI has completed site development and
construction of the 24 log cabins, 16 of which have already been sold. HPI expects to generate
approximately =
P1.7 billion in revenue from the sale of the 60 single-detached log cabins when
fully sold.

Pueblo Real at Tagaytay Midlands The development is adjacent to The Horizon, with a
Mediterranean-style village capturing the old world grace and charm of the Santa Fe community
in New Mexico. The project is situated on a 6 hectare property and has 85 lots with an average
lot cut of 400 square metres. HPI expects to generate approximately =
P411 million in revenue
from this project. Approximately 7 8 % of the lots had been sold as at 31 December 2011.

Woodridge Place Phase 2 This is a condominium project at Tagaytay Highlands, which boast
of a view of Taal Lake and was formally introduced to the market in May 2010. This project
consists of two mid-rise buildings with 128 condominium residential units and has an area
ranging from 85 to 212 square metres per unit. Approximately 1 6 % of the units had been sold
as at 31 December 2011.

Sierra Lago A subdivision development located at Tagaytay Midlands and was launched last
November 2010. Like Pueblo Real 1, Sierra Lagos architectural theme is modern Mediterranean
and has Mt. Makiling and the Highlands mountain range as backdrops and the fairways of the
Midlands golf course and Taal Lake as view corridors. This has 185 lots of approximately
200-300 square meter cuts. HPI expects to generate =
P614 million revenue from this project.
Approximately 4 0 % of the lots has been sold as at 31 December 2011.

In 2012, the Company will be introducing a new leisure lot development at The Highlands, envisioned

147

to have modern log homes which highlight the use of rustic wood elements in modern architecture.
By mid-year, HPI is slated to come out with another themed residential lot development at The
Midlands.
For the year ended 31 December 2010 and 2011, HPI had net sales of =
P427.4 million and =
P330.5 million,
respectively, and a net income of =
P8.2 million and a net loss of =
P35.0 million, respectively. As at 31
December 2010 and 2011, HPI had =
P5.0 billion and =
P4.7 billion of total assets, respectively, of which
P1.0 billion and =
P0.9 billion for both periods was land held for development.
Commercial Development
At the coastal edge of Metropolitan Manila, on one of the six reclaimed islands along the coast of
Manila Bay, the Issuer, through SM Land (formerly Shoemart), owns and holds the exclusive right to
manage and develop the approximately 60 hectares of prime land within CBP-IA directly in front of the
bay which has been named the SM Mall of Asia Complex. The Issuer intends for the SM Mall of Asia
Complex to integrate traditional business park facilities with entertainment, shopping, tourism,
recreational and residential components, promoting the countrys tourism industry. The Groups
corporate headquarters is located in One E-com Center within SM Mall of Asia Complex.
Currently, the SM Mall of Asia Complex also houses the SM Mall of Asia, the SMX Convention Center, One
E-com Center, Two E-Com Center, SM Corporate Offices, OneEsplanade and San Miguel By The Bay. The
Group is further developing the SM Mall of Asia Complex by launching a hotel, the SM Arena and SM
Inns.
One E-com Center and BPO Buildings. One E-com Center is a 10-storey contemporary building
designed for e-commerce, contact centres, business process outsourcing (BPO) companies, credit and
risk management group services and specialised office uses. With a gross floor area of 105,857 square
metres, One E-com Center features a 5th level courtyard and an office floor space of 9,000 square
metres from 5th to 10th floor. It has leasable commercial spaces on the ground level and parking on the
2nd to 4th levels for 600 slots. One E-com Center provides facilities such as multi-telco redundancy and
100% back-up power supply to meet the growing needs of technology-based companies with 24/7
operations.
One E-com Center has approximately 100% occupancy as at 31 December 2011 and the majority of the
tenants are BPOs and call centres who occupy large premises from 1,600 square metres to an entire
floor of 9,000 square metres. Current tenants of One E-com Center include American President Lines,
Maersk Group of companies, Oste Crewing, Legispro, Det Norske Veritas AS, MOF Co, Affiliated
Computer Services and EXL Services. The corporate offices of the Issuer and Watsons are also located
in One E-com Center. Retail and food outlets occupy the ground level arcade.
Two E-com Center is the Groups second major office building within the SM Mall of Asia Complex.
Construction has commenced in 2009 for this 14-storey building with a gross floor area of
approximately 107,000 square metres and was completed at year-end 2011. TwoE-com Center has 60%
occupancy as at 31 December 2011.
The SM Baguio Cyberzone is the second BPO built-to-suit building developed and leased to
PeopleSupport Phils., Inc. in Baguio City. It has a gross floor area of 10,000 square metres and 100%
occupancy as at 31 December 2011.

148

SM Makati CyberOne, another built-to-suit project located along Sen. Gil Puyat Avenue, Makati City, is
being leased by Stream International Global Services Phils, Inc. It has a gross floor area of 18,800
square metres and 99% occupancy as at 31 December 2011.
SM Makati CyberTwo, located at the corner of Sen. Gil Puyat Avenue and Zodiac Street in Makati City, is
being leased by Vision-X, Inc. for its second office in Manila. It has a gross floor area of 16,900 square
metres and 96% occupancy as at 31 December 2011.
Construction for Three E-com Center as well as another BPO building to be located in Quezon City will
commence in the 2nd quarter of 2012.
SM iCITY 2. A total of 119,261 square metres located within the SM Mall of Asia Complex was declared
as an IT park by the Philippine Economic Zone Authority. Named SM iCITY 2, the park was set up as
a prime location for companies engaged in software development and IT-enabled services such as call
centres, data encoding, transcribing and processing, computer-enabled support services, business
process outsourcing and IT research and development. Companies located within the SM iCITY 2 are
entitled to a number of tax incentives granted to similarly located companies within IT parks/zones, such
as income tax holiday and exemption from duties and taxes on imported capital equipment, among
others.
In addition to the existing One E-com Center and the Two E-com Center, a lot within SM iCITY 2 has been
allotted for an additional similar commercial centre proposed to be named Three E-com Center which is
estimated to cost about =
P3 billion.

Hotels and Conventions


SM Hotels and Conventions Corp. (SM Hotels) has been designated as the entity to develop the Groups
hotel and convention business.
On 2 April 2008, SM Hotels was incorporated to further focus and develop the Groups hotel business, and
rationalizes its hotel and convention assets under this entity. On 29 March 2010, the SEC approved the
change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and Conventions Corp.
Hotel Developments
The Group owns two plots of land in Tagaytay, including one where the Taal Vista Hotel is located. The Taal
Vista Hotel is a 261-room English Tudor Mansion-styled hotel, overlooking the Taal Volcano. The hotel has
a coffee shop, a lobby lounge, a ballroom that can accommodate 700 people, a grand ballroom that can
accommodate 1,050 people, as well as 12 function rooms equipped with modern meeting facilities. The
hotel also opened its upscale spa facility, Ylang-Ylang Spa, in 2006. The Taal Vista Hotel received a
four-star first-class rating from the Department of Tourism in 2008. See Legal Proceedings of Taal
Vista Lodge Case below.
The Group currently leases its second property in Tagaytay to Pagcor, which runs a large casino on the
19 hectare site in Tagaytay. The Groups revenue from the rental of this casino site is based on a fixed
rate rental.
The total project cost to complete the Groups 400-room hotel located beside the SM City Cebu is
approximately P3.0 billion, which is a five-star hotel operated by Carlson under the Radisson Blu brand,
the first in Asia. The Radisson Blu Hotel Cebu includes 10 meeting rooms, a 780 square meter junior
149

ballroom, a 1,200 square meter grand ballroom, and a spa and fitness centre. The Radisson Blu Hotel
Cebu commenced operations in October 2010 and is the first Carlson Hotels Worldwide Asia Pacific
property in the Philippines.
In February 2008, the Group entered into a management agreement with Singapore-based Carlson
Hotels Worldwide Asia Pacific (Carlson). This Issuer intends to build a new hotel within the Mall of
Asia Complex.
In July 2011, the Group opened Pico Sands Hotel, a 154-room hotel at Pico de Loro Cove, the first cove
to be developed at Hamilo Coast, Nasugbu, Batangas. Pico Sands Hotel has a total project cost of =
P520
million with 10,800 square meters of floor area. It has a lobby bar and restaurant, spa, business center,
and sundry shop.
The Group is also developing a mid-market 204-room hotel located in J.P. Laurel Avenue, Lanang, Davao
City. The hotel will be part of a 175,000 square meter mixed-use complex that includes SM City Lanang.
The Group also plans to establish a mid-market hotel brand using existing land bank situated around
existing Malls. This mid-market hotel is intended to attract both business and leisure travellers at an
affordable price point.

Convention Centers
SMX Convention Center, inaugurated in November 2007, is a three-storey structure with a gross floor area
of 46,647 square meters with basement parking that can accommodate up to 400 cars and a leasable
area of 21,000 square meters made up of two large exhibit floors which can be divided into multiple
exhibition and function halls. Meeting and break-out rooms are provided in support of trade and function
requirements. The Group intends for SMX Convention Center to serve as a venue for major conferences,
trade exhibitions and shows and similar activities in Metro Manila.
In addition, the Group is assessing the feasibility of establishing additional conference centers, in
conjunction with the mid-market hotels, using existing land bank situated around existing Malls.

SM Arena
Currently under construction, the SM Arena is a five-storey, first-class multipurpose venue for sporting
events, concerts, entertainment shows, and other similar events. The arena has a seating capacity of
approximately 16,000. It occupies about two hectares of land and has a gross floor area of
approximately 64,000 square meters. It is adjacent to the Mall of Asia Arena Annex (Carpark) building
and is right in front of the SMX Convention Center.
The SM Arena will eventually be connected to a large platform parking plaza and park that will be built in
between the SMX Convention Center and the arena itself. Provisions for two future office blocks are also
included in the arenas masterplan.

Insurance, Environment, Health and Safety


The Groups insurance arrangements are effected through BDO Insurance Brokers, Inc. (as broker). The
Issuer believes that each of its subsidiaries is adequately insured, both in terms of the insured risks and
the amount which is covered. The Issuers commercial all risks insurance policy is underwritten by
Prudential Guarantee Assurance Company and Generali Pilipinas Insurance Company. These insurance
150

companies are supported by a panel of reinsurers whose minimum rating from Standard & Poors Rating
Services, a division of The McGraw-Hill Companies, is A.
The Issuers policy covers any potential loss of property. Loss of revenue under the loss of rent coverage
resulting from fire, water damage and acts of God including earthquake, typhoon and flood is provided
for SM Prime as a mall operator. Retail Affiliates operating inside the Malls do not have their own loss of
revenue/business interruption insurance cover.
In addition, the comprehensive general liability insurance coverage extends to third-party liability,
including loss of life and its corresponding litigation expenses.
The Issuer is, and, so far as it is aware, each of its principal subsidiaries is, in material compliance with
all applicable environmental, health and safety regulations.

Legal Proceedings
The Issuer and the Group may be subject to various legal proceedings and claims that arise in the
ordinary course of business. Save as set out below, as of the date of this Offering Circular the Issuer and
the Group are not engaged in or subject to any litigation or arbitration proceedings nor, to the knowledge
of the Directors, is any litigation or claim threatened against the Issuer or the Group which is material in
the context of the offering and issue of the Bonds or which, if determined adversely against the Issuer
or the Group, would have a material adverse effect on their results of operations or financial position.
Taal Vista Lodge Case
In 1988, the Issuer acquired the former Baguio Pines Hotel properties from the Development Bank of
the Philippines (DBP) through a negotiated sale and purchased the Taal Vista Lodge (the Lodge) from
the Taal & Tagaytay Management Corp., the original purchaser of the Lodge from the DBP.
Previously, in 1984, certain non-controlling stockholders of Resort Hotel Corp. (RHC), the previous
owner of the former Baguio Pines Hotel properties and the Lodge filed with the Regional Trial Court
(RTC) of Makati a derivative suit against the DBP questioning the foreclosure by the DBP of the
mortgages on these properties. The Issuer was impleaded as a party defendant in 1995. The RTC of
Makati voided the foreclosure by the DBP on the mortgaged properties and declared the Issuer a buyer
in bad faith.
DBP and the Issuer have appealed the RTCs decision to the Court of Appeals. On 25 May 2007, the Court
of Appeals issued a decision completely reversing and setting aside the 13 February 2004 decision of the
RTC of Makati and, consequently, dismissing the said RTC case. The appellees (certain non-controlling
stockholders of RHC) filed a Motion for Reconsideration (MR) with the Court of Appeals and, on 9
November 2007, the Court of Appeals issued a resolution denying the appellees MR. The appellees filed
a Petition for Review on Certiorari before the Supreme Court appealing the decision of the Court of
Appeals reversing the said decision of the RTC of Makati. On 23 December 2009, the Supreme Court
rendered a decision decreeing, among others, that the foreclosures of the mortgaged Baguio Pines Hotel
and Taal Vista Lodge properties were valid; and on 24 October 2010, the Supreme Court issued a
Resolution denying petitioners (certain non-controlling stockholders of RHC) Motion for Reconsideration
of the Resolution dated 21 June 2010 denying with finality the separate Motion for Partial
Reconsideration filed by Petitioner and DBP since it was treated as a second Motion for Reconsideration,
a prohibited pleading under the Rules of Court.

151

Investments and Property


The Issuers current assets, consisting of cash and cash equivalents, time deposits and short-term
investments, investments held for trading and sale, receivables, merchandise inventories, and other
current assets, amounted to =
P104,291.5 million and =
P101,260.5 million as at 31 December 2010 and
2011, respectively.
As at 31 December 2010 and 2011, the Issuers investments in shares of stock of associates amounted
to =P70,860.2 million and =P88,417.8 million, respectively. These investments pertain to investments in
shares of associates such as BDO, China Bank, HPI, Belle Corporation and Atlas Consolidated Mining and
Development Corporation (Atlas).
The Issuers investment properties amounted to =
P113,667.2 million and =
P131,275.9 million as at 31
December 2010 and 2011, respectively. These investments consist mainly of land, shopping malls and
improvements.
There are statutory encumbrances on titles of certain of the Issuers Tagaytay City land parcels.
Specifically, transfer certificates of title (TCTs) T-34460 and T-34454 bear annotations required for
subdivisions for rights of way, while TCTs T-17628, T-17629 and T-17630 indicate that they were derived
from reconstituted titles and therefore are subject to any prior right appearing on the original title. In
addition, the titles of certain of that Issuers Baguio City properties, namely the lands covered by TCTs
T-45630 and T-45631, contain a notice in respect of the pending Taal Vista Lodge Case. See Legal
Proceedings Taal Vista Lodge Case above. Except for the foregoing, no encumbrance is annotated on
the titles of the Issuers real estate.
The carrying amount of the Issuers consolidated property and equipment was =
P13,368.5 million
and=
P15,092.4 million as at 31 December 2010 and 2011, respectively. These consist of store and office
land, buildings and improvements, furniture and fixtures, software, data processing and wide area
network equipment, and real property. The Issuers consolidated non-current time deposits amounted
to =
P37,419.1 million and=
P37,416.6 million as at 31 December 2010 and 2011, respectively. The Issuer
leases from SM Land the land on which its offices in SM Mall of Asia Complex are located. The lease
covers four parcels of land with a total area of 106,850 square metres. The 60-hectare land in SM Mall
of Asia Complex had a net book value of =P2,455.9 million and =
P2,516.0 million as at 31 December 2010
and 2011, respectively.
Intellectual Property
The Issuer owns the trademarks SM, SM Shoemart and Shoemart, which are all registered with the
Philippine Intellectual Property Office (IPO) for use in connection with goods and services.
The Issuer has granted the use of trademarks to certain affiliates such as Premier Southern Corporation,
Consolidated Prime Dev. Corporation and First Asia Realty Development Corporation pursuant to the
Memorandum of Agreements executed with them. These agreements, which are due to expire in 2020,
do not provide for payment of monetary consideration to the Issuer for the use of the trademarks.
Capital Expenditure
The Group has made, and expects to continue to make, substantial capital expenditures in connection
with the construction of new Malls, opening of new stores, development of SM Mall of Asia Complex,
Hamilo Coast and its residential developments. The following table sets forth the Groups total capital
expenditure for the periods indicated:

152

As at 31 December
(in P millions)

Capital Expenditure

2009

2010

2011

19,515

33,821

39,975

For the years ended 31 December 2009, 2010 and 2011, out of the =
P19,515 million, =
P33,821 million and
=
P39,975 million, respectively, that the Issuer incurred for capital expenditure on a consolidated basis,
=
P10,748 million, =
P11,374 million and =
P16,642 million, respectively, was invested in the construction of
shopping malls.
The Retail Subsidiaries expected to incur capital expenditure of approximately =
P5.1 billion in 2011
related to opening new stores for department stores, supermarkets, savemore and hypermarkets.
The real estate development and tourism group expected to incur capital expenditure of approximately
=
P19.3 billion in 2011 related to project development costs of condominium buildings and resort facilities.
The hotel and convention group expected to incur capital expenditure of approximately =
P0.7 billion in
2011 related to hotel development costs.
SM Prime expected to incur capital expenditure (excluding China operations) of approximately =
P10.8
billion in 2011 related to construction of shopping malls and land banking activities.
Capital expenditures of BDO for 2012 are expected to be minimal as the major investments in information
technology, office renovation and branch expansion have already been completed in previous years.
China Bank has allocated =
P1.3 billion in capital expenditures for 2012, with about =
P400 million for
branch expansion (both China Bank and China Bank Savings). Apart from the substantial capital
expenditures allotted for branch expansion, about half of the capital expenditure budget for 2012 will be
invested in key infrastructure projects such as the acquisition of a new core banking system, ATM/card
switch management system, a new phone banking/call centre software, servers upgrade and
enhancements to our cash management platform to include supply chain functionalities.
In aggregate, the Group expected to incur capital expenditure of =
P40.2 billion in 2011 to finance projects
related to property development, banking, retail, tourism and leisure and general investments, subject to
the overall performance of the Philippine economy. Approximately 67% of these capital expenditures
shall be financed from internally generated funds, while approximately 33% shall be financed from
borrowings.

Government Regulations and Authorizations


The Issuer possesses, and each of its principal subsidiaries possesses, all Government authorizations
and approvals necessary to conduct their respective businesses and the Issuer is, and each of its
principal subsidiaries is, in material compliance with such authorizations and approvals.

Employees
As at 31 March 2012, the Issuer had 269 regular employees and the Group (excluding the Issuer) had
approximately 24,269 regular employees. The employees are classified as follows:

153

Rank and file


Junior/ mid-level managers
Senior executive officers

No. of Employees
21,356
2,185
728

The Issuer and certain of its subsidiaries have a funded non-contributory pension plan covering all
full-time employees considered as having regular employment status. As at 31 December 2011, defined
benefit liability amounted to =
P76.5 million. In addition, healthcare benefits are also provided to the
Issuers employees and those of its subsidiaries.
As at 31 March 2012, the Retail Subsidiaries had more than approximately 22,173 regular employees, of
whom approximately 16,000, 1,600, 2,400, and 2,000 were directly employed at the SM Department
Stores, SaveMore stores, SM Supermarkets, and SM Hypermarkets, respectively. The SM Department
Stores hire seasonal employees when there is an increase in business, which is generally during the
Christmas season and in May, prior to school opening in June.
The Retail Subsidiaries have a retirement plan covering all regular employees, which was launched in
2000. In addition, healthcare benefits are also provided to regular employees of the Retail Subsidiaries.
Approximately 3,000 employees at five SM Department Stores are members of Bargaining Units. The
latest bargaining agreement for such employees was signed in 2007 for a term of five years. The Issuer
considers its relations with the Retail Subsidiaries employees to be generally good, and there have been
no instances of major strikes, lockouts or other disruptive labour disputes within the last five years. The
Issuer is not aware of any impending strikes, lockouts or other disruptive labour disputes.
The average age of SMICs officers and employees is 35 years and the average tenure of SMICs
employees is five years. The mandatory retirement age for the Issuers employees is 60.
Related Party Transactions
The Issuer is the ultimate holding company of the Group, and, as at 31 December 2011, it was 61.18%
owned by Mr. Henry Sy, Sr., the founder of the Group, and other members of the Sy Family. The Issuer and
certain of its subsidiaries, associates and affiliates currently have contractual arrangements with each
other. The principal ongoing related party transactions within the Group as at 31 December 2011 are
summarized below.

Related party transactions


SMIC

Receives management fees from SM Mart, SM Department


Stores, SVI and SSMI and certain Retail Affiliates for the
provision of management services including tax, legal and
treasury services
Leases from SM Land the land for its corporate headquarters
at SM Mall of Asia Complex in the Manila Bay area
SMIC and a number of its subsidiaries maintain banking
facilities with BDO, including deposits and loans
Receives rental income from subsidiaries with respect to
rental of offices at the head office
154

Pays management fees, based on a percentage of rent


revenue, to one of the Management Companies owned by
members of the Sy Family for management of the head office
SM Prime

Receives rental income, based on a percentage of net sales,


pursuant to the leases of 37 SM Department Stores in the
Malls
Receives rental income, based on a percentage of net sales,
from SM Supermarkets, SM Hypermarkets and certain other
Retail Affiliates
Pays management fees, based on a percentage of operating
income, to Management Companies for management of each
of the major revenue streams generated by the Malls

SM Retail

Receives a percentage of net sales from SM Mart and SM


Department Stores for operational support and services,
including for credit cards. Such operational support includes
merchandising, marketing and advertising, information
technology, controllership, operations and human resource
services

SM Mart and Department Store


Companies

Pay SMIC management fees for, among other matters, tax


and legal services as well as the right to use certain
intellectual property rights

37 of the SM Department Stores pay SM Prime a percentage


of net sales for the department store space rented in the
Malls

Pay SM Retail a percentage of net sales for operational


support and services

BDO

Receives fee income and interest for the provision of banking


services including loans to Group companies, affiliates of the
Group and their suppliers and pays interest on deposits.
DOSRI loans amounted to P24,430 million, =
P35,453 million
and =
P42,484 million as at 31 December 2009, 2010 and
2011, respectively
Pays dividends on preferred shares to SM Prime

Retail Affiliates

Pay SMIC a percentage of net sales as management fees

155

Pay SM Prime a variable percentage of net sales as rent


SM Supermarkets/Hypermarkets

Pay SMIC a percentage of net sales as management fees


Pay SM Prime a variable percentage of net sales as rent

Specific details of these transactions are set forth below:

SMIC, SM Land and SM Prime have existing lease agreements for office and commercial space
with related companies. Total rent revenues amounted to =
P2,775.4 million, =
P3,012.8 million
and=
P2,985.5 million, for the years ended 31 December 2009, 2010 and 2011, respectively, and
related rent receivable amounted to =
P578.3 million, =
P878.4 million and =
P1,267.7 million as at 31
December 2009, 2010 and 2011, respectively.

SM Prime and SMIC pay management fees to Shopping Center Management Corporation,
Leisure Center, Inc., West Avenue Theaters Corporation and Family Entertainment Center, Inc.
for the management of the office and mall premises. Total management fees for the years
ended 31 December 2009, 2010 and 2011 amounted to =
P611.8 million, =
P656.1 million and
=
P779.8 million, respectively. Management fees payable amounted to =
P67.7 million, =
P58.4
million and =
P74.8 million as at 31 December 2009, 2010 and 2011, respectively.

SMIC, SM Land and SM Retail receive management fees from related companies for providing
management and consultancy services. As consideration for the services provided, the Issuer
receives annual management fees based on a certain percentage of the related companies
net income as defined in the management contracts. Total management fees earned amounted
to =
P565.7 million, =
P695.4 million and =
P564.2 million for the years ended 31 December 2009,
2010 and 2011, respectively. Accrued management fees receivable amounted to =
P378.2 million,
=
P353.7 million and =
P95.9 million as at 31 December 2009, 2010 and 2011, respectively.

The Group has certain bank accounts and cash placements that are maintained with BDO and
China Bank, and earns interest based on prevailing market interest rates. Cash and cash
equivalents maintained with BDO and China Bank amounted to P39,304.3 million, =P61,561.6
million and =
P50,226.0 million as at 31 December 2009, 2010 and 2011, respectively. Time
deposits and short-term investments of =
P42,596.0 million, =
P38,293.4 million and =
P38,293.4
million as at 31 December 2009, 2010 and 2011, respectively, were deposited with BDO.
Related accrued interest receivable amounted to =
P1,105.9 million, =
P754.1 million and =
P841.4
million as at 31 December 2009, 2010 and 2011, respectively.

The Group, in the normal course of business, had outstanding advances amounting to =
P3,548.6
million, =
P3,350.8 million and =
P2,684.6 million as at 31 December 2009, 2010 and 2011,
respectively, due from related companies. Amounts due to related companies amounted to
=
P2,935.5 million, =
P1,967.9 million and =
P2,734.4 million as at 31 December 2009, 2010 and 2011,
respectively.

The Issuer considers each of its subsidiaries and associates to be responsible for its own profits or losses
and that each such corporation is independent of the Sy Family, and accordingly requires that any
contractual arrangements referred to above should be entered into on an arms length basis. In
particular, all loans by BDO to related parties are within the statutory limits required by the BSP and are
on an arms length basis. See Note 24 Related Party Transactions to the consolidated financial
statements as at and for the year ended 31 December 2010 and 2011, respectively, included elsewhere
in this Prospectus.
156

Material Contracts
As of the date of this Prospectus, the Company is not a party to any material contracts, except for contracts
entered into in the ordinary course of business.

157

RECENT DEVELOPMENTS AND PROSPECTS


SMIC
SMIC regularly considers proposals for purchases of assets as part of its ongoing strategy to expand its
core businesses in retail, commercial centers, property, banking and hotel, resorts and convention.
Certain media reports have speculated that the SM Group will acquire a majority stake in the privately
held OCLP Holdings.
OCLP Holdings owns the 16-hectare Greenhills Shopping Center complex (which includes a commercial
center and commercial buildings with third party leases and a condominium development) as well as raw
plots of land. Greenhills Shopping Center is located close to SMICs Megamall and would be a material
addition to the Groups portfolio, if the acquisition were to proceed.
SMIC has disclosed to the PSE that it has entered into preliminary discussions for such acquisition
however, the discussions remain at an early and preliminary stage. Therefore, it is not possible to say, at
the date of this Prospectus, whether the transaction will be finalized or not and if so, at what date and
under what terms the transaction would be carried out. The Issuer will make timely and appropriate
announcement if the transaction proceeds to be executed. In the meantime, investors should not place
any reliance on such a transaction occurring.
On May 21, 2012, SMIC has notified Atlas that it has purchased from BDO the P5.3418 billion convertible loan
between Atlas and BDO and that SMIC will exercise the conversion option under the loan agreement as the
assignee of BDO. The conversion will be equivalent to 273,098,160 shares and will increase SMICs
ownership of Atlas from 17.6% to 28.4% of total outstanding shares.
See also Risk Factors The Issuer has conducted and may continue to conduct acquisitions, the impact
of which could be less favorable for its activities and results than anticipated, or which could affect its
financial situation.
SMDC
On May 9, 2012, SMDC signed an agreement with Euro-Med Laboratories Inc. (Euro-Med) to purchase all the
shares of 102 E. De Los Santos Realty Co. Inc. (102 EDSA) for P1.25 billion, comprising of two lots with a
total area of approximately 10,936 sqm. 102 EDSA is a wholly owned subsidiary of Euro-Med. The
transaction is expected to be completed in 36 months after signing the agreement.
102 EDSA has an authorized capital of P220.0 million, with outstanding capital stock of 2.1 million Class A
and Class B shares, consisting of 1.26 million Class A shares and 0.84 million Class B shares and paid in
capital of P210.0 million.
The Bank
On February 16, 2012, BDO Unibank Group issued Senior Notes with a face value of US$300 million at a price
of 99.448 or a total price of US$298 million. The Senior Notes, which will mature on February 16, 2017, bear
a coupon rate of 4.5% per annum, with effective yield of 4.625% per annum, and will be payable
semi-annually every February 16 and August 16 starting on August 16, 2012. The net proceeds from the
issuance of Senior Notes are intended for general funding and re-lending purposes.

158

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND RESULTS OF OPERATIONS
Prospective investors should read the following discussion and analysis of the Issuers consolidated financial
position and financial performance together with (i) the report of independent auditors, and (ii) the audited
consolidated financial statements for the years ended of 31 December 2009, 2010 and 2011 and the notes
thereto.
Overview
The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The
Issuer was incorporated in the Philippines on 15 January 1960. On 29 April 2009, the Companys
shareholders approved the amendment of SMICs Articles of Incorporation, extending the Companys
corporate life for another 50 years from 15 January 2010. Its registered office is at the 10th Floor, One
E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City, Metro Manila, Philippines. Through
its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses
located in the Philippines.
The Groups business activities and interests are divided into five principal sectors:

retail merchandising through its department store, supermarket, SaveMore, hypermarket and
wholesale operations (SM Retail);

shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM
Prime);

financial services, through its associate banks that have universal banking licenses in the Philippines
(BDO and China Bank);

real estate development and tourism (SM Land, SMDC, CDHI and HPI); and

hotels and conventions (SM Hotels).

Basis of Preparation
Basis of Preparation
The consolidated financial statements of the Group have been prepared on the historical cost basis, except
for derivative financial instruments, investments held for trading and available-for-sale (AFS) investments,
which have all been measured at fair value. The consolidated financial statements are presented in
Philippine peso, which is the Groups functional and presentation currency under Philippine Financial
Reporting Standards (PFRS). All values are rounded to the nearest thousand, except when otherwise
indicated.
Statement of Compliance
The consolidated financial statements have been prepared in compliance with PFRS. PFRS includes
statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from
International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting
Standards Council (FRSC).

159

Changes in Accounting Policies


The accounting policies adopted are consistent with those of the previous financial year, except for the
adoption of the following new and amended PFRS and Philippine Interpretations from IFRIC starting
January 1, 2011, except when otherwise stated:

Amendments to Standards and Interpretations

PAS 24 (Amendment), Related Party Disclosures, became effective for annual periods beginning on
or after January 1, 2011
PAS 32 (Amendment), Financial Instruments: Presentation, became effective for annual periods
beginning February 1, 2010
Philippine Interpretation IFRIC 14 (Amendment), Prepayments of a Minimum Funding
Requirement, became effective for annual periods beginning January 1, 2011.
Philippine Interpretation IFIRC 19, Extinguishing Financial Liabilities with Equity Instruments ,
became effective for annual periods beginning July 1, 2010.

The above standards have no impact on the Groups consolidated financial statements.

Improvements to PFRSs (Issued 2010)


An omnibus of amendments to standards deal primarily with a view to removing inconsistencies and
clarifying wordings. The adoption of the following amendments resulted in changes to accounting policies
but did not have material impact on the financial position or performance of the Group.

PFRS 3, Business Combinations. The measurement options available for non-controlling interest
(NCI) were amended. Only components of NCI that constitute a present ownership interest that
entitles their holder to a proportionate share of the entitys net assets in the event of liquidation
should be measured at either fair value or at the present ownership instruments proportionate
share of the acquirees identifiable net assets. All other components are to be measured at their
acquisition date fair value.
The amendments to PFRS 3 are effective for annual periods beginning on or after July 1, 2010. The
Group, however, adopted these as at January 1, 2011 and changed its accounting policy
accordingly as the amendment was issued to eliminate unintended consequences that may arise
from the adoption of PFRS 3.

PFRS 7, Financial Instruments - Disclosures, effective January 1, 2011, intended to simplify the
disclosures provided by reducing the volume of disclosures about collateral held and improving
disclosures by requiring qualitative information to put the quantitative information in context. This
amendment is applicable for annual periods beginning on or after July 1, 2010.

PAS 1, Presentation of Financial Statements, effective January 1, 2011, clarifies that an entity may
present an analysis of each component of other comprehensive income maybe either in the
statement of changes in equity or in the notes to the financial statements. This has no significant
impact on the Groups consolidated financial statements.

Other amendments resulting from improvements to PFRSs and interpretations to the following standard did
not have any impact on the accounting policies, financial position or performance of the Group:

160

PFRS 3, Business Combinations (Contingent consideration arising from business combination prior
to adoption of PFRS 3 (as revised in 2008)), applicable for annual periods beginning on or after July
1, 2010

PFRS 3, Business Combinations (Un-replaced and voluntarily replaced share-based payment


awards), applicable for annual periods beginning on or after July 1, 2010

PAS 27, Consolidated and Separate Financial Statements, applicable for annual periods beginning
on or after July 1, 2010

PAS 34, Interim Financial Statements, effective January 1, 2011

Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (determining the fair value of
award credits), effective for annual periods beginning on or after January 1, 2011

Financial Performance
Three months ended 31 March 2012 vs. three months ended 31 March 2011
For a discussion of the financial performance of SMIC for the three months ended March 31, 2012
compared to the three months ended March 31, 2011, please refer to the Issuers Amended SEC Form 17-Q
under the Index to the Consolidated Financial Statements of the Issuer found elsewhere in this Prospectus.
31 December 2011 vs. 31 December 2010
Consolidated revenues grew by 13.0% to P200.3 billion, as against last years P177.2 billion. Income from
operations increased by 16.2% to P37.4 billion from last years P32.2 billion. Operating income margin and
net profit margin is at 18.7% and 10.6%, respectively. Net income attributable to equity holders of SMIC for
the year ended December 31, 2011 increased by 15.1% to P21.2 billion compared to P18.4 billion of the
same period last year.
Retail sales accounts for 74.0% or P148.2 billion of the total revenues for the year. Consolidated retail sales
grew by 9.3% from P135.6 billion to P148.2 billion for the year ended December 31, 2011 due mainly to the
opening of the following new stores in 2011:
SM Department Stores
1
2
3
4
5
6
7
8
9
10
11
12
13
14

SM City Masinag

SM Supermarkets/
SaveMore Stores
SM City Masinag
Megamall A
Olongapo
SaveMore Muntinlupa
SaveMore Jackman
SaveMore Capistrano
SaveMore Bayambang
SaveMore Malhacan
SaveMore Kauswagan*
SaveMore Araneta
SaveMore Sta. Ana
SaveMore Apalit
SaveMore Sta. Maria
SaveMore Binan

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SM Hypermarkets
Mandaue, Cebu*
JMall, Mandaue, Cebu
Imus*
Sucat-Lopez
Marketmall

15
SaveMore Tuguegarao
16
SaveMore Halang
17
SaveMore Shoe Ave.
18
SaveMore Balibago
19
SaveMore Canduman
20
SaveMore Maguikay
21
SaveMore Pedro Gil
22
SaveMore Iba, Zambales
23
SaveMore Kanlaon
24
SaveMore Ilagan
25
SaveMore A. Avenue
26
SaveMore Laoag
27
SaveMore Salitran
28
SaveMore Blumentritt
* Formerly Makro stores which were converted to Hypermarket stores
Excluding the full year sales of Makro, the retail sales growth would be 12.4% from P129.4 billion in 2010 to
P145.4 billion in 2011. Of the total retail sales, the non-food group, which is composed of SM Department
stores, contributed 42.9% or P63.5 billion, while the food group, composed of SM Supermarkets, SM
SaveMore stores, SM Hypermarkets, and Makro outlets, contributed 57.1% or P84.6 billion.
As at December 31, 2011, SMICs retail subsidiaries had 168 stores. These consist of 41 department stores,
33 supermarkets, 64 SaveMore stores and 30 hypermarkets.
Real estate sales for the year ended December 31, 2011, derived mainly from condominium projects of
SMDC, surged by 64.0% to P17.9 billion. The market continues to show strong acceptance of SM
Residences and M Place products, backed by a deeper confidence on SMDCs proven ability to complete its
projects, thereby fueling to a large extent SMDCs notable 2011 results. The consistent offerings of
high-quality and well-designed residential units built by an experienced team composed of the countrys top
contractors, engineers, architects, and interior designers also allowed SMDC to gain further traction and
brand recognition. SMDC has a total of 17 residential projects as at December 31, 2011. In 2011, SMDC
launched Mezza II Residences in Quezon City, Green Residences in Manila, Shell Residences in Pasay City
and M Place Ortigas in Pasig City. For the whole of 2011, SMDC pre-sold 11,726 residential condominium
units worth approximately P26.3 billion. Compared to the same period in 2010, the number of units pre-sold
increased by 14% and exceeded SMDCs sales target of P23.6 billion by 11%.
The other ongoing projects of SMDC are the following: Grass Residences beside SM City North Edsa; Sea
Residences near the Mall of Asia Complex in Pasay City; Field Residences in Sucat, Paranaque; Princeton
Residences along Aurora Boulevard in Quezon City; Jazz Residences near Jupiter Road in Makati City; Sun
Residences right beside the Mabuhay (formerly Welcome) Rotunda near Quezon Avenue; Light Residences
near Pioneer Street in Mandaluyong; Wind Residences along the Emilio Aguinaldo Highway in Tagaytay City;
Blue Residences, which is located at Loyola Heights in Quezon City and M Place South Triangle in Panay
Avenue, Quezon City. Currently, SMDC has four fully completed projects namely Mezza Residences, a
38-storey four-tower high rise condominium across SM City Sta. Mesa, Quezon City; Chateau Elysee, a
mid-rise condominium project in Paraaque City; Berkeley Residences in Katipunan Road, Quezon City; and
Lindenwood Residences, a residential subdivision in Muntinlupa City. Further contributions to the growth in
real estate sales were provided by the sale of condominium units of Costa del Hamilo and club shares in
Pico de Loro.
Rent revenue for the year ended December 31, 2011, derived mainly from mall operations of SM Prime,
increased by 14.3% to P20.5 billion in 2011 from P17.9 billion in 2010. SM Prime is the countrys leading
shopping mall developer and operator which owns 41 malls in the Philippines and four malls in China as at
December 31, 2011. The increase in rental revenues is largely due to rentals from new SM Supermalls. In
162

2010, SM City Tarlac, SM City San Pablo, SM City Calamba and SM City Novaliches were opened. In 2011,
SM Masinag was also opened. The new malls added 380,000 square meters (sqm) to total gross floor area.
Excluding the new malls and expansions, same store rental growth is at 7.0%.
The four malls in China contributed P2.0 billion in 2011 and P1.4 billion in 2010, or 9.9% and 7.7%,
respectively, of SMICs consolidated rental revenue. The rental revenue of these four malls in China
increased by 46.4% in 2011 compared to the same period in 2010 largely due to improvements in the
average occupancy rate, lease renewals and the opening of the SM Xiamen Lifestyle and SM Suzhou which
added 182,000 sqm of gross floor area. Average occupancy rate for the four malls is now at 95%.
For the year 2011, cinema ticket sales and amusement revenues increased by 11.1% to P4.1 billion in 2011
from P3.7 billion in 2010 largely due to the success of local blockbuster movies shown in 2011 compared to
2010 and higher sponsorship revenues in 2011. Amusement revenues is mainly composed of amusement
income from bowling and ice skating operations including the SM Science Discovery Center and the SM
Storyland.
Equity in net earnings of associates increased by 17.9% to P6.4 billion in 2011 from P5.4 billion in 2010,
primarily due to the increase in the net income of BDO which is attributed to the banks recurring fee-based
income from its service businesses which rose 18%. Amid a volatile external environment, BDO generated
a 10% increase in trading and foreign exchange gains. Along with other miscellaneous income, BDO
recorded a 17% growth in non-interest income. BDO continues to derive bulk of its operating income from
core lending and deposit-taking business and fee-based service activities. Having completed its investment
in capacity, BDO is now starting to benefit from scale with operating expenses increasing only moderately
by 4% with ongoing initiatives to enhance operational efficiency.
Gain on sale of available-for-sale investments and fair value changes on investments held for trading and
derivatives decreased by 55.7% to P0.4 billion in 2011 from P0.9 billion in 2010 primarily due to the gain on
sale of various available-for-sale investments of certain subsidiaries in 2010.
Dividend income increased by P0.1 billion or 21.5% in 2011 to P0.4 billion from P0.3 billion in 2010 due to
increase in dividends received from investees. Management and service fees, which is computed based on
percentage of sales, increased by P0.1 billion or 9.1% from P0.8 billion in 2010 to P0.9 billion in 2011
mainly due to increase in sales of retail affiliates.
Other revenues, which comprise mainly of income for the promotional activities highlighting products,
commission from bills payment, prepaid cards and show tickets, slightly decreased by P 0.06 billion or
3.8%.
Total cost and expenses went up by 12.3% to P162.9 billion for the year ended December 31, 2011
compared to 2010. Retail cost of sales increased by 8.4% from P103.5 billion to P112.2 billion while real
estate cost of sales and others increased by 71.6% from P6.0 billion to P10.3 billion mainly due to the
increase in sales. Selling, general and administrative expenses increased by 13.8% from P35.5 billion in
2010 to P40.4 billion in 2011. Major contributors to the increase in selling, general and administrative
expenses are personnel cost, depreciation and amortization, utilities, rent, taxes and licenses, outside
services, advertising and promotion and repairs and maintenance totaling to P34.2 billion in 2011 or a
growth of 14.8% from P29.8 billion in 2010. The increase is primarily associated with new malls,
department stores, supermarkets, savemore and hypermarkets and residential projects.
Other charges of P1.7 billion in 2011 decreased by 10.9% or P0.2 billion from last years other charges of
P1.9 billion. Gain on disposal of investments and properties increased by 61.3% to P2.6 billion from P1.6
billion mainly due to the gain on the share swap of Belle Corporation and Premium Leisure and Amusement
Inc. in 2011 of P1.5 billion (net of non-controlling interest). Interest income increased by 15.0% to P4.3
billion in 2011 from P3.7 billion in 2010 mainly due to higher average balance of temporary investments and
163

time deposits and higher interest rates during 2011. These were offset by the increase in interest expense
by 15.5% or P1.2 billion to P8.8 billion in 2011 from P7.6 billion in 2010 mainly due to new loans availed of
in 2011 (refer to Note 20 of the audited consolidated financial statements) and the decrease in foreign
exchange gains by 40.4% from P0.4 billion in 2010 to P0.2 billion in 2011 mainly from restatement of loans
availed during the year wherein foreign exchange rate of peso to dollar is lower as compared with year-end
exchange rate.
Provision for income tax increased by 1.7% to P5.5 billion for the year 2011 from P5.4 billion in 2010 mainly
due to the increase in taxable income.
Non-controlling interest increased to P9.0 billion in 2011 from P6.4 billion in 2010 due to the increase in net
income of certain subsidiaries.
31 December 2010 vs. 31 December 2009
Consolidated revenues grew by 12.1% to P177.2 billion, as against last years P158.0 billion. Income from
operations increased by 13.9% to P32.2 billion from last years P28.3 billion. Operating income margin and
net profit margin is at 18.2% and 10.4%, respectively. Net income attributable to equity holders of SMIC for
the year ended December 31, 2010 increased by 15.1% to P18.4 billion compared to P16.0 billion of the
same period last year.
Retail sales accounts for 76.5% or P135.6 billion of the total revenues for the year. Consolidated retail sales
grew by 9.4% from P123.9 billion to P135.6 billion for the year ended December 31, 2010 due mainly to the
opening of the following new stores in 2010:
SM Supermarkets /
SaveMore Stores
1
SM City Tarlac
SM City Tarlac
2
SM City San Pablo
SM City San Pablo
3
SM City Calamba
SM City Calamba
4
SM City Novaliches
SM City Novaliches
5
Megamall Extension
6
Southmall Extension
7
SaveMore West Kamias
8
SaveMore Mendez
9
SaveMore Legazpi
10
SaveMore Baliwag
11
SaveMore Pasong Tamo
12
SaveMore Amang Rodriguez
13
SaveMore Bacolod East
14
SaveMore Malabon
15
SaveMore Cagayan De Oro
16
SaveMore Zapote
17
SaveMore Cartimar
18
SaveMore Berkeley
19
SaveMore Isabela
20
SaveMore Angeles
*Formerly Makro stores which were converted to Hypermarket stores
SM Department Stores

SM Hypermarkets
North Harbour*
Adriatico
Cubao*
Jaro, Iloilo*
Jalandoni, Batangas*
Mabalacat, Pampanga*

Excluding the full year sales of Makro, the retail sales growth would be 12.5% from P115.0 billion in 2009 to
P129.4 billion in 2010. Of the total retail sales, the non-food group, which is composed of SM Department
stores, contributed 42.7% or P57.9 billion, while the food group, composed of SM Supermarkets, SM

164

SaveMore stores, SM Hypermarkets, and Makro outlets, contributed 57.3% or P77.7 billion.
As at December 31, 2010, SMICs retail subsidiaries have 142 stores. These consist of 40 department stores,
30 supermarkets, 40 SaveMore stores, 25 hypermarkets and 7 Makro outlets.
Real estate sales for the year ended December 31, 2010, derived mainly from condominium projects of
SMDC, surged by 63.5% to P10.9 billion. In 2010, SMDC launched its new brand, M Place, through the
unveiling of its inaugural project, M Place South Triangle, in the Panay Avenue Mother Ignacia area of
Quezon City. Another project, Blue Residences, which is located at Loyola Heights in Quezon City, was also
launched in 2010. In 2009, Princeton Residences and the Big Four projects were launched. Princeton
Residences is a 40-storey condominium located at Gilmore Ave. Quezon City. The Big Four projects namely,
Jazz Residences (Jupiter St., Makati), Sun Residences (Welcome Rotonda, Quezon City), Wind Residences
(Tagaytay, Cavite), and Light Residences (Pioneer, EDSA) were simultaneously introduced to the market in
December 2009. These projects are experiencing brisk market uptake.
The other ongoing projects of SMDC are the following: Chateau Elysee, a mid-rise condominium project in
Paraaque City; Berkeley Residences in Katipunan Road, Quezon City; Grass Residences beside SM City
North Edsa; Sea Residences near the Mall of Asia Complex in Pasay City; and Field Residences in Sucat,
Paraaque. Both Mezza Residences, a 38-storey four-tower high rise condominium across SM City Sta. Mesa,
Quezon City, and Lindenwood Residences, a residential subdivision in Muntinlupa City, are 100% complete.
Further contributions to the growth in real estate sales were provided by the sale of condominium units of
Costa del Hamilo and club shares in Pico de Loro.
Rent revenue for the year ended December 31, 2010, derived mainly from mall operations of SM Prime,
increased by 13.9% to P17.9 billion in 2010 from P15.7 billion in 2009. SM Prime is the countrys leading
shopping mall developer and operator which currently owns 40 malls in the Philippines and three malls in
China. The increase in rental revenues is largely due to rentals from new SM Supermalls. Towards the end
of 2008, three malls were opened, namely, SM City Marikina, SM City Rosales and SM City Baliwag. Likewise,
the Megamall Atrium and The Annex at SM North Edsa were also opened in the last quarter of 2008. In
2009, SM City Naga, SM Center Las Pias and SM City Rosario, as well as expansions of SM City Rosales,
The Sky Garden at SM North Edsa and SM City Fairview were also opened. In 2010, SM City Tarlac, SM City
San Pablo, SM City Calamba and SM City Novaliches were also opened. The new malls and expansions
added 904,000 square meters (sqm) to total gross floor area. Excluding the new malls and expansions,
same store rental growth is at 6.0%.
The three malls in China contributed P1.4 billion in 2010 and P1.0 billion in 2009, or 7.7% and 6.5%,
respectively, of SMICs consolidated rental revenue. The rental revenue of these three malls in China
increased by 35.5% in 2010 compared to the same period in 2009 largely due to improvements in the
average occupancy rate, lease renewals and the opening of the SM Xiamen Lifestyle which added 110,000
sqm of gross floor area. Average occupancy rate for the three malls is now at 92%.
For the year 2010, cinema ticket sales and amusement revenues increased by 31.2% to P3.7 billion in 2010
from P2.8 billion in 2009 due to the deployment of digital technology and cinema renovations which
increased our market share for both local and foreign films and more blockbuster movies shown in 2010
compared to 2009. Amusement revenues is mainly composed of amusement income from bowling and ice
skating operations including the SM Science Discovery Center and the SM Storyland.
Equity in net earnings of associates increased by 39.2% to P5.4 billion in 2010 from P3.9 billion in 2009,
primarily due to the increase in the net income of BDO which is attributed to the continued growth of its
operating income resulting from the sustained growth in business volumes, judicious management of
operating costs and lower funding costs. BDO continues to derive bulk of its operating income from core
lending and deposit-taking business and fee-based service activities. Also, BDO was able to capitalize on
trading opportunities during the period.
165

Gain on sale of available-for-sale investments and fair value changes on investments held for trading and
derivatives increased by 20.4% to P0.9 billion in 2010 from P0.8 billion in 2009 primarily due to the gain on
sale of various available-for-sale investments of certain subsidiaries
Dividend income decreased to P0.3 billion in 2010 compared to P0.4 billion in 2009 mainly due to the
maturity of the $50.0 million BDO Preferred shares under Available-for-sale investments account of SM
Prime in October 2009.
Management and service fees, which is computed based on percentage of sales, remained at P0.8 billion for
both 2010 and 2009, with a 5.2% increase.
Other revenues, which comprise mainly of service fees for the promotional activities highlighting products,
commission from bills payment, prepaid cards and show tickets and service income, decreased by 48.4% to
P1.6 billion in 2010 from last years P3.1 billion mainly due to the P1.2 billion reversal of asset provisions in
2009.
Total cost and expenses went up by 11.7% to P145.0 billion for the year ended December 31, 2010
compared to 2009. Retail cost of sales increased by 7.3% from P96.5 billion to P103.5 billion while real
estate cost of sales and others increased by 67.1% from P3.6 billion to P6.0 billion, due mainly to the
increase in sales. Selling, general and administrative expenses increased by 19.5% from P29.7 billion in
2009 to P35.5 billion in 2010. Major contributors to the increase in selling, general and administrative
expenses are personnel cost, depreciation and amortization, utilities, rent, taxes and licenses, outside
services, advertising and promotion and repairs and maintenance totaling to P29.8 billion in 2010 or a
growth of 17.7% from P25.3 billion in 2009. The increase is primarily associated with mall expansions and
new malls, department stores, supermarkets, savemore and hypermarkets.
Other charges of P1.9 billion in 2010 decreased by 20.0% from last years other charges of P2.4 billion.
Interest income increased by 7.5% from P3.4 billion in 2009 to P3.7 billion in 2010 mainly due to higher
balance of temporary investments and time deposits in 2010. Gain on disposal of investments and
properties increased by 682.2% to P1.6 billion from P0.2 billion mainly due to disposal of certain
investments in associates during the year and fair value changes of the embedded derivatives related to the
US$300 million convertible bonds of SMIC. The increase in foreign exchange gains by 81.8% from P0.2
billion in 2009 to P0.4 billion in 2010 is primarily related to the decline in exchange rate from
P46.20:US$1.00 in 2009 to P43.84:US$1.00 in 2010. These were partially offset by the increase in interest
expense by 22.1% to P7.6 billion in 2010 from P6.3 billion in 2010 due mainly to the additional interest
expense on loans availed and bonds issued in 2010 (refer to Note 20 of the audited consolidated financial
statements).
Provision for income tax increased by 13.0% to P5.4 billion for the year 2010 from P4.8 billion in 2009 due
mainly to the increase in taxable income.
Non-controlling interest increased to P6.4 billion in 2010 from P5.1 billion in 2009 due to the increase in net
income of certain subsidiaries.
31 December 2009 vs. 31 December 2008
Consolidated revenues grew by 7.1% to P158.0 billion, as against last years P147.5 billion. Income from
operations increased by 30.3% to P28.3 billion from last years P21.7 billion. Operating income margin and
Net profit margin is at 17.9% and 10.1%, respectively. Net income attributable to equity holders of the
Parent for the year ended December 31, 2009 increased by 14.4% to P16.0 billion compared to P14.0 billion
of the same period last year.

166

Retail Sales accounts for 78.4% of the total revenues for the year. Consolidated Retail sales grew by 7.9% to
P123.9 billion for the year ended December 31, 2009 due mainly to the opening of the following new stores
in 2009:

SM Department Stores

SM Supermarkets /
SaveMore Stores

1
2

SM City Naga
SM City Rosales

Mezza, Sta. Mesa


SM City Naga

SM City Rosario

SM City Rosario

4
5
6
7
8
9
10
11
12
13
14
15

SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore
SaveMore

Laon Laan
P. Tuazon
Del Monte
Amigo Mall
Mega Center
Broadway
Taft
Anonas
Libertad
Novaliches
Visayas
Solano

SM Hypermarkets
SM City Fairview
SM City Las Pias
Eton, Quezon Avenue,
Quezon City
Mandaluyong *
Makati *
Novaliches*
-

* These were formerly Makro stores which were converted into Hypermarket stores
Excluding the full year sales of Makro, the retail sales growth would be 11.3%. The sales contribution of SM
Department Stores, SM Supermarkets and SM Hypermarkets (including Makro) are 42.8%, 33.5%, and
23.7%, respectively in 2009 and 42.4%, 33.2%, and 24.4%, respectively in 2008.
Of the total retail sales, the non-food group, which is composed of SM Department stores, contributed 42.8%,
while the food group, composed of SM Supermarkets, SM SaveMore stores, SM Hypermarkets, and Makro
outlets, contributed 57.2%.
As at December 31, 2009, SM Investments retail subsidiaries have 119 stores. These consist of 36
department stores, 26 supermarkets, 26 SaveMore stores, 19 hypermarkets and 12 Makro outlets.
Real estate sales for the year ended December 31, 2009, derived mainly from condominium projects of
SMDC, surged by 72.6% to P6.7 billion. In 2009, Princeton Residences and the Big Four projects were
launched. Princeton Residences is a 40-storey condominium located at Gilmore Ave. Quezon City. The Big
Four projects namely, Jazz Residences (Jupiter St., Makati), Sun Residences (Welcome Rotonda, Quezon
City), Wind Residences (Tagaytay, Cavite), and Light Residences (Pioneer, EDSA) were simultaneously
introduced to the market in December 2009. These projects, which will have fully furnished units, are
experiencing brisk market uptake.
The other ongoing projects of SMDC are the following: Chateau Elysee, a mid-rise condominium project in
Paraaque City, which has completed five of its six clusters; Berkeley Residences in Katipunan Road, Quezon
City, which is 63% complete; Grass Residences beside SM City North Edsa, which is 58% complete with its
Tower 1; Sea Residences near the Mall of Asia Complex in Pasay City, which is 38% complete with Phase 1;
and Field Residences in Sucat, Paraaque, which is 95% complete with its Tower 1. Both Mezza Residences,
a 38-storey four-tower high rise condominium across SM City Sta. Mesa, Quezon City, and Lindenwood
Residences, a residential subdivision in Muntinlupa City, are 100% complete. Further contributions to the
growth in real estate sales were provided by the sale of condominium units of Costa del Hamilo and club
shares in Pico de Loro.

167

SM Prime Holdings, Inc. (SM Prime), the countrys leading shopping mall developer and operator which
currently owns 36 malls in the Philippines and three malls in China posted a 15% increase in rental revenue.
This is largely due to rentals from new SM Supermalls. Towards the end of 2008, three malls were opened,
namely, SM City Marikina, SM City Rosales and SM City Baliwag. Likewise, the Megamall Atrium and The
Annex at SM North Edsa were also opened in the last quarter of 2008. In 2009, SM City Naga, SM Center Las
Pias and SM City Rosario, as well as expansions of SM City Rosales, The Sky Garden at SM North Edsa and
SM City Fairview were also opened. The new malls and expansions in 2009 added 226,000 square meters
(sqm) to total gross floor area, bringing it to 4.5 million sqm, for a 5% increase. Excluding the new malls and
expansions which opened in 2008, same store rental growth is at 5%.
The three malls in China contributed P1.0 billion in 2009 and P0.8 billion in 2008, or 6.5% and 6.0%,
respectively, of SMICs consolidated rental revenue. The rental revenue of these three malls in China
increased by 25.7% in 2009 compared to the same period in 2008 largely due to improvements in the
average occupancy rate and the opening of the SM Xiamen Lifestyle which added 110,000 sqm of gross floor
area. Average occupancy rate for the three malls is now at 86%.
For the year 2009, cinema ticket sales and amusement revenues increased due to more blockbuster movies
shown in 2009 compared to 2008. Amusement revenues is mainly composed of amusement income from
bowling and ice skating operations including the SM Science Discovery Center and the SM Storyland.
Equity in net earnings of associates expanded by 138.7% to P3.9 billion in 2009 from P1.6 billion in 2008,
primarily due to the increase in the net income of Banco de Oro and China Banking Corporation as a result
of the turnaround in the market conditions following the previous years financial crisis.
Gain on sale of available-for-sale investments and fair value changes on investments held for trading and
derivatives decreased significantly from P6.6 billion in 2008 to P0.8 billion in 2009 primarily due to the P7.2
billion gain from the sale of 339.3 million shares of San Miguel Corporation, net of the provision for the
decline in mark-to-market valuation of investment securities in 2008.
Dividend income decreased to P0.4 billion for the year 2009 compared to P0.8 billion in 2008 mainly due to
the sale of 339.3 million San Miguel shares in October 2008.
Other revenues, which comprise mainly of service fees for the promotional activities highlighting products,
commission from bills payment, prepaid cards and show tickets and service income, decreased by 11.1% to
P3.1 billion in 2009 from last years P3.5 billion mainly due to the opening of new stores and expansions in
2009.
Total cost and expenses went up by 3.1% to P129.8 billion for the year ended December 31, 2009 compared
to 2008 primarily brought about by increase in costs associated with mall expansions and new malls,
department stores, supermarkets, savemore and hypermarkets, net of the effect of general asset provisions
amounting to P5.6 billion in 2008.
Other charges of P2.4 billion in 2009 increased from last years other income of P1.4 billion mainly due to the
additional interest expense on loans availed and bonds issued in 2009 and the decrease in interest income
in 2009 compared to 2008. (please refer to Note 25 of the consolidated financial statements).
Provision for income tax decreased by 15.9% to P4.8 billion for the year 2009 from P5.7 billion in 2008 mainly
due to the reduction in the corporate income tax rate from 35% in 2008 to 30% starting 2009.
Non-controlling interest increased to P5.1 billion in 2009 from P3.4 billion in 2008 due to the increase in net
income of certain subsidiaries.

168

Financial Condition
Three months ended 31 March 2012 vs. three months ended 31 March 2011
For a discussion of the financial condition of SMIC for the three months ended March 31, 2012 compared to
the three months ended March 31, 2011, please refer to the Issuers Amended SEC Form 17-Q under the
Index to the Consolidated Financial Statements of the Issuer found elsewhere in this Prospectus.
2011 vs. 2010
Consolidated total assets as at December 31, 2011 amounted to P449.1 billion, higher by 10.2% from
P407.4 billion in previous year. On the other hand, consolidated total liabilities grew by 8.2% to P226.8
billion in 2011 from P209.6 billion in previous year.
Total current assets decreased by 2.9% to P101.3 billion as at December 31, 2011 from P104.3 billion as at
last year. Cash and cash equivalents decreased by 16.3% to P56.1 billion in 2011 from P67.0 billion in 2010
mainly due to payments for investment acquisitions and capital expenditures. This was partially offset by
the increase in receivables by 19.7% to P11.8 billion from P9.8 billion primarily due to increase in receivable
from tenants and real estate buyers. Merchandise inventories increased by 28.1% to P13.4 billion from
P10.5 billion primarily due to new departments stores, supermarkets, savemore and hypermarkets. Other
current assets increased by 21.6% to P17.2 billion from P14.1 billion resulting mainly from the advances to
contractors of the real estate group from its current projects.
Total consolidated non-current assets amounted to P347.8 billion as at December 31, 2011, a growth of
14.8% from P303.1 billion as at December 31, 2010. Investments available for sale increased by 12.2% to
P12.5 billion in 2011 from P11.1 billion in 2010 mainly due to additional investments in bonds during the
year. Investments in shares of stock increased by 24.8% to P88.4 billion in 2011 from P70.9 billion in 2010
mainly due to additional investment in and purchase of shares of stock of associates, increase in equity in
banks and additional share in the unrealized gain on AFS investments of associates in 2011. As disclosed in
Note 13 to the audited consolidated financial statements, in April 2011, the Group increased its ownership
interest in Belle Corporation (Belle), an associate, by 20.78% and 12.58% gross and effective ownership,
respectively, via share swap wherein the outstanding shares of Premium Leisure and Amusement Inc. (PLAI,
a subsidiary) were exchanged for certain number of common shares of Belle valued at P1.95 per share.
The valuation of the PLAI shares was made by an independent appraiser and approved by the SEC on
October 6, 2010. This is the same valuation used in 2011. Upon receipt of the approval from the Bureau of
Internal Revenue on March 31, 2011 and issuance of stock certificates by Belle on April 14, 2011, the Group
recorded the share swap in its 2011 financial statements. The increase in investment properties, property
and equipment and land and development by 15.5% or P17.6 billion, 12.9% or P1.7 billion and 16.8% or
P3.3 billion, respectively, arose from new mall constructions, real estate developments and purchase of
commercial lots in 2011. As at December 31, 2011, the Group has no idle property and equipment and the
carrying amount of fully depreciated property and equipment still in use amounted to P2,869.7 million.
Deferred tax assets increased by 20.5% to P0.7 billion in 2011 from P0.6 billion in 2010 mainly due to tax
effect of unrealized foreign exchange loss, unamortized past service cost and defined benefit liability and
accrued leases. Other non-current assets increased by 14.4% to P24.1 billion from P21.0 billion mainly due
to the non-current receivable from real estate buyers. As disclosed in Note 17 to the audited consolidated
financial statements, Other Noncurrent Assets include Receivable from a related party and escrow fund
amounting to P8.1 billion in 2011. The related party and SMIC have common stockholders. As disclosed in
Note 17, the receivable from related party pertains to various cash advances in 2009 for payment of interest,
purchase of shares and other operating requirements totaling to P6,000.0 million, which bears a fixed
interest of 7.0%, payable semi-annually and will mature in 2013. Further, as disclosed in Note 22, the
Group did not make any provision for doubtful accounts relating to amounts owed by related parties and
that there have been no guarantees provided or received for any related party receivables or payables. As
disclosed in Note 17, Intangibles include Trademarks and brand names amounting to P6.1 billion. These
169

trademarks and brand names pertain to that of the supermarket and hypermarket business of the Group
which were acquired in 2006 and valued using the Relief-from-Royalty Method. The royalty rate was 3.5%,
which was the prevailing royalty rate in 2006 in the retail assorted category where the two entities fall.
Total consolidated current liabilities increased by 27.8 % to P79.8 billion as at December 31, 2011 mainly
due to availment of bank loans which increased by 26.2% to P25.7 billion in 2011 from P20.4 billion in 2010
and increase in accounts payable and other current liabilities by 14.6% to P44.7 billion in 2011 from P39.0
billion in 2010 mainly arising from trade transactions, subscriptions payable and accrued expenses. See
Note 18 to the audited consolidated financial statements for further discussion regarding bank loans.
Income tax payable increased by 12.3% to P1.3 billion in 2011 from P1.2 billion in 2010 mainly due to
higher taxable income in 2011. The 348.3% or P6.2 billion increase in current portion of long-term debt is
mainly due to the reclassification from long-term debt of loans which will mature in 2011. See Note 20 to
the audited consolidated financial statements for further discussion regarding long-term debt. The 5.8%
increase in dividends payable represents dividends to non-controlling stockholders of certain subsidiaries.
Total non-current liabilities slightly decreased by P0.1 billion to P147.0 billion in 2011 from P147.1 billion in
2010. Defined benefit liability decreased by P0.1 billion or 57.1% to P0.1 billion from P0.2 billion in 2010.
Deferred tax liabilities decreased by 2.8% to P4.5 billion in 2011 from P4.6 billion in 2010. Non-current
derivative liability decreased by 82.4% to P0.2 billion from P1.4 billion mainly due to non-deliverable
forwards entered into in 2010 which matured in 2011 and unwinding of interest rate swaps as a result of the
prepayment of the underlying loans. See Note 30 to the audited consolidated financial statements for
further discussion regarding derivative transactions. Long-term debt net of current portion decreased by
P0.1 billion or 0.1% to P128.5 billion in 2011 from P 128.6 billion in 2010. See Note 20 to the audited
consolidated financial statements for further discussion regarding long-term debt. These were partially
offset by the increase in tenants deposits and others by 10.8% to P13.7 billion in 2011 from P12.4 billion in
2010 mainly due to new malls and expansions and from new condominium projects of the real estate
group.
Total equity amounted to P222.3 billion as at December 31, 2011, while total equity attributable to equity
holders of the parent amounted to P157.7 billion. The 48.0% or P0.1 billion increase in cumulative
translation adjustment is related to the translation of the financial accounts of SM China malls from Chinese
yuan renminbi to Philippine pesos. Non-controlling interest increased by 14.8% to P64.6 billion in 2011 from
P56.3 billion in 2010 mainly due to increase in net assets of certain subsidiaries. See Note 21 to the audited
consolidated financial statements for further discussion regarding the stockholders equity.
In the reconciliation of retained earnings available for dividend declaration, which is attached to SEC Form
17-A Annual Report as of December 31, 2011, the beginning balance of unappropriated retained earnings
as of December 31, 2010 amounting to P29,017.4 million was adjusted to reflect the following adjustments:
(1) P248 million regarding rental income from straight line amortization in excess of actual rental payments
in compliance with PAS 17 Leases and (2) P324 million regarding the accretion of tenants deposits,
exchanged bonds and convertible bonds in compliance with PAS 39 Financial Instruments. After the said
adjustments, the beginning balance of unappropriated retained earnings amounted to P29,093.3 million.
2010 vs. 2009
Consolidated total assets as at December 31, 2010 amounted to P407.4 billion, higher by 19.2% from P341.6
billion in previous year. On the other hand, consolidated total liabilities grew by 19.1% to P209.6 billion in
2010 from P175.9 billion in previous year.
Total current assets increased by 17.9% to P104.3 billion as at December 31, 2010 from P88.5 billion as at
last year. Cash and cash equivalents increased by 53.8% to P67.0 billion in 2010 from P43.5 billion in 2009
mainly due to proceeds from loan availments during the year. Time deposits and short-term investments
decreased by 91.5% to P0.9 billion from P10.4 billion as these were used to fund the early redemption by the
170

bondholders of the US$246.3 million convertible bonds in March 2010. Investments held for trading and sale
decreased by 58.1% to P2.0 billion in 2010 from P4.8 billion in 2009 mainly due to disposal of certain
investments in bonds. Receivables increased by 11.8% to P9.8 billion from P8.8 billion primarily due to
increase in receivable from tenants and real estate buyers associated with the increase in real estate sales
and rental revenues. Merchandise inventories increased by 35.1% to P10.5 billion from P7.8 billion primarily
due to new departments stores, supermarkets, savemore and hypermarkets. Other current assets increased
by 6.9% to P14.1 billion from P13.2 billion mainly due to the increase in inventory of club shares of Costa del
Hamilo in Pico de Loro to P0.9 billion in 2010 from P0.02 billion in 2009.
Total consolidated noncurrent assets amounted to P303.1 billion as at December 31, 2010, a growth of
19.7% from P253.2 billion as at December 31, 2009. Investments available for sale increased by 44.5% to
P11.1 billion in 2010 from P7.7 billion in 2009 mainly due to additional investments in bonds during the year.
Investments in shares of stock increased by 22.5% to P70.9 billion in 2010 from P57.8 billion in 2009 mainly
due to additional investment in shares of stock of associates, increase in equity in banks and additional share
in the unrealized gain on available-for-sale investments of associates in 2010. The increase in investment
properties, property and equipment and land and development by 11.8% or P12.0 billion, 21.6% or P2.4
billion and 59.3% or P7.3 billion, respectively, arose from new mall constructions and expansions, real estate
developments and purchase of commercial lots in 2010. The increase in non-current time deposits by 16.1%
to P37.4 billion in 2010 from P32.2 billion in 2009 mainly came from the US$186.3 million bonds issued in
2010. Deferred tax assets went down by 39.6% to P0.6 billion in 2010 from P1.0 billion in 2009 mainly due
to the decrease in deferred tax from unrealized foreign exchange loss and others of the group. Other
noncurrent assets grew by 49.8% to P21.0 billion from P14.0 billion mainly due to the increase in
non-current receivable from real estate buyers and escrow fund for SMDC projects.
Total consolidated current liabilities increased by 53.1% to P62.4 billion as at December 31, 2010 mainly due
to availment of bank loans which increased by 318.8% to P20.4 billion in 2010 from P4.9 billion in 2009 and
increase in accounts payable by 15.2% to P39.0 billion in 2010 from P33.9 billion in 2009 arising from trade
transactions, acquisition of land and payable to government agencies in 2010. See Note 18 to the audited
consolidated financial statements for further discussion regarding bank loans. Income tax payable increased
by 11.0% to P1.2 billion in 2010 from P1.1 billion in 2009 mainly due to higher taxable income in 2010. The
92.0% or P0.8 billion increase in current portion of long-term debt is mainly due to the reclassification from
long-term debt of loans which will mature in 2011. See Note 20 to theaudited consolidated financial
statements for further discussion regarding long-term debt.
Total non-current liabilities increased to P147.1 billion, mainly due to the issuance of additional bonds by
SMIC (US$186.3 million new money component of the US$400 million exchangeable bonds), corporate notes
by SMDC (P10.0 billion) and SM Prime (P6.0 billion) and loan availments of the group, net of loan payments.
The details of these transactions are further discussed in Note 20 to the audited consolidated financial
statements. Defined benefit liability decreased by 49.0% to P0.2 billion in 2010 from P0.3 billion in 2009 due
to additional contributions to the retirement fund in 2010. Deferred tax liabilities increased by 6.7% to P4.6
billion in 2010 from P4.3 billion in 2009 mainly due to higher capitalized interest and deferred rent income in
2010. Tenants deposits and others increased by 23.9% to P12.4 billion in 2010 from P 10.0 billion in 2009
mainly due to new malls and expansions in 2009 and 2010 and from new condominium projects of the real
estate group. Non-current derivative liability decreased by 38.5% to P1.4 billion from P2.2 billion mainly due
to the availment by the bondholders of US$246.3 million of the early redemption option in March 2010 and
conversion of US$9M convertible bond of SMIC. See Note 30 to the audited consolidated financial statements
for further discussion regarding derivative transactions.
Total equity amounted to P197.8 billion as at December 31, 2010, while total equity attributable to equity
holders of the parent amounted to P141.5 billion. Cost of common shares held by a subsidiary increased by
993.1% to P0.3 billion in 2010 from P0.02 billion in 2009 mainly due to the acquisition by a subsidiary of
parent common shares during the year. The 16.0% or P0.06 billion decrease in cumulative translation
adjustment is related to the translation of the financial accounts of SM China malls from China yuan renminbi
171

to Philippine pesos. Non-controlling interest increased by 37.5% to P56.3 billion in 2010 from P40.9 billion in
2009 mainly due to increase in net assets of certain subsidiaries. See Note 21 to the audited consolidated
financial statements for further discussion regarding equity.
2009 vs. 2008
Consolidated total assets as at December 31, 2009 amounted to P341.6 billion, higher by 16.8% from P292.4
billion in previous year. On the other hand, consolidated total liabilities grew by 23.3% to P175.9 billion in
2009 from P142.6 billion in previous year.
Total current assets increased by 6.3% to P88.5 billion as at December 31, 2009 from P83.2 billion as at last
year mainly due to additional investments in time deposits and short term investments (partly from issuance
of US$500 million bonds) and reclassification of noncurrent time deposits in 2008 which will mature in 2010,
increase in merchandise inventories, current receivable from real estate buyers, and condominium units for
sale accounts, net of decrease in cash and cash equivalents as a result of payments for capital expenditures
and debt maturities.
Total consolidated noncurrent assets amounted to P253.2 billion as at December 31, 2009, a growth of
21.0% from P209.2 billion as at December 31, 2008 mainly due to increase in investment properties arising
from new mall constructions and expansions and real estate developments, purchase of commercial lots,
additional investments in shares of stocks of associates, additional investments in time deposits (partly from
issuance of US$500 million bonds), increase in non-current receivable from real estate buyers and
recognition of goodwill arising from the acquisition of the non-controlling interest of a certain subsidiary.
Total consolidated current liabilities decreased by 29.3% to P40.8 billion as at December 31, 2009 mainly due
to payment of bank loans and current portion of long-term debt, net of increase in accounts payable. Current
portion of derivative liabilities account in 2008 mainly pertains to marked-to-market losses on the plain
vanilla cross currency swap entered into in 2004 by SM Prime which was fully settled in October 2009.
Total Noncurrent Liabilities increased to P135.1 billion, mainly due to the Groups loan availments, net of loan
payments and issuance of bonds by SMIC (P10 billion retail bond in June 2009 and US$500 million bond in
September 2009) and the issuance of corporate notes by SM Prime (P5 billion in April 2009). The details of
these transactions are further discussed in Note 20 to the audited consolidated financial statements.
Total equity amounted to P165.7 billion as at December 31, 2009, while total equity attributable to equity
holders of the parent amounted to P124.8 billion. See Note 21 to the audited consolidated financial
statements for further discussion regarding Total Equity.
Key Performance Indicators
The following are the major financial ratios of the Issuer for the years ended December 31, 2011, 2010 and
2009:

Current Ratio
Debt-equity Ratios:
On Gross Basis
On Net Basis
Return on Equity
Net Income to Revenue

2009

Year ended December 31


2010

2011

2.17

1.67

1.27

49:51
21:79
13.6%
10.1%

50:50
22:78
13.8%
10.4%

47:53
28:72
14.2%
10.6%

172

Revenue Growth
Net Income Growth
EBITDA (in P billions)

7.1%
14.4%
P34.2

12.1%
15.1%
P38.8

13.0%
15.1%
P44.6

The current ratio decreased to 1.27x in 2011 from 1.67x in 2010 due to increase in current liabilities
resulting from availment of new bank loans, increase in current portion of long-term debt and trade
payables and decrease in cash and cash equivalents mainly from investment acquisitions and capital
expenditures.
The debt-equity ratio on gross basis slightly decreased to 47:53 in 2011 from 50:50 in 2010 mainly due to
payment of loans in 2011. On a net basis, the debt-equity ratio increased to 28:72 as some loans were used
for capital expansions and general corporate purposes.
In terms of profitability, the return on equity improved to 14.2% in 2011 compared to 13.8% in 2010 due to
the 15.1% increase in net income attributable to equity holders of the parent in 2011. Net income to
Revenue slightly increased to 10.6% in 2011 compared to 10.4% in 2010. Revenue growth increased to
13.0% in 2011 from 12.1% in 2010 mainly attributed to the increase in merchandise and real estate sales
and rental revenues, improvement in the net income of bank associates, net of the increase in costs and
expenses. Net income growth is at 15.1% for both years.
EBITDA improved to P44.6 billion in 2011 over P38.8 billion in 2010 mainly due to the increase in income
from operations and other income.
The manner by which the Company calculates the foregoing indicators is as follows:
1. Current Ratio

Current Assets
Current Liabilities

2. Debt Equity Ratio


Gross Basis

Total Interest Bearing Debt less Pledged time deposits


Total Equity Attributable to Equity Holders of the Parent + Total
Interest Bearing Debt less Pledged time deposits

Net Basis

Total Interest Bearing Debt less cash and cash equivalents, time
deposits, investment in bonds held for trading and available for sale
Total Equity Attributable to Equity Holders of the Parent + Total
Interest Bearing Debt less cash and cash equivalents, time deposits,
investments in bonds held for trading and available for sale

3. Return on Equity

Net Income Attributable to Equity Holders of the Parent


Average Equity Attributable to Equity Holders of the Parent

4. Net Income to Revenue

Net Income Attributable to Equity Holders of the Parent


Total Revenue

5. Revenue Growth

Total Revenues (Current Period) - 1


Total Revenues (Prior Period)

6. Net Income Growth

Net Income Attributable to Equity Holders of the Parent (Current


Period) 1
Net Income Attributable to Equity Holders of the Parent
(Prior Period)
173

7. EBITDA

Income from operations + Depreciation & Amortization

Expansion Plans / Prospects for the Future


For 2012, SM Prime plans to open SM City Lanang in Davao City, SM City General Santos in South Cotabato,
SM City Consolacion in Cebu, SM City Olongapo in Zambales, SM City San Fernando in Pampanga and SM
Chongqing in China.
By the end of 2012, SM Prime will have 46 malls in the Philippines and five in China with an estimated
combined Gross Floor Area of 6.4 million sqm.
Retail expansion plans for 2012 include the opening of five department stores, six supermarkets, 21
SaveMore branches and five hypermarkets.
SMDC currently has 15 residential projects under its SM Residences brand and two projects under the M
Place brand. In order to sustain the growth momentum and to further expand the SMDCs presence in the
industry, SMDC will continue to vigorously pursue its vision of uplifting the Filipino lifestyles by launching
products that will meet the demand for affordable and high quality residential units in prime locations and
will also pursue projects that will cater to the preferences and financial capacity of its target market.
Innovation shall remain to be its strength while continuously focusing attention to changing market needs.
The broadening and strengthening of its revenue base shall also be pursued as it moves forward.
For the year 2012, SMDC is targeting to launch five new projects in various cities within Metro Manila. In
addition, it shall continue to search for viable locations in key cities in Metro Manila in response to the
increasing demands for residences. SMDC shall be open to tapping various sources of financing to support
its operational needs in real estate development.
The Miranda cluster of Costa Del Hamilo was completed in June 2012 and the Carola cluster is targeted to
be completed in July 2012.
SM Hotels is currently developing Park Inn by Radisson Davao, which will be the very first Park Inn by
Radisson in the Asia Pacific region. The Park Inn brand is one of the hotel brands under Carlson and is the
largest mid-market brand for hotels under development in Europe. Park Inn by Radisson Davao hotel
project is approximately a 204-room hotel located in Lanang, Davao City. The hotel is scheduled to open in
the first quarter of 2013.
The above expenditures will be funded through internally generated sources and other capital raising
initiatives such as bond issuances and loan availments.
The Company has no known direct or contingent financial obligation that is material to the Company,
including any default or acceleration of an obligation. There were no contingent liabilities or assets in the
Companys balance sheet. The Company has no off-balance sheet transactions, arrangements, obligations
during the reporting year as at balance sheet date.
There are no known trends, events, material changes, seasonal aspects or uncertainties that are expected
to affect the Companys continuing operations.
There are no known trends or any known demands, commitments, events or uncertainties that will result in
or that are reasonably likely to result in the Issuers liquidity increasing or decreasing in any material way.
The Issuer does not anticipate having any cash flow or liquidity problems within the next twelve months.
There are no significant elements of income or loss arising outside of the Issuers continuing operations.
174

The Issuer is not in default or breach of any note, loan, lease or other indebtedness or financing
arrangement.
There are no significant amounts of the Issuers trade payables that have not been paid within the stated
trade terms.

175

DESCRIPTION OF PROPERTIES
The Issuers principally owned properties consist of malls and lands. The land improvements, buildings,
equipment, owned by the Issuer have a net book value of P107,836.0 million as at 31 December 2011. The
locations and general descriptions of these properties and equipment are described below.
Supermalls
The Issuer has 42 malls as at 31 March 2012 in the following locations:

SM City North EDSA


North Avenue cor. EDSA, Quezon City

SM City Sta. Mesa


Ramon Magsaysay Boulevard cor. Araneta Ave., Barangay Dona Imelda, Quezon City

SM Megamall
EDSA cor. Julia Vargas Avenue, Ortigas Center, Mandaluyong City

SM City Cebu
North Reclamation Area, Cebu City, Cebu

SM City Southmall
Alabang Zapote Road, Almanza, Las Pias City

SM City Bacoor
General Emilio Aguinaldo Highway, Bo. Habay II, Bacoor, Cavite

SM City Fairview
Quirino Hwy. cor. Regalado Ave. and Belfast St., Greater Lagro, Quezon City

SM City Iloilo
Benigno S. Aquino Jr. Avenue, Diversion Road, Mandurriao, Iloilo City, Iloilo

SM City Manila
Natividad Almeda-Lopez (formerly called Concepcion) corner A. Villegas (formerly called Arroceros)
and San Marcelino Streets, Ermita, Manila

SM City Pampanga
Jose Abad Santos Avenue corner North Luzon Expressway, Brgy. Lagundi, Mexico, Pampanga and
Brgy. San Jose, City of San Fernando, Pampanga

SM City Sucat
Dr. A. Santos Avenue corner Carlos P. Garcia Avenue Extension (C5), Brgy. San Dionisio, Paraaque
City

SM City Davao
Quimpo Boulevard corner Tulip Drive, Ecoland Subdivision, Brgy. Matina, Davao City, Davao Region

SM City Bicutan
Doa Soledad Avenue, Brgy. Don Bosco, Paraaque City

SM City Cagayan de Oro


Brgy. Upper Carmen, Cagayan de Oro City, Misamis Oriental

SM City Lucena
Maharlika Highway corner Dalahican Road, Brgy. Ibabang Dupay, Lucena City, Quezon

SM City Baguio
Luneta Hill, Upper Session Road corner Governor Pack Road, Baguio City, Benguet
176

SM City Marilao
Mc Arthur Highway, Brgy. Ibayo, Marilao, Bulacan

SM City Dasmarias
Governor's Drive, Brgy. Sampaloc 1, Dasmarias, Cavite

SM City Batangas
Brgy. Pallocan Kanluran, Batangas City, Batangas

SM City San Lazaro


Felix Huertas Street corner Arsenio H. Lacson Extension, Santa Cruz, Manila

SM Center Valenzuela
Mc Arthur Highway, Karuhatan, Valenzuela City

SM Center Molino
Molino Road, Brgy. Molino 4, Bacoor, Cavite

SM City Santa Rosa


Old National Highway, Barrio Tagapo, Santa Rosa City, Laguna

SM City Clark
M.A. Roxas Highway, Barangay Malabanias, Angeles City, Pampanga

SM Mall of Asia
SM Central Business Park, North Reclamation Area, Bay City, Pasay City

SM Center Pasig
Frontera Verde, C5, Brgy. Ugong, Pasig City

SM City Lipa
J.P. Laurel Highway, Lipa City, Batangas

SM City Bacolod
Rizal Avenue, Reclamation Area, Bacolod City, Negros Occidental

SM City Taytay
Manila East Road, Brgy. Dolores, Taytay, Rizal

SM Center Muntinlupa
National Road, Brgy. Tunasan, Muntinlupa City

SM City Marikina
Marcos Highway corner East Marikina Riverbanks Service Road, Marikina Riverbanks, Calumpang,
Marikina City

SM City Rosales
Carmen East, Rosales, Pangasinan

SM City Baliwag
Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan

SM City Naga
CBD II, Brgy. Triangulo, Naga City

SM Center Las Pias


Alabang Zapote Rd., Brgy. Talon Dos, Las Pias City

SM City Rosario
General Trias Drive, Brgy. Tejero, Rosario, Cavite

SM City Tarlac
Mc Arthur Highway, Brgy. San Roque, Tarlac City
177

SM City San Pablo


Brgy. San Rafael, San Pablo City, Laguna

SM City Calamba
National Road, Brgy. Real, Calamba City, Laguna

SM City Novaliches
Quirino Highway, Brgy. San Bartolome, Novaliches, Quezon City

SM City Masinag
Marcos Highway, Brgy. Mayamot, Antipolo City

SM City Olongapo
Magsaysay Drive corner Gordon Avenue, Pag-asa, Olongapo City

The Issuer has office buildings located at Harbor Drive, Mall of Asia Complex, Pasay City. As of the date of
this Prospectus, there are no mortgages, liens or encumbrances over any of the properties owned by the
Issuer.
Land and Development
Land and development costs pertain to the SMDCs ongoing residential condominium projects. Estimated
cost to complete the projects amounted to P5,518.0 million and P30,587.9 million as at 31 December 2010
and 2011, respectively.
SMDC also acquired several parcels of land for future development with aggregate carrying values of
P8,759.5 million and P4,368.2 million as at December 31, 2010 and 2011, respectively. These costs are
included as part of land and development costs.
SMDC acquired Landfactors for P300.0 million in 2009, Vancouver Lands, Inc. (VLI) for P566.6 million in
2010 and Twenty Two Forty One Properties, Inc. (TTFOPI) for P195.6 million in 2011 and became its
wholly-owned subsidiaries. The purchase of Landfactors, VLI and TTFOPI were accounted for as an
acquisition of asset. Landfactors, VLI and TTFOPI own parcels of land which are being developed into
commercial/residential condominium projects.
On 30 June 2004, SMDC entered into a joint venture agreement with the Government Service Insurance
System (GSIS) for the development of a residential condominium project on a parcel of land owned by
GSIS. Under the joint venture agreement, GSIS shall contribute all its rights, title and interest in and to the
property in consideration of its receipt of allocated units, which is 15% of the value of the total saleable
units in the project, in return for its contribution. In turn, SMDC shall provide financing for the
implementation of the project in consideration for 85% of the value of the total saleable units in the project.
On 14 July 2005, SMDC submitted to GSIS a Letter of Intent to change the GSIS subject for development.
On 7 September 2005, the GSIS Board of Trustees approved the proposal of SMDC to change the GSIS
subject for development. Under the amended joint venture agreement, the property will now be 14,430
square meters, more or less, a portion of the Tree Park Area of the GSIS-Baguio Convention Center.
Under the amended joint venture agreement, in the event of a decrease in the investment commitment but
not below the amount of P1,100.0 million, there will be no adjustment in the sharing or allocation
percentage of both parties as agreed upon based on the original joint venture agreement. In case the
reduction goes lower than P1,100.0 million, there shall be a corresponding adjustment in the sharing or
allocation percentage of both parties, which shall be subject to the agreement of both parties. As at 31
December 2011, the development of the project has not yet started.
Costa del Hamilo Inc., a subsidiary of Mountain Bliss Resort and Development Corporation
CDHIs construction projects located at Hamilo Coast in Nasugbu, Batangas consist of condominium
178

buildings and beach and country club. As at 31 December 2010, the Company completed the construction
of two condominium projects and the beach and country club. The completed condominium projects were
reclassified as inventories in 2010 while the ownership of beach and country club was transferred to Pico de
Loro in June 2010.
Total estimated cost to complete the ongoing projects amounts to =
P 711.5 million and =
P 283.8 million as at
31 December 2010 and 2011, respectively.
Depending on market conditions in the next 12 months, the Company may acquire additional properties for
its commercial center, retailing and/or real estate development and tourism businesses. These potential
acquisitions will depend, among others, on the execution strategies for the Groups expansion plans, and
the availability of suitable properties at reasonable market prices.
Leased Properties
As at 31 March 2012, the Issuer and its subsidiaries had 29 leased properties with the following details set
forth below:
Leased Properties

Lease
Payments

Expiration Date

SM Valenzuela

579,514,688

July 2043

No provision

SM Baguio

932,734,081

October 2053

No provision

SM Muntinlupa

256,481,672

March 2055

No provision

SM Mall of Asia

Renewal Option

1,405,948,350

December 2030

SM Pasig

375,478,596

July 2020

SM Bacoor

99,128,400

December 2043; December 2044

SM San Lazaro

148,534,084

July 2028

SM Calamba

654,873,461

February 2054; April 2060

automatically renewed for another 25 years

SM Sucat

301,071,429

May 2054

automatically renewed for another 25 years

SM Pampanga

245,025,138

October 2053

SM San Pablo

714,378,269

September 2058

SM Tarlac

209,703,120

April 2054

No provision

SM Taytay

460,660,815

January 2055

No provision

1,167,394,180

December 2056

No provision

SM Bacolod

5,138,433

February 2032

renewable for another 25 years

SM Taytay

130,867,040

August 2034

automatically renewed for another 25 years

SM Masinag

60,911,159

April 2036

automatically renewed for another 25 years

SM Taguig Aura ( Head Office )

650,064,585

November 2032; July 2033

automatically renewed for another 25 years

SM Hypermarket Sucat Lopez

206,483,735

October 2034

SM Commonwealth (Head Office )

555,938,016

May 2035

automatically renewed for another 25 years

SM Marketmall Dasmarias

222,778,400

March 2035

automatically renewed for another 25 years

SM Consolacion Cebu (Head Office )

1,095,455,770

September 2060

automatically renewed for another 25 years

SM General Santos (Head Office)

1,629,180,227

February 2059

No provision

SM Calamba Real (Head Office )

82,290,595

February 2054

No provision

SM Olongapo

87,914,656

December 2035

No provision

SM Megamall

119,526,563

December 2031

No provision

1,679,908,116

June 2028; May 2058

SM Naga

SM Clark

179

renewable for another 25 years


No provision
automatically renewed for another 25 years
renewable for another 25 years

No provision
automatically renewed for another 25 years

renewable upon agreement

renewable

SM By The Bay

157,389,506

November 2017

No provision

SM Dasmarias

680,023,978

August 2050

No provision

Total Leased Payments

14,914,797,062

180

BOARD OF DIRECTORS AND MANAGEMENT OF THE ISSUER


Directors and Executive Officers
The following table sets forth the persons who served as a Director and/or executive officer of SMIC as
at the date of this Prospectus:
Name
Henry Sy, Sr

Position
Chairman

Citizenship
Filipino

Age
86

Teresita T. Sy

Vice Chairperson

Filipino

60

Henry T. Sy, Jr.

Vice Chairperson

Filipino

57

Harley T. Sy

Director and President

Filipino

51

Director, Executive Vice President and CFO

Filipino

71

Vicente S. Perez, Jr.

Independent Director

Filipino

52

Ah Doo Lim

Independent Director

Singaporean

61

Joseph R. Higdon

Independent Director

American

69

Jose T. Sio

Grace F. Roque

Treasurer

Filipino

60

Filipino

69

Marianne Malate-Guerrero

Senior Vice President, Compliance Officer and


Assistant Corporate Secretary
Senior Vice President

Filipino

46

Elizabeth Anne C. Uychaco

Senior Vice President

Filipino

55

Ma. Ruby Ll. Cano

Senior Vice President

Filipino

52

Cecilia Reyes-Patricio

Senior Vice President

Filipino

53

Luiz Y. Benitez

Senior Vice President

Filipino

64

Corazon Pilar P. Guidote

Senior Vice President

Filipino

51

Frederic C. DyBuncio

Senior Vice President

Filipino

52

Emmanuel C. Paras

Corporate Secretary

Filipino

61

Corazon I. Morando

Management
Board of Directors
The Directors of the Issuer are elected at the annual stockholders meeting to hold office until the next
succeeding annual meeting and until their respective successors have been appointed or elected and
qualified.
The following describes the background and business experience of the Issuers Directors and Executive
Officers during the last five years:
Henry Sy, Sr. is the Chairman of the Board of Directors of SMIC. He is the founder of the SM Group and
is currently Chairman of SM Prime, SM Land, SMDC, and HPI, among others. Mr. Sy opened the first
ShoeMart store in 1958 and has since evolved into a dynamic group of companies with five lines of
businesses - shopping malls, retail merchandising, financial services, real estate development and
tourism, hotels and entertainment. He is likewise Chairman Emeritus of BDO and Honorary Chairman of
China Bank.
Teresita T. Sy is the Vice Chairperson of SMIC. She has varied experiences in retail merchandising, mall
development and banking businesses. A graduate of Assumption College, she was actively involved in
181

Shoemarts development. At present, she is the Chairman of the Board of Directors of BDO. She also
holds board positions in several companies within the SM Group.
Henry T. Sy, Jr. is the Vice Chairperson of SMIC. He is also the Vice Chairman President of HPI and
SM Land, Vice Chairman of SMDC, Director of SM Prime and BDO. He is likewise the President of National
Grid Corporation of the Philippines. He is responsible for the real estate acquisitions and development
activities of SM Land and SMDC which include the identification, evaluation and negotiation for potential
sites as well as the input of design ideas. He graduated with a Management degree from De La Salle
University.
Harley T. Sy is the President of SMIC. He is a Director of China Banking Corporation, BDO Private Bank
and other companies within the SM Group. He is the Executive Vice-president for Merchandising of SM
Retail, Inc. He holds a degree in Finance from De La Salle University.
Jose T. Sio is the Executive Vice President and Chief Finance Officer of SMIC. He is also a Director of
China Banking Corporation, Belle Corporation, and SM Keppel Land, Inc. as well as other companies
within the SM Group. Mr. Sio is also an adviser to the Board of Directors of Banco de Oro Unibank, Inc.
Mr. Sio holds a masters degree in Business Administration from New York University, is a certified public
accountant and was formerly a senior partner at SGV & Co. (a member practice of Ernst & Young).
Vicente S. Perez, Jr. is an Independent Director of SMIC. His career has ranged from international
banker, debt trader, investment bank partner, private equity investor to cabinet secretary. He is the Chief
Executive Officer of Alternergy Partners, a renewable power company for emerging Asian countries,
Chairman of Merritt Partners, an energy advisory firm, and Chairman of Ten Knots Philippines, the holding
company of El Nido Resorts. He was the youngest and longest serving Secretary of the Department
of Energy. He had also briefly served as Undersecretary for Industry and Investments at the Department
of Trade and Industry and Managing Head of the Board of Investments. He is Chairman of WWF
Philippines and member of the WWF-International Board. Mr. Perez is a member of the advisory boards
of Coca-Cola Phils., Pictet Clean Energy Fund, and Yale Center for Business and Environment. He
obtained his masters degree in Business Administration from the Wharton School of the University of
Pennsylvania, and his bachelors degree in Business Economics from the University of the Philippines. He
was a 2005 World Fellow at Yale University where he lectured an MBA Class on renewable power in
emerging countries.
Ah Doo Lim, a Singaporean, is an Independent Director of SMIC. He is currently a Director and
Chairman of the Audit Committee of Sembcorp Marine Ltd., a world leading rig builder in the offshore
marine and engineering sector, and of ARA-CWT Trust Management (Cache) Ltd., PST Management Pte
Ltd. and GP Industries Ltd. He is also a Director of EDB Investments Pte Ltd., investment arm of the
Singapore Economic Development Board and of U Mobile Sdn Bhd. He obtained a degree in Engineering
from Queen Mary College, University of London in 1971, and a Masters Degree in Business
Administration from Cranfield School of Management, England in 1976.
Joseph R. Higdon, an American, is an Independent Director of SMIC. He was a Senior Vice-President
of Capital Research and Management, a Los Angeles-based international investment management firm.
He joined Capital Research in 1974 and covered Philippine equities from 1989 to 2006. He was also a US
Peace Corps volunteer in the Philippines from 1962 to 1964. He is presently an Independent Director of
International Container Terminal Services, Inc. and a Director of the Advisory Board of Coca-Cola Bottling
Company, Philippines.
Period of Directorship:

182

Name
Henry Sy, Sr.
Teresita T. Sy
Henry T. Sy, Jr.
Harley T. Sy
Jose T. Sio
Vicente S. Perez, Jr.
Ah Doo Lim
Joseph R. Higdon

Period Served
1960 present
1979 present
1979 present
1993 present
2005 present
2005 present
2008 present
2010 present

Executive Officers
Grace F. Roque is the Treasurer of SMIC. She is the Assistant Treasurer of SM Land, Inc. She is also the
President and Chairman of Metro Manila Shopping Mecca and President and Director of HFS Corporation
and Mercantile Stores Group, Inc. She holds a Bachelors Degree in Economics from Maryknoll College
and a Masters in Business Administration Degree from the University of the Philippines.
Corazon I. Morando is Senior Vice President, Corporate Legal Affairs, Compliance Officer and Assistant
Corporate Secretary of SMIC. She is also the Vice President and Corporate Secretary of China Banking
Corporation and Corporate Secretary and Compliance Officer of Highlands Prime, Inc.; Senior Vice
President - Corporate Legal Affairs, Assistant Corporate Secretary and Compliance Officer of SM Prime;
and the Corporate Secretary of Pico de Loro Beach and Country Club, Inc. She holds a Bachelor of Laws
degree from the University of the Philippines and took up graduate studies under the MBA-Senior
Executive Program in the Ateneo de Manila University. She was formerly Director of the Corporate and
Legal Department of the SEC in the Philippines.
Elizabeth Anne C. Uychaco is Senior Vice President, Corporate Services of SMIC. She is also a
Director of Belle Corporation. She was formerly Senior Vice President and Chief Marketing Officer of
Philippine American Life Insurance Company. Prior to that, she was Vice President of Globe Telecom, Inc.
and was responsible for sales and distribution. Ms. Uychaco graduated from St. Scholasticas College in
1978 with a Bachelors of Arts Degree. She obtained a Masters Degree in Business Economics from the
University of Asia and Pacific in 1988 and a Masters Degree in Business Administration from the Ateneo
Business School in 1992.
Marianne Malate-Guerrero is Senior Vice President, Legal Department of SMIC. She formerly worked
as Senior Vice President and Legal Department Head of United Overseas Bank Philippines. Previous to
that, she was Vice President and Legal Officer of Solidbank Corporation. She began her practice with the
law firm of Castillo Laman Tan & Pantaleon Law office. She graduated from the Ateneo School of Law
in 1988.
Ma. Ruby Ll. Cano is Senior Vice President for Controllership of SMIC. She is a Certified Public
Accountant and holds a Masters in Business Administration degree from Ateneo Graduate School of
Business. She graduated from De La Salle University with a Bachelor of Science degree in Accountancy.
Prior to her joining the company, she served as Director of Finance for two leading hotels. She started her
professional career in SGV & Co.
Cecilia Reyes-Patricio is the Senior Vice President, Corporate Tax Department of SMIC. Prior to joining
SMIC in 1988, she was a financial and tax auditor at SGV & Co. She holds a Master of Science degree (with
highest honors) in Commerce, Major in Taxation, from the Manuel Luis Quezon University. A Certified
183

Public Accountant, she graduated magna cum laude with a Bachelor of Science degree in Business
Administration from the University of the East.
Luis Y. Benitez is a Senior Vice President of SMIC for Internal Audit. Prior to joining SMIC, Mr. Benitez
was a Senior Partner of SGV & Co., where he served as Vice Chairman and Head of the Assurance &
Advisory Business Services. He is a member of the Makati Business Club, The Philippine British Business
Council, and the Philippine Institute of Certified Public Accountants. Mr. Benitez holds a Master of
Business Administration degree from New York University, Stern School of Business. He is a graduate of
the Pacific Rim Bankers Program, University of Washington. He holds a Bachelor of Science in Business
Administration degree, Major in Accounting from the University of the Phili ppines.
Corazon P. Guidote is Senior Vice President for Investor Relations of SMIC. She was formerly a
Presidential Consultant for Investor Relations and Executive Director of the Investor Relations Office of
the Republic of the Philippines. Prior to government service, she was a Director and Chief Operating
Officer of ABN AMRO Asia Securities Philippines, Group Vice President for Corporate Communications
and Investor Relations at Metro Pacific Corporation, and Managing Director of Citibank Securities,
Philippines, Inc. A Certified Public Accountant, Ms. Guidote is a Bachelor of Science degree graduate of
the University of Santo Tomas. She holds a Master in Applied Business Economics degree from the
University of Asia and the Pacific and is a Chevening Fellow of the United Kingdom Foreign and
Commonwealth Office. She is also a fellow at the Institute of Corporate Directors.
Frederic C. DyBuncio is Senior Vice President, Investments Portfolio of SMIC. He is also a Director of
Atlas Consolidated Mining and Development Corporation. Prior to joining SMIC, he was a career banker
who spent over 20 years with JPMorgan Chase and its predecessor institutions. During his stint in the
banking industry, he was assigned to various managerial/executive positions where he gained
substantial professional experience in the areas of credit, relationship management and origination,
investment banking, capital markets, and general management. He has worked and lived in several
major cities including New York, Seoul, Bangkok, Hong Kong and Manila. He obtained his undergraduate
degree in Business Management from the Ateneo de Manila University, and his masters degree in
Business Administration from the Asian Institute of Management.
Emmanuel C. Paras is the Corporate Secretary of SMIC and other companies within the Group. He
holds a Bachelor of Law degree from Ateneo de Manila University and is a partner and Head of the
Corporate Services Department of the Sycip, Salazar, Hernandez and Gatmaitan Law Offices.
Period of Officership:
Name
Grace F. Roque
Corazon I. Morando
Elizabeth Anne C. Uychaco
Marianne Malate-Guerrero
Ma. Ruby Ll. Cano
Cecilia Reyes-Patricio
Luis Y. Benitez
Corazon P. Guidote
Frederic C. DyBuncio
Emmanuel C. Paras

Period Served
2010 present
2005 present
2009 present
2006 present
2009 present
2010 present
2010 present
2011 present
2011 present
2005 present

184

Involvement in Legal Proceedings


The Issuer is not aware of any of the following events having occurred during the past five years up
to the date of this Offering Circular that are material to an evaluation of the ability or integrity of any
director, nominee for election as Director, executive officer, underwriter or controlling person of the
Issuer:
(a) any bankruptcy petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within two years prior to that
time;
(b) any conviction by final judgement, including the nature of the offense, in a criminal proceeding,
domestic or foreign, or being subject to a pending criminal proceeding, domestic or foreign,
excluding traffic violations and other minor offenses;
(c) being subject to any order, judgement or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type of business,
securities, commodities or banking activities;
(d) being found by a domestic or foreign court of competent jurisdiction (in a civil action), the SEC
or comparable foreign body, or a domestic or foreign exchange or other organized trading
market or self-regulatory organization, to have violated a securities or commodities law or
regulation, and the judgement has not been reversed, suspended or vacated; and
(e) a securities or commodities law or regulation, and the judgement has not been reversed,
suspended or vacated.

Corporate Governance
The Issuers platform of governance remains rooted in its Manual on Corporate Governance and its Code
of Ethics. The Manual on Corporate Governance (the Governance Manual), which was revised in
compliance with the SEC Revised Code of Corporate Governance in March 2010, institutionalizes the
principles of good corporate governance in the entire organization. It lays down the Issuers compliance
system and identifies the responsibilities of the Board and management in relation to good corporate
governance. The Governance Manual also provides for the Issuers policies on disclosure and
transparency, the conduct of communication and training programs on corporate governance, the rights
of all shareholders, and the protection of the interests of non-controlling shareholders. Under the
Governance Manual, it is the Boards responsibility to foster the long term success of the Issuer and
secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it shall
exercise with the highest standards of corporate governance, in the best interests of the Issuer, its
shareholders and other stakeholders.
The Code of Ethics (the Code) serves as a guiding principle for the Issuers directors, officers and
employees in the performance of their duties and responsibilities, and in their business transactions
with investors, creditors, customers, contractors, suppliers, regulators, and the public. The Code also
reflects the Issuers mission, vision and values statement.
To align with the Code, the Issuer adopted policies on acceptance of gifts, insider trading, placement
of advertisements, and guidelines on the Anti-Money Laundering Law. The Issuer continues to align itself
with corporate governance best practices by developing policies on conflict of interest, related party
transactions and enhancing its risk management systems.
185

Three independent directors namely, Mr. Vicente S. Perez, Jr., Mr. Ah Doo Lim and Mr. Joseph R. Higdon,
sit on the Board. The Issuer adopts the definition of independence under the Securities Regulation Code.
The Issuer considers an independent director one who, except for his directors fees and minimal
qualifying shares, are independent of management and free from any business or other relationship
which could reasonably be perceived to materially interfere with his exercise of independent judgement
in carrying out his responsibilities as a director of the Issuer.
The Board is supported in its corporate governance functions by three committees: the Compensation
and Remuneration Committee, the Nomination Committee and the Audit and Risk Management
Committee. The Compensation and Remuneration Committee is tasked to establish a formal and
transparent procedure for developing a policy on executive remuneration and for fixing the remuneration
packages of officers and directors. The Nomination Committee evaluates all candidates nominated to the
Board in accordance with the Governance Manual. The Audit and Risk Management Committee reviews
and approves the Issuers financial reports, performs oversight financial management functions, and
evaluates and approves internal and external audit plans and oversees the effectiveness of the
Enterprise Risk Management Program. All Board Committees have adopted their respective charters
which identify the Committees composition, roles and responsibilities, as culled from the Issuers
Governance Manual.
The Issuer conducts an annual evaluation of the Board and President, respectively, based on their duties
and responsibilities under the Governance Manual and the Issuers By-Laws. The evaluation also includes
a rating of support services provided to the Board, such as the quality and timing of information given to
the Board, and the frequency and conduct of meetings. The directors were also requested to identify
trainings, programs or any other assistance they may need in the performance of their duties as director.
The results of the annual evaluation were then presented to the Board and President to identify strengths
and weaknesses and possible areas for improvement.
The Corporate Governance Department of the Issuer strives to keep pace with best practices in
corporate governance through the further development of policies and projects and the continued
conduct of orientation and training programs. The Corporate Governance Department also remains
committed to support the advocacy and networking initiatives of public and private institutions that seek
to improve corporate governance standards.
Committees of the Board
Audit and Risk Management Committee. The Audit and Risk Management Committee provides an
oversight of financial management functions, specifically in the areas of managing credit, market,
liquidity, operational, legal and other risks and is primarily responsible for monitoring the statutory
requirements of the Issuer. The Audit and Risk Management Committee is responsible for the setting up
of an internal audit department and for the appointment of an internal auditor, as well as an independent
external auditor. It monitors and evaluates the adequacy and effectiveness of the Groups internal control
systems. It ensures that the Board is taking appropriate corrective action in addressing control and
compliance functions with regulatory agencies. It oversees the policies and procedures relating to the
identification, analysis, management, monitoring and reporting of financial and non-financial risks. It
also ensures the Issuers adherence to corporate governance principles, best practices and compliance
with the Governance Manual. The Audit and Risk Management Committee was constituted in April 2005
and is currently composed of Vicente S. Perez, Jr., Henry T. Sy, Jr., Jose T. Sio, Atty. Serafin U. Salvador
and Atty. Corazon I. Morando. Vicente S. Perez, Jr. is an independent director and the Chairman of the
Committee.
Nomination Committee. The Nomination Committee is primarily responsible for the review and
evaluation of the qualifications of all persons nominated to positions requiring appointment by the Board
186

and the assessment of the Boards effectiveness in directing the process of renewing and replacing Board
members. The Nomination Committee was constituted in April 2005 and is currently composed of Henry
T. Sy, Jr., Ah Doo Lim and Atty. Corazon I. Morando. Henry T. Sy, Jr. is the Chairman of the Committee.
Compensation and Remuneration Committee. The Compensation and Remuneration Committee is
primarily responsible for establishing a formal and transparent process for developing policies on
executive remuneration and for fixing the remuneration packages of corporate officers. It is responsible
for providing oversight of remuneration of senior management and other key personnel and ensuring
that compensation is consistent with the Groups core values, strategy and control environment. The
Compensation and Remuneration Committee was constituted in April 2005 and is currently composed of
Teresita T. Sy, Jose T. Sio and Vicente S. Perez, Jr. Teresita T. Sy is the Chairman of the Committee.

Executive Compensation
For the year ended 31 December 2011, the Board of Directors received a total of =
P68.7 million as
compensation and allowances.
Aggregate compensation paid to SMICs Chief Executive Officer and senior executive officers as a group
for the la st tw o fisca l ye a rs a nd the estima te for the ensui ng yea r a re as follows:
Compensation of Executive Officers and Directors (In P millions)
Name
Harley T. Sy
Jose T. Sio
Grace F. Roque

Elizabeth Anne
C. Uychaco

Principal Position

Salary

Bonus

Other Annual
Compensation

President
Executive Vice President
& CFO
Sr. Vice President and
Treasurer
Senior Vice President
Corporate Services

Ma. Ruby Ll.


Senior Vice President Cano
Controllership
Cecilia
Senior Vice President
Reyes-Patricio
Taxes
Corazon P.
Senior Vice President
Guidote
Investor Relations
Frederic C.
Senior Vice President
DyBuncio
Investments Portfolio
President and 7 most highly compensated
executive officers
All other officers and Directors as a group
unnamed
Total

Year

2012 (estimate)
2011
2010
2012 (estimate)
2011
2010
2012 (estimate)
2011
2010

187

48.2
41.9
50.9
102.8
89.4
83.1
151.0
131.3
134.0

8.0
7.0
8.5
17.1
14.9
13.8
25.1
21.9
22.3

2.0
1.7
2.1
4.3
3.7
3.5
6.3
5.4
5.6

Other Arrangements
There are no standard or other arrangements pursuant to which the directors of the Issuer are
compensated, or are to be compensated, directly or indirectly, by the Issuer for services rendered by
such directors as of the date of this Prospectus.
There are no employment contracts between the Issuer and any named executive officer.
There is no compensatory plan nor arrangement with respect to an executive officer which shall result
or will result from the resignation, retirement or any other termination of such executive officers
employment with the Company, or from a change-in-control of the Company, or a change in an executive
officers responsibilities following a change-in-control of the Company.
Warrants and Options Outstanding
As of the date of this Prospectus, there are no outstanding warrants or options in respect of the Issuers
shares held by the Issuers President, named executive officers and all directors and officers as a group.
Significant Employees
The Issuer has no individual employee who is not an executive officer but w ho is expected to make a
significant contribution to the business.
Family Relationships
Mr. Henry Sy, Sr. is the father of Teresita T. Sy, Elizabeth T. Sy, Henry T. Sy, Jr., Hans T. Sy, Herbert T. Sy
and Harley T. Sy. All other directors and officers are not related either by consanguinity or affinity. There
are no other family relationships known to the registrant other than the ones disclosed herein.

188

MARKET PRICE OF AND DIVIDENDS ON THE ISSUERS COMMON EQUITY


AND RELATED STOCKHOLDER MATTERS
Holders of the Issuers Common Shares
As of 31 March 2012, the following are the top 20 stockholders of the Issuer.

Stockholder Name
1

PCD Nominee Corp. (Non-Filipino)

No. of shares

% to
Total

202,133,598

32.94%

PCD Nominee Corp. (Filipino)

39,081,399

6.37%

Felicidad T. Sy

54,057,498

8.81%

Hans T. Sy

52,775,618

8.60%

Herbert T. Sy

52,768,360

8.60%

Harley T. Sy

46,822,633

7.63%

Henry T. Sy, Jr.

46,768,360

7.62%

Teresita T. Sy

45,668,360

7.44%

Elizabeth T. Sy

37,378,390

6.09%

10

Henry Sy, Sr.

25,732,249

4.19%

11

Henry Sy Foundation

7,000,000

1.14%

12

Felicidad Sy Foundation, Inc.

2,000,000

0.33%

13

Sysmart Corporation

355,164

0.06%

14

Susana Fong

241,599

0.04%

15

Value Plus, Inc.

81,130

0.01%

16

Multi-Realty Development Corporation

45,879

0.01%

17

Alberto S. Yao

41,708

0.01%

18

Belle Corporation

26,068

0.00%

19

Hector Yap Dimacali

20,854

0.00%

20

Hans Sy Fao Wonderfoods Corp.

20,854

0.00%

As of 31 March 2012, the Issuer has 1,290 shareholders of its common shares. The foreign ow nership
level in the Issuer is 32.95%.

189

Dividends and Dividend Policy


As of 31 December 2011, there are no restrictions that would limit the ability of the Issuer to pay
dividends to the common stockholders, except with respect to P75.1 billion, representing accumulated
equity in net earnings of subsidiaries. These earnings are not available for dividend distribution until
such time that the Issuer receives the dividends from the subsidiaries.
On April 27, 2011, the Board approved the declaration of cash dividends of 90.4% of the par value or
P9.04 per share for a total amount of P5,532.3 million in favor of stockholders on record as at May 27,
2011. This was paid on June 22, 2011.
On April 28, 2010, the Board approved the declaration of cash dividends o f 78.8% of the par value or
P7.88 per share for a total amount of P4,814.9 million in favor of stockholders on record as at May 27,
2010. This was paid on June 21, 2010.
On April 29, 2009, the Board approved the declaration of cash dividends of 68.8% of t he par value or
P6.88 per share for a total amount of P4,203.8 million in favor of stockholders on record as at May 29,
2009. This was paid on June 25, 2009.
Market Price of Issuers Common Equity
The registrants common equity is principally traded at the Philippine Stock Exchange. The high and low
sales prices for each period are indicated in the table below.
2011

2010

High

Low

High

Low

1st Quarter

551.00

442.00

370.00

317.50

2nd Quarter

580.00

525.00

420.00

397.50

3rd Quarter

568.00

450.00

570.00

435.00

4th Quarter

585.50

480.00

545.00

485.00

(in P)

The total number of stockholders as at 31 March 2012 was 1,290. Market price of the Issuers Shares as
at 16 April 2012 was P660.00 per share.

Recent Sales of Unregistered or Exempt Securities


The following securities were issued as exempt from the registration requirements of the Securities
Regulation Code (SRC) and therefore have not been registered with the SEC:
(a) On February 15, 2012, SMIC issued US$250.0 million 1.625% Convertible Bonds due 20 17. The
Convertible Bonds, which were listed in the Singapore Stock Exchange, are considered as
exempt security pursuant to Section 10 (1) of R.A. No. 8799. The lead underwriters were
Citigroup Global Markets Limited and J.P. Morgan Securities Limited and the total underwriting
fees and expenses amounted to US$3.1 million
(b) On September 26, 2011, SMIC issued corporate notes comprised of 7-year notes (Series A) and
190

10-year notes (Series B) amounting to P916.0 million and P4,084.0 million, respectively. Series
A and Series B notes will mature on September 26, 2018 and September 26, 2021, respectively,
and bear fixed interest rate of 5.75% and 6.625% per annum, respectively. Interests in arrears
are payable semi-annually starting March 26, 2012. The corporate notes, which were issued to
less than 20 entities, are considered as exempt pursuant to Rule 9.2.2(B) of the Amended
Implementing Rules and Regulations of R.A. No. 8799. The arrangers were BDO Capital, FMIC
and The Hongkong and Shanghai Banking Corporation (HSBC) Limited and the total arrangers
fees amounted to P18.8 million.
(c) On February 7, 2011, SMIC issued fixed rate notes amounting to P7,000.0 million which bear a
fixed interest rate of 6.165% per annum, payable semi-annually. The fixed rate notes will mature
on February 8, 2016. The fixed rate notes, which were issued pursuant to Rule 9.2.2(B) of the
Amended Implementing Rules and Regulations of R.A. No. 8799. The arrangers were ING Bank
N.V., BPI Capital Corporation, Allied Banking Corporation, FMIC, RCBC Capital Corporation and
United Coconut Planters Bank and the total arrangers fees amounted to P 24.1 million.On
October 13, 2010, SMIC issued US$400.0 million bonds which bear a fixed interest rate of 5.5%
per annum, payable semi-annually in arrears. The bonds will mature on October 13, 2017. Of
this amount, US$82.9 million and US$130.8 million were exchanged from the existing US$350.0
million 6.75% bonds due 2013 and US$500.0 million 6.00% bonds due 2014, respectively. The
balance of US$186.3 million represents the new money component. The bonds, which were
listed in the Singapore Stock Exchange, are considered as exempt pursuant to Rule 9.2.2(B) of
the Amended Implementing Rules and Regulations of R.A. No. 8799. The underwriters were
BDO Capital, Citibank and HSBC and the total underwriting fees and expenses amounted to
US$1.7 million.On September 22, 2009, SMIC issued US$500.0 million bonds which bear a fixed
interest rate of 6.0% per annum, payable semi-annually in arrears. The bonds will mature on
September 22, 2014. The bonds, which were listed in Singapore Stock Exchange, are considered
as exempt security pursuant to Section 10 (1) of RA No. 8799. The underwriters were Barclays
Capital and Citibank and the total underwriting fees and expenses amounted to US$2.1 million.
(d) On July 17, 2008, SMIC issued a US$350.0 million 6.75% bonds due on July 18, 2013. The bonds,
which were listed in the Singapore Stock Exchange, are considered as exempt security pursuant
to Section 10 (l) of R.A. No. 8799. The sole underwriter is UBS and the total underwriting fees
and expenses amounted to US$1.5 million.On August 6, 2007 and November 6, 2007, SMIC
issued Series 1 and Series 2 of non-convertible, non-participating, non-voting preferred shares
amounting to P3,300.0 million and P200.0 million, respectively. The preferred shares issued to
financial and non-financial institutions are considered as exempt security pursuant to Section
9.2 of R.A. No. 8799. The lead underwriter was ING Manila N.V. and the total underwriting fees
and expenses amounted to P17.0 million. On February 7, 2011, SMIC prepaid the Series 1
preferred shares amounting to P 3,300.0 million.
(e) On March 19, 2007, SMIC issued a US$300.0 million Convertible Bonds due on March 20, 2012.
The Convertible Bonds, which were listed in the Singapore Stock Exchange, are considered as
exempt security pursuant to Section 10(g) of R.A. No. 8799. The lead underwriters were Citibank
and Macquarie Securities and the total underwriting fees and expenses amounted to US$3.3
million.

Security Ownership of Certain Beneficial Owners and Management


Security Ownership of Certain Record and Beneficial Owners
As at 31 March 2012, the following are the owners of the Issuers common stock in excess of 5% of total
outstanding shares:

191

Title of
Class

Name & address of


record owner &
relationship with
Issuer

Common

Felicidad T. Sy

Stock

(shareholder of Issuer)

Name of beneficial
owner &

Citizenship

relationship with
record owner

No. of
shares

Percent

held

Same as the record


owner

Filipino

54,057,498

8.81%

Same as the record


owner

Filipino

45,668,360

7.44%

Same as the record


owner

Filipino

46,822,633

7.63%

Same as the record


owner

Filipino

52,775,618

8.60%

Same as the record


owner

Filipino

46,768,360

7.62%

Same as the record


owner

Filipino

52,768,360

8.60%

Same as the record


owner

Filipino

37,378,390

6.09%

Various clients 1

Foreign

202,133,598

32.94%

Various clients 1

Filipino

39,081,399

6.37%

No. 63 Cambridge Circle,


Forbes Park, Makati City
Common

Teresita T. Sy

Stock

(Director and Vice


Chairperson)
No. 63 Cambridge Circle,
Forbes Park, Makati City

Common

Harley T. Sy

Stock

(Director and President)


No. 63 Cambridge Circle,
Forbes Park, Makati City

Common

Hans T. Sy

Stock

(Shareholder of Issuer)
No. 11 Harvard Road,
Forbes Park, Makati City

Common

Henry T. Sy, Jr.

Stock

(Director and Vice


Chairperson)
No. 63 Cambridge Circle,
Forbes Park, Makati City

Common

Herbert T. Sy

Stock

(Shareholder of Issuer)
No. 63 Cambridge Circle,
Forbes Park, Makati City

Common

Elizabeth T. Sy

Stock

(Shareholder of Issuer)
No. 63 Cambridge Circle,
Forbes Park, Makati City

Common
Stock

PCD Nominee Corp.


(Non-

Common

PCD Nominee Corp.

Stock

(Filipino)

Filipino)

(1) The Issuer has no information as to the beneficial owners of the shares of stocks held by PCD

Nominee Corp. The clients of PCD Nominee Corp. have the power to decide how their shares are to
192

be voted.
Security Ownership of Management
As at 31 March 2012, the following are the number of Shares owned of record by the Issuers directors
and key executive officers:

Title of Class

Name of Beneficial Owner

Citizenship

Amount and
Nature of
Beneficial
Ownership

Percent
of Class

(d) Direct

Common Stock

Henry Sy, Sr.

Filipino

25,732,249 (d)

4.19%

Common Stock

Teresita T. Sy

Filipino

45,668,360 (d)

7.44%

Common Stock

Harley T. Sy

Filipino

46,822,633 (d)

7.63%

Common Stock

Henry T. Sy, Jr.

Filipino

46,768,360 (d)

7.62%

Common Stock

Jose T. Sio

Filipino

11 (d)

0.00%

Common Stock

Vicente S. Perez, Jr.

Filipino

11 (d)

0.00%

Common Stock

Ah Doo Lim

Singaporean

100 (d)

0.00%

Common Stock

Joseph R. Higdon

American

100 (d)

0.00%

Common Stock

Grace F. Roque

Filipino

Nil

Common Stock

Ma. Ruby Ll. Cano

Filipino

3,220 (d)

0.00%

Common Stock

Corazon I. Morando

Filipino

Nil

Common Stock

Elizabeth Anne C. Uychaoco

Filipino

Nil

Common Stock

Marianne M. Guerrero

Filipino

Nil

Common Stock

Cecilia Reyes-Patricio

Filipino

Nil

Common Stock

Luis Y. Benitez

Filipino

Nil

Common Stock

Corazon P. Guidote

Filipino

1,700 (d)

0.00%

Common Stock

Frederic C. Dybuncio

Filipino

Nil

Common Stock

Emmanuel C. Paras

Filipino

Nil

164,996,744

26.88%

Directors and Executive Officers as a group


Voting Trust Holders of 5% or More

There are no persons holding more than 5% of a class of shares under a voting trust or any similar
agreements.
Change in Control
No change in control in the Issuer has occurred since the beginning of its last fiscal year.

193

Warrants and Options


As of the date of this Prospectus, there are no existing or planned stock options / stock warrant
offerings.

194

DESCRIPTION OF DEBT
As at 31 December 2011, SMIC and its subsidiaries have a total of P128.5 billion in long-term debt
outstanding (net of the current portion of long-term debt), of which approximately 44% of which consisted
of foreign currency-denominated long-term debt. SMIC and its subsidiaries current portion of long-term
debt was approximately P7.9 billion as at 31 December 2011. Foreign currency-denominated debt was
denominated in US dollars and China Yuan Renminbi.
SMIC and its subsidiaries outstanding bank loans were P25.7 billion as at 31 December 2011.
The Company is subject to covenants under agreements evidencing or governing its outstanding
indebtedness, including but not limited to those set forth in loan agreements with local banks and financial
institutions. Under these loans, the Company undertook to maintain a Current Ratio of not less than 1:1 and
Debt-Equity Ratio not exceeding 70:30.
The Company does not believe that these covenants will impose constraints on its ability to finance its
capital expenditure program or, more generally, to develop its business and enhance its financial
performance. The Company is in full compliance with the covenants required by the creditors.

195

TAXATION
The statements herein regarding taxation are based on the laws in force as of the date of this Prospectus
and are subject to any changes in law occurring after such date, which changes could be made on a
retroactive basis. The following summary does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to a decision to purchase, own or dispose of the Bonds and does
not purport to deal with the tax consequences applicable to all categories of investors, some of which (such
as dealers in securities or commodities) may be subject to special rules. Prospective purchasers of the
Bonds are advised to consult their own tax advisers concerning the overall tax consequences of their
ownership of the Bonds.

Philippine Taxation
As used in this section, the term non-resident alien means an individual whose residence is not within the
Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within the
Philippines for an aggregate period of more than 180 days during any calendar year is considered a
non-resident alien doing business in the Philippines; however, a non-resident alien who is actually within
the Philippines for an aggregate period of 180 days or less during any calendar year may be considered a
non-resident alien not engaged in trade or business within the Philippines. A non-resident foreign
corporation is a foreign corporation not engaged in trade or business within the Philippines.
TAXATION OF INTEREST
The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine sourced
income subject to Philippine income tax. Interest income derived by Philippine citizens and alien resident
individuals from the Bonds is thus subject to income tax, which is withheld at source, at the rate of 20%
based on the gross amount of interest. Generally, interest on the Bonds received by non-resident aliens
engaged in trade or business in the Philippines is subject to a 20% final withholding tax while that received
by non-resident aliens not engaged in trade or business is subject to a final withholding tax rate of 25%.
Interest income received by domestic corporations and resident foreign corporations from the Bonds is
subject to a final withholding tax rate of 20%. Interest income received by non-resident foreign
corporations from the Bonds is subject to a 30% final withholding tax.
The foregoing rates are subject to further reduction by any applicable tax treaties in force between the
Philippines and the country of residence of the non-resident owner. Most tax treaties to which the
Philippines is a party generally provide for a reduced tax rate of 15% in cases where the interest which
arises in the Philippines is paid to a resident of the other contracting state. However, most tax treaties also
provide that reduced withholding tax rates shall not apply if the recipient of the interest who is a resident of
the other contracting state, carries on business in the Philippines through a permanent establishment and
the holding of the relevant interest-bearing instrument is effectively connected with such permanent
establishment.
TAX-EXEMPT STATUS OR ENTITLEMENT TO PREFERENTIAL TAX RATE
Bondholders who are exempt from or are not subject to final withholding tax on interest income or entitled
to be taxed at a preferential rate may claim such exemption or avail of such preferential rate by submitting
the necessary documents. Said Bondholder shall submit the following requirements: (i) certified true copy
of the tax exemption certificate, ruling or opinion issued by the BIR, confirming the exemption or
preferential rate; (ii) with respect to tax treaty relief, a certified true copy of the ruling issued by the
International Tax Affairs Division of the BIR, confirming that the preferential tax treatment sought by the
Bondholder is applicable; (iii) a duly notarized undertaking to immediately notify the Issuer, the Registrar
and the Paying Agent of any suspension or revocation of the tax exemption certificate, certificate, ruling or
196

opinion issued by the BIR, executed using the prescribed form, with a declaration and warranty of its tax
exempt status or entitlement to a preferential tax rate, and an agreement to indemnify and hold the Issuer,
the Registrar and the Paying Agent free and harmless against any claims, actions, suits, and liabilities
resulting from the non-withholding or incorrect withholding of the required tax; and (iv) such other
documentary requirements as may be required under the applicable regulations of the relevant taxing or
other authorities; provided, that the Issuer, the Registrar and the Paying Agent shall have the exclusive
discretion to decide whether the documents submitted are sufficient for purposes of applying the
exemption or the reduced rate being claimed by the Bondholder on the interest payments to such
Bondholder; provided further that, all sums payable by the Issuer to tax-exempt entities shall be paid in full
without deductions for taxes, duties, assessments, or government charges, subject to the submission by
the Bondholder claiming the benefit of any exemption of the required documents and of additional
reasonable evidence of such tax-exempt status to the Registrar.
The foregoing requirements shall be submitted, (i) in respect of an initial issuance of Bonds, to the
underwriters or selling agents who shall then forward the same with the Application to Purchase to the
Registrar; or (ii) in respect of a transfer from a Bondholder to a purchaser, to the Registrar within three days
from settlement date.
VALUE-ADDED TAX
Gross receipts arising from the sale of the Bonds in the Philippines by dealers in securities shall be subject
to a 12% value-added tax.
GROSS RECEIPTS TAX
Bank and non-bank financial intermediaries performing quasi-banking functions are subject to gross
receipts tax on gross receipts derived from sources within the Philippines in accordance with the following
schedule:
On interest, commissions and discounts from lending activities as well as income from financial leasing, on
the basis of remaining maturities of instruments from which such receipts are derived:
Maturity period is five years or less
Maturity period is more than five years

5%
1%

Non-bank financial intermediaries not performing quasi-banking functions doing business in the Philippines
are likewise subject to gross receipts tax. Gross receipts of such entities derived from sources within the
Philippines from interests, commissions and discounts from lending activities are taxed in accordance with
the following schedule based on the remaining maturities of the instruments from which such receipts are
derived:
Maturity period is five years or less
Maturity period is more than five years

5%
1%

In case the maturity period of the instruments held by banks, non-bank financial intermediaries performing
quasi-banking functions and non-bank financial intermediaries not performing quasi-banking functions is
shortened through pre-termination, then the maturity period shall be reckoned to end as of the date of
pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly.
Net trading gains realized within the taxable year on the sale or disposition of the Bonds by banks and
nonbank financial intermediaries performing quasi-banking functions shall be taxed at 7%.

197

DOCUMENTARY STAMP TAX


A documentary stamp tax is imposed upon the issuance of debt instruments issued by Philippine companies,
such as the Bonds, at the rate of P1.00 for each P200, or fractional part thereof, of the issue price of such
debt instruments; provided that, for debt instruments with terms of less than one year, the documentary
stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its
term in number of days to 365 days.
The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted, or
transferred, when the obligation or right arises from Philippine sources, or the property is situated in the
Philippines. Any applicable documentary stamp taxes on the original issue shall be paid by the Issuer for its
own account.
TAXATION ON SALE OR OTHER DISPOSITION OF THE BONDS
Income Tax
Any gain realized from the sale, exchange or retirement of bonds will, as a rule, form part of the gross
income of the sellers, for purposes of computing the relevant taxable income subject to the regular rates of
32%, 25%, or 30%, as the case may be. If the bonds are sold by a seller, who is an individual and who is
not a dealer in securities, who has held the bonds for a period of more than 12 months prior to the sale,
only 50% of any capital gain will be recognized and included in the sellers gross taxable income.
However, under the Tax Code, any gain realized from the sale, exchange or retirement of bonds, debentures
and other certificates of indebtedness with an original maturity date of more than five years (as measured
from the date of issuance of such bonds, debentures or other certificates of indebtedness) shall not be
subject to income tax.
Moreover, any gain arising from such sale, regardless of the original maturity date of the bonds, may be
exempt from income tax pursuant to various income tax treaties to which the Philippines is a party, and
subject to procedures prescribed by the Bureau of Internal Revenue for the availment of tax treaty benefits.
Estate and Donors Tax
The transfer by a deceased person, whether a Philippine resident or a non-Philippine resident, to his heirs of
the Bonds shall be subject to an estate tax which is levied on the net estate of the deceased at progressive
rates ranging from 5% to 20%, if the net estate is over P200,000. A Bondholder shall be subject to donors
tax based on the net gift on the transfer of the Bonds by gift at either (i) 30%, where the donee or
beneficiary is a stranger, or (ii) at progressive rates ranging from 2% to 15% if the net gifts made during the
calendar year exceed P100,000 and where the donee or beneficiary is not a stranger. For this purpose, a
stranger is a person who is not a: (a) brother, sister (whether by whole or half-blood), spouse, ancestor or
lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth degree of
relationship.
The estate or donors taxes payable in the Philippines may be credited with the amount of any estate or
donor's taxes imposed by the authority of a foreign country, subject to limitations on the amount to be
credited, and the tax status of the donor.
The estate tax and the donors tax, in respect of the Bonds, shall not be collected (a) if the deceased, at the
time of death, or the donor, at the time of the donation, was a citizen and resident of a foreign country
which, at the time of his death or donation, did not impose a transfer tax of any character in respect of
intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) if the
198

laws of the foreign country of which the deceased or donor was a citizen and resident, at the time of his
death or donation, allows a similar exemption from transfer or death taxes of every character or description
in respect of intangible personal property owned by citizens of the Philippines not residing in the foreign
country.
In case the Bonds are transferred for less than an adequate and full consideration in money or money's
worth, the amount by which the fair market value of the Bonds exceeded the value of the consideration may
be deemed a gift and may be subject to donors taxes.
Documentary Stamp Tax
No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds, trading the
Bonds in a secondary market or through an exchange. However, if the transfer constitutes a renewal of the
Bonds, documentary stamp tax is payable anew.

199

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE ISSUER


Amended SEC Form 17-Q for the Quarter Ended 31 March 2012 for the Group and the
Issuer
Audited Financial Statements as at and for the years ended 31 December 2009, 2010 and
2011 for the Group and the Issuer
Independent Auditors Report
SM Investments Corporation and Subsidiaries Consolidated Balance Sheets as at 31 December 2010 and
2011
SM Investments Corporation and Subsidiaries Consolidated Statements of Income for the years ended
31 December 2009, 2010 and 2011
SM Investments Corporation and Subsidiaries Consolidated Statements of Comprehensive Income for
the years ended 31 December 2009, 2010 and 2011
SM Investments Corporation and Subsidiaries Consolidated Statements of Changes in Equity for the
years ended 31 December 2009, 2010 and 2011
SM Investments Corporation and Subsidiaries Consolidated Statements of Cash Flows for the years ended
31 December 2009, 2010 and 2011
SM Investments Corporation and Subsidiaries Notes to Financial Statements

200

COVER SHEET

1 6 3 4 2
SEC Registration Number

S M

I N V E S T M E N T S

C O R P O R A T I ON

A N D

S U

B S I D I A R I E S

(Companys Full Name)

1 0 t h
b o r

F l o o r ,

O n e

D r i v e ,

C B P - 1 A ,

M a l l

P a s a y

E - C o m

C e n t e r ,

o f

A s i a

C i t y

1 3 0 0

H a r

C o m p l e x ,

(Business Address: No. Street City/Town/Province)

Ms. Ma. Ruby Ll. Cano

857-0100

(Contact Person)

(Company Telephone Number)

Amended
0 5

1 5

Month

Day

1 7 - Q
(Form Type)

(Fiscal Year)

0 4

2 5

Month

Day

(Annual Meeting)

(Secondary License Type, If Applicable)

Dept. Requiring this Doc.

Amended Articles Number/Section


Total Amount of Borrowings

Total No. of Stockholders

Domestic

Foreign

To be accomplished by SEC Personnel concerned

File Number

LCU

Document ID

Cashier

STAMPS
Remarks: Please use BLACK ink for scanning purposes.

SEC Number
PSE Disclosure Security Code

SM INVESTMENTS CORPORATION
(Companys Full Name)

10th Floor, One E-Com Center, Harbor Drive,


Mall of Asia Complex, CBP-IA, Pasay City 1300
(Companys Address)

857- 0100
(Telephone Number)

December 31
(Year Ending)
(month& day)

SEC Form 17-Q


1st Quarter Report
Form Type

Amendment Designation (If applicable)

March 31, 2012


Period Ended Date

(Secondary License Type and File Number)

16342

SECURITIES AND EXCHANGE COMMISSION


SEC FORM 17-Q
QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES
REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER
1. For the quarterly period ended March 31, 2012
2. Commission Identification Number 016342 3. BIR Tax Identification No. 169-020-000
4. Exact name of registrant as specified in its charter SM INVESTMENTS CORPORATION
5. PHILIPPINES
Province, Country or other jurisdiction of incorporation or organization
6. Industry Classification Code:

(SEC Use Only)

7. 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-IA, Pasay
City 1300
Address of principal office Postal Code
8. 857-0100
Registrant's telephone number, including area code
9. Former name, former address, and former fiscal year, if changed since last report.
10. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the
RSA
Title of Each Class

COMMON STOCK
P10 PAR VALUE

Number of Shares
of Common Stock
Outstanding
613,874,621

Amount of Debt Outstanding


N.A.

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 11 of the Securities Regulation
Code (SRC)and SRC Rule 11(a)-1 thereunder and Sections 26 and 141 of The
Corporation Code of the Philippines during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports);
Yes [X]

No [ ]

(b) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December
31, 2011 (Audited)
Consolidated Statements of Income for the Three Months Ended March 31, 2012
and 2011 (Unaudited)
Consolidated Statements of Changes in Stockholders Equity for the Three
Months Ended March 31, 2012 and 2011 (Unaudited)
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2012 and 2011 (Unaudited)
Notes to Consolidated Financial Statements
Item 2. Managements Discussion and Analysis of Financial Condition as of March 31,
2012 and Results of Operations for the three months ended March 31, 2012 and
2011
Item 3. Aging of Accounts Receivable Trade as of March 31, 2012

PART II SIGNATURE

PART I

FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


Consolidated Financial Statements
March 31, 2012 and December 31, 2011
and for the Three Months Ended March 31, 2012 and 2011

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)

ASSETS
Current Assets
Cash and cash equivalents (Notes 5, 16, 20, 24 and 25)
Time deposits and short-term investments (Notes 6, 18, 20, 24 and 25)
Investments held for trading and sale (Notes 7, 10, 20, 24 and 25)
Receivables (Notes 8, 15, 20, 24 and 25)
Merchandise inventories - at cost (Note 21)
Other current assets (Notes 9, 14, 20, 24 and 25)
Total Current Assets
Noncurrent Assets
Available-for-sale investments (Notes 10, 20, 24 and 25)
Investments in shares of stock of associates (Note 11)
Time deposits (Notes 6, 18, 20, 24 and 25)
Property and equipment (Note 12)
Investment properties (Notes 13 and 18)
Land and development (Note 14)
Intangibles (Note 15)
Deferred tax assets - net (Note 22)
Other noncurrent assets (Notes 8, 15, 20, 24 and 25)
Total Noncurrent Assets

LIABILITIES AND EQUITY


Current Liabilities
Bank loans (Notes 16, 20, 24 and 25)
Accounts payable and other current liabilities (Notes 17, 20, 24 and 25)
Income tax payable
Current portion of long-term debt (Notes 13, 18, 20, 24 and 25)
Dividends payable (Notes 24 and 25)
Total Current Liabilities
Noncurrent Liabilities
Long-term debt - net of current portion (Notes 13, 18, 20, 24 and 25)
Derivative liabilities (Notes 24 and 25)
Deferred tax liabilities - net (Note 22)
Defined benefit liability
Tenants deposits and others (Notes 13, 23, 24 and 25)
Total Noncurrent Liabilities
Total Liabilities
Equity Attributable to Owners of the Parent
Capital stock (Note 19)
Additional paid-in capital (Note 19)
Equity adjustments from business combination under common control
Cost of Parent common shares held by subsidiaries (Note 19)
Cumulative translation adjustment of a subsidiary
Net unrealized gain on available-for-sale investments (Notes 10 and 11)
Retained earnings (Note 19):
Appropriated
Unappropriated
Total Equity Attributable to Owners of the Parent
Non-controlling Interests
Total Equity

See accompanying Notes to Consolidated Financial Statements.

March 31,
2012
(Unaudited)

December 31,
2011
(Audited)

P
= 37,346,395
860,631
2,001,488
15,735,850
13,820,682
16,475,567
86,240,613

=56,050,322
P
879,410
1,939,709
11,764,852
13,436,456
17,189,740
101,260,489

14,444,214
95,806,612
47,018,002
15,258,920
136,161,120
22,875,867
15,354,200
693,283
25,429,348
373,041,566
P
= 459,282,179

12,453,181
88,417,849
37,416,562
15,092,354
131,275,911
23,012,453
15,354,200
694,644
24,084,415
347,801,569
=449,062,058
P

P
= 12,766,960
35,485,103
2,011,622
7,008,056
25,393
57,297,134

=25,747,920
P
44,749,807
1,331,046
7,920,961
25,696
79,775,430

147,124,603
268,633
4,653,184
62,304
16,369,243
168,477,967
225,775,101

128,464,019
237,980
4,507,979
76,487
13,713,302
146,999,767
226,775,197

6,138,746
36,295,073
(2,332,796)
(263,195)
376,912
8,770,893
5,000,000
112,209,667
166,195,300
67,311,778
233,507,078
P
= 459,282,179

6,121,640
35,536,615
(2,332,796)
(263,195)
428,058
7,008,067
5,000,000
106,167,942
157,666,331
64,620,530
222,286,861
=449,062,058
P

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)

Three months ended March 31


2011
2012
(Unaudited)
(Unaudited)
REVENUE
Sales:
Merchandise
Real estate and others
Rent (Notes 13, 20 and 23)
Equity in net earnings of associates (Note 11)
Cinema ticket sales, amusement and others
Dividend, management fees, and others(Notes 7,10, 20 and 25)
COST AND EXPENSES
Cost of sales:
Merchandise (Note 21)
Real estate and others
Selling, general and administrative expenses
OTHER INCOME (CHARGES)
Interest expense (Notes 16, 18, 20, 24 and 25)
Interest income (Notes 5, 6, 7, 10, 20)
Gain on disposal of investments and properties
(Notes 11, 12, 13 and 18)
Foreign exchange gain - net (Note 24)
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 22)
Current
Deferred
NET INCOME
Attributable to
Owners of the Parent (Note 26)
Non-controlling interests
Earnings Per Common Share (Note 26)
Basic
See accompanying Notes to Consolidated Financial Statements.

P
= 34,420,109
6,018,690
5,417,723
1,665,275
1,003,906
1,152,916
49,678,619

=31,021,596
P
3,684,042
4,868,931
1,371,302
811,406
1,011,968
42,769,245

25,608,800
3,626,433
9,833,455
39,068,688

23,504,716
2,010,687
7,870,248
33,385,651

(2,256,392)
1,176,367

(2,102,226)
1,009,409

17,432
200,789
(861,804)

510
44,397
(1,047,910)

9,748,127

8,335,684

1,370,643
217,310
1,587,953

1,099,988
19,512
1,119,500

P
=8,160,174

=7,216,184
P

P
=6,041,725
2,118,449
P
=8,160,174

=5,368,038
P
1,848,146
=7,216,184
P

P
= 9.85

=8.77
P

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)

Three months ended March 31


2011
2012
(Unaudited)
(Unaudited)
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS)
Share in unrealized gain on available-for-sale investments of associates - net
(Note 11)
Net unrealized gain (loss) on available-for-sale investments (Note 10)
Income tax relating to components of other comprehensive income
Cumulative translation adjustment of a subsidiary

TOTAL COMPREHENSIVE INCOME


Attributable to
Owners of the Parent
Non-controlling interests

See accompanying Notes to Consolidated Financial Statements.

P
=8,160,174

264,724
2,173,174
70,745
(65,289)
2,443,354

=7,216,184
P

(1,645,890)
(129,770)
68,914
(3,847)
(1,710,593)

P
=10,603,528

=5,505,591
P

P
=7,753,404
2,850,124
P
=10,603,528

=3,704,969
P
1,800,622
=5,505,591
P

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands, Except Per Share Data)

Equity Attributable to Owners of the Parent

Balance at December 31, 2011


Net income for the period
Other comprehensive income
Total comprehensive income for the period
Issuance of Parent common shares
Increase in previous years non-controlling
interests
Balance at March 31, 2012
Balance at December 31, 2010
Net income for the period
Other comprehensive income
Total comprehensive income for the period
Increase in previous years non-controlling
interests
Cash dividends received by non-controlling
interests
Balance at March 31, 2011

Capital Stock
(Note 19)
P
= 6,121,640

17,106

Equity
Adjustments
from Business
AdditionalCombination Under
Paid-in Capital Common Control
(Note 19)
P
= 35,536,615
(P
= 2,332,796)

758,458

Cost of Parent
Common
Shares Held
by Subsidiaries
(Note 19)
(P
= 263,195)

Net Unrealized
Cumulative
Gain on
Translation Available-for-Sale
Adjustment
Investments
of a Subsidiary (Notes 10 and 11)
P
= 428,058
P
= 7,008,067

(51,146)
1,762,826
(51,146)
1,762,826

Non-controlling
Interests

Total
Equity

Appropriated
Retained
Earnings
P
= 5,000,000

Unappropriated
Retained
Earnings
(Note 19)
P
= 106,167,942
6,041,725

6,041,725

Total
P
= 157,666,331
6,041,725
1,711,680
7,753,405
775,564

P
= 64,620,530
2,118,449
731,674
2,850,123

P
= 222,286,861
8,160,174
2,443,354
10,603,528
775,564

P
= 6,138,746

P
= 36,295,073

(P
= 2,332,796)

(P
= 263,195)

P
= 376,912

P
= 8,770,893

P
= 5,000,000

P
= 112,209,667

P
= 166,195,300

(166,109)
P
= 67,304,544

(166,109)
P
= 233,499,844

=6,119,826
P

=35,456,200
P

(P
=2,332,796)

(P
=263,195)

=289,260
P

(3,013)
(3,013)

=6,798,095
P

(1,660,056)
(1,660,056)

=5,000,000
P

=90,475,674
P
5,368,038

5,368,038

=141,543,064
P
5,368,038
(1,663,069)
3,704,969

=56,274,415
P
1,848,146
(47,524)
1,800,622

=197,817,479
P
7,216,184
(1,710,593)
5,505,591

395,506

395,506

=6,119,826
P

=35,456,200
P

(P
=2,332,796)

(P
=263,195)

=286,247
P

=5,138,039
P

=5,000,000
P

=95,843,712
P

=145,248,033
P

(3,126)
=58,467,417
P

(3,126)
=203,715,450
P

See accompanying Notes to Consolidated Financial Statements.

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)

Three months ended March 31


2011
2012
(Unaudited)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest expense
Depreciation and amortization
(Notes 12 and 13)
Equity in net earnings of associates (Note 11)
Interest income
Gain on disposal of investments and properties (Notes 11, 12 and 13)
Gain on available-for-sale investments and fair value changes on
investments held for trading and derivatives - net (Notes 7, 10 and
25)
Dividend income
Unrealized foreign exchangegain
Income before working capital changes
Decrease (increase) in:
Land and development
Merchandise inventories
Receivables
Other current assets
Increase (decrease) in:
Accounts payable and other current liabilities
Tenants deposits and others
Defined benefit liability
Net cash used in operations
Income tax paid
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Investments in shares of stock of associates
Property and equipment
Investment properties
Available-for-sale investments
Additions to:
Investment properties (Note 13)
Investments in shares of stock of associates
Property and equipment (Note 12)
Available-for-sale investments
Decrease (increase) in:
Other noncurrent assets
Time deposits and short-term investments
Interest received
Dividends received (Note 11)
Net cash used in investing activities
(Forward)

P
=9,748,127

P
=8,335,684

2,256,392

2,102,225

1,903,425
(1,665,275)
(1,176,367)
(17,432)

1,703,276
(1,371,302)
(1,009,409)
(30,903)

(105,258)
(288,011)
(74,292)
10,581,309

46,938
(259,209)
(31,853)
9,485,447

(2,619,542)
(384,227)
(2,872,390)
459,013

(2,763,099)
(17,294)
(3,507,653)
(860,336)

(10,006,234)
2,628,825
(14,183)
(2,227,429)
(691,415)
(2,918,844)

(6,450,655)
349,771
(730)
(3,764,549)
(460,169)
(4,224,718)

72,655
890

18,755

17,755
30,394
199

(5,426,580)
(5,493,857)
(873,479)

(4,324,200)

(1,118,623)
(155,482)

372,357
(10,313,651)
1,432,057
129,070
(20,081,783)

(535,643)
8,982
1,344,796
338,293
(4,393,529)

-2-

Three months ended March 31


2011
2012
(Unaudited)
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Availments of:
Long-term debt
Bank loans
Payments of:
Long-term debt
Bank loans
Interest
Dividends
Increase (decrease) in non-controlling interests
Net cash provided by (used in) financing activities

P
= 21,016,250

=11,204,750
P
325,000

(1,606,132)
(12,900,000)
(2,109,919)
(303)
(166,109)
4,233,787

(10,096,236)
(16,798,800)
(2,009,799)
(3,688)
395,506
(16,983,267)

NET DECREASE IN CASH


AND CASH EQUIVALENTS

(18,766,840)

(25,601,514)

62,913

(23,430)

CASH AND CASH EQUIVALENTS


AT BEGINNING OF YEAR

56,050,322

66,961,010

CASH AND CASH EQUIVALENTS


AT END OF PERIOD

P
= 37,346,395

=41,336,066
P

EFFECT OF EXCHANGE RATE CHANGES


ON CASH AND CASH EQUIVALENTS

See accompanying Notes to Consolidated Financial Statements.

SM INVESTMENTS CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information
SM Investments Corporation (SMIC or Parent Company) was incorporated in the Philippines on
January 15, 1960. On April 29, 2009, the shareholders approved the amendment of SMICs
articles of incorporation for another 50 years from January 15, 2010. Its registered office address
is10th Floor, OneE-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City 1300.
The Parent Company and its subsidiaries (collectively referred to as the Group), and its associates
are involved primarily in shopping mall development, retail, real estate development and tourism,
hotels and conventions and financial services and others.
The Parent Companys shares of stock are publicly traded in the Philippine Stock Exchange
(PSE).

2. Basis of Preparation, Statement of Compliance and Changes in Accounting Policies


Basis of Preparation
The consolidated financial statements of the Group have been prepared on the historical cost basis,
except for derivative financial instruments, investments held for trading and available-forsale(AFS) investments,which have all been measured at fair value.The consolidated financial
statements are presented in Philippine peso, which is the Groups functional and presentation
currency under Philippine Financial Reporting Standards (PFRS). All values are rounded to the
nearest thousand, except when otherwise indicated.
Statement of Compliance
The consolidated financial statements have been prepared in compliance with PFRS. PFRS
includes statements named PFRS, Philippine Accounting Standards (PAS)and Philippine
Interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued
by the Financial Reporting Standards Council (FRSC).
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year, except for
the adoption of the following new and amended PFRS and Philippine Interpretations from IFRIC
starting January 1, 2011, except when otherwise stated:
Amendments to Standards and Interpretations

PAS 24 (Amendment), Related Party Disclosures, became effective for annual periods
beginning on or after January 1, 2011.
PAS 32 (Amendment), Financial Instruments: Presentation, became effective for annual
periods beginning February 1, 2010.
Philippine Interpretaion IFRIC 14 (Amendment), Prepayments of a Minimum Funding
Requirement, became effective for annual periods beginning January 1, 2011.
Philippine Interpretation IFIRC 19, Extinguising Financial Liabilities with Equity Instruments,
became effective for annual periods beginning July 1, 2010.

The above standards have no impact on the Groups consolidated financial statements.

-2-

Improvements to PFRSs (Issued 2010)


An omnibus of amendments to standards, deal primarily with a view to removing inconsistencies
and clarifying wordings. The adoption of the following amendments resulted in changes to
accounting policies but did not have material impact on the financial position or performance of
the Group.

PFRS 3, Business Combinations. The measurement options available for non-controlling


interest (NCI) were amended. Only components of NCI that constitute a present ownership
interest that entitles their holder to a proportionate share of the entitys net assets in the event
of liquidation should be measured at either fair value or at the present ownership instruments
proportionate share of the acquirees identifiable net assets. All other components are to be
measured at their acquisition date fair value.
The amendments to PFRS 3 are effective for annual periods beginning on or after
July 1, 2010. The Group, however, adopted these as at January 1, 2011 and changed its
accounting policy accordingly as the amendment was issued to eliminate unintended
consequences that may arise from the adoption of PFRS 3.

PFRS 7, Financial Instruments - Disclosures, effective January 1, 2011, intended to simplify


the disclosures provided by reducing the volume of disclosures about collateral held and
improving disclosures by requiring qualitative information to put the quantitative information
in context. This amendment is applicable for annual periods beginning on or after
July 1, 2010.

PAS 1, Presentation of Financial Statements, effective January 1, 2011, clarifies that an entity
may present an analysis of each component of other comprehensive income maybe either in
the statement of changes in equity or in the notes to the financial statements. This has no
significant impact on the Groups consolidated financial statements.

Other amendments resulting from improvements to PFRSs and interpretations to the following
standard did not have any impact on the accounting policies, financial position or performance of
the Group:

PFRS 3, Business Combinations (Contingent consideration arising from business combination


prior to adoption of PFRS 3 (as revised in 2008)), applicable for annual periods beginning on
or after July 1, 2010
PFRS 3, Business Combinations (Un-replaced and voluntarily replaced share-based payment
awards), applicable for annual periods beginning on or after July 1, 2010
PAS 27, Consolidated and Separate Financial Statements, applicable for annual periods
beginning on or after July 1, 2010
PAS 34, Interim Financial Statements, effective January 1, 2011
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (determining the fair value
of award credits), effective for annual periods beginning on or after January 1, 2011

Future Changes in Accounting Policies


The following are the issued standards, interpretations, amendments and improvements to PFRS
and Philippine Interpretations but are not yet effective up to the date of issuance of the Groups
consolidated financial statements. The Group intends to adopt the applicable standards,
interpretations, amendments and improvements when these become effective.

-3-

New Standards and Interpretations

PFRS 9, Financial Instruments: Classification and Measurement, PFRS 9 as issued reflects


the first phase on the PAS 39, Financial Instruments: Recognition and Measurement, and
applies to classification and measurement of financial assets and financial liabilities as defined
in PAS 39. The standard is effective for annual periods beginning on or after January 1, 2015.
In subsequent phases, hedge accounting and impairment of financial assets will be addressed
with the completion of this project expected in 2012. The adoption of the first phase of
PFRS 9 will have an effect on the classification and measurement of financial liabilities. The
Group will quantify the effect in conjunction with the other phases, when issued, to present a
comprehensive picture. As at March 31, 2012, the Group has decided not to early adopt PFRS
9 on its consolidated financial statements.

PFRS 10, Consolidated Financial Statements, will become effective for annual periods
beginning on or after January 1, 2013. PFRS 10replaces the portion of PAS 27, Consolidated
and Separate Financial Statements, that addresses the accounting for consolidated financial
statements. It also includes the issues raised in Standing Interpretations Committee (SIC) 12,
Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that
applies to all entities including special purpose entities. The changes introduced by PFRS 10
will require management to exercise significant judgement to determine which entities are
controlled, and therefore, are required to be consolidated by a parent, compared with the
requirements that were in PAS 27. The Group is currently assessing the impact of this
standard on its consolidated financial statements.

PFRS 11, Joint Arrangements, will become effective for annual periods beginning on or after
January 1, 2013. PFRS 11replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointlycontrolled Entities - Non-monetary.Contributions by Venturers. PFRS 11 removes the option
to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead,
JCEs that meet the definition of a joint venture must be accounted for using the equity
method. The Group does not expect this amendment to have a significant impact on its
consolidated financial statements.

PFRS 12, Disclosure of Involvement with Other Entities, will become effective for annual
periods beginning on or after January 1, 2013. PFRS 12 includes all of the disclosures that
were previously in PAS 27 related to consolidated financial statements, as well as all of the
disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates.
These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates
and structured entities. A number of new disclosures are also required. The Group is
currently assessing the impact of this standard on its consolidated financial statements.

PFRS 13, Fair Value Measurement, will become effective for annual periods beginning on or
after January 1, 2013. PFRS 13 establishes a single source of guidance under PFRS for all fair
value measurements. PFRS 13 does not change when an entity is required to use fair value,
but rather provides guidance on how to measure fair value under PFRS when fair value is
required or permitted. The Group is currently assessing the impact of this standard on its
consolidated financial statements.

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, covers
accounting for revenue and associated expenses by entities that undertake the construction of
real estate directly or through subcontractors. The interpretation requires that revenue on
construction of real estate be recognized only upon completion, except when such contract

-4-

qualifies as construction contract to be accounted for under PAS 11, Construction Contracts,
or involves rendering of services in which case revenue is recognized based on stage of
completion. Contracts involving provision of services with the construction materials and
where the risks and reward of ownership are transferred to the buyer on a continuous basis
will also be accounted for based on stage of completion. The Securities and Exchange
Commission (SEC) and the FRSC have deferred the effectivity of this interpretation until the
final revenue standard is issued by International Accounting Standards Board (IASB) and an
evaluation of the requirements of the final revenue standard against the practices of the
Philippine real estate industry is completed. The Group is in the process of quantifying the
impact of this new interpretation on its consolidated financial statements

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface
Mine, will become effective for annual periods beginning on or after January 1, 2013.
IFRIC 20 applies to waste removal costs that are incurred in surface mining activity during the
production phase of the mine (production stripping costs) and provides guidance on the
recognition of production stripping costs as an asset and measurement of the stripping activity
asset. The Group is currently assessing the impact of this new interpretation on its
consolidated financial statements.

Amendments to Standards and Interpretation

PAS 1, Financial Statement Presentation (Amendment) - Presentation of Items of Other


Comprehensive Income, will become effective for annual periods beginning on or after
July 1, 2012. The amendments to PAS 1 change the grouping of items presented in other
comprehensive income. Items that could be reclassified (or recycled) to profit or loss at a
future point in time (for example, upon derecognition or settlement) would be presented
separately from items that will never be reclassified. The amendment affects presentation
only and has no impact on the Groups consolidated financial statements.

PAS 12, Income Taxes (Amendment) - Deferred Tax: Recovery of Underlying Assets, will
become effective for annual periods beginning on or after January 1, 2012. It provides a
practical solution to the problem of assessing whether recovery of an asset will be through use
or sale. It introduces a presumption that recovery of the carrying amount of an asset will
normally be through sale. The Group does not expect this amendment to have an impact on its
consolidated financial statements.

PAS 19, Employee Benefits (Amendment), will become effective for annual periods beginning
on or after January 1, 2013. Amendment includes removing the corridor mechanism and the
concept of expected returns on plan assets to simple clarifications and re-wording. The Group
is currently using the corridor approach in recognizing actuarial gains or losses. Upon
adoption of amended PAS 19, unrecognized actuarial gains or losses will be recognized in full
as part of other comprehensive income.

PAS 27, Separate Financial Statements (Amendment), as revised in 2011 will become
effective for annual periods beginning on or after January 1, 2013. Asa consequence of the
new PFRS 10 and PFRS 12, what remains of PAS 27 is limited to accounting for subsidiaries,
jointly controlled entities, and associates in separate financial statements. The Group does not
expect this amendment to have an impact on its parent financial statements.

PAS 28, Investments in Associates and Joint Venture (Amendment), as revised in 2011 will
become effective for annual periods beginning on or after January 1, 2013. As a consequence
of the new PFRS 11 and PFRS 12, PAS 28 has been renamed PAS 28 Investments in

-5-

Associates and Joint Ventures, and describes the application of the equity method to
investments in joint ventures in addition to associates. The Group does not expect this
amendment to have a significant impact on its consolidated financial statements.

PAS 32, Financial Instruments: Presentation(Amendment) -Offsetting Financial Assets and


Financial liabilities. The amendments to PAS 32 are to be applied retrospectively for annual
periods beginning on or after January 1, 2014. These amendments to PAS 32 clarify the
meaning of currently has a legally enforceable right to offset and also clarify the application
of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems)
which apply gross settlement mechanisms that are not simultaneous. While the amendment is
expected not to have any impact on the net assets of the Group, any changes in offsetting is
expected to impact leverage ratios and regulatory capital requirements.

PFRS 7, Financial Instruments: Disclosures (Amendment) - Enhanced Derecognition


Disclosure Requirements, will become effective for annual periods beginning on or after
July 1, 2011. The amendment requires additional disclosure about financial assets that have
been transferred but not derecognised to enable the user of the Groups financial statements to
understand the relationship with those assets that have not been derecognised and their
associated liabilities. In addition, the amendment requires disclosures about continuing
involvement in derecognized assets to enable the user to evaluate the nature of, and risks
associated with, the entitys continuing involvement in those derecognized assets. The Group
does not expect this amendment to have a significant impact on its consolidated financial
statements.

PFRS 7, Financial Instruments: Disclosures (Amendment) - Offsetting Financial Assets and


Financial Liabilities, requires an entity to disclose information about rights of set-off and
related arrangements (such as collateral agreements). The new disclosures are required for all
recognized financial instruments that are set off in accordance with PAS 32. These disclosures
also apply to recognized financial instruments that are subject to an enforceable master netting
arrangement or similar agreement, irrespective of whether they are set-off in accordance
with PAS 32. The amendments require entities to disclose, in a tabular format unless another
format is more appropriate, the following minimum quantitative information. This is presented
separately for financial assets and financial liabilities recognized at the end of the reporting
period:
(a) The gross amounts of those recognized financial assets and recognized financial liabilities
(b) The amounts that are set-off in accordance with the criteria in PAS 32 when determining
the net amounts presented in the statement of financial position
(c) The net amounts presented in the statement of financial position
(d) The amounts subject to an enforceable master netting arrangement or similar agreement
that are not otherwise included in (b) above, including:
i. Amounts related to recognized financial instruments that do not meet some or all of
the offsetting criteria in PAS 32
ii. Amounts related to financial collateral (including cash collateral)
(e) The net amount after deducting the amounts in (d) from the amounts in (c) above
The amendments to PFRS 7 are to be applied retrospectively for annual periods beginning on
or after January 1, 2013. The Group is in the process of assessing the impact of these
amendments on its consolidated financial statements.

-6-

Basis of Consolidation
Basis of Consolidation from January 1, 2010.The consolidated financial statements comprise the
financial statements of the Parent Company and all of its subsidiaries as at December 31, 2011.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group
obtains control, and continue to be consolidated until the date when such control ceases. The
financial statements of the subsidiaries are prepared for the same reporting period as the Parent
Company, using consistent accounting policies. All intra-group balances, transactions, unrealized
gains and losses resulting from intra-group transactions and dividends are eliminated in full.
Non-controlling interests represent the portion of profit or loss, other comprehensive income and
net assets not held by the Group and are presented separately in the consolidated statements of
income, consolidated statements of comprehensive income and within equity section in the
consolidated balance sheets, separately from equity attributable to owners of the Parent.
Losses from a subsidiary are attributed to the non-controlling interest even if that results in a
deficit balance.
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an
equity transaction. If the Group loses control over a subsidiary, it:

Derecognizes the assets (including goodwill) and liabilities of the subsidiary;


Derecognizes the carrying amount of any non-controlling interest;
Derecognizes the cumulative translation differences recorded in equity;
Recognizes the fair value of the consideration received;
Recognizes the fair value of any investment retained;
Recognizes any surplus or deficit in profit or loss;
Reclassifies the Parent Companys share of components previously recognized in other
comprehensive income to profit or loss or retained earnings, as appropriate.

Basis of Consolidation Prior to January 1, 2010. Certain of the above-mentioned policies were
applied on a prospective basis. The following differences, however, are carried forward in certain
instances from the previous basis of consolidation:
Transactions with non-controlling interest without loss of control, prior to January 1, 2010, were
accounted for using the parent entity extension method, whereby, the difference between the
consideration transferred (received) and the proportionate share of the net assets acquired (sold)
were recognized asgoodwill (negative goodwill).
Losses applicable to the non-controlling interest in a consolidated subsidiary may exceed the
non-controlling interest in the subsidiary's equity. The excess, and any further losses applicable to
the non-controlling interest, are allocated against the controlling interest to the extent that the
non-controlling interest has a binding obligation and is able to make an additional investment to
cover the losses. If the subsidiary subsequently reports profits, such profits are allocated to the
controlling interest until the non-controlling interest's share of losses previously absorbed by the
controlling has been recovered. Losses prior to January 1, 2010 were not reallocated between
non-controlling interest and owners of the Parent.
The Group accounts for its interest in the investee using the equity method until it loses control.
The income and expenses of a subsidiary are included in the consolidated financial statements
until the date on which the Group ceases to control the subsidiary. The difference between the

-7-

proceeds from the disposal of the subsidiary and its carrying amount as at the date of disposal,
including the cumulative amount of any exchange differences that relate to the subsidiary
recognized in equity, is recognized in the consolidated statements of income as gain or loss on the
disposal of the subsidiary.
The consolidated financial statements include the accounts of the Parent Company and the
following subsidiaries:

Company
Shopping Mall Development
SM Prime Holdings, Inc. (SM Prime) and Subsidiaries
Retail
SM Retail, Inc. (SM Retail)and Subsidiaries
Prime Central, Inc. (Prime Central) and Subsidiaries
Rappel Holdings, Inc. (Rappel) and Subsidiaries

Percentage of Ownership
December 31, 2011
March 31, 2012
Direct
Indirect
Direct
Indirect

22

41

22

41

100
100
100

100
100
100

Real Estate Development and Tourism


SM Land, Inc. (SM Land) and Subsidiaries:
SM Development Corporation (SMDC) and Subsidiaries
Magenta Legacy, Inc. (Magenta)
Mountain Bliss Resort and Development Corporation
(Mt. Bliss) and Subsidiaries
SM Commercial Properties, Inc. (SMCP)
Intercontinental Development Corporation (ICDC)
Bellevue Properties, Inc.
Tagaytay Resort Development Corporation

67

65
99

67

65
99

100
59
72
62
33

28

25

100
59
72
62
33

28

25

Hotels and Conventions


SM Hotels and Conventions Corp. (SM Hotels)
and Subsidiaries

100

100

Others
Primebridge Holdings, Inc. (Primebridge)
Asia Pacific Computer Technology Center, Inc.
Multi-Realty Development Corporation

80
52
91

20

80
52
91

20

Hyperhome Corp. and Hyperfashion Corp. (subsidiaries of SM Retail)


In 2011, SM Retail incorporated Hyperhome Corp. and Hyperfashion Corp. as wholly owned
subsidiaries to engage in, conduct and carry on the business of buying, selling, distributing,
marketing at wholesale and retail, importing, exporting insofar as may be permitted by law, all
kinds of goods, commodities, wares and merchandise of every kind and description such as but not
limited to bags and luggages, clothing line and accessories and other general merchandise on a
wholesale / retail basis.
SM Prime
On September 3, 2009, SM Land (China) Limited (SM Land China) further completed the
acquisition of 100% ownership of Alpha Star Holdings Limited (Alpha Star) from Grand China
International Limited (Grand China) .
OnOctober 14, 2010, SM Prime has undergone an international placement and engaged into a
Placement Agreement with SM Land (Selling Shareholder) and CLSA Limited and Macquarie
Capital (Singapore) Pte. Limited (the Joint Bookrunners). As stated in the Placement
Agreement, SM Land shall sell its 569.6 million SM Prime common shares (the Sale Shares)
with a par value of P
=1.00 per share at P
=11.50 (Offer Price) per share to the Joint Bookrunners, or
to investors that the Joint Bookrunners may procure outside the Philippines (the International
Placement).

-8-

Contemporaneous with the signing of the Placement Agreement, SM Prime likewise entered into a
Subscription Agreement with SM Land, where the latter will not directly receive any proceeds
from the International Placement but has conditionally agreed to subscribe for new SM Prime
common shares (out of its authorized but unissued capital stock) in an amount equal to the
aggregate number of the Sale Shares sold by SM Land at a subscription price of P
=11.50 per share,
which is equal to the Offer Price of the Sale Shares.
SM Land was able to sell through the Joint Bookrunners the total Sale Shares of 569.6 million
SM Prime common shares. Likewise, SM Land subscribed for and SM Prime issued to SM Land
the same number of new SM Prime common shares.
The placement and subscription agreements resulted in a 3% decrease in total direct and indirect
ownership of the Group over SM Prime.
Sanford_Marketing Corporation (Sanford), a subsidiary of SM Retail
In January 2010, Supervalue, Inc. (SVI), a subsidiary of SM Retail, transferred 20 of its operating
SaveMore stores to Sanford. The transfer includes assignment of SVIs rights and obligations
arising from certain contracts entered into by SVI for the benefit of the transferred stores. Any
related assets and liabilities arising from the transfers were taken up in Sanfords 2010 statutory
financial statements. The transaction is a merely a reorganization between entities that are wholly
owned and under common control and has no impact on consolidated financial statements.
SM Land
In June 2010, SM Land transferred 251.6 million SM Prime shares for P
=10.75 per share or for a
total cost of P
=2,704.6 million to the Parent Company. The transfer resulted in an increase of
1.89% in SMICs ownership over SM Prime, with a corresponding decrease in SM Lands
ownership interest in the latter by 1.26%.
SMDC
In 2011 and 2010, SMDC acquired Twenty Two Forty One Properties, Inc. (TTFOPI) and
Vancouver Lands, Inc. (VLI), respectively, for P
=195.6 million and P
=566.6 million, respectively,
and became its wholly owned subsidiaries (see Note 14).
In January and October 2010, SMDC had a stock rights offering to eligible existing common
shareholders of SMDC at the proportion of one rights share for every three existing common
shares held as at record date, at an offer price of P
=3.50 and P
=6.38 per rights share, respectively.
SMIC acquired a total of 4.04 million additional SMDC shares for a total cost of P
=20.8 million.
The availment of additional shares from the said offering did not result to a change in ownership
interest of SMIC in SMDC.
SM Land acquired a total of 2,114.5 million additional SMDC shares for a total cost of P
=10,840.0
million, a fraction of which amounting to 32.9 million SMDC shares or a total cost of P
=115.2
million was purchased by SM Land from the unsubscribed portion of the aggregate stock rights
offered by SMDC. The availment of additional shares resulted to a 0.6% increase in SM Lands
interest in SMDC.
MH Holdings, Inc.
In 2010, MH Holdings (a subsidiary of SM Retail) invested P
=72.0 million or an equivalent of 60%
interest in a newly incorporated company in the Philippines, Forever Agape & Glory, Inc.
(Forever Agape).Consequently, Forever Agape became a subsidiary of MH Holdings.

-9-

3. Summary of Significant Accounting Policies


Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or lessfrom acquisition date and are subject to an insignificant risk of change in value.
Time Deposits and Short-term Investments
Time deposits and short-term investments are cash placements, shown under current assets, with
original maturities of more than three months but less than one year. Time deposits which will
mature twelve months after the reporting period are presented under noncurrent assets.
Financial Instruments - Initial Recognition and Subsequent Measurement
Date of Recognition.The Group recognizes a financial asset or a financial liability in the
consolidated balance sheets when it becomes a party to the contractual provisions of the
instrument. In the case of a regular way purchase or sale of financial assets, recognition and
derecognition, as applicable, are done using settlement date accounting. Regular way purchases or
sales are purchases or sales of financial assets that require delivery of assets within the period
generally established by regulation or convention in the market place. Derivatives are recognized
on a trade date basis.
Initial Recognition of Financial Instruments.Financial instruments are recognized initially at fair
value, which is the fair value of the consideration given (in case of an asset) or received (in case of
a liability). The initial measurement of financial instruments, except for those classified asfair
value through profit or loss (FVPL), includes transaction cost.
Subsequent to initial recognition, the Group classifies its financial instruments in the following
categories: financial assets and financial liabilities at FVPL, loans and receivables, HTM
investments, AFS investments and other financial liabilities. The classification depends on the
purpose for which the instruments are acquired and whether they are quoted in an active market.
Management determines the classification at initial recognition and, where allowed and
appropriate, re-evaluates this classification at every reporting date.
Determination of Fair Value.The fair value of financial instruments traded in active markets at
reporting period is based on their quoted market price or dealer price quotations (bid price for long
positions and ask price for short positions), without any deduction for transaction costs. When
current bid and asking prices are not available, the price of the most recent transaction provides
evidence of the current fair value as long as there has not been a significant change in economic
circumstances since the time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation techniques. Valuation techniques include net present value
techniques, comparison to similar instruments for which market observable prices exist, options
pricing models and other relevant valuation models.
Day 1Difference.Where the transaction price in a non-active market is different from the fair
value of other observable current market transactions in the same instrument or based on a
valuation technique whose variables include only data from observable market, the Group
recognizes the difference between the transaction price and fair value (a Day 1difference) in the
consolidated statements of income unless it qualifies for recognition as some other type of asset or

- 10 -

liability. In cases where use is made of data which is not observable, the difference between the
transaction price and model value is only recognized in the consolidated statements of income
when the inputs become observable or when the instrument is derecognized. For each transaction,
the Group determines the appropriate method of recognizing the Day 1difference amount.
Financial Assets and Liabilities at FVPL.Financial assets and liabilities at FVPL include financial
assets and liabilities held for trading and financial assets and liabilities designated upon initial
recognition as at FVPL.
Financial assets and liabilities are classified as held for trading if they are acquired for the purpose
of selling or repurchasing in the near term. Gains or losses on investments held for trading are
recognized in the consolidated statements of income under Gain on sale of available-for-sale
investments and fair value changes on investments held for trading and derivatives - net
account.Interest income earned on investments held for trading are recognized in Interest
income account in the consolidated statements of income.
Financial assets and liabilities may be designated by management at initial recognition as FVPL
when any of the following criteria is met:

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

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

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

The Groups investments held for trading and derivative assets are classified as financial assets at
FVPL,while the Groups derivative liabilities arising from issuance of convertible bonds and
derivative financial instruments with negative fair values are also included as financial liabilities at
FVPL.
Loans and Receivables.Loans and receivables are nonderivative financial assets with fixed or
determinable payments that are not quoted in an active market. They are not entered into with the
intention of immediate or short-term resale and are not designated as AFS investments or financial
assets at FVPL.
After initial measurement, loans and receivables are subsequently measured at amortized cost
using the effective interest method, less allowance for impairment. Amortized cost is calculated
by taking into account any discount or premium on acquisition and fees that are an integral part of
the effective interest rate. Gains and losses are recognized in the consolidated statements of
income when the loans and receivables are derecognized and impaired, as well as through the
amortization process. Loans and receivables are included under current assets if realizability or
collectibility is within twelve months from reporting period. Otherwise, these are classified as
noncurrent assets.
The Groups cash and cash equivalents, time depositsand short-term investments (including
noncurrent portion) and receivables(including noncurrent portion of receivables from real estate

- 11 buyers), advances and other receivables (included under Other current assets account),
receivable from a related party and long-term notes (included underOther noncurrrent assets
account)are classified under this category.
HTM Investments.HTM investments are quoted nonderivative financial assets with fixed or
determinable payments and fixed maturities for which the Groups management has the positive
intention and ability to hold to maturity. Where the Group sells other than an insignificant amount
of HTM investments, the entire category would be tainted and reclassified as AFS investments.
After initial measurement, these investments are measured at amortized cost using the effective
interest method, less impairment in value. Amortized cost is calculated by taking into account any
discount or premium on acquisition and fees that are an integral part of the effective interest rate.
Gains and losses are recognized in the consolidated statements of income when the HTM
investments are derecognized or impaired, as well as through the amortization process. Assets
under this category are classified as current assets if maturity is within twelve months
fromreporting period. Otherwise, these are classified as noncurrent assets.
The Groups investment in quoted Philippine government treasury bonds are classified under this
category.
AFS Investments.AFS investments are nonderivative financial assets that are designated under this
category or are not classified in any of the other categories. These are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions. Subsequent to initial recognition, AFS investments are carried at fair value in the
consolidated balance sheets. Changes in the fair value of such assets are reported as net unrealized
gain or loss on AFS investments in the consolidated statements of comprehensive income until the
investment is derecognized or the investment is determined to be impaired. On derecognition or
impairment, the cumulative gain or loss previously reported in consolidated statements of
comprehensive incomeis transferred to the consolidated statements of income. Interest earned on
holding AFS investments are recognized in the consolidated statements of income using the
effective interest method. Assets under this category are classified as current assets if expected to
be disposed of within twelve months fromreporting period and as noncurrent assets if expected
date of disposal is more than twelve months fromreporting period.
The Groups investments in shares of stock, bonds and corporate notes, redeemable preferred
shares andclub shares are classified under this category. The current portion is included under
Investments held for trading and sale account in the consolidated balance sheets.
Other Financial Liabilities.This category pertains to financial liabilities that are not held for
trading or not designated as at FVPL upon the inception of the liability. These include liabilities
arising from operations or borrowings.
Other financial liabilities are recognized initially at fair value and are subsequently carried at
amortized cost, taking into account the impact of applying the effective interestmethod of
amortization (or accretion) for any related premium, discount and any directly attributable
transaction costs. Gains and losses on other financial liabilities are recognized in the consolidated
statements of income when the liabilities are derecognized, as well as through the amortization
process.
The Groups bank loans, accounts payable and other current liabilities, dividends payable,
long-term debt and tenants deposits and others are classified under this category.

- 12 -

Classification of Financial Instruments BetweenLiability and Equity


A financial instrument is classified as liability if it provides for a contractual obligation to:

deliver cash or another financial asset to another entity; or


exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the Group; or
satisfy the obligation other than by the exchange of a fixed amount of cash or another financial
asset for a fixed number of own equity shares.

If the Group does not have an unconditional right to avoid delivering cash or another financial
asset to settle its contractual obligation, the obligation meets the definition of a financial liability.
The components of issued financial instruments that contain both liability and equity elements are
accounted for separately, with the equity component being assigned the residual amount after
deducting from the instrument as a whole the amount separately determined as the fair value of the
liability component on the date of issue.
Redeemable Preferred Shares
In determining whether a preferred share is a financial liability or an equity instrument, the Group
assesses the particular rights attaching to the share to determine whether it exhibits the
fundamental characteristic of a financial liability. A preferred share that provides for mandatory
redemption by the Group for a fixed or determinable amount at a fixed or determinable future
date, or gives the holder the right to require the Group to redeem the instrument at or after a
particular date for a fixed or determinable amount, is a financial liability.
The redeemable preferred shares of the Group exhibit the characteristics of a financial liability and
are thus recognized as a liability under Long-term debt account in the consolidated balance
sheets, net of transaction costs. The corresponding dividends on the shares are charged as interest
expense in the consolidated statements of income.
Transaction costs are amortized over the maturity period of the preferred shares using the effective
interest method.
Debt Issue Costs
Debt issue costs are presented as reduction in long-term debt and are amortized over the terms of
the related borrowings using the effective interest method.
Derivative Financial Instruments
The Group uses derivative financial instruments such as long-term currency swaps, foreign
currency call options, interest rate swaps, foreign currency range optionsand non-deliverable
forwards to hedge the risks associated with foreign currency and interest rate fluctuations.
Derivative financial instruments, including bifurcated embedded derivatives, are initially
recognized at fair value on the date on which the derivative contract is entered into and are
subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is
positive and as liabilities when the fair value is negative.
The Groups derivative instruments provide economic hedges under the Groups policies but are
not designated as accounting hedges. Consequently, any gains or losses arising from changes in
fair value are taken directly to profit or loss for the year.
Embedded Derivative.An embedded derivative is a component of a hybrid (combined) instrument
that also includes a nonderivative host contract with the effect that some of the cash flows of the

- 13 -

combined instrument vary, in a way similar to a stand-alone derivative. The Group assesses
whether embedded derivatives are required to be separated from host contracts when the Group
first becomesa party to the contract.An embedded derivative is separated from the host contract
and accounted for as a derivative if all of the following conditions are met: a) the economic
characteristics and risks of the embedded derivative are not closely related to the economic
characteristics and risks of the host contract; b) a separate instrument with the same terms as the
embedded derivative would meet the definition of a derivative; and c) the hybrid or combined
instrument is not recognized as at FVPL.
Subsequent reassessment is prohibited unless there is change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under the contract, in which
case reassessment is required. The Group determines whether a modification to cash flows is
significant by considering the extent to which the expected future cash flows associated with
embedded derivative, the host contract or both have changed and whether the change is significant
relative to the previously expected cash flows on the contract.
Options arising from the Parent Companys investment in bonds and convertible bonds payable
are the Groups bifurcated embedded derivatives.
Derecognition of Financial Assets and Liabilities
Financial Assets.A financial asset (or, where applicable a part of a financial asset or part of a
group of similar financial assets) is derecognized when:

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

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

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

When the Group has transferred its rights to receive cash flows from an asset and has neither
transferred nor retained substantially all the risks and rewards of the asset, the asset is recognized
to the extent of the Groups continuing involvement in the asset. Continuing involvement that
takes the form of a guarantee over the transferred asset is measured at the lower of original
carrying amount of the asset and the maximum amount of consideration that the Group could be
required to repay.
Financial Liabilities.A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired.
When an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such modification is
treated as a derecognition of the original liability and the recognition of a new liability, and the
difference in the respective carrying amounts is recognized in profit or loss.
Impairment of Financial Assets
The Group assesses at each reporting period whether a financial asset or a group of financial assets
is impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only

- 14 -

if, there is objective evidence of impairment as a result of one or more events that occurred after
the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the
estimated future cash flows of the financial asset or a group of financial assets that can be reliably
estimated. Objective evidence of impairment may include indications that the borrower or a group
of borrowers is experiencing significant financial difficulty, default or delinquency in interest or
principal payments, the probability that they will enter bankruptcy or other financial
reorganization and where observable data indicate that there is measurable decrease in the
estimated future cash flows, such as changes in arrears or economic conditions that correlate with
defaults.
Financial Assets Carried at Amortized Cost. The Group first assesses whether objective evidence
of impairment exists for financial assets that are individually significant, and individually or
collectively for financial assets that are not individually significant. If it is determined that no
objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, the asset is included in a group of financial assets with similar credit risk
characteristics and that group of financial assets is collectively assessed for impairment. Assets
that are individually assessed for impairment and for which an impairment loss is or continues to
be recognized are not included in the collective impairment assessment.
If there is objective evidence that an impairment loss on loans and receivables carried at amortized
cost has been incurred, the amount of the loss is measured as the difference between the assets
carrying amount and the present value of estimated future cash flows (excluding future credit
losses that have not been incurred) discounted at the financial assets original effective interest
rate (i.e., the effective interest rate computed at initial recognition).
The carrying amount of the impaired asset shall be reduced through the use of an allowance
account. The amount of the loss shall be recognized in the consolidated statements of income.
Interest income continues to be accrued on the reduced carrying amount based on the original
effective interest rate of the asset. Loans and receivables together with the associated allowance
are written off when there is no realistic prospect of future recovery and all collateral, if any, has
been realized or has been transferred to the Group. If, in a subsequent period, the amount of the
impairment loss increases or decreases because of an event occurring after the impairment was
recognized, the previously recognized impairment loss is increased or decreased by adjusting the
allowance account. If a future write-off is later recovered, the recovery is recognized in the
consolidated statements of income under Other revenue account.
Financial Assets Carried at Cost. If there is objective evidence that an impairment loss has been
incurred in an unquoted equity instrument that is not carried at fair value because its fair value
cannot be reliably measured, or on a derivative asset that is linked to and must be settled by
delivery of such an unquoted equity instrument, the amount of the loss is measured as the
difference between the assets carrying amount and the present value of estimated future cash
flows discounted at the current market rate of return for a similar financial asset.
AFS Investments. The Group assesses at each reporting period whether there is objective evidence
that an investment or a group of investments is impaired. In the case of equity investments
classified as AFS investments, an objective evidence of impairment would include a significant or
prolonged decline in the fair value of the investments below its cost. Significant decline in fair
value is evaluated against the original cost of the investment, while prolonged decline is assessed
against the periods in which the fair value has been below its original cost. Where there is
evidence of impairment, the cumulative loss, measured as the difference between the acquisition
cost and the current fair value, less any impairment loss on that financial asset previously
recognized in the consolidated statements of income, is removed from the consolidated statements

- 15 -

of comprehensive income and recognized in the consolidated statements of income. Impairment


losses on equity investments are not reversed through the consolidated statements of income;
increases in fair value after impairment are recognized directly in the consolidated statements of
comprehensive income.
In the case of debt instruments classified as AFS investments, impairment is assessed based on the
same criteria as financial assets carried at amortized cost. Future interest income is based on the
reduced carrying amount of the asset and is accrued based on the rate of interest used to discount
future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part
of Interest income account in the consolidated statements of income. If, in subsequent year, the
fair value of a debt instrument increased and the increase can be objectively related to an event
occurring after the impairment loss was recognized in the consolidated statements of income, the
impairment loss is reversed through the consolidated statements of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the
consolidated balance sheets if, and only if, there is a currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net basis, or to realize the asset and
settle the liability simultaneously. This is not generally the case with master netting agreements,
and the related assets and liabilities are presented at gross in the consolidated balance sheets.
Merchandise Inventories
Merchandise inventoriesare valued at the lower of cost and net realizable value. Cost, which
includes all costs directly attributable to acquisition, such as purchase price and transport costs, is
primarily determined using the weighted average method. Net realizable value is the estimated
selling price in the ordinary course of business, less estimated costs necessary to make the sale.
Land and Development, Condominium Units for Sale and Club Shares for Sale
Land and development, condominium units for sale (included under Other current assets
account in the consolidated balance sheets) and club shares for sale (included under Other current
assets account in the consolidated balance sheets) are stated at the lower of cost and net realizable
value. Net realizable value is the selling price in the ordinary course of business, less coststo
complete and the estimated cost to make the sale. Cost includes those costs incurred for
development and improvement of the properties.
Investments in Shares of Stock of Associates
The Groups investments in shares of stock of associates are accounted for under the equity
method of accounting. An associate is an entity in which the Group has significant influence and
which is neither a subsidiary nor a joint venture.
Under the equity method, investment in an associate is carried in the consolidated balance sheets
at cost plus post-acquisition changes in the Groups share in net assets of the associate. Goodwill
relating to an associate is included in the carrying amount of the investment and is not amortized.
After application of the equity method, the Group determines whether it is necessary to recognize
any additional impairment loss with respect to the Groups net investment in the associate. The
consolidated statements of income reflect the share in the results of operations of the associate.
Where there has been a change recognized directly in the equity of the associate, the Group
recognizes its share in any changes and discloses this, when applicable, in the consolidated
statements of comprehensive income. Profits and losses resulting from transactions between the
Group and the associate are eliminated to the extent of the interest in the associate.

- 16 -

An investment in an associate is accounted for using the equity method from the date when it
becomes an associate. On acquisition of the investment, any difference between the cost of the
investment and the investors share in the net fair value of the associates identifiable assets,
liabilities and contingent liabilities is accounted for as follows:
a. goodwill relating to an associate is included in the carrying amount of the investment.
However, amortization of that goodwill is not permitted and is therefore not included in the
determination of the Groups share in the associates profits or losses.
b. any excess of the Groups share in the net fair value of the associates identifiable assets,
liabilities and contingent liabilities over the cost of the investment is included as income in the
determination of the investor's share of the associate's profit or loss in the period in which the
investment is acquired.
Also, appropriate adjustments to the investors share of the associates profit or loss after
acquisition are made to account for the depreciation of the depreciable assets based on their fair
values at the acquisition date and for impairment losses recognized by the associate, such as for
goodwill or property, plant and equipment.
The Group discontinues the use of equity method from the date when it ceases to have significant
influence over an associate and accounts for the investment in accordance with PAS 39,from that
date, provided the associate does not become a subsidiary or a joint venture as defined in PAS 31.
When the Groupsinterest in an investment inassociate is reduced to zero, additional losses are
provided only to the extent that the Group has incurred obligations or made payments on behalf of
the associate to satisfy obligations of the investee that the Group has guaranteed or otherwise
committed. If the associate subsequently reports profits, the Group resumes recognizing its share
of the profits if it equals the share of net losses not recognized.
The financial statements of the associates are prepared for the same reporting period as the Parent
Company. The accounting policies of the associates conform to those used by the Group for like
transactions and events in similar circumstances.
Property and Equipment
Property and equipment, except land, is stated at cost less accumulated depreciation and
amortization and any accumulated impairment in value. Such cost includes the cost of replacing
part of the property and equipment at the time that cost is incurred, if the recognition criteria are
met, and excludes the costs of day-to-day servicing. Land is stated at cost less any impairment in
value.
The initial cost of property and equipment consists of its purchase price, including import duties,
taxes and any directly attributable costs necessary in bringing the asset to its working condition
and location for its intended use. Cost also includes any related asset retirement obligation and
interest incurred during the construction period on funds borrowed to finance the construction of
the projects. When each major inspection is performed, its cost is recognized in the carrying
amount of the property and equipment as a replacement if the recognition criteria are satisfied.
Expenditures incurred after the item has been put into operation, such as repairs, maintenance and
overhaul costs, are normally recognized as expense in the period such costs are incurred. In
situations where it can be clearly demonstrated that the expenditures have improved the condition
of the asset beyond the originally assessed standard of performance, the expenditures are
capitalized as additional cost of property and equipment.

- 17 -

Depreciation and amortization are calculated on a straight-line basis over the following estimated
useful lives of the assets:
Buildings, condominium units and improvements
Store equipment and improvements
Data processing equipment
Furniture, fixtures and office equipment
Machinery and equipment
Leasehold improvements
Transportation equipment

525 years
510 years
5 years
310 years
510 years
510 years or term of the lease,
whichever is shorter
510 years

The residual values, useful lives and method of depreciation and amortization of the assets are
reviewed and adjusted, if appropriate, at each reporting period.
The carrying values of property and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Fully depreciated assets are retained in the accounts until they are no longer in use and no further
depreciation and amortization is credited or charged to current operations.
An item of property and equipment is derecognized when either it has been disposed or when it is
permanently withdrawn from use and no future economic benefits are expected from its use or
disposal. Any gains or losses arising on the retirement and disposal of an item of property and
equipment arerecognized in the consolidated statements of income in the periodof retirement or
disposal.
Investment Properties
Investment properties are measured initially at cost. The cost of a purchased investment property
comprises of its purchase price and any directly attributable costs. Subsequently, investment
properties, except land, are measured at cost, less accumulated depreciation and amortization and
accumulated impairment in value. The carrying amount includes the cost of replacing part of an
existing investment property at the time that cost is incurred if the recognition criteria are met, and
excludes the costs of day-to-day servicing of an investment property. Land is stated at cost less
any impairment in value.
Property under construction or development for future use as an investment property is classified
as investment property.
Depreciation and amortization are calculated on a straight-line basis over the following estimated
useful lives of the assets:
Land improvements
Land use rights
Buildings and improvements
Building equipment, furniture and others

35 years
4060 years
1035 years
315 years

The residual values, useful lives and method of depreciation and amortization of the assets are
reviewed and adjusted, if appropriate, at each reporting period.

- 18 -

Investment property is derecognized when either it has been disposed or when it is permanently
withdrawn from use and no future economic benefit is expected from its disposal. Any gains or
losses on the retirement or disposal of an investment property are recognized in the consolidated
statements of income in the period of retirement or disposal.
Transfers are made to investment property when, and only when, there is a change in use,
evidenced by ending of owner-occupation or commencement of an operating lease to another
party. Transfers are made from investment property when, and only when, there is a change in
use, evidenced by commencement of owner-occupation or commencement of development with a
view to sell.
For a transfer from investment property to owner-occupied property or inventories, the cost of
property for subsequent accounting is its carrying value at the date of change in use. If the
property occupied by the Group as an owner-occupied property becomes an investment property,
the Group accounts for such property in accordance with the policy stated under property and
equipment up to the date of change in use.
Construction in Progress
Construction in progress represents structures under construction and is stated at cost. This
includes cost of construction, property and equipment, and other direct costs. Cost also includes
interest on borrowed funds incurred during the construction period. Construction in progress is
not depreciated until such time that the relevant assets are completed and are ready for use.
Tenants Deposits
Tenants deposits are measured at amortized cost. Tenants deposits refers to security deposits
received from various tenants upon inception of the respective lease contracts on the Groups
investment properties. At the termination of the lease contracts, the deposits received by the
Group are returned to tenants, reduced by unpaid rental fees, penalties and/or deductions from
repairs of damaged leased properties, if any. The related lease contracts usually have a term of
more than twelve months.
Business Combinations
Business Combinations from January 1, 2010.Business combinations are accounted for using the
acquisition method. The cost of an acquisition is measured asthe aggregate of the consideration
transferred, measured at acquisition date fair value and the amount of anynon-controlling interest
in the acquiree. For each business combination, the acquirer measures the non-controllinginterest
in the acquiree either at fair value or at the proportionate share of the acquirees identifiablenet
assets. Transaction costs incurred are expensed and included in Selling, general and
administrative expenses in the consolidated statements of income.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for
appropriateclassification and designation in accordance with the contractual terms, economic
circumstances and pertinentconditions as at the acquisition date. This includes the separation of
embedded derivatives in host contracts bythe acquiree.
If the business combination is achieved in stages, the acquisition date fair value of the acquirers
previouslyheld equity interest in the acquiree is remeasured to fair value at the acquisition date
through profit or loss.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at
the acquisitiondate. Subsequent changes to the fair value of the contingent consideration which is
deemed to be an asset orliability, will be recognized in accordance with PAS 39 either in profit or

- 19 -

loss or as a change to othercomprehensive income. If the contingent consideration is classified as


equity, it should not be remeasured until itis finally settled within equity.
Acquisition of Non-controlling Interests.Changes in the Parent Companys ownership interest in a
subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e.,
transactions with owners in their capacity as owners). In such circumstances, the carrying
amounts of the controlling and non-controlling interests shall be adjusted to reflect the changes in
their relative interests in the subsidiary. Any difference between the amount by which the
non-controlling interests are adjusted and the fair value of the consideration paid shall be
recognized directly in equity.
Business Combinations prior to January 1, 2010.Business combinations were accounted for using
the purchase method, except for commonly controlled transactions, of which, an accounting
similar to pooling of interest method is used. Business combinations under commonly controlled
transactions are those in which all of the combining entities or businesses are controlled by the
same party or parties both before and after the business combination, and that control is not
transitory. For purchase method of accounting, the cost of acquisition is the aggregate of the fair
values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity
instruments issued by the acquirer, in exchange for control over the net assets of the acquired
entity. Transaction costs directly attributableto the acquisition formed part of the acquisition costs.
The non-controlling interest was measured at the proportionate share of the acquirees identifiable
net assets.The identifiable assets, liabilities and contingent liabilities that satisfy certain
recognition criteria have to be measured initially at their fair values at acquisition date,
irrespective of the extent of any non-controlling interest. For accounting similar to pooling of
interest method, the assets, liabilities and equity of the acquired companies for the reporting period
in which the common control business combinations occur, and for any comparative periods
presented, are included in the consolidated financial statements of the Group at their carrying
amounts as if the combinations had occurred from the date when the acquired companies first
became under the control of the Group. The excess of the cost of business combinations over the
net carrying amounts of the assets and liabilities of the acquired companies is considered as
Equity adjustments from business combination account in the equity section of the consolidated
balance sheets.
Business combinations achieved in stages were accounted for as separate steps. Any additional
acquired shareof interest do not affect previously recognized goodwill.
When the Group acquired a business, embedded derivatives separated from the host contract by
the acquireewere not reassessed on acquisition unless the business combination resulted in a
change in the terms of thecontract that significantly modified the cash flows that otherwise would
have been required under the contract.
Contingent consideration was recognized if, and only if, the Group had a present obligation, the
economic outflow was more likely than not and a reliable estimate was determinable. Subsequent
adjustments to the contingent consideration were recognized as part of goodwill.
The acquisition of Service Companies, were considered as business combinationof companies
under common control. Thus, the acquisitions were accounted for usingan accounting similar to
pooling of interests method.
Goodwill
Goodwill is initially measured at cost being the excess of the aggregate of the consideration
transferred and theamount recognized for non-controlling interest over the net identifiable assets

- 20 -

acquired and liabilities assumed.If this consideration is lower than the fair value of the net assets
of the subsidiary acquired, the difference is recognized in consolidated statements of income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For
the purposeof impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated toeach of the Groups cash-generating units that are expected to benefit
from the combination, irrespective ofwhether other assets or liabilities of the acquiree are assigned
to those units. Each unit or group of units to which the goodwill is so allocated:

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

not larger than an operating segment determined in accordance with PFRS 8, Operating
Segments.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is
disposed of,the goodwill associated with the operation disposed of is included in the carrying
amount of the operation whendetermining the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measuredbased on the relative values of the operation disposed
of and the portion of the cash-generating unit retained.
Goodwill is reviewed for impairment, annually or more frequently, if events or changes in
circumstances indicate that the carrying value may be impaired.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group
of cash-generating units), to which the goodwill relates. Where the recoverable amount of the
cash-generating unit (group of cash-generating units) is less than the carrying amount, an
impairment loss is recognized. Where goodwill forms part of a cash-generating unit (group of
cash-generating units) and part of the operation within that unit is disposed, the goodwill
associated with the operation disposed of is included in the carrying amount of the operation when
determining the gain or loss on disposal of the operation. Goodwill disposedof in this
circumstance is measured based on the relative values of the operation disposed and the portion of
the cash-generating unit retained.
Excess of the fair values of acquired identifiable assets and liabilities of subsidiaries and
associates over the acquisition cost of that interest, is credited directly to income. Transfers of
assets between commonly controlled entities are accounted for under historical cost accounting.
If the business combination is achieved in stages, the acquisition date fair value of the acquirers
previously held equity interest in the acquiree is remeasured to fair value at the acquisition date
through profit or loss.
When subsidiaries are sold, the difference between the selling price and the net assets plus
cumulative translation adjustments and goodwill is recognized in the consolidated statements of
income.
Intangible Assets
The cost of trademarks and brand names acquired in a business combination is the fair value as at
the date of acquisition. The Group assessed the useful life of the trademarks and brand names to
be indefinite because based on an analysis of all of the relevant factors, there is no foreseeable
limit to the period over which the asset is expected to generate cash inflows for the Group.

- 21 -

Trademarks and brand names with indefinite useful lives are not amortized but are tested for
impairment annually either individually or at the cash generating unit level. The useful life of an
intangible asset is assessed as indefinite if it is expected to contribute net cash inflows indefinitely
and is reviewed annually to determine whetherthe indefinite life assessment continues to be
supportable. If not, the change in the useful life assessment from indefinite to finite is made ona
prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference
between the net disposal proceeds and the carrying amount of the asset and are recognized in the
consolidated statements of income when the asset is derecognized.
Impairment of Nonfinancial Assets
The carrying values of property and equipment, investment properties and investments in shares of
stock of associates are reviewed for impairment when events or changes in circumstances indicate
that the carrying value may not be recoverable. If any such indication exists, and if the carrying
value exceeds the estimated recoverable amount, the assets or cash-generating units are written
down to their recoverable amounts. The recoverable amount of the asset is the greater of fair
value less costs to sell or value in use. The fair value less costs to sell is the amount obtainable
from the sale of an asset in an arms-length transaction between knowledgeable, willing parties,
less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. For an asset that does not generate largely
independent cash inflows, the recoverable amount is determined for the cash-generating unit to
which the asset belongs. Impairment losses are recognized in the consolidated statements of
income in those expense categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously
recognized impairment loss may no longer exist or may have decreased. If such indication exists,
the recoverable amount is estimated. A previously recognized impairment loss is reversed only if
there has been a change in the estimates used to determine the assets recoverable amount since
the last impairment loss was recognized. If that is the case, the carrying amount of the asset is
increased to its recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation and amortization, had no impairment loss
been recognized for the asset in prior years. Such reversal is recognized in consolidated
statements of income. After such a reversal, the depreciation or amortization charge is adjusted in
future periods to allocate the assets revised carrying amount, less any residual value, on a
systematic basis over its remaining useful life.
Capital Stock
Capital stock is measured at par value for all shares issued. Incremental costs incurred directly
attributable to the issuance of new shares are shown inequity as deduction from proceeds, net of
tax. Proceeds and/or fair value of considerations received in excess of par value, if any, are
recognized as additional paid-in capital.
Revenue
Revenue is recognized when it is probable that the economic benefits associated with the
transaction will flow to the Group and the amount of the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received or receivable, excluding
discounts, rebates and sales taxes or duties. The Group assesses its revenue arrangements against
specific criteria in order to determine if it is acting as a principal or as an agent. The Group has
concluded that it is acting as principal in majority of itsrevenue arrangements. The following
specific recognition criteria must also be met before revenue is recognized:

- 22 -

Sale of Merchandise Inventories. Revenue is recognized when the significant risks and rewards of
ownership of the goods have passed to the buyer, which is normally upon delivery.Sales returns
and sales discounts are deducted from sales to arrive at sales shown in the consolidated statements
of income.
Sale of goods under consignment arrangements with suppliers is recognized as revenue upon
billing, delivery and transfer of goods to customers.
Sale of Real Estate.The Group assesses whether it is probable that the economic benefits will flow
to the Group when the sales prices are collectible. Collectibility of the contract price is
demonstrated by the buyers commitment to pay, which is supported by the buyers initial and
continuous investments that motivates the buyer to honor its obligation. Collectibility is also
assessed by considering factors such as collections, credit standing of the buyer and location of the
property.
Revenue from sales of completed real estate projects is accounted for using the full accrual
method. In accordance with Philippine Interpretations Committee Q&A No. 2006-01, the
percentage-of-completion method is used to recognize income from sales of projects where the
Group has material obligations under the sales contract to complete the project after the property is
sold, the equitable interest has been transferred to the buyer, construction is beyond preliminary
stage (i.e., engineering, design work, construction contracts execution, site clearance and
preparation, excavation and the building foundation are finished), and the costs incurred or to be
incurred can be measured reliably. Under this method, revenue is recognized as the related
obligations are fulfilled, measured principally on the basis of the estimated completion of a
physical proportion of the contract work.
Any excess of collections over the recognized receivables are included in the Tenants deposits
and others account in the consolidated balance sheets. If any of the criteria under the full accrual
or percentage-of-completion method is not met, the deposit method is applied until all the
conditions for recording a sale are met. Pending recognition of sale, cash received from buyers
are presented under the Tenants deposits and others account in the consolidated balance sheets.
Cost of real estate sales is recognized consistent with the revenue recognition method applied.
Cost of condominium units sold before the completion of the development is determined on the
basis of the acquisition cost of the land plus its full development costs, which include estimated
costs for future development works.
Revenue from construction contracts included in the Revenue from real estate and others
account in the consolidated statements of income is recognized using the percentage-ofcompletion method, measured principally on the basis of the estimated physical completion of the
contract work.
For income tax purposes, full recognition is applied when more than 25% of the selling price has
been collected in the year of sale. Otherwise, the installment method is applied.
Sale of Club Shares for Sale.Revenue is recognized when the significant risks and rewards of
ownership of the club shares for sale have passed to the buyer, which is normally upon delivery of
such.
Rent. Revenue is recognized on a straight-line basis over the lease term or based on the terms of
the lease as applicable.

- 23 -

Sale of Cinema and Amusement Tickets. Revenue is recognized upon receipt of cash from the
customer which coincides with the rendering of services.
Gain on Sale of Investments in Shares of Stock andAvailable-for-Sale Investments. Revenue is
recognized upon delivery of the securities to and confirmation of the sale by the broker.
Dividend.Revenue is recognized when the Groups right as ashareholder to receive the payment is
established.
Management and Service Fees. Revenue is recognized when earned in accordance with the terms
of the agreements.
Marketing Support. Revenue is recognized when the performance and provision of contractually
agreed marketing tasks have been rendered and store facilities have been used. Marketing support
is shown under Others account in the consolidated statements of income.
Interest.Revenue is recognized as the interest accrues, taking into account the effective yield on
the asset.
Management Fees
Management fees are recognized as expense in accordance with the terms of the agreements.
Cost and Expenses
Cost of sales, selling, general and administrative expenses and interest expense are recognized as
incurred.
Pension Benefits
The cost of providing benefits under the defined benefit plans is determined separately for each
plan using the projected unit credit actuarial valuation method. This method reflects service
rendered by employees to the date of valuation and incorporates assumptions concerning
employees projected salaries. Pension cost includes current service cost, interest cost, expected
return on plan assets, amortization of unrecognized past service costs, recognition of actuarial
gains or losses and effect of any curtailments or settlements. Past service cost is amortized over a
period until the benefits become vested. The portion of the actuarial gains and losses is
recognized when it exceeds the corridor (10% of the greater of the present value of the defined
benefit obligation or fair value of the plan assets) at the previous reporting date, divided by the
expected average remaining working lives of active plan members.
The defined benefit liability is the aggregate of the present value of the defined benefit obligation
and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and
the fair value of plan assets, out of which the obligations are to be settled directly. If such
aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of
cumulative unrecognized net actuarial losses and past service cost and the present value of any
economic benefits available in the form of refunds from the plan or reductions in the future
contributions to the plan.
If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past
service cost, and the present value of any economic benefits available in the form of refunds from
the plan or reductions in the future contributions to the plan, net actuarial losses of the current
period and past service cost of the current period are recognized immediately to the extent that
they exceed any reduction in the present value of those economic benefits. If there is no change or
if there is an increase in the present value of the economic benefits, the entire net actuarial losses

- 24 -

of the current period and past service cost of the current period are recognized immediately.
Similarly, net actuarial gains of the current period after the deduction of past service cost of the
current period exceeding any increase in the present value of the economic benefits stated above
are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized
net actuarial losses and past service cost and the present value of any economic benefits available
in the form of refunds from the plan or reductions in the future contributions to the plan. If there
is no change or if there is a decrease in the present value of the economic benefits, the entire net
actuarial gains of the current period after the deduction of past service cost of the current period
are recognized immediately.
Foreign Currency-denominated Transactions
The consolidated financial statements are presented in Philippine peso, which is the Groups
functional and presentation currency. Transactions in foreign currencies are initially recorded in
the functional currency rate at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are restated at the functional currency rate of exchange at
reporting period. Nonmonetary items denominated in foreign currency are translated using the
exchange rates as at the date of initial recognition. All differences are taken to the consolidated
statements of income.
Foreign Currency Translation
The assets and liabilities of foreign operations are translated into Philippine peso at the rate of
exchange ruling at reporting period and their respective statements ofincomeare translated at the
weighted average rates for the year. The exchange differences arising on the translation are
included in the consolidated statements of comprehensive incomeand are presented within the
Cumulative translation adjustment of a subsidiary account in the consolidated statements of
changes in equity. On disposal of a foreign entity, the deferred cumulative amount ofexchange
differences recognized in equity relating to that particular foreign operation is recognized in the
profit or loss.
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement and requires an assessment of whether the fulfillment of the arrangement is
dependent on the use of a specific asset or assets and the arrangement conveys a right to use the
asset.
Group as Lessee. Finance leases, which transfer to the Group substantially all the risks and
benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at
the fair value of the leased property or, if lower, at the present value of the minimum lease
payments. Lease payments are apportioned between the finance charges and reduction of the lease
liability so as to achieve a constant rate of interest on the remaining balance of the liability.
Finance charges are reflected in the consolidated statements of income.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset
and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the
end of the lease term.
Leases which do not transfer to the Group substantially all the risks and benefits of ownership of
the asset are classified as operating leases. Operating lease payments are recognized as expense in
the consolidated statements of income on a straight-line basis over the lease term. Associated
costs, such as maintenance and insurance, are expensed as incurred.

- 25 -

Group as Lessor. Leases where the Group does not transfer substantially all the risks and benefits
of ownership of the asset are classified as operating leases. Lease income from operating leases
are recognized as income on a straight-line basis over the lease term. Initial direct costs incurred
in negotiating an operating lease are added to the carrying amount of the leased asset and
recognized over the lease term on the same basis as rental income. Contingent rents are
recognized as revenue in the period in which they are earned.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation, and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is
recognized as a separate asset but only when the receipt of the reimbursement is virtually certain.
Borrowing Costs
Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of
a qualifying asset as part of the cost of that asset. Capitalization of borrowing costs commences
when the activities to prepare the asset are in progress and expenditures and borrowing costs are
being incurred. Borrowing costs are capitalized until the assets are substantially ready for their
intended use. Borrowing costs are capitalized when it is probable that they will result in future
economic benefits to the Group. All other borrowing costs are expensed as incurred. For
borrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a
weighted average cost of borrowings is used.
Taxes
Current Tax.Current tax assets and liabilities for the current and prior periods are measured at the
amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively enacted as atreporting
period.
Deferred Tax.Deferred tax is provided, using the balance sheet liability method, on temporary
differences at reporting period between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable
temporary differences, except:

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

with respect to taxable temporary differences associated with investments in subsidiaries,


associates and interests in joint ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse
in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences andcarryforward
benefits of excess MCIT and NOLCO, to the extent that it is probable that taxable profit will be

- 26 -

available against which the deductible temporary differences and the carryforwardbenefits of
excess MCIT and NOLCO can be utilized, except:

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

with respect to deductible temporary differences associated with investments in subsidiaries,


associates and interests in joint ventures, deferred tax assets are recognized only to the extent
that it is probable that the temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting period and reduced to the
extent that it is no longer probable that sufficient taxable profit will be available to allow all or
part of the deferred income tax assets to be utilized. Unrecognized deferred tax assets are
reassessed at each reporting period and are recognized to the extent that it has become probable
that future taxable profit will allow the deferred tax assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period the asset is realized or the liability is settled, based on tax rates and tax laws that have been
enacted or substantively enacted at reporting period.
Income tax relating to items recognized directly in the consolidated statements of comprehensive
income is recognized in the consolidated statements of comprehensive income and not in the
consolidated statements of income.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to
offset current tax assets against current tax liabilities and the deferred taxes relate to the same
taxable entity and the same taxation authority.
Value Added Tax (VAT).Revenue, expenses and assets are recognized net of the amount ofVAT,
except:

where the tax incurred on a purchase of assets or services is not recoverable from the taxation
authority, in which case the tax is recognized as part of the cost of acquisition of the asset or
as part of the expense item as applicable; and

receivables and payables that are stated with the amount of tax included.

The net amount of VAT recoverable from, or payable to, the taxation authority is included as part
of Other current assets and Accounts payable and other current liabilities accounts in the
consolidated balance sheets.
Business Segments
The Group is organized and managed separately according to the nature of business. The five
major operating businesses of the Group are shopping mall development, retail, real estate
development and tourism,hotels and conventions, and financial services and others. These
operating businesses are the basis upon which the Group reports its segment information presented
in Note 6 to the consolidated financial statements.

- 27 -

Basic/Diluted Earnings Per Common Share (EPS)


Basic EPS is computed by dividing the net income for the period attributable to owners of the
Parent by the weighted-average number of issued and outstanding common shares during the
period, with retroactive adjustment for any stock dividends declared.
For the purpose of computing diluted EPS, the net income for the period attributable to owners of
the Parent and the weighted-average number of issued and outstanding common shares are
adjusted for the effects of all dilutive potential ordinary shares.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. They are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. Contingent assets are not recognized in the consolidated financial statements but are
disclosed when an inflow of economic benefits is probable.
Events after the Reporting Period
Postyear-end events that provide additional information about the Groups position at the end of
the reporting period (adjusting events) are reflected in the consolidated financial statements.
Postyear-end events that are not adjusting events are disclosed in the notes to the consolidated
financial statements when material.

4. Segment Information
For management purposes, the Group is organized into business units based on their products and
services, and has five reportable operating segments as follows: shopping mall development,
retail, real estate development and tourism,hotels and conventions and financial services and
others.
The shopping mall development segment develops, conducts, operates and maintains the business
of modern commercial shopping centers and all businesses related thereto such as the conduct,
operation and maintenance of shopping center spaces for rent, amusement centers, or cinema
theaters within the compound of the shopping centers.
The retail segment is engaged in the retail/wholesale trading of merchandise, such as dry goods,
wearing apparels, food and other merchandise.
The real estate development and tourism segment is involved in the development and
transformation of major residential, commercial,entertainment and tourism districts through
sustained capital investments in buildings and infrastructure.
The hotels and conventions segment engages in and carries on the business of hotel and resort and
operates and maintains any and all services and facilities incident thereto.
Financial services and others segment primarily includes the Parent Company which engages in
asset management and capital investments, and associates which are involved in financial services.
Management monitors the operating results of its business units separately for the purpose of
making decisions about resource allocation and performance assessment. Segment performance is
evaluated based on operating profit or loss and is measured consistently with the operating profit
or loss in the consolidated financial statements.

- 28 -

Segment assets and liabilities do not include deferred tax assets and deferred tax liabilities,
respectively.
Segment revenue includes transfers between business segments. Such transfers are eliminated in
the consolidation.
Business Segment Data
March 31, 2012

Revenue:
External customers
Inter-segment

Shopping
Mall
Development

Retail

Real Estate
Development
and Tourism

Financial
Hotels and Services and
Conventions
Others
(In Thousands)

P
= 5,783,580
1,244,279
P
= 7,027,859

P
= 35,059,119
564,265
P
= 35,623,384

P
= 6,681,381
653,800
P
= 7,335,181

P
= 301,750

P
= 301,750

P
= 1852,789
766,736
P
= 2,619,525

Eliminations

P
=
(3,229,080)
(P
= 3,229,080)

Consolidated

P
= 49,678,619

P
= 49,678,619

Segment results:
Income before income tax
Provision for income tax
Net income (loss)

P
= 3,338,904
(806,186)
P
= 2,532,718

P
= 1,708,983
(512,548)
P
= 1,196,435

P
= 1,939,918
(46,491)
P
= 1,893,427

(P
= 27,325)
(1,841)
(P
= 29,166)

P
= 601,271
(221,940)
P
= 379,331

Net income (loss) attributable to:


Owners of the Parent
Non-controlling interests

P
= 2,433,869
98,848

P
= 1,184,948
11,486

P
= 1,892,886
543

(P
= 30,687)
1,521

P
= 379,331

P
= 66,063,106

P
= 117,223,324

P
= 1,112,249

P
= 193,955,888

(P
= 64,086,524) P
= 458,588,896

P
= 73,443,281

P
= 29,526,122

P
= 38,869,562

P
= 351,652

P
= 114,274,003

(P
= 35,342,701) P
= 221,121,919

P
=

P
= 100,000

P
= 11,673,212

P
=

P
= 84,033,400

P
=

P
= 95,806,612

4,647,820
965,468

837,823
675,167

131,929
2,810,843
87,759

7,564
31,731

1,533,346
615,551
143,300

1,665,275
8,919,601
1,903,425

Shopping
Mall
Development

Retail

Real Estate
Development
and Tourism

Financial
Hotels and Services and
Conventions
Others
(In Thousands)

Eliminations

Consolidated

=5,021,845
P
1,022,090
=6,043,935
P

=31,645,908
P
472,673
=32,118,581
P

=4,102,710
P
188,169
=4,290,879
P

=208,476
P
58
=208,534
P

Segment assets (excluding


deferred tax)
Segment liabilities (excluding
deferred tax)
Other information:
Investments in shares of stock
of associates
Equity in net earnings
of associates
Capital expenditures
Depreciation and amortization

P
= 144,320,853

P
= 2,186,376
1,053
P
= 2,187,429

P
= 181,378
2,006,051

P
= 9,748,127
(1,587,953)
P
= 8,160,174

P
= 6,041,725
2,118,449

March 31, 2011

Revenue:
External customers
Inter-segment

=1,790,306
P
1,533,107
=3,323,413
P

=
P
(3,216,097)
(P
=3,216,097)

=42,769,245
P

=42,769,245
P

Segment results:
Income before income tax
Provision for income tax
Net income (loss)

=2,849,321
P
(649,439)
=2,199,882
P

=1,377,950
P
(379,848)
=998,102
P

=1,237,836
P
(22,020)
=1,215,816
P

(P
=51,813)
(1,621)
(P
=53,434)

=990,180
P
(67,785)
=922,395
P

=1,932,210
P
1,213
=1,933,423
P

P8,335,684
=
(1,119,500)
=7,216,184
P

Net income (loss) attributable to:


Owners of the Parent
Non-controlling interests

=2,119,067
P
80,815

=996,145
P
1,957

=1,214,628
P
1,188

(P
=54,060)
626

=922,902
P
(507)

=169,356
P
1,764,067

=5,368,038
P
1,848,146

=122,256,108
P

=58,709,333
P

=100,292,690
P

=2,837,617
P

=172,051,907
P

(P
=68,355,482) P
=387,792,173

=57,214,897
P

=22,926,132
P

=35,284,058
P

=1,929,491
P

=97,437,846
P

(P
=34,726,110) P
=180,066,314

=
P

=
P

=5,888,442
P

=
P

=64,618,067
P

Segment assets (excluding


deferred tax)
Segment liabilities (excluding
deferred tax)
Other information:
Investments in shares of stock
of associates

=
P

=70,506,509
P

- 29 March 31, 2011

Equity in net earnings


of associates
Capital expenditures
Depreciation and amortization

Shopping
Mall
Development

Retail

Real Estate
Development
and Tourism

2,964,096
926,243

934,905
562,176

98,196
3,108,174
78,679

Financial
Hotels and Services and
Conventions
Others
(In Thousands)

17,519
26,238

1,273,106
1,181,228
109,940

Eliminations

Consolidated

1,371,302
8,205,922
1,703,276

5. Cash and Cash Equivalents


This account consists of:
March 31,
2012

December 31,
2011
(In Thousands)

Cash on hand and in banks (see Note 20)


Temporary investments (see Notes 16 and 20)

P
=6,139,340
31,207,055
P
=37,346,395

P6,384,567
=
49,665,755
=56,050,322
P

Cash in banks earn interest at the respective bank deposit rates. Temporary investments are made
for varying periods of up to three months depending on the immediate cash requirements of the
Group, and earn interest at the respective temporary investment rates.

6. Time Deposits and Short-Term Investments


This account consists of:
March 31,
2012

December 31,
2011
(In Thousands)

Time deposits:
Pledged (see Notes 18 and 20)
Not pledged (see Note 20)
Short-term investments (see Note 20)
Less current portion
Noncurrent portion

P
=20,387,000
26,633,633
47,020,633
858,000
47,878,633
860,631
P
= 47,018,002

=20,824,000
P
16,595,172
37,419,172
876,800
38,295,972
879,410
=37,416,562
P

Dollar and peso time deposits as atMarch 31, 2012amounting to US$1,095.5 million
(P
=47,018.0 million) and P
=2.6 million, respectively, bear annual interest rates ranging from 3.1%
to 6.5% in 2012.As at March 31, 2012, dollar time deposits amounting to
US$378.5 million (P
=16,244.4 million) are due in July 2013, US$430.0 million (P
=18,455.6 million)
are due in September 2014,US$45 million (P
=1,931.4 million)are due in October 2017and US$242
million (P
=10,386.6 million) are due in February 2017. Peso time deposit amounting to P
=2.6
million is due in August 2012.
Dollar and peso time deposits as at December 31, 2011 amounting to US$853.5 million
(P
=37,416.7 million) and P
=2.5 million, respectively, bear annual interest rates ranging from 3.5%
to 6.5% in 2011. As at December 31, 2011, dollar time deposits amounting to

- 30 -

US$378.5 million (P
=16,592.6 million) are due in July 2013, US$430.0 million (P
=18,851.2 million)
are due in September 2014, and US$45.0 million (P
=1,972.9 million) are due in October 2017.
Peso time deposit amounting to P
=2.5 million is due in August 2012.

A portion of the time deposits amounting to US$475.0 million, with peso equivalents of P
=20,387.0
millionand P
=20,824.0 million as atMarch 31, 2012 and December 31, 2011, respectively, were
used as collateral for loans obtained by SMIC (see Note 18).
Short-term investments amounting to US$20.0 million, with peso equivalents of P
=858.0 million
and P
=876.8 millionas atMarch 31, 2012 and December 31, 2011, respectively,beara fixed interest
rate of 3.24%.

7. Investments Held for Trading and Sale


This account consists of investments in shares of stocks and redeemable preferred shares totaling
=550.2 million as of March 31, 2012 and P
P
=482.2 million as at December 31, 2011, and
investments in bonds and corporate notes amounting to P
=1,451.3 million as at March 31, 2012 and
=1,457.5 million as at December 31, 2011.
P
The Group recognized a lossofP
=1.4 million and a gain of P
=2.3 million from fair value adjustments
of investments held for trading for the quarter ended March 31, 2012and 2011, respectively.The
amounts areincluded under Dividends, management fees, and others account in the consolidated
statements of income.

8. Receivables
This account consists of receivable from tenants and real estate buyers (net of noncurrent portion),
due from related parties, management fees, and dividends.
The terms and conditions of the above receivables are as follows:

Trade receivables from tenants and management fee receivables are noninterest-bearing
andare normally collectibleon a 30 to 90 days term. Receivables from real estate buyers
mainly consist of receivables subject to financing from banks and other financial institutions
with interest at market rates ranging from 13% to 18% per annum and normally collectible on
a
3 to 5 years term.

The terms and conditions relating to related party receivables are further discussed in Note 20.

Dividends receivables are noninterest-bearing and are normally collectible within the next
financial year.

Allowance for impairment loss amounting toP


=11.7 million and P
=11.4 million asatMarch 31, 2012
andDecember 31, 2011, respectively,pertains to receivables from tenants which were identified
through specific assessment.
Receivables, other than those identified as impaired, are assessed by the Groups management as
good and collectible.

- 31 -

9. Other Current Assets


This account consists of:
March 31,
2012

December 31,
2011
(In Thousands)

Prepaid taxes and other prepayments


Advances to contractors
Non-trade receivables
Receivable from banks and credit cards
Advances for project development (see Note 20)
Input tax
Condominium units for sale (see Note 14)
Club shares for sale
Accrued interest receivable
Supplies and uniform inventory
Less allowance for impairment loss

P
=4,250,890
3,298,742
2,391,550
1,198,866
1,133,137
1,132,676
969,938
846,307
710,812
548,354
16,481,272
5,705
P
=16,475,567

=3,556,428
P
3,098,881
2,902,621
2,083,278
1,121,565
1,019,280
1,115,878
856,208
966,503
474,803
17,195,445
5,705
=17,189,740
P

Non-trade receivablesincludeinterest-bearing advances to third parties, which are normally


collectible within the next financial year.

Receivable from banks and credit cards are noninterest-bearing and are normally collectible
on a 30 to 90 days term.

Accrued interestreceivable relates mostly to short-term time deposits that will mature within
the next financial year. Interest on time deposits is collected at respective maturity dates.

Advances for project development mostly pertain to advances made to related parties for the
acquisition of land for future development.

Club shares for sale pertain to club shares of Pico de Loro Beach and Country Club (Pico de
Loro) which Costa delHamilo Inc. (Costa), a subsidiary of Mt. Bliss, received as consideration
for the parcel of land and construction costs of the beach and country club. The club shares
entitle its holders to proprietary club membership in Pico de Loros beach and country club
facilities.Costas club shares for salehad a total of 6,998 and7,055as atMarch 31, 2012 and
December 31, 2011, respectively.
Allowance for impairment loss amounting to P
=5.7 million as atMarch 31, 2012 and December
31, 2011, pertains to nontrade receivables which were identified through specific assessment.
There was no additional impairment loss identified based on the collective assessments made
in 2012 and2011.

10. Available-for-Sale Investments


This account consists of investments inshares of stocks and corporate bonds, net of allowance for
impairment losses amounting to P
=45.1 million as at March 31, 2012 and December 31, 2011.

- 32 -

Investments in bonds and corporate notes as atMarch 31, 2012 and December 31, 2011 include
third party convertible bonds and corporate notes with fixed interest rates ranging from 2.5% to
8.25%. These investments will mature on various datesbeginning on February 11, 2013 and April
15, 2018, respectively.
Investment in convertible bonds as at March 31, 2012 and December 31, 2011have embedded
derivatives which are further discussed in Note 25.
Gain on disposal of AFS investments recognized under Dividends, management fees, and others
account in the consolidated statements of income amounted toP
=18.8 millionand P
=0.2 million for
the quarter ended March 31, 2012 and 2011, respectively. The amounts are exclusive of the share
of the non-controlling interests.

11. Investments in Shares of Stock of Associates


The details of and movements in this account are as follows:
December 31,
2011

March 31,
2012

(In Thousands)

Acquisition cost:
Balance at beginning of year
Additions
Disposals
Balance at end of period
Accumulated equity in net earnings:
Balance at beginning of year
Equity in net earnings
Share in net unrealized gain on AFS
investments of associates
Dividends received
Accumulated equity in net earnings
of investments sold
Balance at end of period
Allowance for impairment loss:
Balance at beginning of year
Recovery
Additions
Balance at end of period

P
=66,416,206
5,593,857
(39,032)
71,971,031

=54,114,191
P
12,590,225
(288,210)
66,416,206

26,319,348
1,665,275

21,113,648
6,415,424

264,725
(79,084)

440,127
(1,583,351)

(16,978)
28,153,286
100,124,317

(66,500)
26,319,348
92,735,554

4,317,705

4,317,705
P
=95,806,612

4,367,658
(445,000)
395,047
4,317,705
=88,417,849
P

The Group recognized its share in the net gain on AFSinvestments of the associates amountingto
=264.7 million and P
P
=440.1million, inclusive of the share of the non-controlling interests
amounting to loss of P
=5.0 millionand gain of P
=15.3million, respectively,for the first quarterended
March31, 2012 and for the year ended December 31, 2011, respectively. The unrealized gain or
loss was recognized in the consolidated statements of comprehensive income. The allowance for
impairment loss pertaining to investments in BDO and Highlands Prime, Inc. (HPI) amounted to
=4,317.7 million as at March 31, 2012 and December 31, 2011.
P

- 33 -

The major associates of the Group are as follows:


Effective Percentage
of Ownership
Company
BDO
China Banking Corporation (China Bank)
Atlas
Belle Corp. (Belle)
HPI
Summerhills Home Development Corporation (SHDC)
Sodexo Motivation Solutions Philippines, Inc.
Fast Retailing Philippines, Inc.

March 31, December 31,


2011
2012
46
21
18
26
27
21
40
25

46
21
18
26
27
21
40
25

Principal Activities
Financial services
Financial services
Mining
Real estate development and tourism
Real estate development and tourism
Real estate development and tourism
Retail
Retail

Atlas
On July 25, 2011, SMIC acquired 316.2 million common shares of Atlas for US$142.2 million
(P
=5,996.6 million) for 17.9% equity interest. SMIC has three representations in the BOD of Atlas
as at December 31, 2011 and is participating in operational decisions. Based on these facts and
circumstances, management determined that the Group has significant influence in Atlas and
therefore has accounted it as investment in associate using equity method in the consolidated
financial statements. The acquisition of Atlas was accounted on provisional basis, pending the
information on the fair value of Atlas net assets.
Belle
In 2010, the Group obtained 17.53% additional ownership in Belle for a total consideration of
=1,598.3 million. The acquisition resulted in Belle becoming an associate of the Group at 24.77%
P
and 13.24% grossand effective ownership, respectively, as at December 31, 2010.
In April 2011, the Group, increased its ownership interest in Belle, an associate, by 20.78% and
12.58% grossand effective ownership, respectively, via share swap wherein the entire outstanding
shares of Premium Leisure Amusement, Inc. (a subsidiary) was exchanged for certain number of
common shares of Belle valued at P
=1.95 per share (shares swap). The transaction resulted to a net
gain on share swap amounting to P
=2,604.2 million,net of the eliminated portion of the gain
pertaining to the retained interest of the Group in Belle.
HPI
In 2011, the Group disposed of 134.8 million shares of HPI for a total cost of P
=288.2miliion. The
disposal resulted in a gain of P
=1.0 million, which is included under Gain on disposal of
investments and properties account in the consolidated statements of income.
SHDC
In 2011, SMDC obtained 49% and 21%gross and effective ownership, respectively, in SHDC for a
total consideration of P
=20.1 million. Consequently, SHDC became an associate of the Group.

- 34 -

As at March 31, 2012 and December 31, 2011, the fair values of investments in associates which
are listed in the PSE are as follows:
March 31,
2012

December 31,
2011
(In Thousands)

BDO
China Bank
HPI
Belle
Atlas

P
=90,580,310
12,590,714
2,216,444
24,913,485
5,673,387

P
=80,928,951
10,594,301
1,036,979
24,670,664
5,325,521

- 35 -

12. Property and Equipment


Themovements in this account are as follows:

Land
Cost
Balance as at December 31, 2010
Additions
Reclassifications
Disposals/retirements
Balance as at December 31, 2011
Additions
Reclassifications
Disposals/retirements
Balance as at March 31, 2012
Accumulated Depreciation and Amortization
Balance as at December 31, 2010
Depreciation and amortization
Reclassifications
Disposals/retirements
Balance as at December 31, 2011
Depreciation and amortization
Reclassifications
Disposals/retirements
Balance as at March 31, 2012
Net Book Value
As at March 31, 2012
As at December 31, 2011

=2,945,232
P
26,970
1,893

2,974,095

(1,348)

P
= 2,972,747

=
P

P
=

P
= 2,972,747
2,974,095

Buildings,
Condominium
Units and
Improvements

Store
Equipment and
Improvements

Data
Processing
Equipment

Furniture,
Fixtures
Machinery
and Office
and
Equipment
Equipment
(In Thousands)

Leasehold
Improvements

Transportation
Equipment

=4,534,292
P
118,732
2,549
(1)
4,655,572
14,921
(41)

P
= 4,670,452

=6,638,725
P
784,783
(615,945)
(86,520)
6,721,043
167,235
9,225
(139)
P
= 6,897,364

=3,253,276
P
635,960
317,809
(74,484)
4,132,561
78,452
(2,781)
(41)
P
= 4,208,191

=3,050,238
P
620,339
(186,048)
(27,304)
3,457,225
106,744
10,276

P
= 3,574,245

=2,424,501
P
507,700
(120,348)
(10,407)
2,801,446
136,015
15,323

P
= 2,952,784

=2,629,192
P
1,188,675
(61,331)
(43)
3,756,493
272,872
94,958

P
= 4,124,323

=626,380
P
258,957
(3,365)
(301,378)
580,594
3,180
1,157

P
= 584,931

=2,262,529
P
246,322
(582)

2,508,269
59,807
441

P
= 2,568,517

=4,544,869
P
713,596
(598,186)
(85,128)
4,575,151
186,988
4,099
(53)
P
= 4,766,185

=2,394,063
P
418,680
(31,281)
(41,815)
2,739,647
116,673
177
(25)
P
= 2,856,472

=1,300,562
P
427,925
(106,226)
(26,695)
1,595,566
121,228
497

P
= 1,717,291

=1,454,709
P
296,607
(115,046)
(1,306)
1,634,964
86,540
(298)

P
= 1,721,206

=1,172,404
P
533,033
(88,726)

1,616,711
163,685

P
= 1,780,396

=303,829
P
47,467
(2,934)
(66,826)
281,536
12,943
(1,048)

P
= 293,431

P
= 2,101,935
2,147,303

P
= 2,131,179
2,145,892

P
= 1,351,719
1,392,914

P
= 1,856,954
1,861,659

P
= 1,231,578
1,166,482

P
= 2,343,927
2,139,782

P
= 291,500
299,058

Construction
in Progress

=699,668
P
648,946
(383,445)

965,169
94,059
(81,847)

P
= 977,381

=
P

P
=

P
= 977,382
965,169

Total

26,801,504
4,791,062
(1,048,231)
(500,137)
30,044,198
873,478
44,922
(180)
P
= 30,962,418

=13,432,965
P
2,683,630
(942,981)
(221,770)
14,951,844
747,864
3,868
(78)
P
= 15,703,498

P
= 15,258,920
15,092,354

- 36 -

13. Investment Properties


The movements in this account are as follows:
Land and
Improvements and
Land Use Rights
Cost
Balance as at December 31, 2010
Additions
Reclassifications
Translation adjustment
Disposals
Balance as at December 31, 2011
Additions
Reclassifications
Translation adjustment
Balance as at March 31, 2012
Accumulated Depreciation, Amortization
and Impairment Loss
Balance as at December 31, 2010
Depreciation and amortization
Reclassifications
Translation adjustment
Balance as at December 31, 2011
Depreciation and amortization
Reclassifications
Translation adjustment
Balance as at March 31, 2012
Net Book Value
As at March 31, 2012
As at December 31, 2011

Buildings and
Improvements

Building
Equipment,
Furniture
and Others
(In Thousands)

=27,302,498
P
2,606,363
508,106
153,159

30,570,126
2,345,974
49,083
(55,838)
P
= 32,909,345

=84,785,047
P
2,762,132
6,742,227
387,953
(6,113)
94,671,246
1,004,470
1,398,289
(213,405)
P
= 96,860,600

=15,973,989
P
932,825
549,958
64,394

17,521,166
77,884
44,236
(24,994)
P
= 17,618,292

=1,123,236
P
46,470

1,177,437
18,818

(3,573)
P
= 1,192,682

=18,075,582
P
3,186,275
217,003

21,530,088
800,591
(12,984)
(26,630)
P
= 22,291,065

=8,024,378
P
1,276,725

9,323,793
336,154
(312)
(10,874)
P
= 9,648,761

P
= 74,569,535
73,141,158

P
= 7,969,532
8,197,373

P
= 31,716,663
29,392,689

Construction in
Progress

=12,828,906
P
14,839,591
(7,138,201)
186,433
(48,474)
20,668,255
1,998,254
(560,513)
(77,042)
P
= 22,028,955

=
P

123,564
123,564

P
= 123,564

P
= 21,905,390
20,544,691

Total

=140,890,440
P
21,140,911
662,090
791,939
(54,587)
163,430,793
5,426,582
931,095
(371,279)
P
= 169,417,192

=27,223,196
P
4,509,470
217,003
123,564
32,154,882
1,155,563
(13,296)
(41,077)
P
= 33,256,072

P
= 136,161,120
131,275,911

The fair values of investment properties as at December 31, 2011 were determined by independent
appraisers based on various appraisal reports made in 2011 and 2010, which amounted to
=291,671.9 million. The fair value, which is based on market data approach, represents the
P
amount at which the assets can be exchanged between a knowledgeable, willing seller and a
knowledgeable, willing buyer in an arms-length transaction at the date of valuation in accordance
with International Valuation Standards.
Included under Land account are the 212,119 square meters of real estate properties with a
carrying value of P
=465.0 million and P
=474.0 million as at March 31, 2012 and
December 31, 2011, respectively, and a fair value of P
=13,531.0 million as at August 2007. The
land was planned for residential development in accordance with the cooperative contracts entered
into by Mega Make Enterprises Limited and Affluent Capital Enterprises Limited (Oriental Land)
with Grand China and Oriental Land Development Limited on March 15, 2007. The value of
these real estate properties was not part of the consideration paid by SM Prime of
=10,827.0 million to Grand China and Oriental Land. Accordingly, the assets were recorded at
P
carrying values under Investment properties account and a corresponding liability equivalent to
the same amount is shown as part of Tenants deposits and others account in the consolidated
balance sheets.
A portion of investment properties located in China with a carrying value of P
=635.0 million and
=638.0 millionas at March 31, 2012 and December 31, 2011, respectively, and a fair value of
P
=16,879.0 million as at August 2007, were mortgaged as collaterals to secure the domestic
P
borrowings in China (see Note 18).

- 37 -

Rent income from investment properties, whichis primarily attributable to SM Prime, amounted to
=5,417.7 million andP
P
=4,868.9 millionfor the quarterended March 31, 2012 and 2011, respectively.
Consolidated direct operating expenses from investment properties which generate income
amounted to P
=3,241.7 million and P
=2,799.1millionfor the quarter ended March 31, 2012 and 2011,
respectively.
Construction in progress account includes shopping mall complex under construction of
SM Prime. In 2012, shopping mall complex under construction mainly pertains to costs incurred
for the development of SM San Fernando, SM Consolacion Cebu, SM General Santos, SM
Lanang Davao, SM Taguig, SM Chongqing, SM Zibo and SM Tianjin. In 2011, shopping mall
complex under construction mainly pertains to costs incurred for the development of SM Taguig,
SM Masinag, SM Suzhou and SM Chongqing.
Shopping mall complex under construction includes cost of land amounting to P
=1,729.0 million
and P
=1,575.0 million as atMarch 31, 2012 and December 31, 2011, respectively.
Construction contracts with various contractors related to the construction of the above-mentioned
projects amounted to P
=42,483.0 million and P
=39,240.0million as at March 31, 2012 and December
31, 2011, respectively, inclusive of overhead, cost of labor and materials and all other costs
necessary for the proper execution of the works. The outstanding contracts as atMarch 31, 2012
and December 31, 2011 are valued at P
=23,770.0 million and P
=10,268.0 million, respectively.
Interest capitalized to shopping mall complex under construction amounted to P
=44.0 million and
=30.0 millionfor the quarters ended March 31, 2012 and 2011, respectively. Capitalization rates
P
used were 5.72% and 5.59%in 2012 and 2011, respectively.

14. Land and Development and Condominium Units for Sale


Land and development, which amounted to P
=22,875.9million and P
=23,012.5 millionas at March
31, 2012 and December 31, 2011, respectively, include land and cost of the condominium
projects.
Condominium units for sale amounting to P
=969.9 million and P
=1,115.9 million as at March 31,
2012 and December 31, 2011, respectively, pertain to completed projects of SMDC, Costa and
ICDC. The amounts were included under Other current assets account in the consolidated
balance sheets (see Note 9).
The condominium units for sale and land and development are stated at cost as at
March 31, 2012 and December 31, 2011.
Borrowing costs capitalized by the Group to land and development account amounted to P
=46.9
million and P
=411.7 million in 2012 and 2011, respectively. The average rates used to determine
the amount of borrowing costs eligible for capitalization range from 4.0% to 8.3% in 2012 and
3.7% to 7.5% in 2011. Interest expense charged to operations amounted to P
=240.5 million in 2012
andP
=488.3 million in 2011.

- 38 -

15. Intangibles and Other Noncurrent Assets


Intangibles
This account consists of:
December 31,
2011

March 31,
2012

(In Thousands)

Goodwill
Trademarks and brand names

P
=9,229,438
6,124,762
P
=15,354,200

=9,229,438
P
6,124,762
=15,354,200
P

March 31,
2012

December 31,
2011

Other Noncurrent Assets


This account consists of:

(In Thousands)

Receivable from a related party and escrow


fund (see Note 20)
Receivables from real estate buyers (see Note 8)
Deposits and advance rentals
Derivative assets (see Notes 24 and 25)
Long-term notes (see Note 20)
Defined benefit asset
Treasury bonds
Others

P
=9,067,779
10,042,695
4,358,366
104,720
506,724
372,197
200,000
776,867
P
=25,429,348

=8,195,691
P
8,739,412
5,030,882
159,461
506,724
394,713
200,000
857,532
=24,084,415
P

The recoverable amount of goodwill, trademarks and brand names have been determined using the
cash flow projections based on the financial budgets approved by senior management covering a
three-year period. The calculation of value-in-use is most sensitive to pre-tax discount rates. The
pre-tax discount rates applied to cash flow projections ranged from 7.15% to 8.93% as at
December 31, 2011. The discount rates were determinedbased on the yield of ten-year
government bonds at the beginning of the forecasted year. Discount rates reflect the current
market assessment of the risks to each cash generating unitand were estimated based on the
average percentage of weighted average cost of capital for the industry. The rate was further
adjusted to reflect the market assessment of any risk specific to the cash-generating unit for which
future estimates of cash flows have not been adjusted. Management assessed that no reasonable
possible change in pre-tax discount ratesand future cash inflows would cause the carrying value of
goodwill, trademarks and brand names in 2011 and 2010to materially exceed its recoverable
amount.
In 2009, various cash advances were provided to a related partyfor payment of interest, purchase
of shares and other operating requirements totalingto P
=6,000.0 million, which bears a fixed
interest of 7.0%, payable semi-annually and will mature in 2014 (see Note 20).
Escrow fundamounting to P
=3,067.8million and P
=2,193.2 million as at March 31, 2012 and
December 31, 2011, respectively,pertains mainly to the amounts deposited in the account of an

- 39 -

escrow agent as required by the Housing and Land Use Regulatory Board (HLURB) in connection
with SMDCs temporary license to sell prior to HLURBs issuance of a license to sell and
certificate of registration.
Deposits and advance rentals substantially pertain to the lease agreements entered into by SM
Prime for certain parcels of land where some of its malls are constructed. The lease agreements
provide that the security deposits will be applied to future rentals. Consequently, the said deposits
and advance rentals are not remeasured at amortized cost.
Long-term notes pertain to unquoted and unsecured subordinated debt instruments which carry
fixed interest rates per annum ranging from 7.5% to 8.5% as at March 31, 2012 and December 31,
2011. The P
=200.0 million will mature on November 21, 2017, P
=88.6 million will mature on
May 29, 2018 and the remainingP
=218.1 million will mature on March 20, 2019.
Treasury bonds pertain to quoted Philippine government treasury bonds classified as held-tomaturity investment which bear fixed interest rates ranging from 8.5% to 9.0% and payable
quarterly. The P
=200.0 million will mature on July 31, 2013.
Other noncurrent assets-others account mostly pertainto depreciable input value-added tax.

16. Bank Loans


This account consists of:
December 31,
2011

March 31,
2012

(In Thousands)

Parent Company:
U.S. dollar-denominated loans
Peso-denominated loans
Subsidiaries Peso-denominated loans

P
=3,776,960
3,000,000

P
=3,857,920
15,500,000

5,990,000
P
=12,766,960

6,390,000
P
=25,747,920

The U.S. dollar-denominated loans amounting to US$88 million (P


=3,777.0 million) and
US$88.0 million (P
=3,857.9 million) as atMarch 31, 2012 and December 31, 2011, respectively,
bear interest at 3-month London Inter-Bank Offered Rate (LIBOR) plus margin.The pesodenominated loans bear annual interest rates ranging from 3.60% to 4.26%in 2012 and 2011,
respectively. These loans have maturities of less than one year (see Note 20).
A portion of these loans is collateralized by temporary investments and shares of stocks in
accordance with the regulations of the BangkoSentralngPilipinas (BSP). The carrying values of
the collaterals approximate the amounts of the loans.

- 40 -

17. Accounts Payable and Other Current Liabilities


This account consists of:
2011

2012
(In Thousands)

Trade
Payable arising from acquisition of land
Nontrade
Due to related parties (see Note 20)
Accrued expenses (see Note 20)
Accrued interest (see Note 20)
Gift checks redeemable and others
Payable to government agencies
Derivative liabilities (see Note 25)
Subscriptions payable

P
=19,950,531
3,857,593
3,017,525
2,395,795
2,357,802
1,823,890
1,222,086
859,881

P
=35,485,103

=28,027,967
P
3,116,058
2,078,768
2,734,415
2,748,247
1,702,660
1,690,035
1,426,230
124,222
1,101,205
=44,749,807
P

The terms and conditions of the above liabilities follow:

Trade payables primarily consist of liabilities to suppliers and contractors, which are
noninterest-bearing and are normally settled on a 30 to 60 days term.
Payable arising from acquisition of land, nontrade payables, accrued interest and others are
expected to be settled within the next financial year.
The terms and conditions relating to due to related parties are further discussed in Note 20.
Gift checks are redeemable at face value.
Payable to government agencies mainly consists of output tax which are normally settled
within the next financial year.
Accrued expenses pertain to accrued and unpaid selling, general and administrative expenses
which are normally settled within the next financial year.

In September 2011, the Group exercised its 1:6 stock rights entitlement with Belle Corporation for
734.1 million shares at P
=3 per share. The availment did not affect the Groups direct ownership
with Belle which remained at 46%. The unpaid subscription amounting to P
=1,101.2 million as at
December 31, 2011 was paid in January 2012.

- 41 -

18. Long-term Debt


This account consists of:
Gross Amount
Parent Company
U.S. dollar-denominated:
Fixed rate bonds
Convertible bonds
Peso-denominated:
Seven-year and ten-year
corporate notes
Five-year fixed rate notes
Five-year and seven-year retail
bonds
Bank loans collateralized
with time deposits
Preferred shares
Other bank loans
Subsidiaries
U.S. dollar-denominated:
Five-year term loans
Two-year, three-year and
five-year bilateral loans
Other bank loans
China yuan-renminbi denominated:
Three-year loan
Five-year loan
Eight-year loan
Peso-denominated:
Three-year and five-year fixed
rate notes
Five-year, seven-year and ten-year
corporate notes
Five-year, seven-year and ten-year
fixed and floating rate notes
Five-year and ten-year
corporate notes
Five-year floating rate notes
Five-year, seven-year and
ten-year fixed rate notes
Five-year bilateral loans
Other bank loans
Less current portion
Noncurrent portion

March 31, 2012


Debt Issue Cost

Gross Amount
Net Amount
(In Thousands)

December 31, 2011


Debt Issue Cost

Net Amount

P
= 43,092,646
10,730,000

(P
= 324,296)
(211,994)

P
= 42,768,350
10,518,006

=43,990,263
P
979,645

(P
=357,171)
(8,256)

=43,633,092
P
971,389

5,000,000
6,699,000

(41,389)
(46,997)

4,958,611
6,652,003

5,000,000
6,700,000

(42,578)
(49,708)

4,957,422
6,650,292

9,400,000

(37,838)

9,362,162

9,400,000

(47,422)

9,352,578

8,950,000
200,000
9,548,500

(12,661)
(77)
(16,854)

8,937,339
199,923
9,531,646

8,950,000
200,000
9,548,500

(15,070)
(131)
(17,921)

8,934,930
199,869
9,530,579

11,588,400

(241,359)

11,347,041

6,356,800

(255,267)

6,101,533

1,073,000
2,146,000

(9,304)
(21,319)

1,063,696
2,124,681

1,096,000
3,068,800

(11,071)
(38,021)

1,084,929
3,030,779

1,276,786
2,452,287
272,552

1,299,441
2,599,819
277,388

1,276,786
2,452,287
272,552

1,299,441
2,599,819
277,388

10,000,000

(50,840)

9,949,160

10,000,000

(55,774)

9,944,226

6,930,000

(43,485)

6,886,515

6,930,000

(45,829)

6,884,171

5,000,000

(36,527)

49,963,473

4,289,350
4,950,000

(25,378)
(35,519)

4,263,972
4,914,481

4,289,350
5,000,000

(24,457)
(37,587)

4,264,893
4,962,413

1,997,030
531,250
9,201,300
155,328,101
7,012,287
P
= 148,315,814

(10,833)
(2,423)
(26,349)
(1,195,442)
4,231
(P
= 1,191,211)

1,986,197
528,827
9,174,951
154,132,659
7,008,056
P
= 147,124,603

1,997,030
546,875
9,203,500
137,433,411
7,935,231
=129,498,180
P

(11,355)
(2,584)
(28,229)
(1,048,431)
14,270
(P
=1,034,161)

1,985,675
544,291
9,175,271
136,384,980
7,920,961
=128,464,019
P

Parent Company
Fixed Rate Bonds
On October 13, 2010, SMIC issued US$400 million bonds (P
=16,277.1 million) which bear a fixed
interest rate of 5.5% per annum, payable semi-annually in arrears and will mature on October 13,
2017. This issuance is comprised of US$186.3 million (P
=7,691.3 million) additional bonds, and
US$82.9 million (P
=3,312.8 million) and US$130.8 million (P
=5,273.0 million) exchanged bonds
from the existing US$350.0 million 6.75% bonds due 2013 and US$500.0 million 6.0% bonds due
2014, respectively. The exchange was not accounted for as an extinguishment but merely a
modification of terms because the terms of the exchanged bonds are not substantially different
from the existing bonds (i.e., the difference between the present value of the cash flows of the
exchanged bonds and the present value of the remaining cash flows of the existing bonds
discounted using the original effective interest rate did not exceed 10%).
On September 22, 2009, SMIC issued US$500.0 million bonds, with peso equivalent of
=16,273.4 millionand P
P
=16,622.2 million as at March 31, 2012 and December 31, 2011,

- 42 -

respectively, which bear a fixed interest rate of 6.0% per annum, payable semi-annually in arrears.
The bonds will mature on September 22, 2014.
On July 17, 2008, SMIC issued US$350.0 million bonds, with peso equivalents of
=10,542.1 million and P
P
=10,768.1 million as at March 31, 2012 and December 31, 2011,
respectively, which bear a fixed interest rate of 6.75% per annum, payable semi-annually in
arrears. The bonds will mature on July 18, 2013 and may be redeemed at the option of the
relevant holder beginning July 18, 2011 at the principal amount.
Convertible Bonds
On March 19, 2007, SMIC issued at face zero coupon US$300.0 million Convertible Bonds (the
Bonds) (financial liability component amounted to P
=979.6 million and P
=979.6 million as atMarch
31, 2012 and December 31, 2011, respectively), with a yield to maturity of 3.5% due on March 20,
2012 at 118%. The bonds contain multiple embedded derivatives (i.e., conversion option, call
option and put option) which are further discussed in Note 25.
The conversion option entitles the holder to convert its outstanding bonds for SMICs common
shares at any time, on or after June 30, 2007 until the close of business on March 13, 2012, unless
previously redeemed, converted or purchased and cancelled. Starting April 25, 2007, the
conversion price is equal to P
=453.39 a share, after giving effect to the 4.27% stock dividend. At
various dates in 2012 and 2011, the bondholders of US$16.0 million (P
=813.6 million) and
US$1.7 million (P
=82.5 million) bonds, respectively, opted to convert their holdings into 1,710,588
and 181,364 of SMICs shares (see Note 19). The conversion resulted to a gain of P
=219.3 million
and P
=11.3 million in 2012 and 2011, respectively, shown under Dividends, management fees, and
others account in the consolidated statements of income. The fair value of the related derivative
liability derecognized upon conversion amounted to US$4.2 million (P
=181.50 million) and US$0.3
million (P
=11.0 million) in 2012 and 2011, respectively (see Notes 17 and 25).
The remaining value of convertible bond amounting to $4.7 million (P
=201.4 million) matured on
March 19, 2012, resulted to a gain of P
=28.8 million, shown under Dividend, management fees,
and others account in the consolidated statements of income. The fair value of the related
derivative liability derecognized upon maturity amounted to US$.7 million (P
=28.8 million) (see
Notes 17 and 25).
The put option entitles the bondholders to require the Parent Company to redeem all or some of its
Bonds on March 19, 2010 (put date) at 110.97%. A total of US$246.3 million (P
=11,253.5 million)
bonds were redeemed, which resulted in a gain of P
=844.6 million shown under Gain on disposal
of investments and properties account in the 2010 consolidated statements of income. The fair
value of the related derivative liability derecognized upon early redemption amounted to
US$35.2 million (P
=1,609.7 million) (see Note 25).
Lastly, the call option gives right to the Parent Company to redeem the remaining Bonds, in whole
but not in part at their early redemption amount on the date fixed for redemption, provided,
however, that no such redemption may be made unless the closing price of the shares of the Parent
Company (translated into US Dollars at the prevailing rate) for each of the 30 consecutive trading
days, the last of which occurs no more than five days prior to redemption notice, was at least
130% of the applicable early redemption amount divided by the conversion ratio.
On February 15, 2012, SMIC issued at face value 1.625% coupon US$250.0 million (P
=10,730.0
million) Convertible Bonds (the Bonds), with a yield to maturity of 2.875% due on February 15,
2017 at 106.67%. Interest on the Bonds is payable semi-annually in arrear every February 15 and
August 15 each year.

- 43 -

Each bond will, at the option of the holder, be convertible (unless previously redeemed, converted
or purchased and cancelled) on and after June 15, 2012 (or such earlier date on which approval in
principle to list the shares on the PSE is obtained) up to the close of business on February 5, 2017
into fully paid common shares with a par value of P
=10 each at an initial conversion price of P
=
781.446 per share translated into U.S. dollars at a fixed conversion rate of P
=42.711 to US$1.00.
All or some of the Bonds may be redeemed at the option of the relevant holder on February 15,
2015 at their early redemption amount, together with the accrued but unpaid interest. On or any
time after February 15, 2015 and prior to the maturity date, SMIC may redeem the Bonds in whole
but not in part at their early redemption amount, together with the accrued but unpaid interest,
provided, however, that no such redemption may be made unless the closing price of the shares for
each of the 30 consecutive trading days the last of which occurs not more than five days prior to
the date upon which notice is given, was at least 130% of the applicable early redemption amount
divided by the conversion ratio. SMIC may also redeem the Bonds in whole but not in part at
their early redemption amount, together with the accrued but unpaid interest, if at any time the
aggregate principal amount is less than 10% of the aggregate principal amount originally issued.
Seven-year and Ten-year Corporate Notes
On September 26, 2011, SMIC issued fixed rate corporate notes comprised of seven-year or Series
A Notes and ten-year or Series B Notes due on September 26,2018 and September 26, 2021,
respectively. The total issuance amounted to P
=916.0 million and P
=4,084.0 million for the Series A
and Series B Notes, respectively.
The series A Notes have a term of seven years from the issue date, with a fixed interest rate
equivalent to 5.75% per annum payable semi-annually in arrears starting March 26, 2012. The
Seies B Notes have a term of ten years from the issue date, with a fixed interest rate equivalent to
6.625% per annum payable semi-annually in arrears starting March 26, 2012.
The Series A and B Notes have principal repayment of 0.1% of the principal amount in annual
installments that will commence on the twelfth (12th) month from the issue date, with the last
installment payment to be made on maturity date.
Five-year Fixed Rate Notes
On February 7, 2011, SMIC issued corporate notes amounting to P
=6,700.0 million, which bear a
fixed interest rate of 6.17% per annum, payable semi-annually in arrears. The corporate notes will
mature on February 8, 2016. The notes have principal repayment of P
=1.0 million that will
commence on the twelfth month from the issue date, with the last installment payment to be made
on maturity date.
Five-year and Seven-year Retail Bonds
On June 25, 2009, SMIC issued fixed rate bonds, which comprised of 5-year or Series ABonds
and 7-year or Series B Bonds due on June 26, 2014 and June 25, 2016, respectively. The total
issuance amounted to P
=8,400.0 million and P
=1,000.0 million for the Series A and Series B Bonds,
respectively.
The Series A Bonds have a term of five years and one day from the issue date, with a fixed interest
rate equivalent to 8.25% per annum payable semi-annually in arrears starting December 26, 2009.
The Series B Bonds have a term of seven years from the issue date, with a fixed interest rate
equivalent to 9.10% per annum payable semi-annually in arrears starting December 25, 2009.

- 44 -

Bank Loans Collateralized with Time Deposits


On January 8, 2010, SMIC obtained two five-year term loans amounting to P
=1,500.0 million each.
The loans are based on a three-month Philippine Dealing System Treasury-Fixing (PDST-F) rate
plus an agreed margin. Both loans are payable quarterly in arrears.
On October 16, 2007, SMIC obtained a five-year term loan amounting to P
=6,000.0 million, which
bears interest based on a three-month PDST-F rate plus an agreed margin, payable quarterly in
arrears. On October 12, 2011, SMIC paid P
=50.0 million of this loan.
These loans are collateralized by a portion of SMICs time deposits amounting to
US$475.0 million with peso equivalents of P
=20,387.0 million and P
=20,824.0 million as at March
31, 2012 and December 31, 2011, respectively(see Note 6).
Preferred Shares
On August 6, 2007, SMIC issued Series 1 and Series 2 of non-convertible, non-participating,
non-voting preferred shares amounting to P
=3,300.0 million and P
=200.0 million, respectively. Each
share has a par value of P
=10.0 a share and an offer price of P
=10,000 a share.
The Series 1 preferred shares carry a fixed dividend rate of 7.51% per annum, payable semiannually in arrears, while the Series 2 preferred shares carry a dividend rate based on 3-month
PDST-F rate plus an agreed margin. The dividend rights are cumulative. The preferred shares
rank ahead of the common shares in the event of liquidation.
The preferred shares are mandatorily redeemable on August 6, 2012 at redemption price, which
consists of (1) 100% of the offer price; (2) all unpaid cash dividends accruing thereon, if any,
and/or in the event no cash dividends are declared for the relevant period, an amount equivalent to
the sum of the cash dividends on the preferred shares had dividends been declared and paid for the
relevant period; and (3) any charges on unpaid amounts due then outstanding. SMIC has an option
to early redeem the preferred shares subject to certain conditions. On February 6, 2011, SMIC
prepaid the Series 1 preferred shares amounting to P
=3,300.0 million.
Other Peso Bank Loans
This account includes the following:
December 31,
2011

March 31,
2012

(In Thousands)

Ten-year term loans


Seven-year term loans
Five-year term loans

P
=2,050,000
4,498,500
3,000,000
P
=9,548,500

=2,050,000
P
4,498,500
3,000,000
=9,548,500
P

In January 2008, SMIC obtained two ten-year term loans amounting to P


=1,050.0 million and
=500.0 million, which bear fixed interest rates of 6.85% and 6.71% per annum, respectively.
P
Outstanding balances of these loans as at March 31, 2012 and December 31, 2011 amounted
to P
=1,550.0 million.

In April 2008, SMIC obtained seven-year and ten-year term loans amounting to
=500.0 million each, which bear fixed interest rates of 8.56% and 8.79% per annum,
P
respectively. The seven-year term loan is subject to payment of P
=0.5 million which is due

- 45 -

annually after issue date up to the 6th year. The remaining balance is due upon maturity.
Outstanding balances of the seven-year and ten-year term loans amounted to P
=498.5 million
and P
=500.0 million as at March 31, 2012 and December 31, 2011.

In March 2008, SMIC obtained a seven-year term loan amounting to P


=1,000.0 million, which
bears a fixed interest rate of 7.28% per annum. Outstanding balance as at March 31, 2012 and
December 31, 2011 amounted to P
=1,000.0 million.

The seven-year term loans also include P


=2,000.0 million and P
=1,000.0 million fixed rate loans
with interest rates of 6.90% and 6.91%, respectively. It likewise includes P
=2,000.0 million
floating rate loan with interest based on 3-month PDST-F plus an agreed margin. The loans
will mature in October and November 2014. On January 31, 2011, SMIC prepaid the
=2,000.0 million fixed rate loan. Outstanding balance as at March 31, 2012 and December 31,
P
2011 amounted to P
=3,000.0 million.

In February 2009, SMIC obtained a five-year term loan amounting to P


=3,000.0 million which
bears a floating interest rate based on a 6-month PDST-F plus margin. Outstanding balance as
at March 31, 2012 and December 31, 2011 amounted to P
=3,000.0 million.

Subsidiaries
U.S. Dollar-denominated Five-year Term Loans
This represents a US$270 million unsecured loans obtained in 2012 and 2011 by SM Prime. The
loans bear interest rates based on London Inter-Bank Offered Rate (LIBOR) plus spread, with a
bullet maturity on March 21, 2016.
US Dollar-denominated Two-year, Three-year and Five -year Bilateral Loans
The US$75.0 million unsecured loans were obtained by SM Prime in November 2008. The loans
bear interest rates based on LIBOR plus spread, with bullet maturities ranging from two to five
years. SM Prime prepaid the US$30.0 million (P
=1,386.0 million) and the US$20.0 million
(P
=950.4 million) unsecured loans on November 30, 2010 and June 1, 2009, with original maturity
dates of November 28, 2011 and November 19, 2010, respectively. The related unamortized debt
issuance costs charged to expense amounted to P
=6.1 million and P
=4.0 million in 2010 and 2009,
respectively. The remaining balance of US$25.0 million will mature on November 20, 2013.
US Dollar-denominated Three-year Bilateral Loans
The US$40.0 million (P
=1,753.6 million) three-year bilateral unsecured loans were obtained by
SM Prime on July 13, 2010 and October 15, 2009. The loans bear interest rate based on LIBOR
plus spread, with bullet maturity on January 14, 2013 and October 15, 2012, respectively. The
US$20 million (P
=876.8 million)loan was prepaid on April 15, 2011 and the related unamortized
debt issuance costs charged to expense amounted to P
=2.0 million. The remaining US$20.0 million
loan was prepaid on January 13, 2012 and the related unamortized debt issuance costs charged
to expense amounted to P
=25.0 million.
US Dollar-denominated Five-year Bilateral Loans
The US$20.0 million (P
=858.4 million) and US$30.0 million (P
=1,287.6 million) five-year bilateral
unsecured loans were obtained by SM Prime on April 15, 2011 and November 30, 2010,
respectively. The loans bear interest rate based on LIBOR plus spread, with bullet maturity on
November 30, 2015.

- 46 -

China Yuan Renminbi-denominated Three-year Loan


This represents a three-year loan obtained by SM Prime on March 28, 2011 amounting to
250.0 million to finance the construction of shopping malls. Partial drawdown amounting to
187.4 million (P
=1,299.4 million) was made as at December 31, 2011. The loan has a floating rate
with an annual repricing at prevailing rate dictated by Central Bank of China less 5% and will
mature on March 27, 2014. The loan bears an interest rate of 6.66% in 2012 and 2011.
China Yuan Renminbi-denominated Five-year Loan
This represents a five-year loan obtained by SM Prime on August 26, 2009 amounting to
350.0 million to finance the construction of shopping malls. The loan is payable in semi-annual
installments until 2014. The loan has a floating rate with an annual repricing at prevailing rate
dictated by Central Bank of China less 10%. The loan carries an interest rate of 6.21% in 2012
and 2011 (see Note 25).
China Yuan Renminbi-denominated Five-year Loan
This represents a five-year loan obtained by SM Prime on August 27, 2010 amounting to
150.0 million to finance the construction of shopping malls. Partial drawdown amounting to
0.9 million (P
=6.2 million) and 60 million(P
=408.8 million) was made in 2011 and 2010,
respectively. The loan is payable in annual installments until 2015. The loan has a floating rate
with an annual repricing at prevailing rate dictated by Central Bank of China less 10%. The loan
carries an interest rate of 6.21% in 2012 and 2011 (see Note 25).
China Yuan Renminbi-denominated Eight-year Loan
This represents an eight-year loan obtained by SM Prime on December 28, 2005 amounting to
155.0 million to finance the construction of shopping malls. The loan is payable in annual
installments with two years grace period until December 2012. The loan has a floating rate with
an annual repricing at prevailing rate dictated by Central Bank of China less 10%. The loan bears
interest rate of 6.35% in 2012 and 2011 (see Note 25).
The China yuanrenminbi-denominated loans are secured by investment properties in China
(see Note 13).
Philippine Peso-denominated Three-year and Five-year Fixed Rate Notes
This represents a three-year and five-year fixed rate notes issued by SMDC on June 1, 2010
amounting to P
=2,000.0 million and P
=8,000.0 million, respectively. The three-year and five-year
fixed rate notes bear fixed interest rates of 6.8% and 7.7%, respectively, and will mature on
June 1, 2013 and June 2, 2015, respectively. SMDC has an option to prepay the notes subject to a
fixed prepayment penalty. The prepaid amount shall include the outstanding principal obligation,
any accrued interest on the notes and the prepayment penalty.
Philippine Peso-denominated Five-year, Seven-year and Ten-year Corporate Notes
This represents a five-year floating and five-year, seven-year and ten-year fixed rate notes
obtained by SM Prime amounting to P
=3,000.0 million, P
=1,134.0 million, P
=52.5 million and
=813.5 million, respectively, out of P
P
=7,000.0 million facility obtained on December 20, 2010. The
remaining P
=2,000.0 million floating rate note was obtained on June 13, 2011. The loans bear an
interest rate based on PDST-F plus margin for the five-year floating and 5.79%, 5.89% and 6.65%
for the five-year, seven-year and ten-year fixed, respectively. The loans have bullet maturities in
2015, 2017 and 2020, respectively (see Note 25).
Philippine Peso-denominated Five-year and Ten-year Corporate Notes
This represents a five-year floating and fixed rate notes and ten-year fixed rate note obtained by
SM Prime on April 14, 2009 amounting to P
=200.0 million, P
=3,700.0 million and P
=1,100.0 million,

- 47 -

respectively. The loans bear an interest rate based on PDST-F plus margin for the five-year
floating and 8.4% and 10.1% for the five-year and ten-year fixed, respectively. The loans have
bullet maturities in 2014 and 2019, respectively (see Note 25).
Philippine Peso-denominated Five-year Floating Rate Notes
This represents a five-year floating rate notes obtained on March 18, 2011 and June 17, 2011
amounting toP
=4,000.0 million and P
=1,000.0 million, respectively. The loans bear an interest rate
based on PDST-F plus margin and will mature on March 19, 2016 and June 18, 2016, respectively
(see Note 25).
Philippine Peso-denominated Five-Year, Seven-Year and Ten-Year Fixed and Floating Rate Notes
This represents a five-year floating, five-year, seven-year and ten-year fixed rate notes obtained
by SM Primeon January 12, 2012 amounting to P
=200.0 million, P
=1,012.0 million, P
=133.0 million,
andP
=3,655.0 million, respectively. The loans bear an interest rate based on PDST-F plus margin
for the five-year floating and 5.86%, 5.97% and 6.10% forthe five-year, seven-year and ten-year
fixed, respectively. The loans have bullet maturities in2017, 2020 and 2022, respectively (see Note
24).
Philippine Peso-denominated Five-year, Seven-year and Ten-year Fixed Rate Notes
This represents a five-year, seven-year and ten-year fixed rate notes obtained by SM Prime on
June 17, 2008 amounting to P
=1,000.0 million, P
=1,200.0 million and P
=800.0 million, respectively.
The loans bear fixed interest rates of 9.31%, 9.60% and 9.85%, respectively, and will mature on
June 17, 2013, 2015 and 2018, respectively. A portion of the loans amounting to P
=1,000.0 million
was prepaid on June 17, 2011. The related unamortized debt issuance costs charged to expense
amounted to P
=4.0 million (see Note 25).
Philippine Peso-denominated Five-year Bilateral Loan
This consists of the following:

Five-year term loan obtained by a subsidiary of SM Prime on October 24, 2011 amounting
to P
=500.0 million and will mature on October 24, 2016. The loan carries an interest rate
based on PDST-F plus an agreed margin (see Note 25).

Five-year term loan obtained by a subsidiary of SM Prime on September 28, 2007 and
November 6, 2007 amounting to P
=250.0 million to finance the construction of
a project called San Miguel by the Bay. The loan is payable in equal quarterly
installments of P
=15.6 million starting December 2008 up to September 2012 and carries
an interest rate based on PDST-F plus an agreed margin(see Note 25).

Other Bank Loans - Subsidiaries


This account includes the following:
March 31,
2012

December 31,
2011
(In Thousands)

Ten-year term loan


Five-year term loans

P
=1,200,000
8,001,300
P
=9,201,300

=1,200,000
P
8,003,500
=9,203,500
P

- 48

On August 16, 2006, SM Prime obtained a ten-year bullet fixed rate loan amounting to
=1,200.0 million which bears a fixed interest rate of 9.75% and will mature
P
onAugust 16, 2016 (see Note 25).

The following five-year term loans were obtained by various subsidiaries:


March 31, December 31,
2011
2012
(In Millions)

YearObtained

Maturity

Subsidiary

Interest Rate (see Note 25)

2010

2015

SM Prime
SM Prime
SM Land
Costa
SM Land

P
=2,000.0
990.0
224.0
118.8
75.0

=2,000.0
P
990.0
225.0
120.0
75.0

PDST-F plus an agreed margin


Agreed fixed rate less PDST-F
Fixed rate of 8.0% to 8.15%
Fixed rate of 8.0% to 8.27%
PDST-F plus an agreed margin

2009

2014

SM Prime
SM Land
SM Land

3,000.0
1,393.5
200.0
P
=8,001.3

3,000.0
1,393.5
200.0
=8,003.5
P

PDST-F plus an agreed margin


Fixed rate of 7.87% to 8.25%
PDST-F plus an agreed margin

SM Prime prepaid on March 3, 2011 a five year bullet loan amounting to P


=1,000.0 million
which will mature on March 3, 2013. The related balance of unamortized debt issue cost
charged to expense amounted to P
=3.0 million in 2011.

On April 15, 2009, SM Prime obtained a four-year bullet loan amounting to P


=750.0 million
which will mature on April 15, 2013. The loan bears an interest rate based on Philippine
Reference Rate (PHIREF) plus margin. The loan was prepaid on October 17, 2011. The
related balance of unamortized debt issuance cost charged to expense amounted to
=3.0 million in 2011 (see Note 25).
P

On October 16, 2009, SM Prime obtained a three-year bullet loan amounting to P


=830.0
million and will mature on October 16, 2012. The loan carries an interest rate based on
PDST-F plus an agreed margin. The loan was prepaid on April 13, 2011. The related
unamortized debt issuance costs charged to expense amounted to P
=2.0 million.

The repricingfrequencies of floating rate loans range from three to six months.
Repayment Schedule
The repayments of long-term debt are scheduled as follows:
Gross Loan

Debt Issue Cost

Net

(In Thousands)

2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

P7,012,287
=
14,100,124
41,188,338
25,633,120
25,848,060
28,271,017
3,810,603
1,273,789
780,919
4,083,794
3,326,050
=155,328,101
P

(P
=4,231)
(105,184)
(222,271)
(92,421)
(308,696)
(379,948)
(16,219)
(6,857)
(1,434)
(33,883)
(24,298)
(P
=1,195,442)

P7,008,056
=
13,994,940
40,966,067
25,540,699
25,539,364
27,891,069
3,794,384
1,266,932
779,485
4,049,911
3,301,752
=154,132,659
P

- 49 -

The loan agreements provide certain restrictions and requirements principally with respect to
maintenance of required financial ratios and material change in ownership or control. As at March
31, 2012 and December 31, 2011, the Group is in compliance with the terms of its loan covenants.

19. Equity
Capital Stock
As at March 31, 2012 and December 31, 2011, SMICs authorized capital stock is composed
of690,000,000 commonshares and 10,000,000 redeemable preferred shares with a par value of
=10.0 a share. The redeemable preferred shares are accounted for as a liability (see Note 18).
P
SMICs issued and subscribed common shares are 613,874,621 and 612,164,033 as atMarch 31,
2012 and December 31, 2011, respectively.
At various dates in 2012 and 2011, 1,710,588 common shares and 181,364 common shares,
respectively, were issued as a result of conversion of SMICs convertible bonds (see Note 18).
The excess of conversion price over par value totalingP
=758.4 million and P
=80.4 million,
respectively, are presented as Additional paid-in capital account in the consolidated balance
sheets.
The following summarizes the information on the Parent Companys registration of securities
under the Securities Regulation Code:

Date of SECApproval
March 2005
November 6, 2007
June 14, 2007
April 25, 2007
October 4, 2010
November 3, 2010
November 25, 2010
Augist 17, 2011
September 26, 2011

Authorized
Shares

No. of
Shares Issued
105,000,000
56,000,000

100,000,000
25,023,038
340,858
309,387
309,386
10,668
170,696

Issue/Offer
Price
250
218
10
10
453
453
453
453
453

The Parent Company declared stock dividends in 2007. The total number of shareholders of the
Parent Company is 1,290 and 1,304as atMarch 31, 2012 and December 31, 2011, respectively.
Additional Paid-in Capital
The movements in Additional paid-in capital account in the consolidated balance sheets are as
follows:
March 31,
2012

December 31,
2011

(In Thousands)

Balance at beginning of year


Adjustments from additional issuance of shares
Balance at end of year

P
=35,536,615
758,458
P
=36,295,073

=35,456,200
P
80,415
=35,536,615
P

- 50 -

Cost of Parent Common Shares Held by Subsidiaries


Certain subsidiaries hold common shares of the Parent Company. This is presented as Cost of
Parent common shares held by subsidiaries and is treated as a reduction in equity as shown in the
consolidated balance sheets and consolidated statements of changes in equity.
The cost of common shares held by subsidiaries as atMarch 31, 2012 and December 31, 2011
amounting to P
=263.2 million pertains to 820,491 shares with an average cost of P
=320.8 per share.
Retained Earnings
On April 26, 2012, the BOD approved the declaration of cash dividends of 104.0% of the par
value or P
=10.4 per share for a total amount of P
=6,366.5 million in favor of stockholders on record
as atMay 26, 2012. This will be paid on June 21, 2012.
On April 27, 2011, the BOD approved the declaration of cash dividends of 90.4% of the par value
or P
=9.04 per share for a total amount of P
=5,532.3 million in favor of stockholders on record as at
May 27, 2011. This was paid on June 22, 2011.
The balance of retained earnings includes the accumulated equity in net earnings of subsidiaries
and associates amounting to P
=80,316.0 million and P
=75,086.8million as at March 31, 2012 and
December 31, 2011, respectively. The amount is not available for dividends distribution until
such time that the Parent Company receives the dividends from the respective subsidiaries and
associates.

20. Related Party Transactions


Terms and Conditions of Transactions with Related Parties
For the periods ended March 31, 2012 and December 31, 2011, the Group did not make any
provision for doubtful accounts relating to amounts owed by related parties. An assessment is
undertaken at each financial year-endby examining the financial position of the related party and
the market in which the related party operates.There have been no guarantees provided or received
for any related party receivables or payables. Affiliate refers to an entity, that is neither a parent,
subsidiary, nor an associate, with stockholders common to the SM Group or under common
control.
Parties are considered to be related if one party has the ability, directly and indirectly, to control
the other party or exercise significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they are subject to common
control.
Rent
The Parent Company and subsidiaries have existing lease agreements for office andcommercial
spaces with related companies(retail affiliates, banking group and other affiliates). Total rent
income amounted to P
=730.3 million andP
=831.4 millionfor the quarters ended March 31, 2012
and2011, respectively.
Management Fees
The Group pays management fees to Shopping Center Management Corporation, Leisure Center,
Inc., West Avenue Theaters Corporation and Family Entertainment Center, Inc. (affiliates) for the

- 51 -

management of the office and mall premises. Total management fees amounted to P
=221.4 million,
=189.4 millionfor the quarters ended March 31, 2012 and 2011, respectively.
P
SMIC and SM Retailalso receive management fees from retail affiliates for management and
consultancy services. The annual management fees are based on a certain percentage of the
related companies net income as defined in the management contracts. Total management fees
earned amounted to P
=145.0 million andP
=209.4 million for the quarters ended March 31, 2012 and
2011, respectively, included as part of Dividends, management fees and others account in the
consolidated statements of income.
Service Fees
The Group provides manpower and other services to affiliates. Service fees earned amounted to
=69.6 million andP
P
=5.5 millionin 2012 and 2011, respectively, included as part of Dividends,
management fees and others account in the consolidated statements of income.
Dividend Income
The Groups investment in AFS equity instruments of certain affiliates earn income upon the
declaration of dividends by the investees. Total dividend income from these affiliates amounted to
=280.0 million andP
P
=222.1 millionfor the quarters ended March 31, 2012 and 2011, respectively.
Cash Placements and Loans
The Group has certain bank accounts and cash placements that are maintained with BDO
and China Bank (Bank Associates). Such accounts earn interest based on prevailing market
interest rates (see Notes 5,6 and 15).
The Group also availed of bank loans and long-term debt from BDO and China Bank and pays
interest based on prevailing market interest rates (see Notes 16 and 18).
Others
The Group, in the normal course of business, has outstanding receivables from and payables to
related companies as atreporting period which are unsecured and normally settled in cash.
The consolidated balance sheets and statements of income include the following amounts resulting
from the above transactions with related parties as atMarch 31, 2012 and 2011 and December 31,
2011:
Relationship

Nature of Transactions/ Outstanding Accounts

March 31,
2012

March 31,
2011

(In Thousands)

Bank Associates Interest income


Interest expense
Rent income
Service income
Retail affiliates
and others
Rent income
Management fee expense
Management fee income
Dividend income
Service income

P
=912,606
326,032
6,528
90

=697,057
P
116,017
11,430
90

723,808
221,418
144,959
280,000
69,559

803,267
189,412
209,459
222,089
5,369

- 52 -

Relationship

Nature of Transactions/ Outstanding Accounts

March 31,
2012

December 31,
2011

(In Thousands)

Bank Associates Cash and cash equivalents (see Note 5)


Time deposits and short-term investments
(see Note 6)
Investments held for trading (see Note 7)
AFS investments (see Notes 7 and 10)
Advances and other receivables (see Note 9)
Long-term notes (see Note 15)
Payables Accrued interest (see Note 17)
Bank loans (see Note 16)
Current portion of long-term debt (see Note 18)
Long-term debt - net of current portion
Retail affiliates
and others
Receivables:
Receivable from a related party and
advances for project development
(see Notes 9 and 15)
Due from related parties (see Note 8)
Related party tenants (see Note 8)
Management fees (see Note 8)
AFS investments (see Notes 7 and 10)
Payables:
Due to related parties (see Note 17)
Accrued expenses (see Note 17)

P
=32,120,690

=50,226,026
P

47,876,002
159,717
1,159,077
585,000
506,724

38,293,363
161,114
1,162,545
841,418
506,724

104,494
9,520,960
5,951,198
9,685,501

190,583
21,055,920

7,121,565
2,918,438
1,169,330
109,748
52,650

7,121,565
2,684,558
1,267,728
95,892
52,650

2,395,795
87,259

2,734,415
74,848

5,949,514
9,684,492

21. Cost of Sales


This account consists of:
March 31,
2012

March 31,
2011

(In Thousands)

Merchandise inventories
at beginning of year
Purchases
Total goods available for sale
Less: Merchandise inventories at end of period

P
=13,436,456
25,993,026
39,429,482
13,820,682
P
=25,608,800

=10,485,903
P
23,522,010
34,007,913
10,503,197
=23,504,716
P

22. Income tax


The deferred tax assets of P
=693.3 million as at March 31, 2012 and P
=694.6 million as at
December 31, 2011 represent the tax effects of defined benefit liability, mark-to-market loss on
investments, unrealized foreign exchange losses, unamortized past service cost, NOLCO, accrued
retirement benefits, deferred income on sale of real estate and MCIT.

- 53 -

The deferred tax liabilities of P


=4,653.2 million as at March 31, 2012 and P
=4,508.0 million as at
December 31, 2011 consist of of the tax effects of trademarks and brand names, capitalized
interest, unamortized past service cost and defined benefit asset, unrealized gross profit on sale of
real estate, unrealized mark-to-market gain on investments and unrealized foreign exchange gain.
The disproportionate relationship between income before income tax and the provision for income
tax is due to various factors such as interest income already subjected to final tax, non-deductible
interest expense, equity in net earnings of associates, and dividend income exempt from tax.
The Groups consolidated deferred tax assets as of March 31, 2012 and December 31, 2011 have
been reduced to the extent that part or all of the deferred tax assets may no longer be utilized in the
future.

23. Lease Agreements


The lease agreements of SM Prime and its subsidiaries with their tenants are generally granted for
a term of one year, with the exception of some of the larger tenants operating nationally, which are
granted initial lease terms of five years, renewable on an annual basis thereafter. Upon inception
of the lease agreement, tenants are required to pay certain amounts of deposits. Tenants likewise
pay either a fixed monthly rent, which is calculated by reference to a fixed sum per square meter
of area leased, or pay rent on a percentage rental basis, which comprises of a basic monthly
amount and a percentage of gross sales or a minimum set amount, whichever is higher.
The Parent Companys lease agreements with its tenants are generally granted for a term of one to
twenty-five years. Tenants likewise pay a fixed monthly rent which is calculated by reference to a
fixed sum per square meter of area leased except for few tenants, which pay either a fixed monthly
rent or a percentage of gross sales, whichever is higher.
Upon inception of the lease agreement, tenants are required to pay certain amounts of deposits.
Tenants deposits amounted to P
=8,267.3 million and P
=7,992.4 million as atMarch 31, 2012 and
December 31, 2011, respectively.
The minimum lease receivables under the noncancellable operating leases of the Parent Company
as at March 31, 2012 and December 31, 2011 are as follows:
March 31,
2012

December 31,
2011
(In Thousands)

Within one year


After one year but not more than five years
After five years